MACQUARIE TECHNOLOGY GROUP LIMITED - Annual Report 2012

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ANNUAL REPORT 2012

INTELLICENTRE 2 – OpEN fOR busINEss focusing on green Technology dELIvERING A RECORd fuLL yEAR pROfIT REsuLT Macquarie TelecoM MenTors MaKe a Difference INCREAsE IN HOsTING REvENuE invesTing in clouD coMpuTing capabiliTies

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NOTicE Of ANNUAL GENERAL MEETiNG

notice is hereby given that the annual general Meeting of the members of Macquarie Telecom group limited be held at the Museum of sydney auditorium (at the corner of phillip and bridge streets) in sydney on friday, 23 november 2012 at 9:00am.

COMPANy HIgHLIgHTS 02 fINANCIAL HIgHLIgHTS 03 COMPANy fEATURE 04 CHAIRMAN’S MESSAgE 06 CHIEf ExECUTIvE’S MESSAgE 08 BOARD Of DIRECTORS 10 fINANCIAL STATEMENTS 12

Macquarie Telecom group limited

acn 056 712 228

We are entrusted With the seamless running of our clients’ business and We understand it is essential to deliver this service 24 hours a day, 365 days a year. this enables them to concentrate on What is most important: developing their business.

hosting

data

voice

mobile

Macquarie Telecom’s Macquarie Telecom’s Data Hosting division focuses on Network division provides providing secure, scalable, reliable and secure IP data high-availability, fully network services. We offer managed hosting services the highest level of network for our customers’ critical service availability and applications. optimum network solutions to support our customers’ business application environments.

Macquarie Telecom’s Voice division delivers secure, flexible and cost-effective telephony solutions developed to meet the specific business requirements of our customers and to maximise productive use of telecommunications and control unnecessary spending.

Macquarie Telecom’s Mobiles division provides tailored mobile solutions together with a wide range of enhanced management, reporting and cost control tools that enable our customers to effectively manage and control their mobile fleet and its expenditure.

company highlights

record full year profit

$40.6m full-year ebitda

Macquarie Telecom achieved a full-year EBITDA (earnings before interest, tax, depreciation and amortisation) profit of $40.6 million for the year ended 30 June 2012.

Our strategic objective is to be Australia’s number one Managed Hosting and integrated Telco provider to business and government customers through the delivery of service excellence.

Macquarie Telecom has delivered a record full year result whilst investing in its Cloud Computing capabilities and completing the construction of its second Sydney data centre facility, Intellicentre 2.

$30.8m cash & cash eQuivalents

9%

improvement year on year

increase in hosting revenue

Hosting revenue increased Macquarie Telecom maintains 9% to $58.6 million. a healthy balance sheet with This result supports the cash and cash equivalents of strategic direction we $30.8 million with an additional have taken as we build $30.0 million undrawn working momentum in our higher capital facility in place. margin Hosting business.

The EBITDA result was a 9% improvement on the 12 months ended 30 June 2011.

Financial highlights

profitable groWth

revenue mix continues to improve
net profit after tax of $19.6 million up 10.6% year on year
operating cash floW of $34.0 million
fully franked ordinary dividends of 24 cents per share for the year

Financial summary

for the year ended 30 June, in $m

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2009 2010 2011 2012
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Service revenue*	241.6	236.0	227.5	218.9
EBITDA*	23.2	29.0	37.2	40.6
EBIT*	8.4	13.3	21.8	24.4
Net proft/(loss) after tax* Operating cash fow	6.1 27.6	10.4 28.9	17.7 38.9	19.6 34.0
Gross Margin %*	43.0%	49.0%	56.1%	59.9%

2012 operating results by division*

for the year ended 30 June 2012, in $m

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revenue ebitda
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Hosting Division	58.6	15.3
Data Division	62.4	10.4
Voice Division	76.2	17.5
Mobiles Division	21.7	3.4
Corporate Offce**	0.0	(6.0)
	218.9	40.6

ebitda

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2012 $40.6m
11 $37.2m
10 $29.0m
09 $23.2m
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operating cash Flow

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2012 $34.0m
11 $38.9m
10 $28.9m
09 $27.6m
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service revenue

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2012 $218.9m
11 $227.5m
10 $236.0m
09 $241.6m
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gross margin %

Excludes results from the discontinued Singapore operation. ** The Corporate Office figure represents overhead costs associated with Macquarie Telecom’s corporate and regulatory activities.

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2012 59.9%
11 56.1%
10 49.0%
09 43.0%
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macQUaRiE tElEcom annUal REpoRt 2012

company FEatURE

macQuarie telecom’s neW $60m state-of-the-art, World class data centre, intellicentre 2, is noW open for business.

intellicentre 2 – open For business

conveniently located at macquarie park, only 15 kilometres from the centre of sydney, intellicentre 2 has been engineered with a specific focus on sustainability, security and high availability with full n+1 redundancy in power supply, water and networks, and has been built to be the most secure and accredited data centre in australia.

Delivering green, economical benefits and using the latest in sustainable power generation, intellicentre 2 will have a world leading power Utilisation Efficiency (pUE) of 1.3 to help our customers significantly cut the amount of power required to run their servers and in turn provide substantial cost efficiencies and a lower carbon footprint.

the facilities power system has been designed to be concurrently maintainable, meaning macquarie can provide 100% power and cooling uptime. Every component, cable, device and pipe can be serviced at any time without impacting power to customers.

Diverse high voltage power feeds are connected from two separate power utilities. the facility design caters for 3 separate and diverse sources of power – tri-generation gas, mains power and generator diesel. Even if utility power is down, intellicentre 2 and our customer’s applications remain up.

cooling is further optimised using sensors to continuously monitor temperature and humidity throughout intellicentre 2 and adjusting it in response to changes in demand.

intellicentre 2 is built around a highly secure physical environment, managed by an onsite facility manager, 24/7 onsite security and security video for all locations. all access to the facility is recorded and is available to our customers on inView, macquarie telecom’s management and reporting tool for data and hosted services. access is reinforced through biometrics and man-traps.

intellicentre 2 has an onsite network operations centre (noc) and onsite

engineers (intellihands) to complete customer adds, moves and changes. only authorised staff have access to infrastructure. customers have direct control of their infrastructure security.

When you swipe the poD your own rack locks will light up. Red – locked, green – unlocked. these locks will be integrated with our on-site security access system, ultimately providing our customers with direct visibility of times their racks were accessed and by whom through macView.

intellicentre 2 is a facility designed to, and accredited in, major global standards. our certifications independently verify the significant investment in resiliency, security, sustainability and operational excellence of this data centre. intellicentre 2’s accreditations include Uptime institute tier iii (the first data centre in australia and only one in nsW), iso 27001 (people, processes and security) and asio t4 “intruder Resistant” (very high standard of physical security).

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macquarie telecom Focusing on green technology

in october 2010 macquarie telecom announced a $60 million investment to build the greenest data centre in australia. now completed, this facility, known as intellicentre 2, utilises the best practices and latest technology to ensure it can achieve the lowest power Usage Effectiveness, the default industry benchmark, as possible.

measuring and monitoring what impacts power management and metrics in our Data centres.
Working to better understand where power is being utilised the most and how to make this usage more efficient.
sorting through the “vendor hype” around “green it” and “green technology” in order to understand which technologies actually make an impact, for example enterprise virtualisation, server architectures, rack and cooling options and the impact of perforated rack doors.

macquarie telecom is focusing on green technology and low it energy consumption in both our intellicentres in order to establish low carbon footprint hosting environment’s in each facility. this focus on green technology includes:

Using racks incorporating ipamm technology (intelligent plenum air management module) to replace existing racks.

our focus is on green technology and energy consumption in our intellicentres in order to establish loW carbon footprint hosting environments.

Employing cold-isle containment and rain-water harvesting.

community work

macQuarie telecom mentors make a difference

During the year, volunteers from macquarie telecom worked with young people from the yWca nsW links to learning program.

links to learning is a program for high school students who have been identified by the school as at-risk of dropping out of the education system. the program is designed to help students begin to understand the diverse range of career and educational choices available to them and participate in a variety of practical activities aimed at preparing them for applying for jobs and the interview process.

‘oFFicE liFE is DiFFEREnt to What i imaginED. i thoUght staFF WERE FRiEnDly anD thE toUR Was FUn. it opEnED nEW caREER oppoRtUnitiEs FoR mE. i lEaRnED thERE aRE many caREER paths i coUlD choosE FRom. i lEaRnED that i am capablE oF gEtting a job anD taking a lot oF stEps to gEt thERE in thE pRocEss.’

Volunteers from macquarie were able to provide some experience in the office environment, share some skills and talk about career aspirations. after the workshop, one student commented:

macQUaRiE tElEcom annUal REpoRt 2012

chaiRman’s mEssagE

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during a year of significant investment for future groWth, macQuarie telecom delivered another strong profit result, and generated solid operational cash floWs.

During a year of significant investment for future growth, Macquarie Telecom delivered another strong profit result, and generated solid operational cash flows. We achieved this pleasing result in fiscal 2012, whilst continuing to expand our market leadership position in the provision of mission critical application hosting to Australian business and government customers.

Macquarie Telecom delivered a net profit after tax from continuing operations of $19.6 million for fiscal 2012, an increase of 10.6% on 2011. This strong result supports the strategic direction we have taken to be Australia’s number one Managed Hosting and integrated Telco provider to business and government customers, through the delivery of service excellence.

Total service revenue for the year was $218.9 million, with our revenue mix continuing to improve, and our higher margin Hosting business once again making an increased contribution to total service revenue year on year.

‘macQUaRiE tElEcom Exits thE yEaR in a stRong Financial position, With a RobUst balancE shEEt, anD $30.8 million in cash anD cash EQUiValEnts.’

Macquarie Telecom is experiencing increased demand for its Hosting services due to the growing trend of selective outsourcing of Information Technology. We believe this trend of outsourcing is accelerating due to higher speed internet connectivity driving new web technology, and the associated demand for managed hosting.

Our Hosting business continued its strong revenue performance, growing by 8.9% on 2011, contributing $58.6 million, or 26.8% of total revenue. The Hosting business recorded EBITDA of $15.3 million, an increase of 5.5% on the previous corresponding period.

In order to take full advantage of future growth opportunities, and to capitalise on the increasing demand for our Hosting services, we invested significantly in 2012 to expand our Hosting capacity, by completing the construction of our second Sydney data centre, Intellicentre 2.

This facility, built on a 20,000 sqm site in North Ryde, Sydney, is accredited to the highest global security standards in order to support the data management needs of both corporate and government customers. The data centre also utilises state-of-the-art energy, cooling and management technologies, in order to drive down power consumption to match world-class levels.

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‘macQUaRiE tElEcom has a

highly skillED anD ExpERiEncED managEmEnt tEam Which is ExEcUting thE company’s gRoWth stRatEgy EFFEctiVEly.’

Macquarie Telecom’s Telco business, consisting of Data, Voice and Mobile services, remains an important part of the company’s overall offering, delivering $160.3 million in revenue, and an EBITDA profit of $31.3 million, up 9.4% on the previous year. Strict cost control and enhanced automation have contributed to improved margins in the Telco business. We remain focused on continuously improving operational efficiency in our Telco business, in order to enhance our customers experience and improve our margins.

Macquarie Telecom exits the year in a strong financial position, with a robust balance sheet, and $30.8 million in cash and cash equivalents. In addition, a $30 million undrawn working-capital facility is in place to support our growth. Combined with strong operating cash flows, Macquarie Telecom is therefore well positioned to take advantage of future organic and inorganic growth opportunities, as they emerge.

Capital expenditure for fiscal 2013 is expected to be approximately $34 million, of which it is expected approximately $14 million will be spent on the expansion of Hosting capacity.

In conclusion, Macquarie Telecom has a highly skilled and experienced management team which is executing the company’s growth strategy effectively. We enter the new financial year confident that our strategies are working, and that our significant investments in data centre capacity and Cloud Computing, will provide the platform for continued growth.

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robert kaye chairman

macQUaRiE tElEcom annUal REpoRt 2012

chiEF ExEcUtiVE’s mEssagE

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macQuarie telecom has delivered a record full year result Whilst investing in its cloud computing capabilities and completing the construction of its second sydney data centre facility, intellicentre 2.

Intellicentre 2 complements our existing CBD based data centre, Intellicentre 1, and alleviates any security, compliance, data residency and low latency concerns customers have about cloud services, particularly in today’s climate which is dominated by a growing number of security scares, locally and overseas.

Intellicentre 2 is the first facility of its type in Australia to be certified to a Tier III standard by the Uptime Institute. The facility utilises global-leading energy, cooling and management technologies to drive down power consumption. The facility is engineered to world-class standards with a focus on sustainability, security and full N+1 redundancy for all elements including power, water and data.

‘thERE aRE a nUmbER oF impoRtant REcEnt DEVElopmEnts in thE inFoRmation tEchnology anD tElEcommUnications inDUstRy WE bEliEVE Will continUE to DRiVE gRoWth in thE coming yEaRs.’

The strong 2012 profit result demonstrates that our long term strategy of driving a change in revenue mix towards higher-margin services, such as Hosting, is successfully delivering profitable growth. There are a number of important recent developments in the Information Technology and Telecommunications industry we believe will continue to drive growth in the coming years.

Firstly, the emergence of Cloud Computing, which is a natural extension of managed hosting, is providing new market opportunities which Macquarie Telecom is well positioned to capitalise on with the opening of Intellicentre 2, our deep Hosting product set and 11 years of Hosting experience.

Secondly, the roll-out of the NBN fundamentally shifts the competitive dynamics of the telecommunications market from infrastructure to customer service which plays to Macquarie Telecom’s key strength in customer service delivery. In addition, we believe increasing bandwidth speeds will elevate the importance of mission critical web applications in business and fuel growth in Hosting. Indeed, we have identified that for many businesses, it is important that information that is hosted in data centres remains in Australia. Accordingly, the increasing awareness of the benefits of “on-shored” solutions provides Macquarie Telecom with the opportunity to service the emerging data security and residency needs of our customers.

Thirdly, the proliferation of “Bring Your Own Device”, where staff bring their own devices to work and want them connected to the corporate network is creating significant security issues for the corporate Chief Information Officer.

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‘thE managEmEnt anD staFF oF macQUaRiE tElEcom aRE DEDicatED to bUilDing on thE pRogREss that has bEEn achiEVED in 2012. in thE yEaR ahEaD WE Will bE FocUsED on continUing to ExEcUtE on oUR stRatEgy oF gRoWing oUR highER maRgin bUsinEssEs anD DEliVERing ExcEptional sERVicE to oUR cUstomERs.’

Macquarie Telecom’s mobile device management tools solve these issues. In addition, our new Telstra 3G network means we now uniquely have three mobile networks to offer our customers to get the perfect fit for their expanding mobile device fleets.

The management and staff of Macquarie Telecom are dedicated to building on the progress that has been achieved in 2012. In the year ahead we will be focused on continuing to execute on our strategy of growing our higher margin businesses and delivering exceptional service to our customers. In recent years we have demonstrated that our strategy is working and we remain confident that the momentum we have created combined with investments in data centre capacity and Cloud Computing will lead to continued growth in the future.

In closing, I would like to express my gratitude to the management team and Macquarie Telecom’s staff for their dedication and hard work during the past year and thank our business partners and customers for their ongoing support.

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david tudehope chief Executive

macQUaRiE tElEcom annUal REpoRt 2012

boaRD oF DiREctoRs

the strong 2012 profit result demonstrates that our long term strategy of driving a change in revenue mix toWards higher-margin services, such as hosting, is successfully delivering profitable groWth.

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robert kaye chairman

Robert is Chairman of Macquarie and was appointed as a director in 2001. He was British Telecom’s director of market and business development for the Australasian region, a former managing director of British Telecom’s Australian operations, and a director of Clear Communications Ltd in New Zealand, until retirement in June 2002. Robert has held CEO positions in the past with several major IT&T companies. Robert is chairman of the Corporate Governance, Nomination and Remuneration Committee and a member of the Audit and Risk Management Committee.

