8.05 AA(Trk)/bbb (STABLE)

TURKEY

Corporate Governance

Rating

Report

This Report has been prepared by JCR-ER in compliance to the regulations of Capital Market Board of Turkey

Revised Report

NON-FINANCIAL

8.05

Co

rporate

Go

ve

rnan

ce

Score

& Out

lo

ok

7.55

8.59

7.61

Board of Directors AA(Trk)/bbb

8.21

Ceyhun KIR/ +90 212 352 56 73

[email protected]

Company Information

Trade Name IHLAS EV ALETLERI IMALAT _{SAN. VE TIC. A.Ş.}

Address Merkez Mah.29 Ekim Cad. Ihlas Plaza No:11 _{B/21 Yenibosna Bahçelievler/ İSTANBUL}

Chairman ABDULLAH TURALI

CEO SEDAT KURUCAN

Investor Relations Phone:+90.212.875.35.62 [email protected] Web www.iea.com.tr Corporate

Governance UGUR KURT

İHLAS EV ALETLERİ İMALAT SAN.VE TİC.A.Ş.

F i n a n c i a l D a t a 2012* 2011* 2010* 2009* 2008* 2007* 2006* Total Assets (000 USD) 171.143 151.307 187.185 192.65 118.34 98.651 44.331

Total Assets (000 TRY) 304.223 285.803 289.389 289.085 178.965 114.898 62.312

Equity (000 TRY) 218.127 203.455 231.488 232.485 111.928 84.004 33.977

Net Profit (000 TRY) 17.631 -25.924 5.315 -702 -23.996 5.702 1.205

Net Profit Margin (%) 17.42 -26.10 5.22 -0.78 -31.11 8.00 1.68

ROAA (%) 8.00 -11.14 1.85 0.84 -17.66 8.65 2.41

ROAE (%) 11.20 -14.73 2.31 1.14 -26.48 12.99 4.43

Equity/Assets (%) 71.70 71.19 79.99 80.42 62.54 73.11 54.53

Debt Ratio (%) 28.30 28.81 20.01 19.58 37.46 26.89 45.47

Asset Size Growth Rate

(%) 6.44 -1.24 0.10 61.53 55.76 84.39 3.43

* End of year Overview

İhlas Ev Aletleri İmalat Sanayi ve Ticaret A.Ş. (IHEVA or the Company) was

incorporated on December 5, 1975 under the name of Hizmet Gazetecilik ve Matbaacılık

Ltd. Şti and began operating under its current name on July 5, 1995. The Company

produces cleaning robots, water purification systems and water heaters at two facilities covering 21,000 m2 within the Beylikdüzü organized industrial zone. Products are sold on

the domestic market through İhlas Pazarlama A.Ş.’s widespread distribution channels and

are exported to over 30 countries, including those of the European Union and Turkic Republics.

The separate, specialist-managed Shareholder Relations Unit conducts shareholder relations, organizes General Assembly meetings and is responsible for public disclosures. Company shares have been listed on the ISE under the code of IHEVA since September 26, 1996 and are included in the ISE National 100 Index. 74.83% of shares are publicly

traded as of August 2013. The Company’s equity stood at TL194 mn, and asset size and

sales reached TL284 mn and TL27 mn as of March 2013, respectively.

The Board of Directors is composed of 7 members, 3 of which are independent, five members are non-executive. Additionally, Audit, Corporate Governance and Risk Committees have been established within the Board and are chaired by independent board members.

Strengths

A female member existing in the Board

An effective transparency platform in Turkish through the

Company’s website

Continuation of a strong staff commitment

More effective implementation for General Meeting Process

Increase in the environmental protection activities

Constraints

The vote of privileged shareholders in determining the Board of Directors

Non-disclosure of the remuneration per person provided to senior

management

Absence of regulations in the articles of incorporation for the invitation of

stakeholders and the media to the General Meeting

1- Executive Summary and Rating Rationale

This revised report was prepared in light of JCR-ER’s

original methodological procedures in accordance with the Corporate Governance Principles (the code) set by the Capital Market Board (CMB-Turkish SPK) and states the İhlas Ev Aletleri İmalat San. Ve Tic. A. Ş.’s (İHEVA or the Company) level of compliance level with corporate governance principles as of August 2012. The report should be evaluated taking into consideration the previous reports published on 28.12.2010, 20.12.2011 and 27.09.2013 to better understands the Company’s

compliance level.

