MACQUARIE TECHNOLOGY GROUP LIMITED — Annual Report 2012

Aug 22, 2012

Macquarie Telecom Group Limited ACN 056 712 228

Annual Report for the year ended 30 June 2012

Macq u ari e T el eco m G ro u p L i mi ted

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 Robert is Chairman of Macquarie Telecom and was appointed as a director in 2001. (Chairman) He was British Telecom’s director of market and business development for the Australasian region, a former managing director of British Telecom’s Australian Age 74 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	David is Chief Executive and co-founder of Macquarie Telecom and has been a
(Chief Executive)	director since 1992. He is responsible for overseeing the general management and
Age 45	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’.
Aidan Tudehope	Aidan is co-founder of Macquarie Telecom and has been a director since 1992. He
(Managing Director –	is the managing director of Macquarie Hosting with a focus on business growth,
Hosting) Age 40	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	John’s career spans more than 25 years in the IT industry. He was executive
(Non-Executive Director)	chairman of 90East Inc, an Australian supplier of managed security services to
Age 53	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*	Anouk is CEO of Moon Communications Group and a director of Hatch
(Non-Executive Director)	Entertainment, another STW company. With over 15 years experience in marketing
Age 42	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.

2

Macq u ari e T el eco m G ro u p L i mi ted

DIRECTORS’ REPORT

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 Non-Executive Director of iiNet Limited, Australia’s second largest DSL Internet Services 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

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

Michael Simmonds 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 Age 46 director in the UK. Michael has been a chartered accountant for over 20 years. Richard Lutterbeck Richard was appointed as company secretary of the Company in February 2009. In addition, he holds the position of Group Commercial and Strategy Manager. Age 41 Richard has been with the Company since 2001. He holds a Bachelor of Economics degree and a Masters of Business Administration.

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.

3

Macq u ari e T el eco m G ro u p L i mi ted

DIRECTORS’ REPORT

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

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.

REVENUE (A$ million) Hosting Hosting Total Telco Voice Data Mobiles Telco Total Total Continuing Operations	Full Year 2012 Full Year 2011 Full Year 2010
	58.6 53.8 44.5
	76.2 86.3 104.1 62.4 59.2 58.6 21.7 28.2 28.8
	160.3 173.7 191.5
	218.9 227.5 236.0

4

Macq u ari e T el eco m G ro u p L i mi ted

DIRECTORS’ REPORT

EBITDA (A$ million) Hosting Hosting Total Telco Voice Data Mobiles Telco Total Corporate Office Corporate Office Total Total Continuing Operations Reconciliation of EBITDA to profit before income tax Total EBITDA Interest revenue Interest expense Depreciation and amortisation expense Profit before income tax	Full Year 2012 Full Year 2011 Full Year 2010
	15.3 14.5 15.2
	17.5 16.2 15.0 10.4 8.8 3.4 3.4 3.6 1.9
	31.3 28.6 20.3
	(6.0) (5.9) (6.5)
	40.6 37.2 29.0
	40.6 37.2 29.0 2.3 3.1 2.1 (0.2) - (0.2) (16.2) (15.4) (15.7)
	26.5 24.9 15.2

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).

5

Macq u ari e T el eco m G ro u p L i mi ted

DIRECTORS’ REPORT

DIVIDENDS

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

ividends paid to members during the financial year were as follows:
(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%. (ii) Special dividend for the year ended 30 June 2011 of nil (2011: 20 cents) fully franked based on tax paid at 30%. (iii) Interim dividend for the year ended 30 June 2012 of 12 cents per share (2011: 10 cents) fully franked based on tax paid at 30%.	2012 2011 $’000 $’000 2,511 4,163 - 4,163 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 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.

6

Macq u ari e T el eco m G ro u p L i mi ted

DIRECTORS’ REPORT

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 nonexecutive 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 10 of this report.

7

Macq u ari e T el eco m G ro u p L i mi ted

DIRECTORS’ REPORT

REMUNERATION REPORT (cont’d)

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 8.

Remuneration for all senior managers consists of the following key elements:

• Fixed remuneration

• Variable remuneration

• Short Term Incentive (“STI”); and

• Long Term Incentive (“LTI”).

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 11.

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) customer related; (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.

8

Macq u ari e T el eco m G ro u p L i mi ted

DIRECTORS’ REPORT

REMUNERATION REPORT (cont’d)

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.

