Lider Faktoring Hizmetleri Anonim Şirketi. Financial Statements 31 December 2006 and 2005 With Independent Auditors Report Thereon

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2 Lider Faktoring Hizmetleri Anonim Şirketi Financial Statements 31 December 2006 and 2005 With Independent Auditors Report Thereon Table of Contents Independent Auditors Report Income Statements Balance Sheets Statements of Cash Flows

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5 Lider Faktoring Hizmetleri Anonim Şirketi Income Statements For the Years Ended 31 December 2006 and 2005 (Currency: New Turkish Lira ("YTL") unless otherwise stated) Notes Factoring interest income 31,920,495 19,588,598 Income from factoring operations 31,920,495 19,588,598 Interest expense on bank borrowings (14,545,504) (8,047,911) Net losses from derivative instruments carried at fair value (30,532) - Foreign exchange losses, net (957,331) (16,130) Provision for impaired factoring receivables 9 (1,018,550) (912,590) Income after interest expense, foreign exchange losses, net and provision for impaired factoring receivables 15,368,578 10,611,967 Interest income other than on factoring transactions 3,938 3,600 Other operating income 6 73, ,999 Operating income 15,445,777 10,961,566 Salaries and employee benefits (7,481,814) (4,624,352) Administrative expenses 5 (1,751,266) (1,189,851) Depreciation and amortisation expenses 11 and 12 (278,431) (191,194) Impairment in value of property and equipment 11 (506,423) Other expenses (4,183) - Loss on net monetary position - (325,471) Profit before income taxes 5,423,660 4,630,698 Income tax expense 7 (1,178,582) (1,505,136) Net profit for the year 4,245,078 3,125,562 The accompanying notes are an integral part of these financial statements. 1

6 Lider Faktoring Hizmetleri Anonim Şirketi Balance Sheets As at 31 December 2006 and 2005 (Currency: New Turkish Lira ("YTL") unless otherwise stated) Assets Notes Cash and cash equivalents 8 3,610, ,472 Factoring receivables 9 96,996,074 61,531,240 Other assets , ,800 Property and equipment 11 2,672,598 3,378,356 Intangible assets 12 43,457 43,821 Deferred tax assets 7 383, ,023 Total assets 104,431,198 65,442,712 Equity Share capital 17 16,873,808 12,504,738 Accumulated losses 17 (6,032,058) (5,419,795) Net profit for the year 4,245,078 3,125,562 Total shareholders' equity 15,086,828 10,210,505 Liabilities Bank borrowings 13 87,663,389 54,014,953 Other liabilities 14 1,039, ,262 Derivative financial instruments 15 30,532 - Income taxes payable 7 483, ,880 Reserve for employee severance payments ,352 71,112 Total liabilities 89,344,370 55,232,207 Total equity and liabilities 104,431,198 65,442,712 Commitments and contingencies 19 The accompanying notes are an integral part of these financial statements. 2

7 Lider Faktoring Hizmetleri Anonim Şirketi Statements of Cash Flows For the Years Ended 31 December 2006 and 2005 (Currency: New Turkish Lira ("YTL") unless otherwise stated) Notes Cash Flows From Operating Activities: Net profit for the year 4,245,078 3,125,562 Components of net profit not generating or using cash Depreciation and amortisation 11 and , ,194 Provision for employee severance payments 16 70,207 44,515 Interest expense accruals 1,989, ,956 Unearned factoring interest income 9 2,259,334 1,819,385 Provision for taxes on income 7 1,342,053 1,720,294 Deferred tax charge 7 (163,471) (215,158) Provision for doubtful receivables 9 1,018, ,590 Impairment in value of property and equipment ,423 - Net losses from derivative instruments carried at fair value 30,532 - (Gain)/loss on sale of property and equipment 1,900 - Effect of inflation on monetary items - (1,471) Changes in operating assets and liabilities Change in factoring receivables (38,797,901) (32,827,276) Change in other assets (622,075) (20,239) Change in other liabilities (106,186) 244,768 Employee severance paid 16 (13,967) (10,635) Taxes paid 7 (858,912) (1,207,414) Proceeds from recoveries of doubtful factoring receivables 9 55, ,966 Net cash used in operating activities (28,765,739) (24,986,963) Investing Activities : Purchase of property and equipment 11 (111,949) (2,761,883) Proceeds from disposal of property and equipment 11 48,713 - Purchase of intangible assets 12 (17,396) - Net cash used in investing activities (80,632) (2,761,883) Financing Activities: Proceeds from bank borrowings 240,523, ,283,322 Repayment of bank borrowings (208,863,654) (133,344,149) Share capital increase ,245 80,939 Net cash provided by financing activities 32,290,599 25,020,112 Net increase/(decrease) in cash and cash equivalents 3,444,228 (2,728,734) Cash and cash equivalents at 1 January 166,472 2,895,206 Cash and cash equivalents at 31 December 8 3,610, ,472 The accompanying notes are an integral part of these financial statements. 3