CMB Corporate Governance Principles (the code) were first published in 2003 and important revisions and changes were made at the beginning of 2012. The Principles, detailed in communiqué Serial: IV, No: 56 are accessible on www.spk.gov.tr

The Board of Directors, shareholders’ rights,

stakeholders’ rights and Company’s practices in terms

of public disclosure and transparency have been assessed within the framework of CMB regulations and information as well as findings ascertained therein and have been quantified by assessments regarding weighting factors on which JCR ER has predicated the subcategories.

Subject to the preservation of integrity of regulations by the CMB and compliance with the limitations thereof, this revised report also covers such topics as

implementations regarding “Outlook” determinations

and “Financial Efficiency” analyses all of which exist

in JCR ER’s original methodological structure.

Findings and assessments within the content of the report are based on information and documents disclosed by the Company to the public through various channels and also submitted to JCR ER in writing and verbally, as well as reports and statistics by the CMB and CRA(Central Registry Agency).

Through the analysis of JCR ER’s original methodology,

the general compliance level of the Company with corporate governance principles as of August 2013

and the corresponding levels within the JCR ER’s

notation have been determined as follows;

Numerical value is 8.05,

Convergence Level AA(Trk) representing the category of “Merit Compliance”,

Notch degree (bbb) representing the category of

“outsatnding”,

Outlook (Stable)

First Corporate Governance Principles Compliance scores, as published on 28.12.2010, can be seen in the table below;

28.12.2010

Fields Numerical _Value Convergence _Level Notch Degree Outlook

Shareholders 57.69 B (Trk) (Insufficient ) (c) (Borderline) Stable Public Disclosures and Transparency 81.15 AA (Trk) (Merit) (bbb) (Outstanding) Positive

Stakeholders 66.27 _{(Satisfactory)} A (Trk) _(Average) (ccc) Positive

Board of Directors 73.62 AA (Trk) _{(Merit ) (Adequate)} (b) Positive

Overall 71.17 AA (Trk) (Merit ) (Adequate) (b) Positive

Through both 12 months of observation from December 28, 2010 as well as a comprehensive review done in December 2011, the conclusions reached by JCR ER and corresponding notation are shown in the following table; 20.12.2011 Fields Numerical Value Convergence

Level Notch Degree Outlook

Shareholders 68.07 _{(Satisfactory )} A (Trk) _(Average) (ccc) Stable

Public Disclosures and Transparency 80.36 AA (Trk) (Merit) (bbb) (Outstanding) Stable

Stakeholders 68.33 _{(Satisfactory)} A (Trk) _(Average) (ccc) Stable

Board of Directors 73.97 AA (Trk) _{(Merit ) (Adequate)} (b) Stable

Overall 73.88 AA (Trk) (Merit ) (Adequate) (b) Stable

Through both 9 months of observation from December 20, 2011 as well as a comprehensive review done in September 2012, the conclusions reached by JCR ER and corresponding notation are shown in the following table:

27.09.2012

Fields Numerical _Value Convergence _Level Notch Degree Outlook

Shareholders 72.73 AA (Trk) (Merit ) (b) (Adequate) Stable Public Disclosures and Transparency 80.50 AA (Trk) (Merit) (bbb) (Outstanding) Stable Stakeholders 70.65 AA (Trk) (Merit) (b) (Adequate) Stable Board of Directors 79.18 AA (Trk) (Merit ) (bb) (Good) Stable

Overall 76.75 AA (Trk) (Merit ) (Good) (bb) Stable

Finally, through both 10 months of observation from September 27, 2012 as well as a comprehensive review done in August 2013, the conclusions reached by JCR ER and corresponding notation are shown in the following table

01.08.2013 Fields Numerical

Value

Convergence

Level Notch Degree Outlook

Shareholders 75.45 AA (Trk) _{Merit Good} (bb) Stable

Public Disclosures and Transparency 85.90 AAA (Trk) Distinctive (a) Excellent Stable