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) become 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.

9

Macq u ari e T el eco m G ro u p L i mi ted

DIRECTORS’ REPORT

REMUNERATION REPORT (cont’d)

Remuneration of Directors for the year ended 30 June 2012:

Directors		Short Term	Short Term	Short Term	Short Term	Short Term	Short Term	Long Term	Long Term				Long Term
		Primary and bonus				Post Employ- ment	% Bonus Granted	Bonus and Share-based Payments		Total	Total Perfor- mance Related		Long Term Incentive Provision
		Salary and Fees	Cash Bonus	Non – Monetary Benefits (i)	Other (ii)	Super- annuation		Cash Bonus (iii)	Options (iv)				Cash Bonus (vi)
R Kaye – Chairman	2012	170,000	-	-	-	15,300	-	-	-	185,300	0.0%		-
	2011	170,000	-	-	-	15,199	-	-	-	185,199	0.0%		-
D Tudehope – Chief Executive (v)	2012	489,636	194,707	(36,389)	38,432	15,775	94.6%	-	-	702,161	27.7%		70,863
	2011	467,273	304,431	(17,356)	37,996	15,199	175.5%	57,012	-	864,555	41.8%		-
A Tudehope – Managing Director Hosting (v)	2012	456,056	127,969	16,570	38,432	15,775	95.5%	-	-	654,802	19.5%		62,383
	2011	433,455	239,311	(20,547)	37,996	15,199	221.1%	57,012	-	762,426	38.9%		-
S Butler3 – Non-Executive Director	2012	33,333	-	-	-	3,000	-	-	-	36,333	0.0%		-
	2011	100,000	-	-	-	9,000	-	-	-	109,000	0.0%		-
J Palfreyman – Non-Executive Director	2012	114,450	-	-	419,255	-	-	-	11,266	544,971	2.1%		-
	2011	114,450	-	-	300,599	-	-	-	27,414	442,463	6.2%		-
A Darling4 – Non-Executive Director	2012	27,692	-	-	-	2,492	-	-	-	30,184	0.0%		-
	2011	-	-	-	-	-	-	-	-	-	-		-
P James5 – Non-Executive Director	2012	25,000	-	-	76,668	2,250	-	-	-	103,918	0.0%		-
	2011	-	-	-	-	-	-	-	-	-	-		-
Total Directors’ Remuneration	2012	1,316,167	322,676	(19,819)	572,787	54,592		-	11,266	2,257,669			133,246
	2011	1,285,178	543,742	(37,903)	376,591	54,597		114,024	27,414	2,363,643			-

10

Macq u ari e T el eco m G ro u p L i mi ted

DIRECTORS’ REPORT

REMUNERATION REPORT (cont’d) Remuneration of Other Key Management Personnel for the year ended 30 June 2012:

Other Key Management Personnel		Short Term	Short Term	Short Term	Short Term	Short Term	Short Term	Short Term	Long Term				Long Term
		Primary and bonus				Post Employment		% Bonus Granted	Share- based Payments	Total	Total Perfor- mance Related		Long Term Incentive Provision
		Salary and Fees	Cash Bonus	Non – Monetary Benefits(i)	Other (ii)	Super- annuation	Termina- tion Payment		Options (iv)				Cash Bonus (vi)
C Greig – Group Executive, Telco Business (v)	2012	319,333	109,161	8,962	18,904	15,775	-	89.5%	-	472,135	23.1%		-
	2011	309,631	219,963	(8,839)	18,904	15,199	-	180.3%	657	555,515	39.7%		-
M Simmonds – Chief Financial Officer (v)	2012	304,048	102,201	11,435	16,000	15,775	-	94.3%	-	449,459	22.7%		131,898
	2011	286,068	190,841	14,659	13,667	15,199	-	190.8%	3,284	523,718	37.1%		31,902
S Gatward2 - Group Executive, Telecom Services	2012	60,669	-	(7,447)	5,054	3,944	484	0.0%	-	62,704	0.0%		-
	2011	284,592	188,882	8,143	22,404	15,199	-	188.9%	-	519,220	36.4%		33,444
J Scollay1 - Group Executive, Sales	2012	13,196	-	(9,347)	-	3,944	5,862	0.0%	-	13,655	0.0%		-
	2011	311,900	222,772	2,808	-	15,199	-	159.1%	-	552,679	40.3%		-
L Clifton - Group Executive, Sales(v)	2012	241,553	111,675	9,431	23,086	15,775	-	74.5%	-	401,520	27.8%		-
	2011	-	-	-	-	-	-	-	-	-	-		-
Total Other Key Management Personnel Remuneration	2012	938,799	323,037	13,034	63,044	55,213	6,346		-	1,399,473			131,898
	2011	1,192,191	822,458	16,771	54,975	60,796	-		3,941	2,151,132			65,346

11

Macq u ari e T el eco m G ro u p L i mi ted

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 5 years.