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david tudehope chief Executive

David is Chief Executive and co-founder of Macquarie Telecom and has been a director since 1992. He is responsible for overseeing the general management and strategic direction of the Company, and is actively involved in the Company’s participation in regulatory issues. He was previously a director of the Service Providers’ Industry Association. He is a member of the Australian School of Business Advisory Council. David holds a Bachelor of Commerce degree from the University of NSW. He is a member of the Corporate Governance, Nomination and Remuneration Committee. David received the Australian Telecommunication User Group’s highest award in 2011, the Charles Todd Medal.

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aidan tudehope managing Director – hosting

Aidan is co-founder of Macquarie Telecom and has been a director since 1992. He is the managing director of Macquarie Hosting with a focus on business growth, operational efficiency, cyber security and customer satisfaction. He has been responsible for the strategy and execution of the $60m investment in Intellicentre 2. As the former Chief Operating Officer for Macquarie, Aidan played an integral part in the strategy and direction of the Hosting business since its state-of-theart data centre, the Intellicentre opened in 2001, as well as being instrumental in the development of Macquarie’s data networking strategy. He is on the Australian Government’s IT Industry Innovation Council and holds a Bachelor of Commerce degree.

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anouk darling

non-Executive Director

Anouk is CEO of Moon Communications Group and a director of Hatch Entertainment, another STW company. With over 15 years’ experience in marketing and brand strategy, she has been central to some of Australia’s largest re-branding projects across a broad range of sectors including energy, finance, retail and airlines. She has a BA, MBA (major in Marketing), AICD, AIMIA and AIM memberships. Anouk joined the Board on 22 March 2012 and is a member of the Audit and Risk Management Committee and the Corporate Governance, Nomination and Remuneration Committee.

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John palFreyman

non-Executive Director

John’s career spans more than 25 years in the IT industry. He was Executive Chairman of 90East Inc, an Australian supplier of managed security services to federal government agencies, until the company’s successful trade sale in early 2004. Previously, John was Managing Director of Baltimore Technologies (Asia Pacific), the region’s dominant supplier of public key infrastructure based e-commerce and enterprise security systems. He holds a Bachelor of Commerce degree and qualified as a chartered accountant in 1982. John joined the Board on 26 July 2004 and is Chairman of the Audit and Risk Management Committee and a member of the Corporate Governance, Nomination and Remuneration Committee.

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peter James

non-Executive Director

Peter has a BA with majors in Computer Studies and Business and is a Fellow of the Australian Institute of Company Directors. Peter joined the Board on 2 April 2012 and is a member of the Audit and Risk Management Committee and the Corporate Governance, Nomination and Remuneration Committee.

macQUaRiE tElEcom annUal REpoRt 2012

Financial statEmEnts

DiREctoRs’ REpoRt	13
coRpoRatE goVERnancE statEmEnt	24
statEmEnt oF compREhEnsiVE incomE	27
statEmEnt oF Financial position	28
statEmEnt oF changEs in EQUity	29
statEmEnt oF cash FloWs	30
notEs to thE Financial statEmEnts	31
DiREctoRs’ DEclaRation	61
inDEpEnDEnt aUDitoR’s REpoRt	62
aUDitoR’s inDEpEnDEncE DEclaRation	63
asx aDDitional inFoRmation	64

DIRECTORs’ REPORT

Your directors submit their report for the year ended 30 June 2012.

Directors

The names and details of the directors of Macquarie Telecom Group Limited (“Macquarie Telecom” or the “Company”) in office during the financial year and until the date of this report are as follows. Directors were in office for this entire period unless otherwise stated.

Names, qualifications, experience and special responsibilities

Robert Kaye

(Chairman), Age 74

Robert is Chairman of Macquarie Telecom and was appointed as a director in 2001. He was British Telecom’s director of market and business development for the Australasian region, a former managing director of British Telecom’s Australian operations, and a director of Clear Communications Ltd in New Zealand, until retirement in June 2002. Robert has held CEO positions in the past with several major IT&T companies. Robert is chairman of the Corporate Governance, Nomination and Remuneration Committee and a member of the Audit and Risk Management Committee.

David Tudehope

(Chief Executive), Age 45

Aidan Tudehope

(Managing Director – Hosting), Age 40

Aidan is co-founder of Macquarie Telecom and has been a director since 1992. He is the managing director of Macquarie Hosting with a focus on business growth, operational efficiency, cyber security and customer satisfaction. He has been responsible for the strategy and execution of the $60m investment in Intellicentre 2. As the former Chief Operating Officer for Macquarie, Aidan played an integral part in the strategy and direction of the Hosting business since its state-of-the-art data centre, the Intellicentre opened in 2001, as well as being instrumental in the development of Macquarie’s data networking strategy. He is on the Australian Government’s IT Industry Innovation Council and holds a Bachelor of Commerce degree.

John Palfreyman

(Non-Executive Director), Age 53

John’s career spans more than 25 years in the IT industry. He was executive chairman of 90East Inc, an Australian supplier of managed security services to federal government agencies, until the company’s successful trade sale in early 2004. Previously, John was managing director of Baltimore Technologies (Asia Pacific), the region’s dominant supplier of public key infrastructure based e-commerce and enterprise security systems. He holds a Bachelor of Commerce degree and qualified as a chartered accountant in 1982. John joined the Board on 26 July 2004 and is chairman of the Audit and Risk Management Committee and a member of the Corporate Governance, Nomination and Remuneration Committee.

Anouk Darling*

(Non-Executive Director), Age 42

Peter James**

(Non-Executive Director), Age 62

Peter has over 30 years’ experience in the technology, telecommunications and media industries. His experience includes over 20 years as a board member of a range of Australian publicly listed companies. In addition, Peter has 16 years’ experience in Chief Executive Officer roles including Computer Power Group Limited and Adcorp Australia Limited. Peter is currently a non-executive Director of iiNet Limited, Australia’s second largest DSL Internet Service Provider. He has played a leading role in launching Ninefold, an Australian cloud technology business backed by Macquarie Telecom and he is also a successful investor in a number of Australian technology and social media businesses, including the leading Australian group buying site JumpOnIt which was sold to US-based LivingSocial in January this year. Peter has a BA with majors in Computer Studies and Business and is a Fellow of the Australian Institute of Company Directors. Peter joined the Board on 2 April 2012 and is a member of the Audit and Risk Management Committee and the Corporate Governance, Nomination and Remuneration Committee.

Appointed 22 March 2012

** Appointed 2 April 2012

MACQUARIE TELECOM ANNUAL REPORT 2012

DIRECTORs’ REPORT

Directors’ interests in the shares and options of the Company and related bodies corporate

As at the date of this report, the interests of the directors in the shares and options of the Company and related bodies corporate were as follows:

(a) D Tudehope and A Tudehope collectively wholly own Claiward Pty Ltd, an entity which holds 12,501,390 (60%) of the ordinary shares of Macquarie Telecom. The relevant ownership interests in Claiward Pty Ltd are held by Semark Pty Ltd at 84% and Fenton Australia Pty Ltd at 16%. The shares in these latter companies are held by D Tudehope and A Tudehope respectively;
(b) a director-related entity of D Tudehope and A Tudehope holds 7,183 ordinary shares issued under the Employee Discretionary Share Plan and Share Purchase Plan;
(c) a director-related entity of D Tudehope holds 323,291 ordinary shares. D Tudehope holds a further 133 shares issued under the Employee Discretionary Share Plan;
(d) 5,000 ordinary shares were on issue to a director-related entity of R Kaye. R Kaye also has an interest in 25,000 ordinary shares;
(e) a director-related entity of J Palfreyman holds 10,000 ordinary shares. J Palfreyman also has an interest in 80,000 ordinary shares.

Company Secretaries

Independent Professional Advice

Directors and board committees have the right, in connection with their duties and responsibilities, to seek independent professional advice at the Company’s expense. Prior written approval of the Chairman is required, but this will not be unreasonably withheld.

Principal Activities

Macquarie Telecom Group Limited is the head entity of a consolidated group comprising Macquarie Telecom Pty Limited (“MT”), Macquarie Hosting Pty Limited (“MH”), Macquarie Telecom Carrier Services Pty Limited (“MTCS”), Macquarie Telecom Network Carrier Services Pty Limited (“MTNCS”) and Ninefold Pty Limited (“Ninefold”).

The principal activities of the consolidated entity were the provision of telecommunication and hosting services to corporate and government customers within Australia.

Earnings Per Share

Earnings Per Share
	2012	2011
	cents	cents
Earnings per share for proft attributable to
the ordinary equity holders of the company
Basic earnings per share	93.4	84.8
Diluted earningsper share	93.4	84.5

Michael simmonds

Age 46

Michael was appointed as Chief Financial Officer and company secretary of the Company in March 2006. Prior to this he held a number of positions as finance director in the UK. Michael has been a chartered accountant for over 20 years.

Richard Lutterbeck

Age 41

Richard was appointed as company secretary of the Company in February 2009. In addition, he holds the position of Group Commercial and Strategy Manager. Richard has been with the Company since 2001. He holds a Bachelor of Economics degree and a Masters of Business Administration.

Review and Results of Operations

The consolidated entity achieved earnings before interest, tax, depreciation and amortisation (“EBITDA”) of $40.6 million in the year ended 30 June 2012, up from $37.2 million in the corresponding period from continuing operations.

The following tables summarise the revenue and EBITDA performance of Macquarie Telecom’s major lines of business for the past three comparable reporting periods.

past three comparable reporting periods.
Revenue
(A$million)	Full Year 2012	Full Year 2011	Full Year 2010
Hosting
HostingTotal	58.6	53.8	44.5
Telco
Voice	76.2	86.3	104.1
Data	62.4	59.2	58.6
Mobiles	21.7	28.2	28.8
Telco Total	160.3	173.7	191.5

Total ContinuingOperations	218.9	227.5	236.0
EBITDA
(A$million)	Full Year 2012	Full Year 2011	Full Year 2010
Hosting
HostingTotal	15.3	14.5	15.2
Telco
Voice	17.5	16.2	15.0
Data	10.4	8.8	3.4
Mobiles	3.4	3.6	1.9
Telco Total	31.3	28.6	20.3
Corporate Offce
Corporate Offce Total	(6.0)	(5.9)	(6.5)

Total ContinuingOperations	40.6	37.2	29.0
Reconciliation of EBITDA to proft before income tax
Total EBITDA
(A$million)	Full Year 2012	Full Year 2011	Full Year 2010
Total EBITDA	40.6	37.2	29.0
Interest revenue	2.3	3.1	2.1
Interest expense	(0.2)	-	(0.2)
Depreciation and amortisation expense	(16.2)	(15.4)	(15.7)
Proft before income tax	26.5	24.9	15.2

MACQUARIE TELECOM ANNUAL REPORT 2012

DIRECTORs’ REPORT

In the 12 months to 30 June 2012, Macquarie Telecom’s service revenue from continuing operations was $218.9 million, a decrease of 3.5% compared to the corresponding period.

Macquarie Telecom’s Hosting business, which provides secure, high-availability hosting solutions for companies with online applications, mission critical to their business, continued to perform strongly with revenue increasing 8.9% to $58.6 million. Hosting now represents 26.8% of Macquarie Telecom’s revenue. It generated an EBITDA profit of $15.3 million, up 5.5% on the corresponding period.

Macquarie Telecom’s Telco (Data, Voice and Mobile) business remains an important part of the Company’s overall offering, delivering $160.3 million in revenue and an EBITDA profit of $31.3 million, up 9.4% on the previous corresponding period. Strict cost control and automation has contributed to the improved margins in the Telco business.

Capital expenditure for the full year was $51.9 million including $36.7 million towards construction of Macquarie Telecom’s new data centre facility, Intellicentre 2 at North Ryde. Prior year capital expenditure was $30.6 million.

Macquarie Telecom has generated operating cash flows of $34.0 million and held cash and cash equivalents of $30.8 million as at 30 June 2012.

The consolidated entity employed 419 employees at 30 June 2012 (2011: 404 employees).

Dividends

Dividends paid to members during the financial year were as follows:

developments in the operations of the consolidated entity and the expected results of those operations in years after the current year would be likely to result in unreasonable prejudice to the Company. Accordingly, this information has not been included in this report. Further developments by the time of the Annual General Meeting will be reported in the Chairman’s address to that meeting.

Significant Changes in the State of Affairs

There were no significant changes in the state of affairs during the year ended 30 June 2012.

Significant Events After the Balance Date

Refer to Note 28 for significant events occurring after the balance date.

Share Options

Details of options on issue at 30 June 2012 and movements in options on issue during the year are included in Note 16 to the financial statements.

Indemnification and Insurance of Directors and Officers

During the year, the Company paid premiums in respect of a contract insuring all the directors of Macquarie Telecom against costs incurred in defending proceedings for conduct involving:

(a) a wilful breach of duty; or
(b) a contravention of sections 182 or 183 of the Corporations Act 2001 , as permitted by section 199B of the Corporations Act 2001 .

The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premiums.

as follows:
	2012	2011
	$’000	$’000
(i) Final dividend for the year ended 30 June
2011 of 12 cents per share (2011: 20 cents)
fully franked based on tax paid at 30%.	2,511	4,163
(ii) Special dividend for the year ended
30 June 2011 of nil (2011: 20 cents) fully
franked based on tax paid at 30%.	-	4,163
(iii) Interim dividend for the year ended
30 June 2012 of 12 cents per share
(2011: 10 cents) fully franked based
on taxpaid at 30%.	2,516	2,090
	5,027	10,416

In addition to the above dividends, since the end of the financial year the directors declared the payment of a fully franked final dividend of $2.52 million (12 cents per fully paid ordinary share) to be paid on 11 October 2012 out of retained earnings at 30 June 2012.

Likely Developments and Expected Results

The directors believe, on reasonable grounds, that to include in this report detailed information regarding likely

Remuneration Report (Audited)

This report outlines the remuneration arrangements in place for directors and executives of Macquarie Telecom.

Remuneration philosophy

The performance of the Company depends upon the quality of its directors and senior managers. To prosper, the Company must attract, motivate and retain highly skilled directors and executives.

To this end, the Company embodies the following principles in its remuneration framework:

Provide competitive rewards to attract high calibre senior managers;
Link senior manager rewards to shareholder value;
Significant portion of senior manager remuneration ‘at risk’, dependent upon meeting predetermined performance benchmarks; and
Establish appropriate, demanding performance hurdles in relation to variable senior manager remuneration.

Responsibility for evaluating the Board’s performance falls to the Corporate Governance, Nomination and Remuneration Committee. The performance of key executives is evaluated by the Chief Executive and where considered appropriate, the Board as a whole.

Remuneration link to performance

Macquarie Telecom’s remuneration philosophy directly aligns a percentage of short-term incentives, such as bonuses, and all long-term incentives granted to employees with key business outcomes such as investment returns, company profit growth and total shareholder return.

Remuneration structure

In accordance with best practice corporate governance, the structure of non-executive director and senior manager remuneration is separate and distinct.

Non-executive director remuneration

Objective

The Board seeks to set aggregate remuneration at a level which provides the Company with the ability to attract and retain non-executive directors of the highest calibre, whilst incurring a cost which is acceptable to shareholders.

structure

The Company’s constitution and the ASX Listing Rules specify that the aggregate remuneration of non-executive directors will be determined from time to time by a general meeting. An amount not exceeding the amount determined is then divided between the non-executive directors as agreed. The latest determination was at the Annual General Meeting held on 26 November 2003 when shareholders approved an aggregate remuneration of $500,000 per year.

The amount of aggregate remuneration sought to be approved by shareholders and the manner in which it is apportioned amongst non-executive directors is reviewed annually.

Each non-executive director receives a fee for being a director of the Company.

The non-executive directors of the Company may hold shares and options over shares in the Company.

The issue of any options to non-executive directors must be approved by shareholders in general meeting.

