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TELECARD LIMITED

ANNUAL REPORT 1997

CONTENTS

COMPANY INFORMATION

BOARD OF DIRECTORS

Rear Admiral (Retd.) A.W. Bhombal (Chairman)

Mr. Sultan-ul-Arfeen

Mr. Shahid Firoz

Mr. Khalid Firoz

Mr. Javaid Firoz

Mr. Asghar Mehdi Abidi

Dr. Dudley B. Christie

CHIEF EXECUTIVE

Mr. Shahid Firoz

COMPANY SECRETARY

Mr. Jawed Hasan Ansari

BANKERS

Bank of America

Emirates Bank International Ltd.

Muslim Commercial Bank Ltd.

Habib Bank Ltd.

National Bank Ltd.

Askari Commercial Bank Ltd.

Standard Chartered Bank Ltd.

Prudential Commercial Bank Ltd.

AUDITORS

Ford, Rhodes, Robson, Morrow,

Chartered Accountants

REGISTERED OFFICE

3rd Floor

World Trade Centre

75, East Blue Area, Fazal-ul-Haq Road

Islamabad, Pakistan

CORPORATE OFFICE

7th Floor

World Trade Centre

Khayaban-e-Roomi, Clifton

Karachi, Pakistan

NOTICE OF ANNUAL GENERAL MEETING

Notice is hereby given that the 4th Annual General Meeting of the Shareholders of the

Company will be held on Saturday, February 28, 1998 at 3:00 p.m., at Islamabad

Holiday Inn, Islamabad to transact the following business:

1. To confirm the minutes of the last Annual General Meeting held on December

29, 1996.

2. To receive, consider and adopt the Audited Accounts of the Company for the

year ended on June 30, 1997 together with the Directors' and Auditors report

thereon.

3. To appoint Auditors of the Company and fix their remuneration. Present

Auditors M/s Ford, Rhodes, Robson, Morrow, Chartered Accountant retire and

being eligible offer themselves for re-appointment.

4. To transact any other business with the permission of the Chair.

NOTES:

1. The share transfer books of the Company shall remain closed from 21st to

28th February, 1998 (both days inclusive).

2. A member of the Company entitled to attend and vote may appoint another

member as his/her proxy to attend and vote instead of him/her. Proxy in-order

must be received at the Registered Office of the Company not less than 48

hours before the time of holding Annual General Meeting.

3. The members are requested to communicate with Company of any change in

their address.

DIRECTORS' REPORT

The Directors of the Company submit their report together with the Audited Accounts

for the year ended June 30, 1997.

FINANCIAL RESULTS

Rupees in thousand

JUNE 30

1997

1996

(18 months)

GROSS SALES

173,552

197,475

LESS: DISCOUNT

9,041

8,789

----------

NET SALES

164,511

188,686

COST OF SALES

139,399

193,445

----------

GROSS PROFIT/(LOSS)

25,112

(4, 759)

ADMINISTRATIVE AND SELLING EXPENSES

36,940

37,359

----------

(11,828)

(42,118)

OTHER INCOME

13,872

22,279

----------

2,044

(19,839)

FINANCIAL CHARGES

(13,717)

(17,407)

----------

NET LOSS FOR THE YEAR

(11,673)

(37,246)

PRIOR YEAR ADJUSTMENT

(4,101)

----------

(15,774)

(37,246)

EXTRAORDINARY ITEM-KARACHI

RELOCATION COST

(9,668)

----------

NET LOSS BEFORE TAXATION

(25,442)

(37,246)

----------

TAXATION CURRENT YEAR

(823)

(943)

- PRIOR YEARS

(928)

----------

(1,751)

(943)

----------

NET LOSS AFTER TAXATION

(27,193)

(38,189)

ACCUMULATED LOSS BROUGHT FORWARD

(38,189)

----------

ACCUMULATED LOSS CARRIED FORWARD

(65,382)

(38,189)

==========

CHIEF EXECUTIVE'S REVIEW

The review on pages from 7 to 9 deals with business activities of the Company during

the year, future outlook and subsequent events that have taken place between the end

of the financial year and the date of this Report. The Directors of the Company

endorse the contents of the review.