Year ended 30 June	EBITDA	NPAT	Share Price
	(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

12

Macq u ari e T el eco m G ro u p L i mi ted

DIRECTORS’ REPORT

REMUNERATION REPORT (cont’d)

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

R Kaye D Tudehope A Tudehope S Butler3 J Palfreyman A Darling4 P James5 C Greig M Simmonds S Gatward2 J Scollay1 L Clifton Total

Balance Granted as remuner- ation Options exercised Balance Vested and exercisable Not vested and exercisable Consideration received $ Fair value of options when exercised $ 1 July 2011 30 June 2012 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 40,000 - (40,000) - - - 165,600 320,000 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

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

13

Macq u ari e T el eco m G ro u p L i mi ted

DIRECTORS’ REPORT

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:

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

1 Resigned 31 October 2011 2 Appointed 22 March 2012

3 Appointed 2 April 2012

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.

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 66 for the independence declaration from our auditor, PricewaterhouseCoopers.

14

Macq u ari e T el eco m G ro u p L i mi ted

DIRECTORS’ REPORT

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 nonaudit service provided means that auditor independence was not compromised.

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

Signed in accordance with a resolution of the directors:

==> picture [82 x 47] intentionally omitted <==

David Tudehope Chief Executive

Sydney, 22 August 2012

15

Macq u ari e T el eco m G ro u p L i mi ted

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.

16

Macq u ari e T el eco m G ro u p L i mi ted

CORPORATE GOVERNANCE STATEMENT

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 non-executive 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:

	Total Females	% Females
Number of females in entire organisation	114	27.5%
Number of females in people management positions	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;

• enhancing customer relationships.

17

Macq u ari e T el eco m G ro u p L i mi ted

CORPORATE GOVERNANCE STATEMENT

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

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 company-wide 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.

18

Macq u ari e T el eco m G ro u p L i mi ted

CORPORATE GOVERNANCE STATEMENT

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.

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 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.

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.

19

Macq u ari e T el eco m G ro u p L i mi ted

CORPORATE GOVERNANCE STATEMENT

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.

20

Macq u ari e T el eco m G ro u p L i mi ted

STATEMENT OF COMPREHENSIVE INCOME

YEAR ENDE D 30 JUNE 2 01 2

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

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

21

Macq u ari e T el eco m G ro u p L i mi ted

STATEMENT OF FINANCIAL POSITION

AS AT 30 JU NE 20 12

Notes	CONSOLIDATED
	2012 2011
	$’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
Retainedprofit 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.

22

Macq u ari e T el eco m G ro u p L i mi ted

STATEMENT OF CHANGES IN EQUITY

YEAR ENDE D 30 JUNE 2 01 2

	Contributed Equity	Reserves Retained Profit/(Loss) Total
	$’000	$’000 $’000 $’000
At 1 July 2010	42,723	148 26,324 69,195
Total comprehensive income for the year	-	- 17,692 17,692
Transactions with owners in their capacity as owners:
Share-based payments expense	-	34 - 34
Exercise of options	88	- - 88
Dividends provided for or paid	-	- (10,416) (10,416)
	88	34 (10,416) (10,294)
At 30 June 2011	42,811	182 33,600 76,593
	Contributed Equity	Reserves Retained Profit/(Loss) Total
	$’000	$’000 $’000 $’000
At 1 July 2011	42,811	182 33,600 76,593
Total comprehensive income for the year	-	- 19,567 19,567
Transactions with owners in their capacity as owners:
Share-based payments expense	- 180 -	12 - 12 - - 180 - (5,027) (5,027)
Exercise of options
Dividends provided for or paid
	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.