8 Notes to the financial statements 1. Reporting entity 12. Intangible assets 2. Basis of preparation 13. Bank borrowings 3. Significant accounting policies 14. Other liabilities 4. Determination of fair values 15. Derivative financial instruments 5. Administrative expenses 16. Reserve for employee severance payments 6. Other operating income 17. Equity 7. Taxation 18. Financial instruments 8. Cash and cash equivalents 19. Commitments and contingencies 9. Factoring receivables 20. Related party disclosures 10. Other assets 21. Subsequent events 11. Property and equipment 22. Explanation of transition to IFRS

9 1 Reporting entity Şetat Faktoring A.Ş. was incorporated on 20 September 1992 in Turkey to provide factoring services to industrial and commercial firms. The name of Şetat Faktoring A.Ş. was changed to Lider Faktoring Hizmetleri AŞ ( the Company ) and the change was announced on 12 June 2002 dated and 5568 numbered Trade Registry Gazette. The Company s head office is located at Büyükdere Caddesi 100 Maya Akar Center K:25 Esentepe- Istanbul. The Company has 93 employees as at 31 December 2006 (2005: 69 employees). The Company s principal activity is to provide factoring services substantially in one geographical segment (Turkey). 2 Basis of preparation (a) Statement of compliance The Company maintains its books of account and prepares its statutory financial statements in New Turkish Lira ( YTL ) in accordance with the Turkish Uniform Chart of Accounts, the Turkish Commercial Code ( the TCC ), and Tax Legislation. The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), its interpretations adopted by the International Accounting Standards Board (IASB) and are based on the statutory records with adjustments and reclassifications for the purpose of fair presentation in accordance with IFRS. These are the Company s first IFRS financial statements and IFRS 1 has been applied. An explanation of how the transition to IFRS has affected the reported financial position, financial performance and cash flows of the Company is provided in note 22. (b) Basis of measurement The financial statements have been prepared on the historical cost basis except for the derivative financial instruments which are measured at fair value. The methods used to measure fair values are discussed further in note 4. (c) Functional and presentation currency These financial statements are presented in YTL, which is the Company s functional currency. All financial information presented in YTL is rounded to the nearest digit. (d) Use of estimates and judgements The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. 4

10 2 Basis of preparation (continued) In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described in the following notes: Note 7 taxation Note 4 fair value measurement of financial instruments Note 16 reserve for employee severance payments Note 18 financial instruments Note 19 contingencies 3 Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these financial statements. (a) Accounting in hyperinflationary economies International Accounting Standard ( IAS ) 29, which deals with the effects of inflation in the financial statements, requires that financial statements prepared in the currency of a hyperinflationary economy to be stated in terms of the measuring unit current at the balance sheet date and the corresponding figures for previous periods be restated in the same terms. One characteristic that necessitates the application of IAS 29 is a cumulative three year inflation rate approaching or exceeding 100%. The cumulative three-year inflation rate in Turkey has been 35.61% as of 31 December 2005, based on the Turkish nation-wide wholesale price indices announced by Turkish Statistical Institute ( TURKSTAT ). This, together with the sustained positive trend in the quantitative factors such as financial and economical stabilization, decrease in the interest rates and the appreciation of YTL against the US Dollars ( USD ), have been taken into consideration to categorize Turkey as a nonhyperinflationary economy under IAS 29 effective from 1 January Therefore, IAS 29 has not been applied to the financial statements as of and for the year ended 31 December The financial statements of income and cash flows for the year ended 31 December 2005 have been adjusted for the effects of inflation in YTL units current at 31 December Such recent indices and conversion factors used to restate the statements of income and cash flows for the year ended 31 December 2005 are given below: Date Index Conversion factor 31 December , December , December , The main procedures for the application of IAS 29 are as follows: Financial statements prepared in the currency of a hyperinflationary economy are stated in terms of the measuring unit current at the balance sheet date, and corresponding figures for previous periods are restated in the same terms. Monetary assets and liabilities, which are carried at amounts current at the balance sheet date are not restated because they are already expressed in terms of the monetary unit current at the balance sheet date. 5