DIRECTORS

The present Board of Directors was elected for a period of three years at the Extra

Ordinary General Meeting of the Company held on April 01, 1997, following Directors

were elected:

1. Admiral (Retd.) Abdul Waheed Bhombal

2. Mr. Sultan-u!-Arfeen

3. Mr. Shahid Firoz

4. Mr. Javaid Firoz

5. Mr. Khalid Firoz

6. Syed Asghar Mehdi Abidi

7. Dr. Dudley B.Christie

PATTERN OF HOLDING OF THE SHARES

The pattern of holding is provided on page 33.

AUDITORS

The present Auditors M/s. Ford, Rhodes, Robson, Morrow, Chartered Accountants

retire and being eligible, offer themselves for re-appointment.

CHIEF EXECUTIVE'S REVIEW

It is a pleasure to welcome you to the 4th Annual General Meeting of the Company and

to present the Annual Report & Financial Statements for the year ended June

30,1997.

REVIEW OF OPERATIONS

As a result of change in the financial year from December closing to June closing in the

Finance Bill 1995, the report for the period ended June 30, 1996 was based on the

results of eighteen months from January 1, 1995 to June 30, 1996. The results of the

current year comprise Profit & Loss Account for 12 months from July 1,1996 to June

30,1997.

The year under review was overshadowed by the continued ban on the payphone

service in Karachi, the Company's largest revenue base, financial difficulties were

accentuated by devaluation in Pak Rupee, .political turmoil, and a general atmosphere of

economic uncertainties.

Despite the above mentioned adverse factors and the fact that 60% of the Company's

capital was prevented due to policies of the Government for productive employment, a

growth of 35% in total Company's sales was witnessed during the year 1996-97, from

Rs.128.4 million in 1995-96 (12 months) to Rs.173.6 million in 1996-97.

The increase in sales was largely achieved through volume increase resulting from the

Company's policy of selective high revenue Payphones sites and effective operational

strategies. During the year under review, cost of sales remained under control and

variable costs were reduced by almost 20% by pursuing very harsh austerity recourses.

Although devaluation of Pak. Rupee increased the cost of cards but this increment was

offset by persuading card suppliers to a special price concession for relieving this

hardship.

On January 20, 1997 an agreement was finally reached between TeleCard and the

Government whereby in exchange, your Company agreed to drop its claim of Rs.2.226

billion against the Government and in response the Ministry of Communications agreed

to restore our service in Karachi and offered a compensation in kind which envisaged

reduced Pakistan Telecommunication Company Limited (PTCL) charges for TeleCard

and lower rates of import duty and certain postponement of charges payable to PTCL.

This arrangement has enabled TeleCard to resume service in Karachi, a vital revenue

region and has helped in scaling down average cost of sales.

Due to the increase in revenue and decrease in cost of sales, gross profit of your

Company touched the figure of 25 million which is more than 15% of net sales as

compared to the last year's adverse future of gross loss of Rs. 3 million which reflected a

negative gross profit of 2% on net sales.

It is worth mentioning here that logistics of restoring service is a time consuming

process. Karachi Region contributed about 12% in the gross revenue of your Company

after the restoration of service. This indicates that the results of financial statements

could have been far better than the existing one if the ban on Payphone service in

Karachi had not been imposed. On the other hand the interim re-deployment of idle

phones was a painful but nonetheless worthwhile strategy.

Your management not only emphasized on increase in revenue and decrease in cost but

also strived to reduce the administrative and selling expenses by stretching the limits of

frugality. The administrative and selling expenses excluding depreciation and

amortization remained under control.

The Company deliberately decided not to extend its borrowing capacity and aggravate

the Profit & Loss Account in an uncertain situation, nevertheless, the financial strength

of your Company was supported by the financial institutions to meet the requirements

of capital work in progress as well as other short term needs. The financial expenses

were kept under tight control during the whole year.

Your Company also incurred expenses of Rs.9.668 million for relocation and

restoration of payphones for Karachi operations after the ban on service in

Karachi was lifted. These expenses were unavoidable and were incurred for

increasing the future profitability of your Company. However, in the present year

these expenses increased the current year's loss significantly.

Since your Company is heavily committed towards continued growth and consolidating

its position as market leader in the industry, your Company had to invest in network

planning and expansion.

During the year 1996-97, more than 50% of total equity stayed in capital

work-in progress. This huge investment has presently not contributed towards the

profitability and remained idle and unproductive because of the delay by the

Government in granting various operating permissions.