Stakeholders 76.05 AA (Trk) _{Merit Good} (bb) Stable

Board of Directors 82.13 AA (Trk) _{Merit Outstanding} (bbb) Stable

Overall 80.49 AA (Trk) Merit

(bbb)

Outstanding Stable

JCR ER’s notation system may be viewed at:

http://www.jcrer.com.tr/Administrator/files/436_kyder_notation.pdf

Corporate Governance

Overall Results

8.05

AA (Trk)/bbb

Stable

The outlook has been determined as “Stable”

considering that the Company is expected to maintain its current compliance level in the monitoring period to come.

2- Company Overview

IHEVA was incorporated on December 5, 1975 under

the name of Hizmet Gazetecilik ve Matbaacılık Ltd. Şti

and, following changes in name on May 2, 1990, July 30, 1990, and January 01, 1994, began operating under its current name on July 5, 1995. The Company produces cleaning robots, water purification systems, water heaters, and their plastic components at two facilities in the Beylikdüzü organized industrial zone. IHEVA is also the widespread dealers and marketing channels of its distributor İhlas Pazarlama A.Ş.

The Company offers its products mainly on the domestic market and exports to over 30 countries, including those of the European Union and Turkic Republics. Company shares have been listed on the ISE under the code of IHEVA since December 26, 1996. As of July 2013 74.83% of shares are publicly traded. Additionally, the Company has been listed on in the ISE National 100 Index since October 1, 2007 and the Corporate Governance index since December 29, 2010.

Information on the Company’s affiliates and

Beginning in 2006, the Company focused on and made important investments in the mining and energy sectors. According to March, 2013 consolidated financial

statements, the Company’s equity stood at TL191Mn

and its asset size and sales reached TL284Mn and TL27Mn, respectively. Balance sheet items and ratios

that reflect the Company’s financial structure are

exhibited in Table 3 of the Appendix.

As of August 2013, a total of 298 workers were employed by the Company, 91 of which were administrative staff members. The Board of Directors is composed of 7 members, three of which are independent. Furthermore, the five members have non-executive position in the Company. The qualifications of the Board members are detailed in Table 4 of the Appendix.

3- Shareholders

This section on the shareholders’ compliance with CMB

Principles includes rules and practices covering the rights of company shareholders and the facilitating of the exercise of these rights.

Through the 10 months of observation period, compliance in the Shareholder field has been improved further to 7.55 from a score of 7.27. The primary reasons behind this increase are that the effective operation of the investor relations department lead to greater shareholder information sharing and a more effective general meeting process was implemented JCR-ER changed the coefficients of the subsections and standards in the main section. The corresponding level

of this note in JCR ER’s notation system is outlined

below:

Numerical value is 7.55,

Convergence Level AA(Trk) representing the category of “Merit Compliance”,

Notch degree (bb) representing the category of

“Good”, Outlook (Stable)

Shareholders

Results

7.55

AA(Trk)bb

Stable

Activities carried out during the monitoring period in the Shareholder field:

 IHEVA’s 2012 general meeting was held on

Thursday March 29, 2013 at 10:00 and the privileged shareholders general meeting was held on the same day at 12:00 at İhlas Holding’s

Headquarters located at Merkez Mahallesi 29 Ekim Caddesi İhlas Plaza No: 11Yenibosna-Bahçelievler/İstanbul. Our analyst attended the meetings as a monitor. All measures were taken to facilitate the attendance of Company shareholders and all preparations were carried out according to Code. The meeting was run by the chairman according to democratic rules, all agenda items were discussed separately, shareholders were able to express their opinions, all agenda items were voted on through a show of hands and voting outcomes were recorded in the minutes. Following the meeting all related documents were released

to the public on the company’s website within a

reasonable time period.

 The Investor Relations Department received 33 inquiries through email and telephone during the monitoring period. The Company has declared that all inquiries were answered.

 Any investor information meeting was not held with the Investor Relations Department and senior management during the monitoring period.