11 3 Significant accounting policies (continued) (a) (b) Accounting in hyperinflationary economies (continued) Non-monetary assets and liabilities that are not carried at amounts current at the balance sheet date, and components of shareholders equity are restated by applying the relevant (monthly, yearly average, year end) conversion factors. Additions to property and equipment in the year of acquisition are restated using the relevant conversion factors. All items in the income statement are restated by applying the monthly conversion factors except for those amounts deriving from non-monetary items, which are calculated, based on the restated values of the related items. The effect of general inflation on the Company s monetary position is included in the income statement as of and for the year ended 31 December 2005 as Loss on net monetary position. Foreign currency transactions Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are converted into YTL at the exchange rates ruling at balance sheet date with the resulting exchange differences recognized in the income statement as foreign exchange gain or loss. Gains and losses arising from foreign currency transactions are reflected in the income statement as realized during the course of the period. (c) Financial Instruments (i) Non-derivative financial instruments Non-derivative financial instruments comprise factoring receivables, other assets, cash and cash equivalents, bank borrowings, factoring payables and other liabilities. Non-derivative financial instruments are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition non-derivative financial instruments are measured as described below. A financial instrument is recognised if the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognised if the Company s contractual rights to the cash flows from the financial assets expire or if the Company transfers the financial asset to another party without retaining control or substantially all risks and rewards of the asset. Regular way purchases and sales of financial assets are accounted for at trade date, i.e., the date that the Company commits itself to purchase or sell the asset. Financial liabilities are derecognised if the Company s obligations specified in the contract expire or are discharged or cancelled. Cash and cash equivalents comprise cash balances and bank deposits. Accounting for financial income and expense is discussed in note 3(l). Factoring receivables and other assets Factoring receivables are measured at amortised cost less specific allowances for uncollectability and unearned interest income. Specific allowances are made against the carrying amount of factoring receivables and that are identified as being impaired based on regular reviews of outstanding balances to reduce factoring receivables to their recoverable amounts. When a factoring receivable is known to be uncollectible, all the necessary legal procedures have been completed, and the final loss has been determined, receivable are written off immediately. Subsequent to initial recognition, other assets are measured at cost due to their short term nature. 6

12 3 Significant accounting policies (continued) (c) Financial Instruments (continued) Bank borrowings Bank borrowings are recognized initially at cost, net of any transaction costs incurred. Subsequent to initial recognition, bank borrowings are stated at amortized cost with any difference between cost and redemption value being recognized in the income statement over the period of the borrowings. Other Demand deposits and other payables are measured at cost. (ii) Derivatives held for risk management purposes The Company holds derivative financial instruments for risk management purposes which include all derivative assets and liabilities that are not classified as trading assets and liabilities Derivatives held for risk management purposes are recognized initially at fair value; attributable transaction costs are recognised in income statement when incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below. Other non-trading derivatives When a derivative is not held for trading and is not designated in a qualifying hedge relationship, all changes in its fair value are recognized immediately in profit o loss as a component of net income/(loss) from derivative instruments carried at fair value. (iii) Share capital Ordinary shares Incremental costs directly attributable to issue of ordinary shares and share options are recognised as a deduction from equity. Share capital increased pro-rata to existing shareholders is accounted for at par value as approved at the annual meeting of shareholders. (d) Property and equipment (i) Recognition and measurement Items of property and equipment acquired before 1 January 2006 are measured at cost restated for the effects of inflation in YTL units current at 31 December 2005 pursuant to IAS 29 less accumulated depreciation and impairment losses. Property and equipment acquired in 2006 are measured at cost, less accumulated depreciation, and impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. 7

13 3 Significant accounting policies (continued) (d) Property and equipment (continued) (ii) Subsequent costs The cost of replacing part of an item of property and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Company and its cost can be measured reliably. The costs of the day-to-day servicing of property and equipment are recognized in the income statement as incurred. (iii) Depreciation Depreciation is recognised in the income statement on a straight-line basis over the estimated useful lives of each part of an item of property and equipment. (e) The estimated useful lives for the current and comparative periods are as follows: Buildings 50 years Furniture and fixtures 5 years Motor vehicles 5 years Leasehold improvements are amortized over the periods of the respective leases on a straight-line basis. Intangible assets Intangible assets represent computer software licences and rights. Intangible assets acquired before 1 January 2006 are measured at cost restated for the effects of inflation in YTL units current at 31 December 2005 pursuant to IAS 29, less accumulated amortization and impairment losses. Intangible assets acquired in 2006 are measured at cost, less accumulated amortisation and impairment losses. Amortization is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets. (f) Leased assets Leases in terms of which the Company assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Other leases are operating leases and are not recognised on the Company s balance sheet. Investment property held under an operating lease is recognised on the Company s balance sheet at its fair value. 8