The remuneration of non-executive directors for the period ending 30 June 2012 is detailed in the table on page 20 of this report.

senior manager and executive director remuneration

Objective

The Company aims to reward senior managers with a level of remuneration commensurate with their position and responsibilities within the Company and so as to:

Reward senior managers for Company, business unit and individual performance against targets set by reference to appropriate benchmarks;
Align the interests of the executives with those of the shareholders;
Link reward with the strategic goals and performance of the Company; and
Ensure total remuneration is competitive by market standards.

structure

Service agreements have been entered into with each of the Chief Executive and the Managing Director – Hosting, but not with any other senior managers, each of whom is employed under the terms of a letter of appointment. Details of the service agreements are provided on page 19. Remuneration for all senior managers consists of the following key elements:

Fixed remuneration
Variable remuneration
Short Term Incentive (“STI”); and
Long Term Incentive (“LTI”).

MACQUARIE TELECOM ANNUAL REPORT 2012

DIRECTORs’ REPORT

Remuneration Report (cont’d)

Fixed remuneration

Objective

The level of fixed remuneration is set so as to provide a base level of remuneration, which is both appropriate to the position and is competitive in the market.

Fixed remuneration of the Chief Executive and Managing Director – Hosting is reviewed annually by the Corporate Governance, Nomination and Remuneration Committee and the process consists of a review of Company-wide and individual performance; relevant comparative remuneration in the market; and internal and, where appropriate, external advice on policies and practices. The Committee has access to external advice independent of management.

structure

Senior managers are given the opportunity to receive their fixed (primary) remuneration in certain forms including cash and allowances such as motor vehicle allowances. It is intended that the manner of payment chosen will be optimal for the recipient without creating undue cost for the Company.

The fixed remuneration component of the key management personnel is detailed on page 20.

On a half-yearly basis, after consideration of performance against KPIs, an overall performance rating for the Company is approved by the Corporate Governance, Nomination and Remuneration Committee. The individual performance of each senior manager and executive director is also rated and taken into account when determining the amount, if any, of the STI component to be paid to each senior manager and executive director. This structure was in place for all financial years disclosed in this report, and continues for the present financial year.

Variable pay – Long Term Incentive (“LTI”)

Objective

The objective of the LTI plan is to reward senior managers in a manner which aligns this element of remuneration with the creation of shareholder wealth.

As such, LTI grants are made to senior managers who are able to influence the generation of shareholders’ wealth and thus have a direct impact on the Company’s performance against the relevant long-term performance hurdle.

structure

LTI grants to senior managers are delivered in the form of options, discretionary shares or cash payments.

Variable remuneration – short Term Incentive (“sTI”)

Objective

The objective of the STI program is to link the achievement of the Company’s operational targets with the remuneration received by the senior managers charged with meeting those targets. The total potential STI available is set at a level so as to provide sufficient incentive to the senior manager to achieve the operational targets and such that the cost to the Company is reasonable in the circumstances.

structure

Actual STI payments granted to each senior manager and executive director depend on the extent to which specific operating targets set at the beginning of the financial year are met or exceeded. The operational targets consist of a number of Key Performance Indicators (“KPIs”) covering both financial and non-financial measures of performance and may be based on Company, individual, business and personal objectives. All measures are classified under the following four categories: (a) financial; (b) customerrelated; (c) operational; and (d) people management. The Company has predetermined benchmarks which must be met in order to trigger payments under the STI scheme. There is an overachievement element to these payments, meaning it is possible to achieve greater than 100% of the base incentive amount.

service agreements

The Chief Executive and the Managing Director – Hosting are each employed under a service agreement. The current agreements commenced in August 1999 and continue until terminated by either the Company or the Chief Executive or the Managing Director – Hosting (as the case may be). Under the terms of the present agreements:

Each of the Chief Executive and the Managing Director – Hosting may resign from their position and thus terminate their agreement by giving six months’ written notice;
The Company may terminate the agreements by providing six months’ written notice or provide payment in lieu of the notice period, based on the fixed component of the Chief Executive or the Managing Director – Hosting’s remuneration (as the case may be). The Company may also terminate the agreements on a lesser period of notice if, for example, the Chief Executive or the Managing Director – Hosting (as the case may be) becomes incapacitated.
The Company may terminate the agreements at any time without notice if serious misconduct has occurred. Where termination with cause occurs, the Chief Executive or the Managing Director – Hosting (as the case may be) is only entitled to that portion of remuneration which is fixed, and only up to the date of termination.

MACQUARIE TELECOM ANNUAL REPORT 2012

DIRECTORs’ REPORT

Remuneration Report (cont’d)

Remuneration of Directors and other Key Management Personnel for the year ended 30 June 2012:

Directors

Directors
		short Term
	Primaryand Bonus
		salary and Fees	Cash Bonus	Non-Monetary Benefts(i)	Other(ii)
R Kaye – Chairman	2012	170,000	-	-	-
	2011	170,000	-	-	-
D Tudehope – Chief Executive(v)	2012	489,636	194,707	(36,389)	38,432
	2011	467,273	304,431	(17,356)	37,996
A Tudehope – Managing Director – Hosting(v)	2012	456,056	127,969	16,570	38,432
	2011	433,455	239,311	(20,547)	37,996
S Butler3– Non-Executive Director	2012	33,333	-	-	-
	2011	100,000	-	-	-
J Palfreyman – Non-Executive Director	2012	114,450	-	-	419,255
	2011	114,450	-	-	300,599
A Darling4– Non-Executive Director	2012	27,692	-	-	-
	2011	-	-	-	-
P James5– Non-Executive Director	2012	25,000	-	-	76,668
	2011	-	-	-	-
Total Directors’ Remuneration	2012	1,316,167	322,676	(19,819)	572,787
	2011	1,285,178	543,742	(37,903)	376,591

Other Key Management Personnel

Other Key Management Personnel
		short Term
	Primaryand Bonus
		salary and Fees	Cash Bonus	Non-Monetary Benefts(i)	Other(ii)
C Greig – Group Executive, Telco Business(v)	2012	319,333	109,161	8,962	18,904
	2011	309,631	219,963	(8,839)	18,904
M Simmonds – Chief Financial Offcer(v)	2012	304,048	102,201	11,435	16,000
	2011	286,068	190,841	14,659	13,667
S Gatward2– Group Executive, Telecom Services	2012	60,669	-	(7,447)	5,054
	2011	284,592	188,882	8,143	22,404
J Scollay1– Group Executive, Sales	2012	13,196	-	(9,347)	-
	2011	311,900	222,772	2,808	-
L Clifton – Group Executive, Sales(v)	2012	241,553	111,675	9,431	23,086
	2011	-	-	-	-
Total Other Key Management Personnel Remuneration	2012	938,799	323,037	13,034	63,044
	2011	1,192,191	822,458	16,771	54,975

		LongTerm
					Total	Long Term
Post	% Bonus	Bonus and			Performance	Incentive
Employment	Granted	share-based Payments		Total	Related	Provision
superannuation		Cash Bonus(iii)	Options(iv)			Cash Bonus(vi)
15,300	-	-	-	185,300	0.0%	-
15,199	-	-	-	185,199	0.0%	-
15,775	94.6%	-	-	702,161	27.7%	70,863
15,199	175.5%	57,012	-	864,555	41.8%	-
15,775	95.5%	-	-	654,802	19.5%	62,383
15,199	221.1%	57,012	-	762,426	38.9%	-
3,000	-	-	-	36,333	0.0%	-
9,000	-	-	-	109,000	0.0%	-
-	-	-	11,266	544,971	2.1%	-
-	-	-	27,414	442,463	6.2%	-
2,492	-	-	-	30,184	0.0%	-
-	-	-	-	-	-	-
2,250	-	-	-	103,918	0.0%	-
-	-	-	-	-	-	-
54,592		-	11,266	2,257,669		133,246
54,597		114,024	27,414	2,363,643		-

		LongTerm
					Total	Long Term
Post		% Bonus	share-based		Performance	Incentive
Employment		Granted	Payments	Total	Related	Provision
	Termination
superannuation	Payment		Options(iv)			Cash Bonus(vi)
15,775	-	89.5%	-	472,135	23.1%	-
15,199	-	180.3%	657	555,515	39.7%	-
15,775	-	94.3%	-	449,459	22.7%	131,898
15,199	-	190.8%	3,284	523,718	37.1%	31,902
3,944	484	0.0%	-	62,704	0.0%	-
15,199	-	188.9%	-	519,220	36.4%	33,444
3,944	5,862	0.0%	-	13,655	0.0%	-
15,199	-	159.1%	-	552,679	40.3%	-
15,775	-	74.5%	-	401,520	27.8%	-
-	-	-	-	-	-	-
55,213	6,346		-	1,399,473		131,898
60,796	-		3,941	2,151,132		65,346

MACQUARIE TELECOM ANNUAL REPORT 2012

DIRECTORs’ REPORT

Remuneration Report (cont’d)

Details of shares issued to and held by key management personnel are disclosed in Note 22 to the financial statements.

The terms “director” and “executive officer” have been treated as mutually exclusive for the purposes of this disclosure. The elements of emoluments have been determined on the basis of the cost to the Company and the consolidated entity. Executives are those directly accountable and responsible for the operational management and strategic direction of the Company and the consolidated entity. All directors are paid through subsidiary entities.

Notes:

1 Resigned 15 July 2011
2 Resigned 15 September 2011
3 Resigned 31 October 2011
4 Appointed 22 March 2012
5 Appointed 2 April 2012
(i) The category “Non-Monetary Benefits” represent amounts accrued or released in respect of annual leave and long service leave.
(ii) The category “Other” includes the value of any non-cash benefits provided including motor vehicle allowances, and in the case of non-executive directors, consulting services to the consolidated entity. All amounts paid were on normal commercial terms and conditions and at market rates.
(iii) The Long Term Incentive Plan (“LTIP”) has the following characteristics: (a) the period of the scheme is two years; and (b) the amount payable is determined with reference to actual Earnings Per Share (“EPS”) against an EPS target for the second year.
(iv) The directors have issued options over ordinary shares to a number of eligible employees. The terms of the Employee Option Plan stipulate that options will vest over certain timeframes. The plan is designed to encourage superior performance and provide opportunity to all eligible employees to participate in the future success of the Company.

Whilst LTIs may include discretionary shares, no such shares have been issued either in this financial year or the previous year.

(v) Denotes one of the five highest remunerated executives.
(vi) The Executive Long Term Discretionary Incentive Plan (“ELTDIP”) has the following characteristics: (a) the period of the scheme is four years; and (b) the amount payable is determined with reference to a mix of financial measures including: (1) the achievement of budget net profit after tax for each year; (2) the achievement of budget net profit after tax accumulated for all four years; and (3) target share price for the fourth year. If the senior executive leaves before the end of the period he forfeits all entitlements under the scheme.

Performance of Macquarie Telecom Group Limited

The following table shows earnings before interest, tax, depreciation and amortisation (“EBITDA”), net profit after tax (“NPAT”) and share price performance over the last five years.

	EBITDA	NPAT	share Price
Year ended 30 June	(A$million)	(A$million)	AsX Code: MAQ
2012	40.6	19.6	8.36
2011	37.2	17.7	10.20
2010	29.0	17.9	4.62
2009	25.0	7.4	2.41
2008	13.8	(1.2)	0.71

Equity compensation: granted and vested during the year

During the financial year there were nil options granted as equity compensation to directors and key management personnel (2011: nil).

Details of director-related interests in shares and other director-related transactions are included in Note 24.

Option holdings of key management personnel

								Fair value of
						Not	Consideration	options when
	Balance	Granted as	Options	Balance	Vested and	vested and	received	exercised
	1 July2011	remuneration	exercised	30 June 2012	exercisable	exercisable	$	$
R Kaye	-	-	-	-	-	-	-	-
D Tudehope	-	-	-	-	-	-	-	-
A Tudehope	-	-	-	-	-	-	-	-
S Butler3	-	-	-	-	-	-	-	-
J Palfreyman	40,000	-	(40,000)	-	-	-	165,600	320,000
A Darling4	-	-	-	-	-	-	-	-
P James5	-	-	-	-	-	-	-	-
C Greig	-	-	-	-	-	-	-	-
M Simmonds	-	-	-	-	-	-	-	-
S Gatward2	-	-	-	-	-	-	-	-
J Scollay1	-	-	-	-	-	-	-	-
L Clifton	-	-	-	-	-	-	-	-
Total	40,000	-	(40,000)	-	-	-	165,600	320,000

1 Resigned 15 July 2011 2 Resigned 15 September 2011 3 Resigned 31 October 2011 4 Appointed 22 March 2012 5 Appointed 2 April 2012

Directors’ Meetings

The number of meetings of directors, including meetings of committees of directors, held during the year and the number of meetings attended by each director was as follows:

follows:
		Meetings of Committees
			Corporate
		Audit	Governance,
	Directors’	and Risk	Nomination and
	Meetings	Management	Remuneration
Number of
meetings held:	17	4	4
Number of
meetings attended:
R Kaye	17	4	4
D Tudehope	17	-	4
A Tudehope	17	-	-
S Butler1	5	1	2
J Palfreyman	17	4	4
A Darling2	8	1	-
P James3	8	1	-

1 Resigned 31 October 2011 2 Appointed 22 March 2012

Rounding

The amounts contained in this report and in the financial report have been rounded to the nearest $1,000 (where rounding is applicable) under the option available to the Company under ASIC Class Order 98/100. The Company is an entity to which the Class Order applies.

Audit Independence

Refer to page 63 for the independence declaration from our auditor, PricewaterhouseCoopers.

Non-Audit Services

Taxation advice and compliance work was provided by the entity’s auditor, PricewaterhouseCoopers. The directors are satisfied that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act. The nature and scope of each type of non-audit service provided means that auditor independence was not compromised.

PricewaterhouseCoopers received or is due to receive the following amounts for the provision of non-audit services: $19,300 (2011: $24,750) as disclosed in Note 23.

3 Appointed 2 April 2012

Signed in accordance with a resolution of the directors:

As at the date of this report, the Company had an Audit and Risk Management Committee and a Corporate Governance, Nomination and Remuneration Committee.

The members of the Audit and Risk Management Committee are R Kaye, J Palfreyman, A Darling and P James.

The members of the Corporate Governance, Nomination and Remuneration Committee are R Kaye, J Palfreyman, A Darling, P James and D Tudehope.

==> picture [91 x 35] intentionally omitted <==

David Tudehope Chief Executive

Sydney, 22 August 2012

MACQUARIE TELECOM ANNUAL REPORT 2012

CORPORATE GOVERNANCE sTATEMENT

Introduction

The Board is responsible for the corporate governance practices of the Company. The major processes by which the Board fulfils that responsibility are described in this statement.

The Board considers that except to the extent expressly indicated in this statement, those corporate governance practices comply with the ASX Corporate Governance Council’s (“ASXCGC”) Corporate Governance Principles and Recommendations with 2010 Amendments. Also, except to the extent expressly indicated in this statement, those practices were followed throughout the year.

A copy of the Corporate Governance Statement, the Audit and Risk Management Committee Charter and the Company’s Code of Conduct are available in the corporate governance section of the Company’s website at www.macquarietelecom.com, together with all other information which the ASXCGC recommends be made publicly available.

Principle 1

Lay solid foundations for management and oversight by the Board

The Board acts on behalf of and is accountable to the shareholders. The expectations of shareholders together with regulatory and ethical expectations and obligations are taken into consideration when defining the Board’s responsibilities.

The Board’s key responsibilities are:

establishing, monitoring and modifying the Company’s corporate strategies;
monitoring the performance of management;
reporting to shareholders and the market;
ensuring that appropriate risk management systems, internal control and reporting systems and compliance frameworks are in place and are operating effectively;
monitoring financial results;
reviewing business results and monitoring budgetary control and corrective actions (if required);
authorising and monitoring budgets and major investments and strategic commitments;
monitoring Board composition, director selection and Board processes and performance;
reviewing the performance of the Chief Executive, the Managing Director – Hosting and senior management;
endorsing key executive appointments and ensuring executive succession planning;
reviewing and approving remuneration of the Chief Executive and the Managing Director – Hosting;
reviewing and approving remuneration policies for senior management;
overseeing and monitoring progress in relation to the Company’s diversity objectives and compliance with its diversity policy; and

– ensuring best practice corporate governance.

The responsibility for the day-to-day operation and administration of the Company has been delegated to the Chief Executive and the executive team. The Board ensures that this team is appropriately qualified and experienced. The Board is also responsible for ensuring that management’s objectives and activities are aligned with the expectations and risks identified by the Board.