 According to the Company’s 2012 legal records, no dividend was distributed due to the fact that

the previous years’ losses were deducted from

current year profit. After approval of retention by the Shareholders at the general meeting, the dividend distribution table was disclosed to the

public via the company’s website and the PDP

following the general meeting.

 Seventeen items were amended in the articles of incorporation during the 2012 general meeting. Information regarding these changes was presented to the shareholders prior to the meeting.

 Mr. Murat MEMİOĞLU was appointed as an independent member replacing board members Mr. Ahmet OLGUN.

 No shareholders have canceled any agreement or opened any lawsuit against the Company.

Outlook

JCR-ER is of the opinion that during the monitoring period the Company maintained its level of compliance with the Code in the Shareholders field. For this reason, the Outlook for this section has been determined as

“Stable”.

4- Public Disclosure and Transparency

The compliance level of the Company with the rules and implementations in the Public Disclosure and Transparency section has been increased to 8.59 from

8.05. The primary reasons behind this increase are that the Turkish website content is kept up to date and comprehensive annual reports were published.

This important main section focuses on the disclosure of information and documents needed by shareholders and stakeholders while protecting trade secrets The

Company’s level in this field and their corresponding

notes are outlined below;

Numerical value of 8.59,

Convergence Level AAA(Trk) representing the category of “Distinctive Compliance”,

Notch degree (a) representing the category of

“Excellent”,

Outlook (Stable)

Public Disclosures &

Transparency Results

8.59

AA (Trk)/bbb

Stable

Activities carried out during the monitoring period in the Public Disclosure and Transparency field:

 The company’s website is kept up to date in

Turkish. Significant improvements in the

Company’s organizational structure and

operations are published in a timely manner.  The 2012 annual report was also published

with high compliance level with the code.  The Company disclosed a total of 34

notifications to the PDP in the monitoring period. Following these disclosures not further information was requested. A link to the PDP is

available on the Company’s internet site.

 The Company’s quarterly financial statements

were regularly publically disclosed on its internet site.

 The Company was not delisted on the BIST.  Annual figures for 3rd-party commercial and

financial relations were disclosed to the public

via the Company’s internet site.

 All IHEVA share transactions conducted by managers with access to important company information were disclosed to the public through the PDP and internet site.

 The independent audit firm was changed in the monitoring period. The Company will be audited next year by Bilgili Bağımsız Denetim ve Yeminli Mali Müşavirlik A.Ş.

Outlook

JCR-ER is of the opinion that the Company will maintain its level of compliance with Code in the Public Disclosure and Transparency field during the upcoming monitoring period. For this reason, the Outlook for this section has been determined as “Stable”.

5- Stakeholders

With the exception of upper-level managers, a

company’s employees, customers, suppliers, creditors,

public authorities and the public in general are considered as the stakeholders of an institution. The rules and practices in this main section primarily aim to secure the rights of stakeholders and to facilitate the exercise of their rights, thus to maximize their contributions to the institution.

The compliance level of the Company with the rules and implementations in the Stakeholders section has been increased to 7.61 from 7.07. The primary reason

behind this increase is that developments about the environmental protection activities.

At the end of the monitoring period and according to

JCR-ER’s original methodology, the Company’s level of

compliance in the Stakeholder field is outlined below;

Numerical value of 7.61

Convergence Level AA(Trk) representing the category of “Merit Compliance”,

Notch degree (bb) representing the category of

“Good”, Outlook (Stable)

Stakeholders

Results

7.61

AA (Trk)/bb

Stable

Activities carried out during the monitoring period in the Stakeholder field:

 The Company hired 105 new employee, 74 employees left the company for various reasons and 3 employee retired in the monitoring period.

 Seven lawsuits were opened against the Company by employees. These lawsuits are currently ongoing.

 IHEVA products reach the final customer through İhlas Pazarlama A.Ş. For this reason, customer complaints are received by the marketing company, although IHEVA plays an active role in the resolving of these complaints. During the monitoring period 19.475 complaints were received by the call center. Of these, 95% have been resolved and 5% are ongoing.

 Five lawsuits were opened against the Company by customers and vendors.

Additionally four lawsuits also resulted against the Company in the monitoring period.