14 3 Significant accounting policies (continued) (g) Impairment (i) Financial assets A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. An impairment loss in respect of an available-for-sale financial asset is calculated by reference to its current fair value. Individually significant financial assets are tested for impairment on a individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. All impairment losses are recognised in income statement. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets measured at amortised cost and available-for-sale financial assets that are equity securities, the reversal is recognised in the income statement. (ii) Non-financial assets The carrying amounts of the Company s non-financial assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset s recoverable amount is estimated. For intangible assets that have indefinite lives or that are not yet available for use, recoverable amount is estimated at each reporting date. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognised in the income statement. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. 9

15 3 Significant accounting policies (continued) (h) Employee benefits (i) Reserve for employee severance payments In accordance with the existing social legislation in Turkey, the Company is required to make certain lump-sum payments to employees whose employment is terminated due to retirement or for reasons other than resignation or misconduct. Such payments are calculated on the basis of an agreed formula, are subject to certain upper limits and are recognized in the accompanying financial statements as accrued. The reserve has been calculated by estimating the present value of the future obligation of the Company that may arise from the retirement of the employees. (ii) Short-term benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A provision is recognised for the amount expected to be paid under short-term cash bonus or profitsharing plans if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. (i) Provisions A provision is recognised if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. (j) Offsetting Financial assets and liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable right to set off the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. (k) Related Parties For the purpose of this report, the shareholders of the Company, the ultimate shareholders of the Company and the companies controlled by/associated with them are referred to as related parties. 10

16 3 Significant accounting policies (continued) (l) Income and expense recognition (i) Factoring interest and commission income Factoring interest and commission income is recognized on the accrual basis. (ii) Other income and expenses Other income and expenses are recognized on the accrual basis. (iii) Interest income other than on factoring transactions Such interest income includes interest income from time deposits. (iv) Interest expense on bank borrowings Interest expense on borrowings is calculated using the effective interest rate method. (m) Income tax Taxes on income comprise current tax and the change in the deferred taxes. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred income tax is provided, using the balance sheet liability method, on all taxable temporary differences arising between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax liabilities and assets are recognized when it is probable that the future economic benefits resulting from the reversal of taxable temporary differences will flow to or from the Company. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the deferred tax asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized. Currently enacted tax rates are used to determine deferred taxes on income. 11

17 3 Significant accounting policies (continued) (n) New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are not yet effective for the year ended 31 December 2006, and have not been applied in preparing these financial statements: IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies addresses the application of IAS 29 when an economy first becomes hyperinflationary and in particular the accounting for deferred tax. IFRIC 7, which becomes mandatory for the Company s 2007 financial statements, is not expected to have any impact on the financial statements. IFRIC 8 Scope of IFRS 2 Share-based Payment addresses the accounting for share-based payment transactions in which some or all of goods or services received cannot be specifically identified. IFRIC 8 will become mandatory for the Company s 2007 financial statements, with retrospective application required. IFRIC 8 is not expected to have any impact on the financial statements. IFRIC 9 Reassessment of Embedded Derivatives requires that a reassessment of whether embedded derivative should be separated from the underlying host contract should be made only when there are changes to the contract. IFRIC 9, which becomes mandatory for the Company s 2007 financial statements, is not expected to have any impact on the financial statements. IFRIC 10 Interim Financial Reporting and Impairment prohibits the reversal of an impairment loss recognised in a previous interim period in respect of goodwill, an investment in an equity instrument or a financial asset carried at cost. IFRIC 10 will become mandatory for the Company s 2007 financial statements, and will apply to goodwill, investments in equity instruments, and financial assets carried at cost prospectively from the date that the Company first applied the measurement criteria of IAS 36 and IAS 39 respectively (i.e., 1 January 2004). The adoption of IFRIC 10 will not have any impact on the financial statements. 12

18 4 Determination of fair values A number of the Company s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and / or disclosure purposes based on the following methods. Where applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by a quoted market price. The estimated fair values of financial instruments have been determined using available market information by the Company, and where it exists, appropriate valuation methodologies. However, judgement is necessary required to interpret market data to determine the estimated fair value. While management has used available market information in estimating the fair values of financial instruments, the market information may not be fully reflective of the value that could be realised in the current circumstances. Management has estimated that the fair value of certain balance sheet instruments is not materially different than their recorded values due to their short nature except for derivative financial instruments and bank borrowings. These balance sheet instruments include cash and cash equivalents, factoring receivables and bank borrowings. At 31 December, the carrying amounts and fair values of financial instruments are as follows: Carrying amount Carrying amount Fair value Fair value Financial assets Factoring receivables 96,996,074 96,996,074 61,531,240 61,531,240 Cash at banks 3,610,700 3,610, , ,742 Financial liabilities Bank borrowings 87,663,389 87,365,620 54,014,953 53,952,640 The Company utilizes currency forward derivative instruments. Currency forwards represent commitments to purchase or to sell foreign and domestic currency, including undelivered spot transactions. The notional amounts of certain types of financial instruments provide a basis for comparison with instruments recognized on the balance sheet but do not necessarily indicate the amounts of future cash flows involved or the current fair value of the instruments and, therefore, do not indicate the Company s exposure to credit or price risks. The derivative instruments become favorable (assets) or unfavorable (liabilities) as a result of fluctuations in foreign exchange rates and interest rates relative to their terms. The aggregate contractual or notional amount of derivative financial instruments on hand, the extent to which instruments are favorable or unfavorable and, thus the aggregate fair values of derivative financial assets and liabilities can fluctuate significantly from time to time. 13