23

Macq u ari e T el eco m G ro u p L i mi ted

STATEMENT OF CASH FLOWS YEAR ENDE D 30 JUNE 2 01 2

Notes	CONSOLIDATED
	2012 2011
	$’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 FLOWS FROM OPERATING ACTIVITIES 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 FLOWS(USED IN)INVESTING ACTIVITIES	(51,872) (30,598)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of shares	180 88
Repayment of finance lease principal	- (342)
Dividendspaid on ordinaryshares	(5,027) (10,416)
NET CASH FLOWS (USED IN) FINANCING ACTIVITIES	(4,847) (10,670)
NET (DECREASE) IN CASH AND CASH EQUIVALENTS	(22,740) (2,365)
Cash and cash equivalents at the beginning of the financial year	53,463 56,304
Effects of exchange rate changes on cash and cash equivalents	85 (476)
CASH AND CASH EQUIVALENTS AT THE END OF YEAR 6	30,808 53,463

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

24

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

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.

25

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)

(c) Foreign currencies

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.

(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:

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.

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

(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.

26

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)

(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.

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.

27

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)

(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 longterm 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 non-market 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.

28

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)

(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.

(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.

Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively.

29

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)

(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.

(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.

30

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)

(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.

31

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)

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 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.

Amendments to AASB 128 provide clarification that an entity continues to apply the equity method and does not remeasure 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 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 standard 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 restated where necessary to conform with current presentation.

32

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

		CONSOLIDATED
		2012 2011
		$’000 $’000
	3. REVENUE AND EXPENSES
	(a) Revenue and other income
	Revenue from services	218,863 226,710
	Interest	2,338 3,067
	Net profit 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
	(b) 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)

33

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

		CONSOLIDATED	CONSOLIDATED
		2012	2011
		$’000	$’000
4. DIVIDENDS
(a) Dividends paid during the reporting period
(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 tax paid at 30%.		2,516	2,090
		5,027	10,416
(b) Dividends not recognised at the end of the reporting period Since year end, the directors declared the payment of a final dividend of 12 cents per share (2011: final 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 liability at year end, is		2,516	2,511
(c) Franking account balance
The amount of franking credits available for the subsequent financialyears 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).

34

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

	CONSOLIDATED
	2012 2011
	$’000 $’000
5. INCOME TAX
(a) Income tax expense
Current tax	5,705 6,714
Deferred tax	1,265 503
	6,970 7,217
Income tax expense is attributable to:
Profit from continuing operations	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
(b) Numerical reconciliation of income tax expense toprima facie tax payable
Profit from continuing operations 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

35

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

		CONSOLIDATED 2012 2011 $’000 $’000 - - - 90 4,834 4,488 4,834 4,578 1,290 1,139 973 1,049 468 406 107 314 15 - 2,853 2,908 7,687 7,486 (3,298) (1,832) 4,389 5,654 2,658 2,665 5,029 4,821 7,687 7,486	CONSOLIDATED 2012 2011 $’000 $’000 - - - 90 4,834 4,488 4,834 4,578 1,290 1,139 973 1,049 468 406 107 314 15 - 2,853 2,908 7,687 7,486 (3,298) (1,832) 4,389 5,654 2,658 2,665 5,029 4,821 7,687 7,486
		2012
		$’000
5. INCOME TAX (cont’d) NON-CURRENT ASSETS – DEFERRED TAX ASSETS
The balance comprises temporary differences attributable to:
Tax losses		- - 4,834
Foreign income tax offsets (“FITO”)
Accelerated depreciation for accounting purposes
		4,834
Employee benefits		1,290 973 468 107 15
Accrued expenses
Provisions for doubtful debts and credit notes
Other assets
Fringe benefits tax
Subtotal other		2,853
		7,687
Total deferred tax assets
Set-off of deferred tax liabilitiespursuant to set-offprovisions		(3,298)
Net deferred tax assets		4,389
Deferred tax assets expected to be recovered within 12 months		2,658
Deferred tax assets expected to be recovered after m	ore than 12 months	5,029
		7,687
Movements – Consolidated	Tax Losses FITO Accelerated Depreciation		Other Total
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