 There are no warning and penalty which were given by the regulatory bodies.

 No donations were made during monitoring period. The Company has initiated the carbon footprint report this year in scope of the Carbon Disclosure Project. Additionally, the contract through TÜKÇEV for the Company’s

recycling is ongoing.

Outlook

JCR-ER is of the opinion that during the following monitoring period the Company will maintain its level of compliance with the code in the Stakeholders field. For this reason, the Outlook for this section has been determined as “Stable”.

6- Board of Directors

This section consists of the board functions, qualifications, duties, powers and responsibilities of its members and the upper-level managers, and rules and practices related with established systems for effective supervision and control.

The compliance level of the Company with the rules and implementations in the Board of Directors section has been increased to 8.21 from 7.92. The primary reasons behind this increase are that a more effective risk management was implemented and the risk committee was established within scope of Board of Directors. At the end of the monitoring period and according to

JCR-ER’s original methodology, the Company’s level of

compliance in the Board of Directors field is outlined below;

Numerical value is 8.21,

Convergence Level AA(Trk) representing the category of “Merit Compliance”,

Notch degree (bbb) representing the category of

“Outstanding”,

Board of Directors

Results

8.21

AA (Trk) /bbb

Stable

Activities carried out during the monitoring period in the Board of Directors field:

 The Board of Directors was acquitted at the general meeting held on March 29, 2013.  Mr. Murat MEMIOGLU was approved by

shareholders in the general meeting as an independent member of the Board, this change were disclosed in a timely manner to the PDP.  There were no changes in the top management.  The risk committee was established in scope of

the Board and Mr. Tolga SONMEZ was appointed as the chairman, Mr. Mehmet KUSMEZ was appointed as the member of committee.

 The Board of Directors held 17 meetings as of 30.06.2013. All votes and decisions made during these meetings were recorded in the minute book and archived in accordance with the Code.

 The Audit Committee held 4 meetings in monitoring period. All decisions reached during these meetings were forwarded to the Board as suggestions.

 The Corporate Governance Committee held 4 meetings in monitoring period. All decisions reached during these meetings were forwarded to the Board as suggestions.

Outlook

JCR-ER is of the opinion that the Company will maintain its level of compliance with Code in the Board of Directors field during the following monitoring period. For this reason, the Outlook for this section has been determined as “Stable”.

7- Financial Efficiency

Since the year of 2009, the Company’s equity capital’s

absolute and relative amounts have suffered from erosion by reason of negative profitability during the same period. However, its equity capital’s high amount

in source composition is at a level which is expected to

maintain its sufficiency to meet funding requirements needed for sustainability and improvement capability of Ihlas Ev Aletleri compliance level to corporate governance principles.

Although the Company has exhibited a fluctuating growth trend since the year of 2005, it has materialized a cumulative asset growth at the rate of 376.14% during this period.

The Company, generating loss since 2006 cumulatively from the aspect of basic profitability performance indicators like ROAA and ROAE, reached a sufficient level of profit generation in as of 2012.

2006 2007 2008 2009 2010 2011 2012 ROAA (%) 2.41 8.65 -17.66 0.84 1.85 -11.14 8.00 ROAE (% ) 4.43 12.99 -26.48 1.14 2.31 -14.73 11.20 -30.00 -25.00 -20.00 -15.00 -10.00 -5.00 -5.00 10.00 15.00 20.00 ROAA (%) ROAE (% )

It can be noted that the Company owns adequate capital structure within its balance sheet composition because the largest source of the Company exhibiting also the fastest growth rate is its equity capital in its present structure.

Since 2006, the Company leverage ratio has retreated back from 45.47% to the rate of 29.21% and its equity capital share against its liabilities has increased significantly. Fast increase of its equity capital raised balance sheet cash items in significant amount to the extent that it improved liquidity ratios and this situation helped the maintenance of increase in working capital. On the other hand, the fact that the Company bought shares of the Group companies deteriorated the liquidity and cash ratios.

Commitment and contingency risks, forming by reason of on-balance-sheet and off-balance-sheet transactions are very high. Even currency and interest rate risks are compatible with ratios in the sector in general; profitability is one of the most important inputs of its stability.