19 5 Administrative expenses For the years ended 31 December, administrative expenses comprised the following: Traveling expenses 351, ,616 Communication expenses 275, ,242 Consultancy expenses 255, ,265 Taxies and duties other than on income 175,291 90,376 Office supplies expenses 127,287 83,164 Advertising expenses 117,690 53,952 Rent expenses 79,667 73,477 Maintenance expenses 57,112 62,836 Others 311, ,923 1,751,266 1,189,851 6 Other operating income For the years ended 31 December, other operating income comprised the following: Recoveries from doubtful factoring receivables 55, ,966 Others 18,078 13,033 73, ,999 7 Taxation As of 31 December 2006, corporate income tax is levied at the rate of 20% (31 December 2005: 30%) on the statutory corporate income tax base, which is determined by modifying accounting income for certain exclusions and allowances for tax purposes. There is also a withholding tax levied at a certain rate on the dividends paid and is accrued only at the time of such payments. Some of the deduction rates included in the 15th and 30th articles of the Law no on the Corporate Tax, has been redefined according to the cabinet decision numbered 2006/10731, which has been announced at Trade Registry Gazette of 23 July In this context, withholding tax rate on dividend payments which are made to the companies except those are settled in Turkey or generate income in Turkey via a business or a regular agent has been increased to 15% from 10%. Under the Turkish taxation system, tax losses can be carried forward to be offset against future taxable income for up to five years. Tax losses cannot be carried back to offset profits from previous periods. In Turkey, there is no procedure for a final and definitive agreement on tax assessments. Companies file their tax returns within four months following the close of the accounting year to which they relate. Tax returns are open for five years from the beginning of the year that follows the date of filing during which time the tax authorities have the right to audit tax returns, and the related accounting records on which they are based, and may issue re-assessments based on their findings. The reported tax expense for the years ended 31 December are different than the amounts computed by applying the statutory tax rate to profit before tax as shown in the following reconciliation: Amount % Amount % Reported profit before income taxes 5,423,660 4,630,698 Taxes on reported profit per statutory tax rate (1,084,732) (20)% (1,389,209) (30)% Permanent differences: Non-deductible expenses (21,172) - (23,840) (1)% Effect of change in tax rate (73,341) (2)% (442) - Other permanent differences (91,645) (2)% Income tax expense (1,178,582) (22)% (1,505,136) (33)% 14

20 7 Taxation (continued) The income tax expense for the years ended 31 December comprised the following items: Current corporation and income taxes Deferred taxes on taxable temporary differences 1,342,053 (163,471) 1,720,294 (215,158) Taxation charge 1,178,582 1,505,136 In accordance with the related regulation for prepaid taxes on income, advance payments during the year are being deducted from the final tax liability computed over current year operations. Accordingly, the income tax expense is not equal to the final tax liability appearing on the balance sheet. The taxes payable on income as of 31 December comprised the following: Taxes on income Less: Corporation taxes paid in advance 1,342,053 (858,912) 1,720,294 (1,207,414) Income taxes payable 483, ,880 Deferred income tax is provided, using the balance sheet liability method, on all taxable temporary differences arising between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes, except for the initial recognition of assets and liabilities which effect neither accounting nor taxable profit. Deferred tax assets ( DTA ) and deferred tax liabilities ( DTL ) at 31 December were attributable to the items detailed in the table below: Assets Liabilities Assets Liabilities Doubtful factoring receivables 228, ,231 - Reserve for employee severance payments 25,470-21,334 - Derivative financial instruments 6, Property and equipment, and intangible assets 80, ,550 Bank borrowings 34, Others 8,841-18,521 - Total DTA and DTL 383, ,573 53,550 Deferred income tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The following amounts as of 31 December, determined after appropriate offsetting, are shown in the balance sheet: Gross Offsetting Net Gross Offsetting Net DTA DTL 383, , ,573 (53,550) (53,550) 220,023 53,550 - DTA, net 383, , , ,023 15