A performance assessment for senior management last took place in July 2012. The process for these assessments is described in the Corporate Governance statement on the Company’s website.

Principle 2

structure the Board to add value

The Board has adopted a policy of ensuring that it is composed of a majority of non-executive directors with an appropriate mix of skills to provide the necessary breadth and depth of knowledge and experience. Each of the current non-executive directors is an independent director for the purposes of the criteria for independence outlined by the ASXCGC. The Chairman is selected from the nonexecutive directors and appointed by the Board.

The same person does not exercise the roles of Chairman and Chief Executive. The Board has agreed the division of responsibilities between these roles. That division is sufficiently clear and understood as to not require a formal statement of position.

Information about the directors, including their qualifications, experience and special responsibilities, appears in the Directors’ Report.

Directors and Board committees have the right in connection with their duties and responsibilities to seek independent professional advice at the Company’s expense.

Principle 3

Promote ethical and responsible decision making

The Board is committed to the highest standards of conduct. To ensure that the Board, management and employees have guidance in the performance of their duties, the Board has adopted a Code of Conduct that reinforces the requirement that the business be conducted ethically and with professionalism.

In order to guard against the misuse of price sensitive information, the Board has established a share trading policy relating to the Board, senior managers and other employees dealing in the Company’s shares.

Macquarie Telecom embraces diversity and believes it is a critical factor in our success. Diversity means all differences between people including gender, age, race, ethnicity, disability, sexual orientation, religion and culture. To attract and retain a diverse workforce, we are committed to promoting a culture which celebrates diversity and an atmosphere in which all employees and

candidates for employment are treated fairly, with respect and have equal access to opportunities at work.

The current proportion of female employees at Macquarie Telecom is as follows:

The current proportion of female employees at Macquarie Telecom is as follows:	The current proportion of female employees at Macquarie Telecom is as follows:	The current proportion of female employees at Macquarie Telecom is as follows:
Total Females % Females
Number of females in entire organisation	114	27.5%
Number of females inpeople managementpositions	17	22.1%
Number of females on the Macquarie Telecom Board	1	16.7%

Macquarie Telecom recognises that by promoting a culture of diversity, the business benefits at multiple levels, by:

attracting a high calibre and wide range of talent;
increasing levels of engagement across the organisation;
retaining and promoting highly skilled staff;
increasing innovation which drives business results; and
enhancing customer relationships.

In accordance with the ASXCGC, Macquarie Telecom established objectives to promote diversity. The objectives and the progress toward achieving them are outlined below:

	Objective Outcome Board and Executive	Objective Outcome Board and Executive	Objective Outcome Board and Executive
	Board and executive level vacancies: aim to proactively source and consider a minimum of 30% female applicants for Board and executive level vacancies.d		Macquarie Telecom has policies and practices in place to support our ongoing commitment to this objective. d
	Board composition: aim to appoint one female non- executive Board member by December 2012.c		One female non-executive Board member was appointed and commenced in March 2012.c
	General Appoint a Diversity Offcer to review progress and report annuallyto the Board.c A HR employee was appointed as Diversity Offcer and commenced this role on 1 March 2012.c Aim to achieve 26% or greater Macquarie Telecom female population composition by June 2012. c As at 30 June 2012 this objective was achieved (27.5%).c
	Appoint a Diversity Offcer to review progress and report annuallyto the Board.c Aim to achieve 26% or greater Macquarie Telecom female population composition by June 2012. c

Macquarie Telecom is committed to the development and career advancement of women. All managers, regardless of gender, have equal access to training, development and career opportunities. We will continue to raise the profile of gender diversity and further our efforts to date. For the financial year ending 30 June 2012, this included Companywide education sessions and women in business events.

Responsibility for ratifying diversity objectives will remain with the Macquarie Telecom Board of Directors. The objectives set will be managed and reported by the Company’s Diversity Officer.

Principle 4

safeguard integrity in financial reporting

The Board has established an Audit and Risk Management Committee, which operates under a Charter approved by the Board in September 2003 and amended by the Board in August 2006. Each of the members of the Committee is an independent director. The names of the members of the Committee and their attendances at meetings of the Committee appear in the Directors’ Report.

The Chief Executive, Chief Financial Officer, Managing Director – Hosting, Company Secretary and the external auditor attend meetings at the discretion of the Committee. The Committee also meets privately with the external auditor without management present.

Minutes of all Committee meetings are provided to the Board.

The Board has delegated to the Committee responsibility for making recommendations on the appointment, evaluation and dismissal of the external auditor, setting its fees and ensuring that the auditor reports to the Committee and the Board.

The Company is committed to audit independence. The Committee reviews the independence and objectivity of the external auditors. Those reviews include:

seeking confirmation that the auditor is, in their professional judgement, independent of the Company. The external auditor, PricewaterhouseCoopers, has declared its independence to the Board; and
considering whether, taken as a whole, the various relationships between the Company and the external auditor impair the auditor’s judgement or independence. The Committee is satisfied that the existing relationships between the Company and the external auditor do not give rise to any such impairment.

The Company’s audit engagement partners will rotate every five years.

Principle 5

Make timely and balanced disclosure

The Board has adopted a formal continuous disclosure plan, the object of which is to ensure that material information is identified and disclosed in a timely manner. The Board is advised of any notifiable events. In addition, the Board has developed a guidance paper on the Company’s disclosure obligations, which is intended to provide guidance for all managers on those obligations.

The Board approves all releases that are made to ASX Limited.

The Company Secretary is responsible for communications with the ASX.

MACQUARIE TELECOM ANNUAL REPORT 2012

CORPORATE GOVERNANCE sTATEMENT

Principle 6

Respect the rights of shareholders

In addition to complying with its continuous disclosure obligations under the ASX Listing Rules, the Company ensures that shareholders are kept informed in a variety of other ways:

shareholders can gain access to information about the Company, including Annual Reports and financial statements, half-year financial statements, Board commentaries on those financial statements, information provided to analysts during briefings on those financial statements, notices of meeting and explanatory materials and all relevant announcements made to the market, through the website at www.macquarietelecom.com;
in conducting analyst briefings, the Company takes care to ensure that any information provided to analysts is made available to the market prior to it being provided to analysts;
the principal method of communication with shareholders is through the provision of the Annual Report and financial statements, the half-year financial statements and Annual General Meetings. Shareholders are encouraged to use these meetings to ask questions on any matters related to the Company, its business and the performance of that business; and
the Company requests the external auditor to attend the Annual General Meeting and be available to answer questions about the conduct of the audit and the preparation and content of the auditor’s report.

Principle 7

Recognise and manage risk

The Board is responsible for ensuring that the Company has in place a system of risk management and internal compliance and control that effectively safeguards assets and enhances the value of shareholders’ investments.

The Chief Executive and the Chief Financial Officer have stated to the Board in writing:

that the Company’s financial reports are complete and present a true and fair view, in all material respects, of the financial condition and operational results of the Company and are in accordance with relevant accounting standards; and
that the above statement is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks.

Principle 8

Remunerate fairly and responsibly

The functions of the Corporate Governance, Nomination and Remuneration Committee include reviewing the remuneration arrangements for non-executive and executive directors and reviewing and approving the issue of shares and options under the Company’s employee share and option plans. The Committee also reviews remuneration for the senior management team and monitors, reviews and makes recommendations to the Board as to the remuneration policies of the Company generally. The names of the members of the Committee and their attendances at meetings of the Committee appear in the Directors’ Report.

Non-executive directors receive fees determined by the Board, but within the aggregate limits approved by shareholders at general meetings of the Company.

The remuneration of senior managers consists of a combination of fixed and variable (at risk) remuneration. The bonus paid to a senior manager is based on a review of the individual manager’s performance.

Details of shares and options issued to employees of controlled entities of the Company are included in Note 20 to the financial statements.

The Board has adopted a formal risk management strategy and policy. In addition, the Company has established a formal framework for risk management and internal compliance, which includes the establishment of an internal business risk management function. The Audit and Risk Management Committee is responsible for reviewing and reporting to the Board on the effectiveness of the Company’s management of risk, including systems for internal controls. The business risk management function reports to the Board on a quarterly basis as to the effectiveness of the Company’s management of its material business risks.

The assets of the Company and its controlled entities are insured under a comprehensive insurance program which is reviewed annually.

sTATEMENT OF COMPREHENsIVE INCOME YEAR ENDED 30 JUNE 2012

			Consolidated
		2012	2011
	Notes	$’000	$’000
Revenue and other income	3	221,266	230,605
Expenses	3	(194,493)	(205,678)
Proft before income tax and fnance costs		26,773	24,927
Finance costs		(236)	(18)
Proft before income tax		26,537	24,909
Income tax expense	5	(6,970)	(7,217)
Proft after income tax for the year attributable to owners of the parent		19,567	17,692
Total comprehensive income for theyear attributable to owners of theparent		19,567	17,692
		cents	cents
Earnings per share for proft attributable to the ordinary equity holders
of the Company:
Basic earnings per share	21	93.4	84.8
Diluted earningsper share	21	93.4	84.5

The above statement of comprehensive income should be read in conjunction with the accompanying notes.

MACQUARIE TELECOM ANNUAL REPORT 2012

sTATEMENT OF FINANCIAL POsITION

AS AT 30 JUNE 2012

			Consolidated
		2012	2011
	Notes	$’000	$’000
Current Assets
Cash and cash equivalents	6	30,808	53,463
Receivables	7	6,213	6,327
Accrued income	8	5,600	7,876
Other	9	2,378	2,072
Total current assets		44,999	69,738
Non-Current Assets
Property, plant and equipment	10	69,275	33,632
Intangibles	11	8,387	8,023
Deferred tax assets	5	4,389	5,654
Other	12	959	1,262
Total non-current assets		83,010	48,571
Total assets		128,009	118,309
Current Liabilities
Payables	13	29,826	34,318
Current tax liabilities	5	3,631	4,072
Provisions	14	1,239	1,499
Other	15	187	66
Total current liabilities		34,883	39,955
Non-Current Liabilities
Deferred tax liabilities	5	-	-
Provisions	14	1,124	898
Other	15	677	863
Total non-current liabilities		1,801	1,761
Total liabilities		36,684	41,716
Net assets		91,325	76,593
Equity
Contributed equity	16	42,991	42,811
Reserves	17	194	182
Retainedproft	17	48,140	33,600
Total equity		91,325	76,593

The above statement of financial position should be read in conjunction with the accompanying notes.

sTATEMENT OF CHANGEs IN EQUITY

YEAR ENDED 30 JUNE 2012

	Contributed		Retained
	Equity	Reserves	Proft/(Loss)	Total
	$’000	$’000	$’000	$’000
At 1 July2010	42,723	148	26,324	69,195
Total comprehensive income for theyear	-	-	17,692	17,692
Transactions with owners in their capacity as owners:
Share-based payments expense	-	34	-	34
Exercise of options	88	-	-	88
Dividendsprovided for orpaid	-	-	(10,416)	(10,416)
	88	34	(10,416)	(10,294)
At 30 June 2011	42,811	182	33,600	76,593
At 1 July2011	42,811	182	33,600	76,593
Total comprehensive income for theyear	-	-	19,567	19,567
Transactions with owners in their capacity as owners:
Share-based payments expense	-	12	-	12
Exercise of options	180	-	-	180
Dividendsprovided for orpaid	-	-	(5,027)	(5,027)
	180	12	(5,027)	(4,835)
At 30 June 2012	42,991	194	48,140	91,325

The above statement of changes in equity should be read in conjunction with the accompanying notes.

MACQUARIE TELECOM ANNUAL REPORT 2012

sTATEMENT OF CAsH FLOws

YEAR ENDED 30 JUNE 2012

			Consolidated
		2012	2011
	Notes	$’000	$’000
Cash Flows From Operating Activities
Receipts from customers (inclusive of goods and services tax)		242,387	253,476
Payments to suppliers and employees (inclusive of goods and services tax)		(204,546)	(211,483)
Interest received		2,564	3,183
Interest paid		(236)	(18)
Income tax paid		(6,236)	(7,076)
Other receipts		46	821
Net cash fows from operatingactivities	18	33,979	38,903
Cash Flows From Investing Activities
Acquisition of non-current assets		(51,872)	(30,602)
Proceeds from sale of non-current assets		-	4
Net cash fows (used in) investingactivities		(51,782)	(30,598)
Cash Flows From Financing Activities
Proceeds from issue of shares		180	88
Repayment of fnance lease principal		-	(342)
Dividendspaid on ordinaryshares		(5,027)	(10,416)
Net cash fows (used in) fnancingactivities		(4,847)	(10,670)
Net (decrease) in cash and cash equivalents		(22,740)	(2,365)
Cash and cash equivalents at the beginning of the fnancial year		53,463	56,304
Effects of exchange rate changes on cash and cash equivalents		85	(476)
Cash and cash equivalents at the end ofyear	6	30,808	53,463

The above statement of cash flows should be read in conjunction with the accompanying notes.

NOTEs TO THE FINANCIAL sTATEMENTs AT 30 JUNE 2012

1. Basis of Preparation of the Financial Report

(a) Corporate information

The financial report of Macquarie Telecom Group Limited (“Macquarie Telecom” or the “Company”) for the year ended 30 June 2012 was authorised for issue in accordance with a resolution of directors on 22 August 2012. The directors have the power to amend and reissue the financial statements.

Macquarie Telecom Group Limited is the head entity of a consolidated group (“Group”) comprising Macquarie Telecom Pty Limited (“MT”), Macquarie Hosting Pty Limited (“MH”), Macquarie Telecom Carrier Services Pty Limited (“MTCS”), Macquarie Telecom Network Carrier Services Pty Limited (“MTNCS”) and Ninefold Pty Limited (“Ninefold”).

Macquarie Telecom Group Limited is a company limited by shares incorporated in Australia whose shares are publicly traded on the ASX (ASX Code: MAQ).

The nature of the operations and principal activities of the Group are described in Note 25.

(b) Basis of preparation

The financial report is a general purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001 , Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board and Urgent Issues Group Interpretations. Macquarie Telecom is a for-profit entity for the purpose of preparing the financial statements.

The financial report has been prepared in accordance with the historical cost convention except for equity-based payments that have been measured at fair value.

Compliance with IFRs

This financial report also complies with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

2. Summary of Significant Accounting Policies

(a) Principles of consolidation

The consolidated financial statements are those of the consolidated entity, comprising Macquarie Telecom Group Limited and all entities that Macquarie Telecom Group Limited controlled during the year and at balance sheet date. Consolidation is based on control, which is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

The financial statements of subsidiaries are prepared for the same reporting period as that of the parent entity, using consistent accounting policies. All inter-company balances and transactions have been eliminated in full. Subsidiaries are deconsolidated from the date that control ceases.

(b) significant accounting judgements, estimates and assumptions

In preparing the financial report, the consolidated entity is required to make estimates and assumptions about the carrying values of assets and liabilities. The key estimates and accounting judgements for Macquarie Telecom relate to income taxes, revenue recognition (see (p)) and the depreciation and amortisation of non-current assets. These estimates and assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis.

Translation of foreign currency transactions

Transactions denominated in a foreign currency are translated at the rates in existence at the date of the transactions.

Exchange gains and losses are brought to account in determining the net profit or loss for the year.

Amounts payable to and by the entities within the consolidated entity that are outstanding at balance date and are denominated in foreign currencies have been converted to local currency using rates of exchange ruling at the end of the financial year.

The functional and presentation currency of the parent company and its Australian subsidiaries is Australian dollars.

MACQUARIE TELECOM ANNUAL REPORT 2012

NOTEs TO THE FINANCIAL sTATEMENTs AT 30 JUNE 2012

Summary of Significant Accounting Policies (cont’d)
(d) Property, plant and equipment

Cost and valuation

Property, plant and equipment is stated at cost less accumulated depreciation and any impairment in value. Property, plant and equipment includes costs in relation to infrastructure development projects where future benefits are probable to exceed these costs.

Depreciation

Depreciation is calculated on a straight-line basis on all property, plant and equipment commencing from the time the asset is ready for use.