==> picture [502 x 32] intentionally omitted <==

36

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

			CONSOLIDATED 2012 2011 $’000 $’000 3,631 4,072 3,631 4,072 2,997 1,626 2,997 1,626 280 161 21 45 301 206 3,298 1,832 (3,298) (1,832) - - 1,672 368 1,626 1,464 3,298 1,832	CONSOLIDATED 2012 2011 $’000 $’000 3,631 4,072 3,631 4,072 2,997 1,626 2,997 1,626 280 161 21 45 301 206 3,298 1,832 (3,298) (1,832) - - 1,672 368 1,626 1,464 3,298 1,832
5. INCOME TAX (cont’d)
CURRENT LIABILITIES – CURRENT TAX LIABILITIES
Current tax liabilities
NON-CURRENT LIABILITIES – DEFERRED TAX LIABILITIES
The balance comprises temporary differences attributable to:
Accelerated depreciation for tax purposes
Other debtors
Prepayments
Subtotal other
Total deferred tax liabilities
Set-off of deferred tax liabilitiespursuant to set-offprovisions
Net deferred tax liabilities
Deferred tax liabilities expected to be recovered within 12 months
Deferred tax liabilities expected to be recovered after mor	e than 12 months
Movements – Consolidated	Accelerated Depreciation			Other Total
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.

37

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

		CONSOLIDATED
		2012 2011
		$’000 $’000
	6. CASH AND CASH EQUIVALENTS
	Cash at bank and on hand	12,704 21,960 17,600 28,984 504 2,519
	Short-term deposits
	Restricted cash*
		30,808 53,463
	* Bank deposits held by financial institutions as security against letters of credit.
	7. RECEIVABLES
	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
	(ii) Details of impairment of trade receivables are set out in Note 26(b)
	(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)
	8. ACCRUED INCOME Accrued income	5,600 7,876
	9. OTHER CURRENT ASSETS
	Prepayments	2,378 2,072

38

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

	CONSOLIDATED
	2012 2011
	$’000 $’000
10. 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 & equipment under construction
At cost	49,313 12,612
Accumulated depreciation	- -
	49,313 12,612
Total written down amount	69,275 33,632
Reconciliations
Reconciliation of the carrying amounts of property, plant and equipment at the beginning and end of the current financial year:
Leasehold improvements
Opening balance	828 583
Additions	234 456
Disposals	- -
Amortisation expense	(229) (211)
Closing balance	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)
Closing balance	19,129 20,192

*At the end of the lease, plant and equipment under lease was transferred to plant and equipment.

39

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

	CONSOLIDATED
	2012 2011
	$’000 $’000
10. PROPERTY, PLANT AND EQUIPMENT (cont’d)
Plant and equipment under lease
Opening balance	- 231
Transfers*	- (63)
Depreciation expense	- (168)
Closing balance	- -
*At the end of the lease, plant and equipment under lease was transferred to plant and equipment.
Land, buildings, plant and equipment under construction
Opening balance	12,612 -
Additions	36,701 12,612
Closing balance	49,313 12,612
11. 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
Reconciliations
Reconciliation of the carrying amounts of intangibles at the beginning and end of the current financial 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)
Closing balance	7,479 7,158

40

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

	CONSOLIDATED
	2012 2011
	$’000 $’000
11. INTANGIBLES (cont’d)
Product development
Opening balance	865 1,553
Additions – internal development	686 316
Disposals	- -
Amortisation expense	(643) (1,004)
Closing balance	908 865
12. OTHER NON-CURRENT ASSETS
Transmission capacity	4,722 4,722
Accumulated amortisation	(3,763) (3,460)
	959 1,262
13. 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
(a) Australian dollar equivalents Australian dollar equivalent of amounts payable in foreign currencies not effectively hedged:
- New Zealand dollars	- 3
- United States dollars	279 270

(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.

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

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

41

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

	CONSOLIDATED
	2012 2011
Notes	$’000 $’000
14. PROVISIONS
CURRENT
Employee benefits (a) 20	1,239 1,301
Leased premises make-good	- 198
	1,239 1,499
NON-CURRENT
Employee benefits (a) 20	1,124 898
(a) A reconciliation of the movements in the provision balance are as follows:
Long service leave
At 1 July	2,199 2,241
Charged to profit or loss
- additional provisions recognised	621 546
Amounts used during the period	(457) (588)
At 30 June	2,363 2,199
15. OTHER LIABILITIES
CURRENT
Lease incentive 19(b)	187 66
NON-CURRENT
Lease incentive 19(b)	677 863

42

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

	CONSOLIDATED
	2012 2011
	$’000 $’000
16. CONTRIBUTED EQUITY
(a) Share capital
Ordinary shares fully paid (no par value)	42,991 42,811

	Notes	2012	2012	2011	2011
		Number of		Number of
		shares	$	shares	$
(b) 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 of year		20,967,121	42,990,744	20,912,121	42,811,294

(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
	Number of	Weighted	Number of	Weighted
	options	average	options	average
		exercise price		exercise price
		$		$
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 of year	-	-	55,000	3.26
Exercisable at end of year	-	-	15,000	0.92

43

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

16. CONTRIBUTED EQUITY (cont’d)

(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.