21 8 Cash and cash equivalents At 31 December, cash and cash equivalents comprised the following: Cash at banks -demand deposits 3,556, ,574 Cash on hand 53,923 9,898 Total cash and cash equivalents 3,610, ,472 As at 31 December 2006 and 2005, there is not any blockage on bank deposits. 9 Factoring receivables At 31 December, factoring receivables comprised the following: Domestic factoring receivables 103,171,065 65,446,897 Doubtful receivables 2,155,745 1,192,378 Factoring receivables, gross 105,326,810 66,639,275 Unearned factoring interest income (6,174,991) (3,915,657) Allowance for doubtful factoring receivables (2,155,745) (1,192,378) Factoring receivables, net 96,996,074 61,531,240 As at 31 December 2006 and 2005, factoring receivables comprised short-term portions factoring receivables. The Company has obtained the following collaterals for its receivables at 31 December: Customer notes and cheques obtained as collateral 109,201,380 69,568,662 16

22 9 Factoring receivables (continued) Movements in the allowance for doubtful receivables during the years ended 31 December were as follows: Balance at the beginning of the year 1,192, ,604 Restatement effect of the opening balance - (27,850) Allowance for the year 1,018, ,590 Recoveries of amounts previously provided (55,183) (332,966) Balance at the end of the year 2,155,745 1,192, Other assets At 31 December, other assets comprised the following: Advances given 479,499 40,516 Deposits and guarantees given 157,896 58,573 Personnel advances 66,841 2,934 Prepaid expenses 20, , ,800 At 31 December 2006, YTL 390,000 of advances given relates to the advances given to a shareholder of the Company, with respect to the purchase of a flat owned by him the Company has paid the total amount of the due in 2007 and the title of the deed of the flat has been registered in the name of the Company. 17

23 11 Property and equipment Movement of property and equipment and related accumulated depreciation during the year ended 31 December 2006 was as follows: Cost 1 January 2006 Additions Disposals Impairment 31 December 2006 Buildings 2,605, (506,423) 2,098,899 Motor vehicles 382,881 - (72,334) - 310,547 Furniture and fixtures 453, ,949 (2,362) - 563,271 Leasehold improvements 380,311 - (408) - 379,903 Total cost 3,822, ,949 (75,104) (506,423) 3,352,620 Less: Accumulated 1 January Current year 31 December Depreciation 2006 Charge Disposals Impairment 2006 Buildings 25,896 52, ,001 Motor vehicles 98,630 62,108 (23,521) - 137,217 Furniture and fixtures 205,529 83,187 (833) - 287,883 Leasehold improvements 113,787 63,271 (137) - 176,921 Total accumulated depreciation 443, ,671 (24,491) - 680,022 Net carrying value 3,378,356 2,672,598 In 2006, the Company provided an impairment loss amounting to YTL 506,423 in its financial statements regarding the building located in Şişi/Istanbul which is used as one its office buildings as the independent appraisals did not determine an amount for the illegal floor of the related building in the appraisal report. Movement of property and equipment and related accumulated depreciation during the year ended 31 December 2005 was as follows: Cost 1 January 2005 Additions Disposals Impairment 31 December 2005 Buildings 408,375 2,196, ,605,322 Motor vehicles 298,892 83, ,881 Furniture and fixtures 261, , ,684 Leasehold improvements 91, , ,311 Total cost 1,060,315 2,761, ,822,198 Less: Accumulated 1 January Current year 31 December Depreciation 2005 Charge Disposals Impairment 2005 Buildings 2,708 23, ,896 Motor vehicles 30,958 67, ,630 Furniture and fixtures 160,653 44, ,529 Leasehold improvements 74,428 39, ,787 Total accumulated depreciation 268, , ,842 Net carrying value 791,568 3,378,356 18

24 11 Property and equipment (continued) At 31 December 2006, there is a mortgage on head office building of the Company addressed to Akbank T.A.Ş. amounting to USD 1,428, Intangible assets Movement of intangible assets and related accumulated amortisation during the year ended 31 December 2006 was as follows: 1 January 2006 Additions Disposals 31 December 2006 Cost Licenses 69,368 17,396-86,764 Other 11, ,125 Total cost 80,493 17,396-97,889 Less: Accumulated Amortization Current year 1 January 2006 charge Disposals 31 December 2006 Licenses 28,875 15,535-44,410 Other 7,797 2,225-10,022 Total accumulated amortization 36,672 17,760-54,432 Net carrying value 43,821 43,457 Movement of intangible assets and related accumulated amortisation during the year ended 31 December 2005 was as follows: Cost 1 January 2005 Additions Disposals 31 December 2005 Licenses 69, ,368 Other 11, ,125 Total cost 80, ,493 Less: Accumulated Amortization Current year 1 January 2005 charge Disposals 31 December 2005 Licenses 15,001 13,874-28,875 Other 5,572 2,225-7,797 Total accumulated amortization 20,573 16,099-36,672 Net carrying value 59,920 43,821 19