The estimated useful lives are as follows:

(f) Transmission capacity

Expenditure, relating to the acquisition of transmission capacity, is capitalised to the extent that it is expected to provide future economic benefits to the Company. Capitalised expenditure less rebates are amortised over the period in which the related benefits are expected to be realised.

(g) Impairment of assets

At each reporting date, the consolidated entity assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the consolidated entity makes a formal estimate of recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.

Plant and equipment 1 to 10 years

Leasehold improvements are amortised over the lease term. Buildings are under construction and a depreciation period has not been determined. Land is not depreciated.

(e) Intangibles

Cost and valuation

All assets reported as intangibles are held at cost less accumulated amortisation and impairment losses. Intangibles includes costs in relation to the development of software systems and products where future benefits are expected to exceed these costs. Costs capitalised include external direct costs of materials and service and direct payroll and payroll-related costs of employees’ time spent on the project during the development phase. Software and product development costs are only recognised following completion of technical feasibility and where the Group has an intention and ability to use the asset.

Amortisation

Amortisation is calculated on a straight-line basis on all intangibles commencing from the time the asset is ready for use.

for use.
Amortisation periods are:
Software	3 to 6years
Product development	1 to 4years

Recoverable amount is the greater of fair value less costs to sell and value in use. It is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

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.

Impairment losses are recognised in the income statement.

(h) Cash and cash equivalents

For the purpose of presentation in the statement of cash flows, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions and other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value.

(i) Trade and other receivables

Trade receivables are recognised and carried at original invoice amount, less a provision for any uncollectible debts.

An allowance for doubtful debts is made when there is objective evidence that the Group will not be able to collect the debts. Bad debts are written off when identified.

Receivables from related parties are recognised at amortised cost.

Other receivables are recognised at cost.

(j) Accrued income

Accrued income represents the estimated amounts of unbilled services provided to all customers as at the balance date after taking into account all discounts as applicable.

(k) Payables

Liabilities for carrier suppliers (trade creditors) are carried at the net amount the consolidated entity expects to have to pay each carrier, in respect of the services received.

Liabilities for other trade creditors and other creditors are carried at cost which is the fair value of the consideration to be paid in the future for goods and services received, whether or not billed to the consolidated entity.

(l) Leases

Leases are classified at their inception as either operating or finance leases based on the economic substance of the agreement so as to reflect the risks and benefits incidental to ownership.

Operating leases

The minimum lease payments of operating leases, where the lessor effectively retains substantially all of the risks and benefits of ownership of the leased item, are recognised as an expense on a straight-line basis.

In the event that lease incentives are received to enter into non-cancellable operating leases, such incentives are recognised as a liability. Lease payments are allocated between rental expenses, reduction of the liability and, where appropriate, interest expense over the term of the lease.

Finance leases

Leases which effectively transfer substantially all of the risks and benefits incidental to ownership of the leased item to the consolidated entity are capitalised at the fair value of the leased property or, if lower, at the present value of the minimum lease payments and disclosed as property, plant and equipment under lease. A lease liability of equal value is also recognised.

Capitalised lease assets are depreciated over the shorter of the estimated useful life of the assets and the lease term. Minimum lease payments are allocated between interest expense and reduction of the lease liability.

(m) Employee benefits

The liability for employees’ benefits to wages, salaries, bonuses and annual leave is accrued to balance date based on the consolidated entity’s present obligation to pay resulting from employees’ services provided. The liability for other long-term employees’ obligations is recognised in the provision for employee benefits and measured as the present value of expected future cash flows to be paid by the consolidated entity resulting from the employees’ services provided.

(n) share-based payment transactions

The consolidated entity provides benefits to employees, including directors, in the form of share-based payment transactions.

The cost of these equity-settled transactions with employees is measured by reference to the fair value of the options at the date at which they are granted. The fair value is determined using the Monte Carlo Simulation model for those options subject to performance hurdles.

The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (“Vesting date”).

The cumulative expense recognised for equity-settled transactions at each reporting date until vesting reflects: (i) the extent to which the vesting period has expired; and (ii) the number of awards that, in the opinion of the directors, will vest ultimately. This opinion is formed based on the best available information at balance date. No adjustment is made for the likelihood of market performance conditions being met as the effect of those conditions is included in the determination of fair value at grant date. No expense is recognised for awards that do not vest based on nonmarket conditions.

(o) Contributed equity

Issued capital is recognised at the fair value of the consideration received by the Company.

Any transaction costs arising on the issue of ordinary shares are recognised directly in equity as a reduction of the share proceeds received.

(p) Revenue recognition

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the entity and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised:

service revenue

Service revenue is recognised when the telecommunication services have been provided to the customer. Revenue is recognised net of customer discounts and allowances.

Interest income

Interest income is recognised using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset.

MACQUARIE TELECOM ANNUAL REPORT 2012

NOTEs TO THE FINANCIAL sTATEMENTs AT 30 JUNE 2012

Summary of Significant Accounting Policies (cont’d)

(q) Government grants

Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions.

Government grants relating to costs are deferred and recognised in the profit or loss over the period necessary to match them with the costs that they are intended to compensate.

Government grants relating to the purchase of property, plant and equipment are included in non-current liabilities as deferred income and are credited to profit or loss on a straight-line basis over the expected lives of the related assets.

(r) Taxes

Income taxes

The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the applicable income tax rate for each jurisdiction, adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses.

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions, where appropriate, on the basis of amounts expected to be paid to the tax authorities.

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively.

(i) Tax consolidation legislation

Macquarie Telecom Group Limited and its wholly owned Australian controlled entities have implemented the tax consolidation legislation.

The head entity, Macquarie Telecom Group Limited, and the controlled entities in the tax consolidated group, account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a stand-alone taxpayer in its own right.

In addition to its own current and deferred tax amounts, Macquarie Telecom Group Limited also recognises the current tax liabilities or assets and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group.

Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the Group. Details of the tax funding agreement are disclosed in Note 5.

Any differences between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly owned tax consolidated entities.

(ii) Goods and services Tax (GsT)

Revenues, expenses and assets are recognised net of the amount of GST except:

where the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and
receivables and payables are stated with the amount of GST included.

The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the balance sheet.

Cash flows are included in the Statement of Cash Flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority are classified as operating cash flows.

Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority.

Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in

(s) segment reporting

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the Group chief operating decision maker and for which discrete financial information is available. Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker is the Board.

(t) Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognised for future operating losses.

Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the balance sheet date. The discount rate used to determine the present value reflects current market assessment of the time value of money and the risks specific to the liability.

(u) Earnings per share

Basic earnings per share

Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of shares outstanding during the financial year.

Diluted earnings per share

Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares.

(v) Rounding of amounts

Amounts contained in the financial report have been rounded to the nearest $1,000, where rounding is applicable, under the option available to the Company under ASIC Class Order 98/100. The Company is an entity to which the Class Order applies.

(w) Parent entity financial information

The financial information for the parent entity, Macquarie Telecom Group Limited, disclosed in Note 27 has been prepared on the same basis as the consolidated financial statements except as set out in Note 2(r) above “Tax consolidation legislation”.

Investments in subsidiaries are accounted for at the lower of cost or recoverable amount in the financial statements.

(x) New accounting standards and interpretations

Certain new accounting standards and UIG interpretations have been published that are not mandatory for 30 June 2012 reporting periods. The consolidated entity’s assessment of the impact of relevant new standards and interpretations are set out below.

(i) AASB 9 Financial Instruments, AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9 and AASB 2010-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) (effective from 1 January 2013*)

AASB 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and financial liabilities. The standard is not applicable until 1 January 2013* but is available for early adoption. The Group is yet to assess its full impact and has not decided when to adopt AASB 9.

In December 2011, the IASB delayed the application date of IFRS 9 to 1 January 2015. The AASB is expected to make an equivalent amendment to AASB 9 shortly.

(ii) AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements, AASB 12 Disclosure of Interests in Other Entities, revised AASB 127 Separate Financial Statements and AASB 128 Investments in Associates and Joint Ventures and AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards (effective 1 January 2013)

In August 2011, the AASB issued a suite of five new and amended standards which address the accounting for joint arrangements, consolidated financial statements and associated disclosures.

AASB 10 replaces all of the guidance on control and consolidation in AASB 127 Consolidated and Separate Financial Statements , and Interpretation 12 Consolidation – Special Purpose Entities . The core principle that a consolidated entity presents a parent and its subsidiaries as if they are a single economic entity remains unchanged, as do the mechanics of consolidation. However, the standard introduces a single definition of control that applies to all entities. It focuses on the need to have both power and rights or exposure to variable returns. Power is the current ability to direct the activities that significantly influence returns. Returns must vary and can be positive, negative or both. Control exists when the investor can use its power to affect the amount of its returns. There is also new guidance on participating and protective rights and on agent/principal relationships. While the Group does not expect the new standard to have a significant impact on its composition, it has yet to perform a detailed analysis of the new guidance in the context of its various investees that may or may not be controlled under the new rules.

AASB 11 introduces a principles-based approach to accounting for joint arrangements. The focus is no longer on the legal structure of joint arrangements, but rather on how rights and obligations are shared by the parties to

MACQUARIE TELECOM ANNUAL REPORT 2012

NOTEs TO THE FINANCIAL sTATEMENTs AT 30 JUNE 2012

2. Summary of Significant Accounting Policies (cont’d)

the joint arrangement. Based on the assessment of rights and obligations, a joint arrangement will be classified as either a joint operation or a joint venture. Joint ventures are accounted for using the equity method, and the choice to proportionately consolidate will no longer be permitted. Parties to a joint operation will account their share of revenues, expenses, assets and liabilities in much the same way as under the previous standard. AASB 11 also provides guidance for parties that participate in joint arrangements but do not share joint control. As the Group is not party to any joint arrangements, this standard will not have any impact on the financial statements.

AASB 12 sets out the required disclosures for entities reporting under the two new standards, AASB 10 and AASB 11, and replaces the disclosure requirements currently found in AASB 127 and AASB 128.

of the amounts recognised in the financial statements. However, application of the new standard will impact the type of information disclosed in the notes to the financial statements. The Group does not intend to adopt the new standard before its operative date, which means that it would be first applied in the annual reporting period ending 30 June 2014.

(iv) None of the new standards and amendments to standards that are mandatory for the first time for the financial year beginning 1 July 2011 affected any of the amounts recognised in the current period or any prior period and are not likely to affect future periods.

(y) Comparatives

Prior year comparatives have been re-stated where necessary to conform with current presentation.

Amendments to AASB 128 provide clarification that an entity continues to apply the equity method and does not re-measure its retained interest as part of ownership changes where a joint venture becomes an associate, and vice versa. The amendments also introduce a “partial disposal” concept.

The Group is still assessing the impact of these amendments. The Group does not expect to adopt the new standards before their operative date. They would therefore be first applied in the financial statements for the annual reporting period ending 30 June 2014.

(iii) AASB 13 Fair Value Measurement and AASB 2011-8 Amendments to Australian Accounting Standards arising from AASB 13 (effective 1 January 2013)

AASB 13 was released in September 2011. It explains how to measure fair value and aims to enhance fair value disclosures. The Group has yet to determine which, if any, of its current measurement techniques will have to change as a result of the new guidance. It is therefore not possible to state the impact, if any, of the new rules on any

3. Revenue and Expenses

(a)
(b)

Consolidated
2012
2011
$’000
$’000
Revenue and other income
Revenue from services
218,863
226,710
Interest
2,338
3,067
Net proft on disposal of plant and equipment
-
7
Net foreign exchange gains
19
-
Other income
46
821
Total revenue and other income
221,266
230,605
Expenses
Amortisation of non-current assets
Leasehold improvements
229
211
Intangibles
3,930
3,128
Transmission capacity
303
303
Depreciation of non-current assets
Property,plant and equipment
11,705
11,777
Total depreciation and amortisation expense
16,167
15,419
Bad and doubtful debts – trade debtors*
41
(1,044)
Operating lease rental
5,727
6,124
Employment costs
61,721
62,081
Carrier costs
92,123
103,010
Net loss on disposal of plant and equipment
1
-
Net foreign exchange losses
-
456
Other expenses
18,713
19,632
178,326
190,259
Total expenses
194,493
205,678

Includes recoveries of debts previously provided of nil (2011: $1.5 million)

MACQUARIE TELECOM ANNUAL REPORT 2012

NOTEs TO THE FINANCIAL sTATEMENTs AT 30 JUNE 2012

4. Dividends

4.	Dividends
(a) (i) (ii) (iii) (b) (c)	Consolidated
	2012 2011 $’000 $’000
	Dividends paid during the reporting period Final dividend for the year ended 30 June 2011 of 12 cents per share (2011: 20 cents) fully franked based on tax paid at 30%. 2,511 4,163 Special dividend for the year ended 30 June 2011 of nil (2011: 20 cents) fully franked based on tax paid at 30%. - 4,163 Interim dividend for the year ended 30 June 2012 of 12 cents per share (2011: 10 cents) fullyfranked based on taxpaid at 30%. 2,516 2,090
	5,027 10,416
	Dividends not recognised at the end of the reporting period Since year end, the directors declared the payment of a fnal dividend of 12 cents per share (2011: fnal dividend 12 cents) fully franked based on tax paid of 30%. The aggregate amount of the declared dividends expected to be paid on 11 October 2012 out of retained earnings at 30 June 2012,but not recognised as a liabilityatyear end,is 2,516 2,511
	Franking account balance The amount of franking credits available for the subsequent fnancial years based on a tax rate of 30% (2011: 30%) 12,979 9,339

The above amount represents the balance of the franking account as at the reporting date, adjusted for:

(i) franking credits that will arise from the payment of the amount of the provision for income tax; and

(ii) franking debits that will arise from the payment of dividends recognised as a liability at the reporting date.

The impact on the franking account of the dividend recommended by the directors since the end of the reporting period, but not recognised as a liability at the reporting date, will be a reduction in the franking account of $1,078,309 (2011: $1,075,481).

5. Income Tax

(i) (ii) 5.	franking credits that will arise from the payment of the amount of the provision for income tax; and franking debits that will arise from the payment of dividends recognised as a liability at the reporting date. The impact on the franking account of the dividend recommended by the directors since the end of the reporting period, but not recognised as a liability at the reporting date, will be a reduction in the franking account of $1,078,309 (2011: $1,075,481). Income Tax
(a)	Consolidated
	2012 2011 $’000 $’000
	Income tax expense Current tax 5,705 6,714 Deferred tax 1,265 503
	6,970 7,217
	Income tax expense is attributable to:
	Proft from continuingoperations 6,970 7,217
	Deferred income tax (revenue)/expense included in income tax expense comprises: (Increase)/decrease in deferred tax assets (201) 324 Increase in deferred tax liabilities 1,466 179
	1,265 503

5. Income Tax (cont’d)

(b)

Consolidated
2012
2011
$’000
$’000
Numerical reconciliation of income tax expense to prima facie tax payable
Proft from continuingoperations before income tax expense
26,537
24,909
_Prima facie_tax at the Australian tax rate of 30% (2011: 30%)
7,961
7,473
Tax effect of amounts which are not deductible/(taxable) in calculating taxable income:
Expenditure not allowable for income tax purposes
218
194
Research and development incentive
(420)
(138)
Research and development concession – prior year
(756)
(301)
Adjustments to tax in respect ofprioryears
(33)
(11)
Income tax expense
6,970
7,217
Non-Current Assets – Deferred Tax Assets
The balance comprises temporary differences attributable to:
Tax losses
-
-
Foreign income tax offsets (“FITO”)
-
90
Accelerated depreciation for accounting purposes
4,834
4,488
4,834
4,578
Employee benefts
1,290
1,139
Accrued expenses
973
1,049
Provisions for doubtful debts and credit notes
468
406
Other assets
107
314
Fringe benefts tax
15
-
Subtotal other
2,853
2,908
Total deferred tax assets
7,687
7,486
Set-off of deferred tax liabilitiespursuant to set-offprovisions
(3,298)
(1,832)
Net deferred tax assets
4,389
5,654
Deferred tax assets expected to be recovered within 12 months
2,658
2,665
Deferred tax assets expected to be recovered after more than 12 months
5,029
4,821
7,687
7,486
Accelerated
Tax Losses
FITO
Depreciation
Other
Total
Movements – Consolidated
At 1 July 2010
71
158
4,292
3,289
7,810
Charged/(credited)to the income statement
(71)
(68)
196
(381)
(324)
At 30 June 2011
-
90
4,488
2,908
7,486
Charged/(credited) to the income statement
-
(90)
346
(55)
201
At 30 June 2012
-
-
4,834
2,853
7,687

MACQUARIE TELECOM ANNUAL REPORT 2012

NOTEs TO THE FINANCIAL sTATEMENTs AT 30 JUNE 2012

5. Income Tax (cont’d)

Income Tax (cont’d)
			Consolidated
			2012	2011
			$’000	$’000
Current Liabilities – Current Tax Liabilities
Current tax liabilities			3,631	4,072
			3,631	4,072
Non-Current Liabilities – Deferred Tax Liabilities
The balance comprises temporary differences attributable to:
Accelerated depreciation for taxpurposes			2,997	1,626
			2,997	1,626
Other debtors			280	161
Prepayments			21	45
Subtotal other			301	206

Total deferred tax liabilities			3,298	1,832
Set-off of deferred tax liabilitiespursuant to set-offprovisions			(3,298)	(1,832)
Net deferred tax liabilities			-	-
Deferred tax liabilities expected to be recovered within 12 months			1,672	368
Deferred tax liabilities expected to be recovered after more than 12 months			1,626	1,464
			3,298	1,832
	Accelerated
	Depreciation	Prepayments	Other	Total
Movements – Consolidated
At 1 July 2010	1,464	-	189	1,653
Charged/(credited) to the income statement	162	45	(28)	179
At 30 June 2011	1,626	45	161	1,832
Charged/(credited) to the income statement	1,371	(24)	119	1,466
At 30 June 2012	2,997	21	280	3,298

Tax consolidation

Macquarie Telecom Group Limited and its 100% owned Australian resident subsidiaries formed a tax consolidated group with effect from 1 July 2002. Macquarie Telecom Group Limited is the head entity of the tax consolidated group. The agreement provides for the allocation of income tax liabilities between the entities should the head entity default on its tax obligations. At balance date, the possibility of default is remote.