In conclusion, although high equity capital level which

IHEVA has maintained in its balance sheet during the

previous 7 years has been pressed downwards due to negative profitability performance, it is adequate to

contribute to the sustainability of the Company’s

compliance level with the corporate governance principles.

8-

Appendices

TABLE: 1

İ

HLAS EV ALETLER

İ

İ

MALAT SANAY

İ

VE T

İ

CARET ANON

İ

M

Ş

İ

RKET

İ

SHAREHOLDING STRUCTURE

2008

2009

2010

2011

2012

August

2013

TL

(000)

95,685

191,370

191,370

191,370

191,370

191,370

USD

(000)

63,271

127,532

123,784

101,313

105,934

100,721

Share

Share

Share

Share

Share

Share

Shareholders

%

%

%

%

%

%

İ

hlas Holding A.

Ş

25.96%

17.60%

4.18%

7.32%

7.32%

7.32%

İ

hlas Pazarlama Yat

ı

r

ı

m Holding

A.Ş.

0.00%

0.00%

17.60%

17.60%

17.60%

17.60%

Ahmet Mücahit ÖREN

0.00%

0.23%

0.23%

0.23%

0.23%

0.23%

Ali Tubay GÖLBAŞI

0.00%

0.02%

0.02%

0.02%

0.02%

0.02%

Other

0.25%

Public

73.79%

82.15%

77.97%

74.83%

74.83%

74.83%

TABLE: 2

As of August 2013

Share %

Consolidated Subsidiaries

1-

İ

hlas Madencilik A.

Ş

.

62.25%

2-Mir Maden

Işletmeciligi Enerji ve Kimya San.Tic.

Ltd.

Ş

ti.

51.50%

3-

Detes Enerji Üretim A.Ş.

99.84%

Unconsolidated Subsidiaries

1-

İ

hlas Mining Ltd.

Ş

ti.

56.02%

TABLE: 3

İ

HLAS EV ALETLER

İ

İ

MALAT SAN.VE T

İ

C.A.Ş.

F i n a n c i a l D a t a

2012*

2011*

2010*

2009*

2008*

2007*

2006*

Total Assets (000 USD) 171.143 151.307 187.185 192.65 118.34 98.651 44.331

Total Assets (000 TRY) 304.223 285.803 289.389 289.085 178.965 114.898 62.312

Equity (000 TRY) 218.127 203.455 231.488 232.485 111.928 84.004 33.977

Net Profit (000 TRY) 17.631 -25.924 5.315 -702 -23.996 5.702 1.205

Net Profit Margin (%) 17.42 -26.10 5.22 -0.78 -31.11 8.00 1.68

ROAA (%) 8.00 -11.14 1.85 0.84 -17.66 8.65 2.41

ROAE (% ) 11.20 -14.73 2.31 1.14 -26.48 12.99 4.43

Equity/Assets (%) 71.70 71.19 79.99 80.42 62.54 73.11 54.53

Debt Ratio (%) 28.30 28.81 20.01 19.58 37.46 26.89 45.47

Asset Size Growth Rate (%) 6.44 -1.24 0.10 61.53 55.76 84.39 3.43

TABLE: 4

BOARD OF DIRECTORS

Name Task Profession

Election Date Education Executive/ Non Executive Independent/ Not

Independent Committee Membership Experience

(Year)

Abdullah TURALI Chairman Chartered _Accountant 10.05.2004 36 University Non-Executive Not Independent Sedat KURUCAN Vice-President Mechanical _Engineer 17.12.2002 30 Master Executive Not Independent

Mehmet KÜSMEZ Member Financial _Officer 16.03.2001 25 University Executive Not Independent Risk Committee Member H. Alev VOLKAN Member Accountant 31.05.2012 43 University Non-Executive Not Independent Corp. Gov. Committee Member Tolga SÖNMEZ Member Financial _Officer 31.05.2012 16 University Non-Executive Independent Risk Committee Chairman, Audit _{Committee Member} Salman ÇİFTÇİ Member Accountant 31.05.2012 20 University Non-Executive Independent Audit Committee Chairman