25 13 Bank borrowings At 31 December, bank borrowings comprised the following: Original Amount Nominal interest YTL amount Original rate Up to 1 year 1 year amount (%) and over Nominal interest Rate (%) YTL amount Up to 1 year 1 year and over YTL 81,859, ,859,468-47,298, ,298,156 - USD 2,778, ,107, ,414 4,399, ,073, ,923 Euro 1,025, ,898, , ,562 - Total 86,865, ,414 53,185, ,923 As at 31 December 2006, the Company has given customer cheques and notes amounting to YTL 100,380,389 (31 December 2005: YTL 62,359,342) as collateral against the bank borrowings. In addition, as of 31 December 2006, the Company has given its notes as collateral of Euro 5,550,000 and YTL 4,250,000 to the creditor banks against the borrowings (31 December 2005: Euro 550,000 and YTL 1,250,000). At 31 December 2006, there is a mortgage on head office building of the Company addressed to Akbank T.A.Ş. amounting to USD 1,428, Other liabilities At 31 December, other liabilities comprised the following: Taxes and duties other than on income 542, ,283 Wages and salaries payable to personnel 431, ,295 Others 65,439 36,684 1,039, , Derivative financial instruments The Company utilizes currency forward derivative instruments. Currency forwards represent commitments to purchase or to sell foreign and domestic currency, including undelivered spot transactions. The notional amounts of certain types of financial instruments provide a basis for comparison with instruments recognized on the balance sheet but do not necessarily indicate the amounts of future cash flows involved or the current fair value of the instruments and, therefore, do not indicate the Company s exposure to credit or price risks. The derivative instruments become favorable (assets) or unfavorable (liabilities) as a result of fluctuations in foreign exchange rates and interest rates relative to their terms. The aggregate contractual or notional amount of derivative financial instruments on hand, the extent to which instruments are favorable or unfavorable and, thus the aggregate fair values of derivative financial assets and liabilities can fluctuate significantly from time to time. The fair values of derivative instruments held at 31 December 2006 and 2005 were as follows: Assets Liabilities Assets Liabilities Currency forward contracts - (30,532) (30,532)

26 16 Reserve for employee severance payments In accordance with existing social legislation in Turkey, the Company is required to make lump-sum payments to employees whose employment is terminated due to retirement or for reasons other than resignation or misconduct. Such payments are calculated on the basis of 30 days pay, maximum of YTL 1, at 31 December 2006 (31 December 2005: YTL 1,727.15) per year of employment at the rate of pay applicable at the date of retirement or termination. The principal assumption used in the calculation of the total liability is that the maximum liability for each year of service will increase in line with inflation semi-annually. The liability is not funded, as there is no funding requirement. International Accounting Standard No: 19 ( IAS 19 ) requires actuarial valuation methods to be developed to estimate the enterprise s obligation under defined benefit plans. The reserve has been calculated by estimating the present value of future probable obligation of the Company arising from the retirement of the employees. Accordingly, the following statistical assumptions were used in the calculation of the following liability: 31 December 31 December Expected inflation rate 5% 6% Expected rate of salary/limit increase 11% 12% For the years ended 31 December, movements in the reserve for employee severance payments were as follows: Balance at the beginning of the year 71,112 38,924 Restatement effect of the opening balance - (1,692) Paid during the year (13,967) (10,635) Increase during the year 70,207 44,515 Balance at the end of the year 127,352 71,112 21

27 17 Equity For the years ended 31 December 2006 and 2005, movements in equity were as follows: Nominal share capital Inflationary effect on share capital Retained earnings /(Accumulated losses) Net profit for the year Total equity Balances as at 1 January ,650,000 6,483,461 (4,129,457) - 7,004,004 Share capital increase in cash 79, ,939 Share capital increase from retained earnings 1,270,056 20,282 (1,290,338) - - Net profit for the year ,125,562 3,125,562 Balances as at 31 December ,000,000 6,504,738 (5,419,795) 3,125,562 10,210,505 Transfers 3,125,562 (3,125,562) - Share capital increase in cash 631, ,245 Share capital increase from retained earnings 4,368,755 (630,930) (3,737,825) - - Net profit for the year ,245,078 4,245,078 Balances as at 31 December ,000,000 5,873,808 (6,032,058) 4,245,078 15,086, Paid-in capital At 31 December 2006, the Company s nominal value of authorized share capital amounts to YTL 11,000,000 (31 December 2005: YTL 6,000,000) comprising (31 December 2005: ) registered shares of par value of 1 YTL each in its statutory accounts. Adjustment to share capital represents the restatement effect of the contributions to share capital equivalent to purchasing power of YTL as of 31 December