Tax effect accounting by members of the tax consolidated group

Members of the tax consolidated group have entered into a tax funding agreement. The tax funding agreement provides for the allocation of current taxes to members of the tax consolidated group in accordance with their accounting profit/(loss) for the period, while deferred taxes are allocated to members of the tax consolidated group in accordance with AASB 112 Income Taxes and UIG 1052 Tax Consolidation Accounting.

6. Cash and Cash Equivalents

Cash and Cash Equivalents
		Consolidated
	2012	2011
	$’000	$’000
Cash at bank and on hand	12,704	21,960
Short-term deposits	17,600	28,984
Restricted cash*	504	2,519
	30,808	53,463

Bank deposits held by financial institutions as security against letters of credit.

7. Receivables

Receivables
		Consolidated
	2012		2011
	$’000		$’000
Current
Trade debtors	6,631		6,998
Provision for doubtful debts	(1,095)		(963)
Provision for credit notes	(507)		(596)
Other receivables	1,184		888
	6,213		6,327

(a) Terms and conditions relating to the above financial instruments:

(i) Sales are normally on 14 day terms; and

Terms and conditions relating to the above fnancial instruments: (i) Sales are normally on 14 day terms; and
(ii) Details of impairment of trade receivables are set out in Note 26(b)
Movements in provision for doubtful debts/credit notes are as follows:
At 1 July	(1,559)	(4,202)
Amounts written off	104	622
Netprovision released/(additional amountsprovided)	(147)	2,021
At 30 June	(1,602)	(1,559)
Accrued Income
Accrued income	5,600	7,876
Other Current Assets
Prepayments	2,378	2,072
Property, Plant and Equipment
Leasehold improvements
At cost	2,221	1,987
Accumulated amortisation	(1,388)	(1,159)
	833	828
Plant and equipment
At cost	102,585	91,943
Accumulated depreciation	(83,456)	(71,751)
	19,129	20,192
Land, buildings, plant and equipment under construction
At cost	49,313	12,612
Accumulated depreciation	-	-
	49,313	12,612
Total written down amount	69,275	33,632

(b) Movements in provision for doubtful debts/credit notes are as follows:

8. Accrued Income

9. Other Current Assets

10. Property, Plant and Equipment

MACQUARIE TELECOM ANNUAL REPORT 2012

NOTEs TO THE FINANCIAL sTATEMENTs AT 30 JUNE 2012

10. Property, Plant and Equipment (cont’d)

Property, Plant and Equipment (cont’d)
		Consolidated
	2012	2011
	$’000	$’000
Reconciliations
Reconciliation of the carrying amounts of property, plant and equipment at the beginning
and end of the current fnancial year:
Leasehold improvements
Opening balance	828	583
Additions	234	456
Disposals	-	-
Amortisation expense	(229)	(211)
Closingbalance	833	828
Plant and equipment
Opening balance	20,192	20,106
Additions	10,643	11,632
Disposals	(1)	-
Transfers*	-	63
Depreciation expense	(11,705)	(11,609)
Closingbalance	19,129	20,192
Plant and equipment under lease
Opening balance	-	231
Transfers*	-	(63)
Depreciation expense	-	(168)
Closingbalance	-	-
Land, buildings, plant and equipment under construction
Opening balance	12,612	-
Additions	36,701	12,612
Closingbalance	49,313	12,612
* At the end of the lease, plant and equipment under lease was transferred to plant and equipment.
Intangibles
Software
At cost	20,042	16,434
Accumulated amortisation	(12,563)	(9,276)
	7,479	7,158
Product development
At cost	6,999	6,313
Accumulated amortisation	(6,091)	(5,448)
	908	865
Total written down amount	8,387	8,023

11. Intangibles

11. Intangibles (cont’d)

Intangibles (cont’d)
		Consolidated
	2012	2011
	$’000	$’000
Reconciliations
Reconciliation of the carrying amounts of intangibles at the beginning
and end of the current fnancial year:
software
Opening balance	7,158	3,696
Additions – internal development	3,250	3,185
Additions – acquisition	358	2,401
Amortisation expense	(3,287)	(2,124)
Closingbalance	7,479	7,158
Product development
Opening balance	865	1,553
Additions – internal development	686	316
Disposals	-	-
Amortisation expense	(643)	(1,004)
Closingbalance	908	865
Other Non-Current Assets
Transmission capacity	4,722	4,722
Accumulated amortisation	(3,763)	(3,460)
	959	1,262
Payables
Current
Trade creditors	16,530	20,878
Other creditors and accruals	11,358	11,842
Annual leave entitlements	1,938	1,598
	29,826	34,318
Australian dollar equivalents
Australian dollar equivalent of amounts payable in foreign currencies not effectively hedged:
– New Zealand dollars	-	3
– United States dollars	279	270

12. Other Non-Current Assets

13. Payables

(a) Australian dollar equivalents

(b) Included in trade creditors are amounts payable to various telecommunications carriers. The Company disputes certain charges levied by some of its carriers. Included in trade creditors are the amounts the Company believes are its obligations for the services provided, after a careful review of the carrier billings.

(i) Trade liabilities are normally settled on 30 to 60 day terms.

MACQUARIE TELECOM ANNUAL REPORT 2012

NOTEs TO THE FINANCIAL sTATEMENTs AT 30 JUNE 2012

14. Provisions

(a)	Consolidated
	2012 2011 Notes $’000 $’000
	Current Employee benefts (a) 20 1,239 1,301 Leasedpremises make-good - 198
	1,239 1,499
	Non-Current Employee benefts (a) 20 1,124 898
	A reconciliation of the movements in the provision balance are as follows: Long service leave At 1 July 2,199 2,241 Charged to proft or loss – additional provisions recognised 621 546 Amounts used duringtheperiod (457) (588)
	At 30 June 2,363 2,199

15. Other Liabilities

Current

Current
Lease incentive	19(b)	187	66
Non-Current
Lease incentive	19(b)	677	863

16. Contributed Equity

(a) (b)	share capital Ordinaryshares fully paid (nopar value) 42,991 42,811
	2012 2012 2011 2011
	Number Number Notes of shares $ of shares $
	Movements in shares on issue Balance at beginning of year 20,912,121 42,811,294 20,814,621 42,723,019 Conversion of share options 16(c) 55,000 179,450 97,500 88,275
	Balance at end ofyear 20,967,121 42,990,744 20,912,121 42,811,294

16. Contributed Equity (cont’d)

(c) share options

Options over ordinary shares

There were no options over ordinary shares issued during the year.

At the end of the year, there were nil (2011: 55,000) unissued ordinary shares in respect of which options were outstanding.

Option holders do not have any right, by virtue of the option, to participate in any share issue of the Company or any related body corporate or in the interest issue of any other registered scheme.

No share options are held by the parent entity or its subsidiaries (2011: nil).

Information with respect to the number of options issued by Macquarie Telecom Group Limited is as follows:

		2012		2011
		weighted		weighted
		average		average
	Number	exercise price	Number	exercise price
	of options	$	of options	$
Balance at beginning of year	55,000	3.26	152,500	0.97
Granted	-	-	-	-
Forfeited/expired	-	-	-	-
Exercised	(55,000)	3.26	(97,500)	0.91
Balance at end ofyear	-	-	55,000	3.26
Exercisable at end ofyear	-	-	15,000	0.92

(d) Terms and conditions of contributed equity

Ordinary shares have the right to receive dividends as declared and, in the event of winding up the Company, to participate in the proceeds from the sale of all surplus assets in proportion to the number of and amounts paid up on shares held.

Ordinary shares entitle their holder to one vote, either in person or by proxy, at a meeting of the Company.

(e) Capital risk management

The Group’s objectives when managing capital are to safeguard their ability to continue as a going concern, so that they can continue to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. The Group currently has no borrowings.

MACQUARIE TELECOM ANNUAL REPORT 2012

NOTEs TO THE FINANCIAL sTATEMENTs AT 30 JUNE 2012

Reserves and Retained Earnings

Reserves and Retained Earnings
			Consolidated
		2012		2011
	Notes	$’000		$’000
Other reserves	17(a)	194		182
Retainedprofts	17(b)	48,140	33,600

(a) Other reserves

(i) Nature and purpose of reserves

The employee equity benefits reserve is used to record the value of equity benefits provided to employees as part of their remuneration. Refer to Note 20 for further details of these plans.

(ii) Movements in reserves

Employee equity benefits reserve:

(b)	Balance at beginning of year 182 148 Share-basedpayments expense 12 34 Balance at end ofyear 194 182 Retained profts Balance at beginning of year 33,600 26,324 Netproft for theyear 19,567 17,692 Total available for appropriation 53,167 44,016 Dividendspaid orprovided for (5,027) (10,416) Balance at end ofyear 48,140 33,600

18. Statement of Cash Flows

(a)

Consolidated
2012
2011
$’000
$’000
Reconciliation of the proft after income tax expense
to the net cash fows from operating activities
Proft after income tax expense
19,567
17,692
Amortisation of non-current assets
4,462
3,642
Depreciation of non-current assets
11,705
11,777
Loss/(proft) on sale of plant and equipment
1
(7)
Share-based payments expense
12
34
Net foreign currency (gains)/losses
(85)
476
Changes in assets and liabilities
Trade receivables
410
2,553
Other receivables
(296)
1,392
Accrued income
2,276
1,198
Prepayments
(306)
19
Deferred tax assets
1,265
503
Trade and other creditors
(4,492)
260
Other liabilities
(65)
(503)
Current tax liabilities
(441)
(289)
Deferred tax liabilities
-
-
Provisions
(34)
156
Net cash fow from operatingactivities
33,979
38,903

18. Statement of Cash Flows (cont’d)

(b) (c)	Consolidated
	2012 2011 $’000 $’000
	Non-cash investing activities There were no non-cash investing activities during the fnancial year. Financing facilities available Total facilities: – bank guarantee facility 3,667 4,144 – cash advance facility 30,000 -
	33,667 4,144
	Facilities used at reporting date: – bank guarantee facility 3,667 3,512 – cash advance facility - -
	3,667 3,512
	Facilities unused at reporting date: – bank guarantee facility - 632 – cash advance facility 30,000 -
	30,000 632
	Facilities used at reporting date 3,667 3,512 Facilities unused at reportingdate 30,000 632
	Total facilities 33,667 4,144

Bank guarantee facility

The consolidated entity has a guarantee facility with a financial institution for rental bonds.

Cash advance facility

On 25 July 2011, the consolidated entity entered into a $30 million cash advance facility with a financial institution. The facility allows the entity to draw down up to $30 million in $500,000 parcels for interest periods of one, three and six months for a period of two years.

19. Expenditure Commitments

19.	Expenditure Commitments
(a)	Consolidated
	2012 2011 $’000 $’000
	Capital expenditure commitments Estimated capital expenditure contracted for at the reporting date but not recognised as liabilities is as follows: Not later than one year Plant and equipment 1,710 1,571 Land, buildings, plant and equipment under construction 3,522 7,947 Payable later than oneyear - -
	5,232 9,518

(b) Lease expenditure commitments

Operating leases

All operating leases relate to premises, parking spaces and office equipment in various locations and have a lease term of between six months and five years. There are no restrictions placed upon the lessee by entering into these leases.

MACQUARIE TELECOM ANNUAL REPORT 2012

NOTEs TO THE FINANCIAL sTATEMENTs AT 30 JUNE 2012

19. Expenditure Commitments (cont’d)

Expenditure Commitments (cont’d)
		Consolidated
	2012	2011
	$’000	$’000
Minimum lease payments:
Not later than one year	5,754	4,667
Later than one year and not later than fve years	10,674	14,938
Later than fveyears	-	-
	16,428	19,605
Aggregate expenditure commitments comprise:
Amounts provided for:
Lease incentive liability – current	187	66
Lease incentive liability – non-current	677	863
Amounts not provided for:
Rental commitments	16,428	19,605
	17,292	20,534

20. Employee Benefits and Superannuation Commitments

Employee Benefts and Superannuation Commitments
			Consolidated
		2012	2011
	Note	$’000	$’000
Employee benefts
The aggregate employee benefts liability is comprised of:
Accrued wages, salaries, annual leave and on costs		6,947	8,993
Provisions (current)	14	1,239	1,301
Provisions (non-current)	14	1,124	898
		9,310	11,192

Employee share schemes

The consolidated entity has adopted the following three employee share plans:

(a) Employee Option Plan;
(b) Discretionary Share Plan; and
(c) Share Purchase Plan.

Full-time and part-time employees of Macquarie Telecom or its subsidiaries are eligible to participate in these plans at the discretion of the directors. Directors, both executive and non-executive, are also eligible to participate in the plans. However, their participation is subject to the Corporations Act 2001 and the ASX Listing Rules. The plans are administered by the Board, which determines the directors or employees that will be made offers to participate in the plans and the terms of those offers. There are currently 419 employees and directors eligible for these plans.

Each of the plans contains provisions dealing with matters such as administration of the plans, variation of the plan rules, and termination or suspension of the plans. The plans are subject to the overriding application of the Corporations Act 2001 and the ASX Listing Rules.

The plans restrict the total number of shares issued under all of the plans, including as a result of the exercise of options, in the previous five years and the number of unexercised options issued to no more than 5% of the issued share capital of Macquarie Telecom.

During the year, there were nil options (2011: nil) issued under the Employee Option Plan to eligible employees. At 30 June 2012, there were nil (2011: 15,000) options on issue under this plan. During the year, 15,000 options were exercised (2011: 97,500) and nil (2011: nil) options were forfeited. Employee options are contingent on: (a) the employee remaining in employment with the Company; and (b) the Company’s share price reaching an amount equal to or greater than 25% higher than the option exercise price for 20 consecutive days prior to the date of exercise.

During the year, there were nil shares (2011: nil) issued under the Discretionary Share Plan to eligible employees, and nil shares (2011: nil) issued under the Share Purchase Plan. Ordinary shares issued under the Discretionary Share Plan are not

disposable for two years from the date of issuance. Ordinary shares issued under the Share Purchase Plan are not disposable until the earlier of the date of termination of employment with Macquarie Telecom, or three years from the date of issuance.