The net loss before prior year adjustments of Rs.11.673 million which is a dramatic

improvement but does not reflect the true return on total capital employed. As

reported, the loss before tax for the year under review after prior year adjustments and

Karachi relocation cost comes to Rs.25.442 million. It is imperative to mention that

capital work in progress of Faisalabad project and suspension of service in Karachi

depressed revenues during the year. Therefore net loss for the year does not delineate

the veritable return on capital employed by the investors.

FUTURE OUTLOOK

Now that the saga of the ban on Karachi operation is behind us, a breath of fresh air

and relief is being experienced by the Stakeholders.

Our existing international shareholders have expressed a willingness to commit newer

resources to the Company.

On the other hand the present Government and the Prime Minister has been gracious

enough to personally intervene in ensuring that the Ministry of Communications and

Pakistan Telecommunication Company Limited (PTCL) urgently resolve the outstanding

issues for permitting the Wireless Payphone System. The Ministry of Communications

has assured the Prime Minister that a decision to this effect will be in place by February

28, 1998. Your Company is thus poised for a huge roll out and international

agreements with some of the world's largest companies are already in motion. Hoping

no new surprises occur, we look forward to TeleCard emerging as a very powerful and

profitable Telecommunication Company an the country, playing a crucial role hand in

hand with PTCL in uplifting the economic and social horizon for the citizens of

Pakistan, urban and rural alike.

May God guide us all!

APPRECIATION

I now wish to record that the achievements were possible because your Company has

continued to emphasize in the development of the caliber of its human resources which

has been achieved through "on the job training" and development through "in house

training" which personifies the Company culture. My sincere thanks to the staff and

workers of the Company who have contributed to its profitability and growth.

Acknowledgments are particularly due to the Board of Directors for its active

participation and guidance in steering the Company through very difficult times inflicted

by the decisions of the last Government. Acknowledgment is also in order for the

support of Ministry of Communications in objectively resolving the outstanding issues of

the Company and to the Financial Institutions for having supported the Company to

tide an extraordinary financial crisis.

Lastly and not the least, I wish to record my sincere appreciation for the support and

confidence of our esteemed shareholders.

AUDITORS' REPORT TO THE MEMBERS

We have audited the annexed balance sheet of TELECARD LIMITED as at June 30,

1997 and the related profit and loss account and statement of changes in financial

position (cash flow statement), together with the notes forming part thereof, for the

year then ended and we state that we have obtained all the information and

explanations which to the best of our knowledge and belief were necessary for the

purposes of our audit and, after due verification thereof, we report that:

(a) (i) cash in transit (note 20.1 to the accounts) includes an amount of Rs. 1.998

million which has not been recovered from the branches to-date and

remained unverified by us. No provision against the above amount has been

made in the accounts;

(ii) mark-up amounting to Rs.7.82 million has been capitalised to the Faisalabad

Project for the reason given in note 13.1 to the accounts although the assets

were acquired and paid for in previous years; and

(iii) reference is made to Rs. 4.1 million shown in note 25 to the accounts. The

treatment of these items as per IAS 8 Net Profit or Loss for the Period,

Fundamental Errors and Changes in Accounting Policies would have

increased the net loss for the year shown in the accounts by the above

amount although the net loss before taxation would have been the same as

shown in the profit and loss account;

(b) in our opinion, proper books of account have been kept by the company as

required by the Companies Ordinance, 1984;

(i) the balance sheet and profit and loss account together with the notes

thereon have been drawn up in conformity with the Companies Ordinance,

1984, and are in agreement with the books of account and are further in

accordance with accounting policies consistently applied, except for the

change as stated in note 2.14 to the accounts with which we concur but for

the matter stated in paragraph (a) (ii) above;

(ii) the expenditure incurred during the year was for the purpose of the

company's business; and

(iii) the business conducted, investments made and the expenditure incurred

during the year were in accordance with the objects of the company;

(d) in our opinion, except for the effect of the matters referred to in paragraph (a) (i)

and (ii) above which would increase the loss for the year and accumulated loss by