28 17 Equity (continued) At 31 December, the composition of the authorized and paid-in share capital was as follows: Share (%) YTL Share (%) YTL Yuda Elenkave 38% 4,180,000 38% 2,280,000 Nedim Menda 30% 3,300,000 30% 1,800,000 Jak Sucaz 20% 2,200,000 20% 1,200,000 Raşel Elenkave 10% 1,100,000 10% 600,000 Can Güney 1% 110,000 1% 60,000 İsmail Çağrı Karataş 1% 110,000 1% 60,000 Historical share capital 100% 11,000, % 6,000,000 Adjustment to share capital 5,873,808 6,504,738 Total paid-in share capital 16,873,808 12,504, Legal Reserves The legal reserves are established by annual appropriations amounting to 5% of income disclosed in the Company s statutory accounts until it reaches 20% of paid-in share capital (first legal reserve). Without limit, a further 10% of dividend distributions in excess of 5% of paid-in capital is to be appropriated to increase legal reserves (second legal reserve). The first legal reserve is restricted and is not available for distribution as dividend unless it exceeds 50% of share capital. In the accompanying financial statements, the total of the nominal legal reserves is YTL 349,238 included in retained earnings as of 31 December 2006 (31 December 2005: YTL 152,510). 23

29 18 Financial instruments Counter party credit risk: The Company is subject to credit risk through its factoring operations. The Risk Management and Analysis Department of the Company is responsible to manage the credit risk. The Company requires a certain amount of collateral in respect of its financial assets. Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed on all customers. A special software programme has been developed to monitor the credit risk of the Company. At balance sheet date, there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet. At 31 December, the breakdown of the factoring receivables by industrial groups is as follows: 2006 % 2005 % Textile 21,569, ,617, Food 12,446, ,172, Machinery 10,269, ,699, Trade 10,192, ,075,700 7 Construction 7,801, ,600,775 9 Iron and steel 7,357, ,615,309 4 Chemicals 6,196, ,463,558 7 Wood products 5,244, ,746, Rubber and plastics 5,042, ,562,774 3 Automotive 1,537, ,973 1 Electrics and electronics 1,373, ,228,931 2 Agricultural products 694, ,421 1 Tourism 314, ,197 1 Education 217,366-47,889 - Others 6,737, ,157, ,996, ,531,

30 18 Financial instruments (continued) Liquidity risk Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations from its financial liabilities. The Company s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company s reputation. The following are the contractual maturities of financial liabilities, including interest payments and excluding the impact of netting agreements. Carrying amount Contractual cash flows 6 months or less 6 to 12 months Over 1 year 31 December 2006 Non-derivative financial liabilities Bank borrowings 87,663,389 87,492,720 86,599,830 55, ,084 Other liabilities 1,039,956 1,039,956 1,039, Income taxes payable 483, , , Derivative financial liabilities Forward exchange contracts - Outflow (30,532) (1,063,279) (1,063,279) Inflow - 965, , Carrying amount Contractual cash flows 6 months or less 6 to 12 months Over 1 year 31 December 2005 Non-derivative financial liabilities Bank borrowings 54,014,953 54,013,330 51,516,615 1,625, ,690 Other liabilities 633, , , Income taxes payable 512, , ,

31 18 Financial instruments (continued) Interest rate risk The Company s operations are subject to the risk of interest rate fluctuations to the extent that interestearning assets and interest-bearing liabilities mature or re-price at different times or in differing amounts. In the case of floating rate assets and liabilities the Company is also exposed to basis risk, which is the difference in repricing characteristics of the various floating rate indices, such as six months Libor, Euribor and different types of interest. Risk management activities are aimed at optimizing net interest income, given market interest rate levels consistent with the Company s business strategies. The tables below summarises average effective interest rates by major currencies for monetary financial instruments at 31 December: USD (%) EUR (%) YTL (%) USD (%) EUR (%) YTL (%) Assets Factoring receivables Liabilities Bank borrowings Interest rate profile: As at 31 December, the interest rate profile of the Company's interest-bearing financial instruments were as follows: Carrying Amount Fixed rate instruments Factoring receivables 96,996,074 61,531,240 Bank borrowings 85,764,796 52,375,155 Variable rate instruments Bank borrowings 1,898,593 1,639,798 Fair value sensitivity analysis for fixed rate instruments: The Group does not account for any fixed rate financial assets and liabilities at fair value through profit or loss, and the Group does not designate derivatives as hedging instruments under a fair value hedge accounting model. Therefore a change in interest rates at the reporting date would not affect profit or loss. A change of 100 basis points in interest rates would have increased or decreased equity by YTL 112 thousand (31 December 2005: YTL 92 thousand). 26