The market value of Macquarie Telecom shares closed at $8.36 on 30 June 2012.

No other equities in any of the entities within the consolidated entity were acquired by or issued to employees during the year in relation to any other ownership-based remuneration scheme.

The maximum contractual life of each option granted is five years. There are no cash settlement alternatives.

Information in respect to the number of options granted under the Employee Option Plan is as follows:

		2012		2011
		weighted		weighted
		average		average
	Number	exercise price	Number	exercise price
	of options	$	of options	$
Balance at beginning of year	15,000	0.92	112,500	0.91
Granted	-	-	-	-
Forfeited/expired	-	-	-	-
Exercised	(15,000)	0.92	(97,500)	0.91
Balance at end ofyear	-	-	15,000	0.92
Exercisable at end ofyear	-	-	15,000	0.92

(a) Options held at the beginning of the reporting period

The following table summarises information about the options held by employees as at 1 July 2011.

					weighted average
					exercise price
Number of options		Grant date	Vestingdate	Expirydate	$
5,000		23 April 2007	23 April 2009	23 April 2012	0.97
10,000	14	November 2008	14 November 2010	14 November 2013	0.90
15,000

(b) Options granted during the reporting period

There were nil options granted by the Company to employees during the year.

(c) Options exercised during the reporting period

There were 15,000 options exercised by employees during the year.

(d) superannuation commitments

MT makes contributions in accordance with the superannuation law in respect of each eligible employee. At the end of the financial year, contributions of up to 9% (2011: 9%) of employees’ salaries and wages are legally enforceable in Australia.

21. Earnings Per Share

(a) (b) (c)	Consolidated
	2012 2011 cents cents
	Basic earnings per share
	Basic earningsper share attributable to the ordinaryequityholders of the Company 93.4 84.8
	Diluted earnings per share
	Diluted earningsper share attributable to the ordinaryequityholders of the Company 93.4 84.5
	Reconciliation of earnings used in calculating earnings per share Consolidated
	2012 2011 $’000 $’000
	Proft attributable to the ordinary equity holders of the Company used in calculating basic 19,567 17,692 and diluted earnings per share

MACQUARIE TELECOM ANNUAL REPORT 2012

NOTEs TO THE FINANCIAL sTATEMENTs AT 30 JUNE 2012

21. Earnings Per Share (cont’d)

(d)	2012 2011 Number of shares Number of shares
	weighted average number of ordinary shares used in calculating basic earnings per share 20,941,162 20,869,710 Effect of dilutive securities: Share options 14,381 70,726
	Adjusted weighted average number of ordinary shares used in calculating diluted earningsper share: 20,955,543 20,940,436
	Number of options that are not dilutive and not included in the calculation of diluted earnings per share – Options over ordinaryshares - -

Since the end of the financial year, no ordinary shares have been issued upon the exercise of options.

22. Key Management Personnel Disclosures

(a) Details of key management personnel

Key management personnel of the consolidated group are defined as those persons having the authority and responsibility for planning, directing and controlling activities of the entity, directly or indirectly.

Directors:
R Kaye	Chairman
D Tudehope	Chief Executive
A Tudehope	Managing Director – Hosting
S Butler3	Non-Executive Director
J Palfreyman	Non-Executive Director
A Darling4	Non-Executive Director
P James5	Non-Executive Director
Other Key Management Personnel:
C Greig	Group Executive, Telco Business
M Simmonds	Chief Financial Offcer
J Scollay1	Group Executive, Sales
S Gatward2	Group Executive, Telecom Services
L Clifton	Group Executive, Sales
1Resigned 15 July 2011
2Resigned 15 September 2011
3Resigned 31 October 2011
4Appointed 22 March 2012
5Appointed 2 April 2012

(b) Compensation of Key Management Personnel
(i) Compensation policy

The Corporate Governance, Nomination and Remuneration Committee comprise all the non-executive directors and the Chief Executive. Its main responsibilities are to review all matters relating to the appointment, retirement and performance of the Board, the Board Committees and the Chief Executive and Managing Director – Hosting of the Company.

The Committee addresses the people management processes and reviews the remuneration arrangements for non-executive directors, executive directors and senior managers. The Committee also reviews and approves the issue of shares and options under the Company’s share and option plans. The Managing Director – Hosting joins the Committee to determine the remuneration policy for the senior management team.

Further details of remuneration policy and service contracts in place are outlined in the Directors’ Report under the heading “Remuneration Report”.

(ii) Compensation by category

Compensation by category
		Consolidated
	2012	2011
	$	$
Short-term employee benefts	3,529,725	4,254,003
Long-term employee benefts	199,797	179,370
Post employment benefts	109,805	115,393
Termination payments	6,346	-
Share-basedpayments	11,266	31,355
	3,856,939	4,580,121

Information regarding individual directors’ and executives’ remuneration is provided in the Remuneration Report on page 17 to 23.

		Balance	Granted as	On exercise	Net change	Balance
30 June 2012	Note	1 July2011	remuneration	of options	other	30 June 2012
Directors
R Kaye		30,000	-	-	-	30,000
D Tudehope		323,291	-	-	133	323,424
A Tudehope		3,591	-	-	-	3,591
D & A Tudehope	24(c)(i)	12,501,390	-	-	-	12,501,390
S Butler2		30,000	-	-	(30,000)	-
J Palfreyman		50,000	-	40,000	-	90,000
A Darling3		-	-	-	-	-
P James4		-	-	-	-	-
Executives
C Greig		22,500	-	-	-	22,500
M Simmonds		50,000	-	-	-	50,000
S Gatward1		1,400	-	-	(1,400)	-
L Clifton		-	-	-	-	-
Total		13,012,172	-	40,000	(31,267)	13,020,905

1 Resigned 15 September 2011

2 Resigned 31 October 2011

3 Appointed 22 March 2012

4 Appointed 2 April 2012

All options and shareholdings referred to above are ordinary shares in the Company.

(d) shares issued on exercise of compensation options

During the financial year there were 40,000 shares (2011: 62,500) issued to key management personnel on exercise of compensation options.

(e) Other transactions and balances with key management personnel

Services provided by any related party have been disclosed in the Remuneration Report.

23. Auditor’s Remuneration

Auditor’s Remuneration
		Consolidated
	2012	2011
	$	$
The auditor of Macquarie Telecom is PricewaterhouseCoopers.
Amounts received or due and receivable by the auditor of Macquarie Telecom for:
– an audit or review of the fnancial report of the Company and any other entity
in the consolidated entity	225,000	215,000
– other services in relation to the Companyand anyother entityin the consolidated entity	19,300	24,750
	244,300	239,750

MACQUARIE TELECOM ANNUAL REPORT 2012

NOTEs TO THE FINANCIAL sTATEMENTs AT 30 JUNE 2012

24. Related Party Disclosures

(a) The directors of Macquarie Telecom during the year were:

R Kaye D Tudehope

A Tudehope

Amounts due from/payable to wholly owned entities

On 30 June 2012, the Company had current and noncurrent receivables with a carrying value of $84,111,201 (2011: $87,314,301) due from MT, which was a result of tax consolidations and advances made to MT in relation to normal commercial transactions.

S Butler[1]

J Palfreyman

A Darling[2]

P James[3]

1 Resigned 31 October 2011

On 30 June 2012, the Company had an amount payable to Ninefold Pty Limited (“Ninefold”) of $2,619,976 (2011: $936,935), which was a result of tax consolidations.

Transactions with director-related entities

2 Appointed 22 March 2012
3 Appointed 2 April 2012
(b) The following related party transactions occurred during the financial year:

Transactions with related parties in the wholly owned group

Business Development Agreement

On 29 June 1998, the Company entered into a Business Development Agreement with its wholly owned subsidiary, Macquarie Telecom Pty Limited (“MT”). Under this agreement, the Company can charge MT a fee for the provision of services to customers and can be charged a management fee by MT for servicing any customers contracted to the Company. No such fees were levied during the current financial year (2011: nil).

Tax consolidation

Effective 1 July 2002, for the purposes of income taxation, Macquarie Telecom Group Limited and its 100% owned Australian subsidiaries have formed a tax consolidated group. Members of the group have entered into a tax sharing arrangement in order to allocate income tax expense to the wholly owned Australian subsidiaries based on their accounting profit/(loss) for the period. In addition, the agreement provides for the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations.

services

A director-related entity of J Palfreyman was paid $419,255 (2011: $300,599) for the provision of consulting services to the consolidated entity.

P James was paid $75,000 (2011: nil) for the provision of consulting services to the consolidated entity.

All amounts paid were on normal commercial terms and conditions and at market rates.

(c) Equity instruments of directors
Interests in the equity instruments of entities in the consolidated entity held by directors of the reporting entity and their director-related entities at 30 June 2012, being the number of instruments held, were:
(i) D Tudehope and A Tudehope collectively wholly own Claiward Pty Ltd, an entity which holds 12,501,390 (60%) of the ordinary shares of Macquarie. The relevant ownership interests in Claiward Pty Ltd are held by Semark Pty Ltd at 84% and Fenton Australia Pty Ltd at 16%. The shares in these latter companies are held by D Tudehope and A Tudehope respectively;
(ii) a director-related entity of D Tudehope and A Tudehope holds 7,183 ordinary shares issued under the Employee Discretionary Share Plan and Share Purchase Plan;

(iii) a director-related entity of D Tudehope holds 323,291 ordinary shares. D Tudehope holds a further 133 shares issued under the Employee Discretionary Share Plan;
(iv) 5,000 ordinary shares were on issue to a director-related entity of R Kaye. R Kaye also has an interest in 25,000 ordinary shares;
(v) a director-related entity of J Palfreyman holds 10,000 ordinary shares. J Palfreyman also has an interest in 80,000 ordinary shares.
(d) Terms and conditions
All transactions with key management personnel were made on normal commercial terms and conditions and at market rates.

25. Segment Information

segment description

The consolidated entity operates in four primary operating segments providing services to Australian corporate and Australian government customers. The Voice segment relates to the provision of voice telecommunications services. The Data segment relates to the provision of services utilising the Macquarie data network. The Hosting segment relates to the provision of services utilising the Macquarie data hosting facility. The Mobile segment relates to the provision of mobile telecommunications services.

Geographically, the consolidated entity operated in one location being Australia.

segment accounting policies

Segment accounting policies are the same as the consolidated entity’s policies described in Note 2.

MACQUARIE TELECOM ANNUAL REPORT 2012

NOTEs TO THE FINANCIAL sTATEMENTs AT 30 JUNE 2012

25. Segment Information (cont’d)

segment information on primary operating segments


	2012	2011	2012	2011
	$’000	$’000	$’000	$’000
Revenue
Sales to customers outside the consolidated entity	76,199	85,903	62,428	58,879
Other income	-	450	16	307
Inter-segment revenue	-	-	-	-
Total segment revenue	76,199	86,353	62,444	59,186
Inter-segment elimination
Unallocated revenue
Total consolidated revenue
Results
Segment result before income tax	17,243	15,922	5,231	3,695
Unallocated revenue and expenses
Proft before income tax and fnance costs
Finance costs
Consolidated entity proft before income tax
Income tax expense
Consolidated entity proft after income tax
Depreciation	195	255	4,217	4,152
Unallocated depreciation
Total depreciation
Amortisation	51	61	922	983
Unallocated amortisation
Total amortisation


	2012	2011	2012	2011
	$’000	$’000	$’000	$’000
Other segment information
Acquisition ofproperty, plant and equipment and intangible assets	69	871	4,491	3,913
Unallocated acquisitions
Total acquisitions

				Consolidated	Consolidated
2012	2011	2012	2011	2012	2011
$’000	$’000	$’000	$’000	$’000	$’000
58,530	53,715	21,706	28,213	218,863	226,710
49	69	-	-	65	826
-	-	-	-	-	-
58,579	53,784	21,706	28,213	218,928	227,536
				-	-
				2,338	3,069
				221,266	230,605
7,819	7,462	3,156	3,417	33,449	30,496
				(6,676)	(5,569)
				26,773	24,927
				(236)	(18)
				26,537	24,909
				(6,970)	(7,217)
				19,567	17,692
6,445	6,549	28	31	10,885	10,987
				820	790
				11,705	11,777
1,120	535	169	119	2,262	1,699
				2,200	1,943
				4,462	3,642

				Consolidated	Consolidated
2012	2011	2012	2011	2012	2011
$’000	$’000	$’000	$’000	$’000	$’000
44,039	22,073	239	158	48,838	27,015
				3,034	3,587
				51,872	30,602

MACQUARIE TELECOM ANNUAL REPORT 2012

NOTEs TO THE FINANCIAL sTATEMENTs AT 30 JUNE 2012

26. Financial Risk Management

Objectives and policies

The consolidated entity’s principal financial instruments comprise cash and short-term deposits.

The main purpose of these financial instruments was to provide additional funding capacity for the consolidated entity’s operations.

The consolidated entity has various other financial instruments such as trade debtors and trade creditors, which arise directly from its operations.

The main risks arising from the consolidated entity’s financial instruments are interest rate risk, liquidity risk, credit risk and foreign exchange risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below.

Interest rate risk

The consolidated entity is exposed to interest rate risk as it borrows funds at both fixed and floating interest rates. The risk is managed by maintaining an appropriate mix between fixed and floating rate borrowings.

Liquidity risk

The consolidated entity’s objective is to maintain a balance between continuity of funding and flexibility through use of financing facilities.

Credit risk

Information regarding the consolidated entity’s credit risk policies and objectives is set out in Note 26(b).

Foreign exchange risk

The consolidated entity is exposed to changes in foreign exchange risk in relation to the earnings of its international data operations, which have not been hedged on the basis of its significance to the Group’s results.

The consolidated entity holds the following financial instruments:

		Consolidated
	2012	2011
	$’000	$’000
Financial assets
Cash and cash equivalents	30,808	53,463
Trade and other receivables	6,213	6,327
Accrued income	5,600	7,876
Other current assets	2,378	2,072
	44,999	69,738
Financial liabilities
Trade and otherpayables	29,826	34,318
	29,826	34,318

(a) Market risk
(i) Foreign exchange risk

The consolidated entity operates primarily in Australia and is exposed to foreign exchange risk arising mainly from its international data operation. Commercial transactions in Australia are mainly in AUD. Foreign currency transactions are not significant to the consolidated operations. As such, the consolidated entity chooses not to hedge its foreign exchange risk using forward exchange contracts. The consolidated entity’s exposure to foreign currency risk at the reporting date was as follows:

was as follows:
		2012			2011
	$’000		$’000	$’000	$’000
	UsD		NZD	UsD	NZD
Cash and cash equivalents	2,600		-	2,499	-
Trade and other receivables	-		-	-	-
Other current assets	-		-	-	-
Accrued income	-		-	-	-
Trade and otherpayables	279		-	270	3

Consolidated entity sensitivity

Based on the financial instruments held at 30 June 2012, had the Australian dollar weakened/strengthened by 10% against the US dollar with all other variables held constant, the consolidated entity’s post-tax profit for the year would have been $320,000 higher/$262,000 lower (2011: $308,000 higher/$252,000 lower) mainly as a result of foreign exchange gains/losses on translation of US denominated financial assets as detailed in the above table.

(ii) Interest rate risk

The consolidated entity’s and parent entity’s main interest risk arises from cash and cash equivalents with banks. The consolidated entity’s borrowings are at fixed and floating interest rates.

Based on the cash and cash equivalents at 30 June 2012, if interest rates had changed by +/- 10% from the year-end rates with all other variables held constant, post-tax profit would have been $56,000 higher/lower (2011: $109,000 higher/lower) as a result of higher/lower interest income from these financial assets.

(iii) Other price risk

Neither the consolidated entity nor parent entity carries any other price risk.