Rs.9.818 million and changes in presentation as referred to in paragraph (a) (iii)

above, to the best of our information and according to the explanations given to

us, the balance sheet, profit and loss accounts and the statement of changes in

financial position (cash flow statement), together with the notes forming part

thereof, give the information required by the Companies Ordinance, I984, in the

manner so required and respectively give a true and fair view of the state of the

company's affairs as at June 30, 1997 and of the loss and the changes in

financial position for the year then ended;

(e) in our opinion no Zakat was deductible at source under the Zakat and Ushr

Ordinance, 1980; and

(f) without further qualifying our opinion, we draw attention to the following matters:

(i) the custom duty payable on payphones awaiting clearance from customs

amounting to Rs.24.016 million has been reversed in the current year and

booked at Rs.2.85 million (note 10.1 to the accounts) on the basis of the

representations made by the company to the appropriate authorities. The

position will finally be determined at the time of clearance of the goods

(ii) attention is drawn to note 18.1 to the accounts concerning outstanding

balance from debtors amounting to Rs. 2.2 million. The ultimate outcome of

actions taken by the company cannot presently be determined and no

provision for any doubtful debts that may result has been made in these

financial statements; and

(iii) as shown in the financial statements the company has suffered recurring

losses upto the year ended June 30,1997 and as of that date, the

company's current liabilities exceeded its current assets by Rs.88.156

million. These financial statements have been prepared on a going concern

basis, the validity of which is dependent on the successful outcome of

matters stated in note 28 to the accounts.

(iv) supplier's credit and royalties amounting to Rs. 24.4 million have been

treated as deferred liabilities on the basis of the reason given in note 5.5 to

the accounts.

Ford, Rhodes, Robson, Morrow

Karachi: Feb 6, 1998

Chartered Accountants

BALANCE SHEET AS AT JUNE 30, 1997

1997

1996

Note

Rupees

SHARE CAPITAL

Authorised

25,000,000 ordinary shares of

Rs. 10 each

250,000,000

==========

Issued, subscribed and paid-up

250,000,000

249,750,000

Revenue reserve

Profit and loss account-adverse balance

(65,382,700)

(38,189,165)

----------

184,617,300

211,560,835

DEFERRED INCOME

872,918

1,555,286

DEFERRED LIABILITIES

67,347,089

35,907,465

OBLIGATIONS UNDER FINANCE

LEASE

20,894,332

32,106,609

CURRENT LIABILITIES

Short term loans

6,166,667

Short term finances

31,065,189

49,870,144

Supplier's credit

606,309

58,573,586

Current portion of obligations

under finance lease

32,255,925

30,093,145

Current portion of custom duty debentures

14,469,963

1,562,129

Creditors, accrued and other liabilities

43,455,062

95,313,861

----------

128,019,115

235,412,865

CONTINGENCY AND COMMITMENTS

----------

401,750,754

516,543,060

==========

TANGIBLE FIXED ASSETS

Operating fixed assets

234,607,431

254,852,148

Capital work in-progress

105,685,357

114,889,286

----------

340,292,788

369,741,434

DEFERRED ADVERTISEMENT

EXPENDITURE

3,150,000

4,680,000

DEFERRED COST

2,025,724

2,757,044

LONG TERM DEPOSITS

16,419,097

16,477,597

CURRENT ASSETS

----------

Stores, spares and tools

95,214

Stock-in-trade

3,721,468

2,206,609

Trade debts

4,426,143

2,299,631

Advances, deposits, prepayments

and other receivables

21,980,038

12,767,151

Cash and bank balances

9,735,496

105,518,380

----------

39,863,145

122,886,985

----------

401,750,754

516,543,060

==========

Auditors' Report is annexed hereto.

The annexed notes form an integral part of these accounts.

PROFIT AND LOSS ACCOUNT

FOR THE YEAR ENDED JUNE 30, 1997

18 months to

June 30,

1997

1996

Note

Rupees

Gross sales

173,552,484

197,475,046

Less: Discount

9,041,440

8,789,376

----------

Net sales

164,511,044

188,685,670

Cost of sales

139,398,685

193,444,883

----------

Gross profit/loss)

25,112,359

(4,759,213)

Administrative and selling expenses

36,940,600

37,358,949

----------

(11,828,241)

(42,118,162)

Other income

13,872,792

22,279,648

----------

2,044,551

(19,838,514)

Financial charges

(13,717,943)

(17,407,203)