MACQUARIE TELECOM ANNUAL REPORT 2012

NOTEs TO THE FINANCIAL sTATEMENTs AT 30 JUNE 2012

26. Financial Risk Management (cont’d)

(iv) Cash flow and fair value interest rate risk

The consolidated entity’s exposure to interest rate risks and the effective interest rates of financial assets and financial liabilities, both recognised and unrecognised at the balance date, are as follows:

					Fixed interest rate maturingin	Fixed interest rate maturingin
	Floating	interest rate	1year or less		Over 1 to 5years		More than 5years
	2012	2011	2012	2011	2012	2011	2012	2011
	$’000	$’000	$’000	$’000	$’000	$’000	$’000	$’000
(i) Financial assets
Cash	12,703	21,959	18,104	31,503	-	-	-	-
Receivables – trade	-	-	-	-	-	-	-	-
Accrued income	-	-	-	-	-	-	-	-
Other – current	-	-	-	-	-	-	-	-
Total fnancial assets	12,703	21,959	18,104	31,503	-	-	-	-
(ii) Financial liabilities
Payables	-	-	-	-	-	-	-	-
Total fnancial liabilities	-	-	-	-	-	-	-	-

N/A: Not applicable for non-interest bearing financial instruments.

(b) Credit risk

Credit risk is managed on a consolidated entity basis. Credit risk arises from cash and cash equivalents, deposits with financial institutions, as well as credit exposures to customers including receivable and committed transactions. Customers are assessed for their creditworthiness by using a third party credit rating agency. If there are no independent credit ratings available, credit risk is assessed by taking into account the financial position of the company, past experience and other factors. The consolidated entity mitigates the credit risk of the top 20 customers through trade credit insurance. The credit quality of the financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings (if available) or to historical information about counterparty default rates. The maximum exposure to credit risk at the reporting date is the carrying amount of the financial assets as summarised on page 56.


	2012	2011
	$’000	$’000
Trade receivables
Group 1	4,984	5,881
Group 2	1,647	1,117
Provision for doubtful debts	(1,095)	(963)
	5,536	6,035

Group 1 Aged 0–30 days including past due, but not impaired. Group 2 Aged 30+ days against which provision has been made.

		Total carrying	Total carrying	weighted	weighted
		amount as per		average effective
Non-interest bearing		the Balance sheet		interest rate
2012	2011	2012	2011	2012	2011
$’000	$’000	$’000	$’000	%pa	%pa
1	1	30,808	53,463	4.85	5.35
6,213	6,327	6,213	6,327	N/A	N/A
5,600	7,876	5,600	7,876	N/A	N/A
2,378	2,072	2,378	2,072	N/A	N/A
14,192	16,276	44,999	69,738
29,826	34,318	29,826	34,318	N/A	N/A
29,826	34,318	29,826	34,318

(c) Liquidity risk

The consolidated entity manages liquidity risk by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Surplus funds are generally invested on investment account and short-term deposit.

Cash advance facility

Maturities of financial liabilities

Maturities of fnancial liabilities
						Total
	Less than	6–12	Between 1	Between 2		contractual
	6 months	months	and 2years	and 5years	Over 5years	cash fow
	$’000	$’000	$’000	$’000	$’000	$’000
Consolidated entity at 30 June 2012
Non-interest bearing	29,826	-	-	-	-	29,826
Variable rate	-	-	-	-	-	-
Fixed rate	-	-	-	-	-	-
	29,826	-	-	-	-	29,826

(d) Fair value estimation

The carrying value of all financial instruments is assumed to approximate their fair value given their short-term nature.

MACQUARIE TELECOM ANNUAL REPORT 2012

NOTEs TO THE FINANCIAL sTATEMENTs AT 30 JUNE 2012

27. Parent Entity Financial Information

(a) summary financial information

The individual financial statements for Macquarie Telecom Group Limited, the parent entity, show the following aggregate amounts:

amounts:
	2012	2011
	$’000	$’000
statement of fnancial position
Current assets	-	347
Total assets	143,539	147,176
Current liabilities	6,361	5,109
Total liabilities	6,361	5,109
Shareholders’ equity:
Contributed equity	42,991	42,811
Reserves
Employee equity benefts reserve	194	182
Retainedproft	93,993	99,074
	137,178	142,067
(Loss)/proft for the year	(53)	84,430
Total comprehensive (loss)/income	(53)	84,430

(b) Guarantees entered into by the parent entity

Macquarie Telecom Group Limited (the “Company”), Macquarie Telecom Pty Limited (“MT”), Macquarie Hosting Pty Limited (“MH”), Macquarie Telecom Carrier Services Pty Limited (“MTCS”) and Macquarie Telecom Network Carrier Services Pty Limited (“MTNCS”) (the “Closed Group”) entered into a Deed of Cross Guarantee on 28 June 2005. The effect of the deed is that the Company has guaranteed to pay any deficiency in the event of winding up of MT, MH, MTCS and MTNCS. MT, MH, MTCS and MTNCS have also given a similar guarantee in the event that the Company is wound up. The Deed of Cross Guarantee was amended on 20 July 2011 to include Ninefold Pty Limited and as such, Ninefold Pty Limited entered the Closed Group on this date.

(c) Contingent liabilities of the parent entity

The Company has guaranteed MT’s performance, including payments owed, under various wholesale supply agreements between MT and Telstra Corporation Limited (“Telstra”). It is not practical to disclose the maximum amount payable under the guarantee.

(d) Contractual commitments for the acquisition of property, plant or equipment

Macquarie Telecom Group Limited did not have any contractual commitments for the acquisition of property, plant or equipment as at 30 June 2012 or 30 June 2011.

28. Events Occuring After the Reporting Date

On 22 August 2012, the directors declared a fully franked final dividend of 12 cents per share to the holders of fully paid ordinary shares in respect of the financial year ended 30 June 2012, to be paid to the shareholders on 11 October 2012. This dividend has not been included as a liability in these financial statements. The total estimated dividend to be paid is $2.52 million.

DIRECTORs’ DECLARATION

In accordance with a resolution of the directors of Macquarie Telecom Group Limited, we state that:

(1) In the opinion of the directors:
(a) the financial report, the additional disclosures included in the directors’ report designated as audited, and notes of the consolidated entity are in accordance with the Corporations Act 2001 , including:
- (i) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2012 and of its performance for the year ended on that date; and
- (ii) complying with Accounting Standards and Corporations Regulations 2001 and other mandatory professional reporting requirements.
(b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.
(2) This declaration has been made after receiving the declarations required to be made to the directors in accordance with section 295A of the Corporations Act 2001 for the financial period ending 30 June 2012.
(3) In the opinion of the directors, as at the date of this declaration, there are reasonable grounds to believe that the members of the Closed Group identified in Note 27(b) will be able to meet any obligations or liabilities to which they are or may become subject, by virtue of the Deed of Cross Guarantee.

Note 1(b) confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board.

On behalf of the Board:

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David Tudehope Chief Executive

Sydney, 22 August 2012

MACQUARIE TELECOM ANNUAL REPORT 2012

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INDEPENDENT AUDITOR’s REPORT

Independent auditor’s report to the members of Macquarie Telecom Group Limited

Report on the financial report

We have audited the accompanying financial report of Macquarie Telecom Group Limited (the company), which comprises the statement of financial position as at 30 June 2012, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration for the Macquarie Telecom Group (the consolidated entity). The consolidated entity comprises the company and the entities it controlled at the year’s end or from time to time during the financial year.

Directors’ responsibility for the financial report

The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements , that the financial statements comply with International Financial Reporting Standards .

Auditor’s responsibility

Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report.

Our procedures include reading the other information in the Annual Report to determine whether it contains any material inconsistencies with the financial report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions.

Independence

In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001.

Auditor’s opinion

In our opinion:

(a) the financial report of Macquarie Telecom Group Limited is in accordance with the Corporations Act 2001, including:
(i) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2012 and of its performance for the year ended on that date; and
(ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001 ; and
(b) the financial report and notes also comply with International Financial Reporting Standards as disclosed in Note 1.

Report on the Remuneration Report

We have audited the remuneration report included in pages 17 to 23 of the directors’ report for the year ended 30 June 2012. The directors of the company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001 . Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards.

Auditor’s opinion

In our opinion, the remuneration report of Macquarie Telecom Group Limited for the year ended 30 June 2012, complies with section 300A of the Corporations Act 2001.

PricewaterhouseCoopers

==> picture [126 x 52] intentionally omitted <==

Scott Walsh Partner

Sydney 22 August 2012

PricewaterhouseCoopers, ABN 52 780 433 757

Darling Park Tower 2, 201 Sussex Street, GPO BOX 2650, SYDNEY NSW 1171 DX 77 Sydney, Australia T +61 2 8266 0000, F +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation.

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AUDITOR’s INDEPENDENCE DECLARATION

Auditor’s Independence Declaration

As lead auditor for the audit of Macquarie Telecom Group Limited for the year ended 30 June 2012, I declare that to the best of my knowledge and belief, there have been:

(a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and
(b) no contraventions of any applicable code of professional conduct in relation to the audit.

This declaration is in respect of Macquarie Telecom Group Limited and the entities it controlled during the period.

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Scott Walsh Partner PricewaterhouseCoopers

Sydney 22 August 2012

PricewaterhouseCoopers, ABN 52 780 433 757 Darling Park Tower 2, 201 Sussex Street, GPO BOX 2650, SYDNEY NSW 1171 DX 77 Sydney, Australia T +61 2 8266 0000, F +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation.

MACQUARIE TELECOM ANNUAL REPORT 2012

AsX ADDITIONAL INFORMATION

Additional information required by the Australian Securities Exchange and not shown elsewhere in the Annual Report as follows: The shareholder information set out below was applicable as at 27 September 2012.

A. Distribution of Equity Securities

Analysis of numbers of equity security holders by size of holding:

	Ordinary	shares
				EsP	DsP
				share	Discretionary
				Purchase Plan	share Plan
	shares	Options		shares	shares
1–1,000	491		-	-	-
1,001–5,000	334		-	-	-
5,001–10,000	85		-	-	-
10,001–100,000	69		-	-	-
100,001–and over	12		-	-	-
	991		-	-	-
The number of shareholders holding less than
a marketableparcel of shares	27			-	-

B. Equity Security Holders

Twenty largest shareholders

The names of the 20 largest holders of quoted shares at 27 September 2012

		Quoted Ordinaryshares	Quoted Ordinaryshares
		Number shares	% Held
1	Claiward Pty Limited	12,501,390	59.62%
2	J P Morgan Nominees Australia Limited	1,767,020	8.43%
3	National Nominees Limited	1,361,251	6.49%
4	Ms Elizabeth Dibbs	319,699	1.53%
5	Aust Executor Trustees NSW Ltd	305,350	1.46%
6	Moat Investments Pty Ltd	211,500	1.01%
7	Mr Richard Mews & Mrs Wee Khoon Mews	181,426	0.87%
8	Carrier International Pty Limited	180,000	0.86%
9	Equity Trustees Limited	165,402	0.79%
10	BNP Paribas Noms Pty Ltd	150,069	0.72%
11	HSBC Custody Nominees	119,200	0.57%
12	Mr Richard Ewan Mews	115,588	0.55%
13	Mr Neville Clyde Martin & Mrs Lauren Carol Martin	96,000	0.46%
14	Mrs Vicky Teoh	85,001	0.41%
15	Mr John William Palfreyman	80,000	0.38%
16	Yazad Super Pty Ltd	75,000	0.36%
17	Citicorp Nominees Pty Limited	65,956	0.32%
18	Mr Matthew James Wallace	55,000	0.26%
19	Mr Denis Alan Aitken	50,000	0.24%
20	Mr Robert Brydon Rudd	49,340	0.24%
		17,934,192	85.54%
Unquoted Equity Holders
		Number	Number
		on issue	of holders
Share Purchase Plan Shares		-	-
Discretionary Share Plan Shares		-	-
Options issued under the Employee Option Plan		-	-
Options issued to directors to take upordinaryshares		-	-

C. Substantial Shareholders

Substantial holders in the company are set out below:

		Ordinary	shares
		Number shares	% Held
1	Claiward Pty Limited	12,501,390	59.62%
2	J P Morgan Nominees Australia Limited	1,767,020	8.43%
3	National Nominees Limited	1,361,251	6.49%

D. Voting Rights

All ordinary shares carry one vote per share without restriction.

ThanK you for your conTinueD invesTMenT

Directors

Robert Kaye chairman David Tudehope chief executive Aidan Tudehope Managing Director – hosting John Palfreyman non-executive Director Anouk Darling non-executive Director Peter James non-executive Director

Auditor

pricewaterhousecoopers

Bankers

australia and new Zealand banking group limited

Solicitors

gilbert & Tobin

Environment Note

This report is printed on environmentally responsible paper stock, sovereign silk, using organic inks.

Company Secretaries Michael Simmonds Richard Lutterbeck

Registered Office level 20 2 Market street sydney nsW 2000

sovereign silk paper stock is manufactured using low environmental impact fsc accredited pulps and is also made totally chlorine free. it is accredited under the environmental Management system iso 14001.

Internet Address macquarietelecom.com

MacquarieHUB T 1800 789 999

Share Registry boardroom pty limited level 7, 207 Kent street sydney nsW T 61 2 9290 9600 f 61 2 9279 0664

macquarietelecom.com

sydney Melbourne level 20 level 1 2 Market street 441 st Kilda road sydney nsW 2000 Melbourne vic 3004 T (02) 8221 7777 T (03) 9206 6800 f (02) 8221 7788 f (03) 9206 6888

brisbane perth level 10 level 10 26 Wharf street 251 adelaide Terrace brisbane qlD 4000 perth Wa 6000 T (07) 3874 2300 T (08) 9229 0000 f (07) 3874 2388 f (08) 9229 0088

Adelaide 297 pirie street adelaide sa 5000 T (08) 8363 9700 f (08) 8363 9788

Hobart

49a Davey street hobart Tas 7000 T (03) 6214 0000 f (03) 6214 0088

Canberra level 7 54 Marcus clarke street canberra acT 2600 T (02) 6257 6277 f (02) 6257 7188

Intellicentre level 16 477 pitt street sydney nsW 2000 T 1800 789 999 f (02) 8204 5188

Intellicentre 2 17–23 Talavera road Macquarie park nsW 2113 T (02) 8221 7256 f (02) 8221 7788

Toll free Numbers T 1800 676 272 f 1800 676 373

AI assistant

MACQUARIE TECHNOLOGY GROUP LIMITED — Annual Report 2012

65295_rns_2012-10-17_6c51b194-1724-43a3-9d7f-44127e86efb5.pdf

ANNUAL REPORT 2012

NOTicE Of ANNUAL GENERAL MEETiNG

hosting

data

voice

mobile

record full year profit

$40.6m full-year ebitda

$30.8m cash & cash eQuivalents

9%

9%

improvement year on year

increase in hosting revenue

profitable groWth

Financial summary

2012 operating results by division*

ebitda

operating cash Flow

service revenue

gross margin %

company FEatURE

intellicentre 2 – open For business

macquarie telecom Focusing on green technology

community work

anouk darling

peter James

Financial statEmEnts

contEnts

DIRECTORs’ REPORT

Directors

Names, qualifications, experience and special responsibilities

Robert Kaye

(Chairman), Age 74

David Tudehope

(Chief Executive), Age 45

Aidan Tudehope

(Managing Director – Hosting), Age 40

John Palfreyman

(Non-Executive Director), Age 53

Anouk Darling*

Peter James**

DIRECTORs’ REPORT

Company Secretaries

Independent Professional Advice

Principal Activities

Earnings Per Share

Michael simmonds

Richard Lutterbeck

Review and Results of Operations

DIRECTORs’ REPORT

Dividends

Significant Changes in the State of Affairs

Significant Events After the Balance Date

Share Options

Indemnification and Insurance of Directors and Officers

Likely Developments and Expected Results

Remuneration Report (Audited)

Remuneration philosophy

Remuneration link to performance

Remuneration structure

Non-executive director remuneration

Objective

structure

senior manager and executive director remuneration

Objective

structure

DIRECTORs’ REPORT

Remuneration Report (cont’d)

Fixed remuneration

Objective

structure

Variable pay – Long Term Incentive (“LTI”)

Objective

structure

Variable remuneration – short Term Incentive (“sTI”)

Objective

structure

MACQUARIE TECHNOLOGY GROUP LIMITED Annual Report 2012