Notes	CONSOLIDATED
	2012 2011
	$’000 $’000
17. RESERVES AND RETAINED EARNINGS
Other reserves 17(a)	194 182
Retained profits 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:
Balance at beginning of year	182 148
Share-basedpayments expense	12 34
Balance at end of year	194 182
(b) Retained profits
Balance at beginning of year	33,600 26,324
Net profit for the year	19,567 17,692
Total available for appropriation	53,167 44,016
Dividends paid or provided for	(5,027) (10,416)
Balance at end of year	48,140 33,600

44

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

	CONSOLIDATED
	2012 2011
	$’000 $’000
18. STATEMENT OF CASH FLOWS
(a) Reconciliation of the profit after income tax expense to the net cash flows from operating activities
Profit 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/(profit) 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 flow from operating activities	33,979 38,903

(b) Non-cash investing activities

There were no non-cash investing activities during the financial year.

45

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

	CONSOLIDATED
	2012 2011
	$’000 $’000
18. STATEMENT OF CASH FLOWS (cont’d)
(c) 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 reporting date	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 1, 3 and 6 months for a period of 2 years.

46

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

	CONSOLIDATED
	2012 2011
	$’000 $’000
19. EXPENDITURE COMMITMENTS
(a) 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 one year	- -
	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.
Minimum lease payments:
Not later than one year	5,754 4,667
Later than one year and not later than five years	10,674 14,938
Later than five years	- -
	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

47

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

Notes	CONSOLIDATED
	2012 2011
	$’000 $’000
20. EMPLOYEE BENEFITS AND SUPERANNUATION COMMITMENTS
Employee benefits
The aggregate employee benefits 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.

48

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS AT 30 JU NE 20 12

20. EMPLOYEE BENEFITS AND SUPERANNUATION COMMITMENTS (cont’d)

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

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

Number of	Grant date	Vesting date	Expiry date	Weighted
options				average
				exercise price
				$
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.

49

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

21. EARNINGS PER SHARE	CONSOLIDATED	CONSOLIDATED
	2012	2011
	cents	cents
(a) Basic earnings per share
Basic earnings per share attributable to the ordinary equity holders	93.4	84.8
of the company
(b) Diluted earnings per share
Diluted earnings per share attributable to the ordinary equity holders	93.4	84.5
of the company
	2012	2011
	$’000	$’000
(c) Reconciliation of earnings used in calculating earnings per share
Profit attributable to the ordinary equity holders of the company used in	19,567	17,692
calculating basic and diluted earnings per share
	2012	2011
	Number of	Number of
	shares	shares
(d) 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 earnings per 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 ordinary shares	-	-

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

50

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

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 Butler[3] Non-Executive Director J Palfreyman Non-Executive Director A Darling[4] Non-Executive Director P James[5] Non-Executive Director

Other Key Management Personnel:

C Greig Group Executive, Telco Business M Simmonds Chief Financial Officer J Scollay[1] Group Executive, Sales S Gatward[2] Group Executive, Telecom Services L Clifton Group Executive, Sales

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

(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 nonexecutive 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”.

51

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS AT 30 JU NE 20 12

22. KEY MANAGEMENT PERSONNEL DISCLOSURES (cont’d)

(ii) Compensation by category

	CONSOLIDATED
	2012 2011
	$ $
Short-term employee benefits	3,529,725 4,254,003
Long-term employee benefits	199,797 179,370
Post employment benefits	109,805 115,393
Termination payments	6,346 -
Share-based payments	11,266 31,355
	3,856,939 4,580,121
Information regarding individual directors’ and executives’ remuneration is provided in the Remuneration Report on pages 7 to 13. (c) Shareholdings of key management personnel 30 June 2012 Balance 1 July 2011 Granted as remuneration On exercise of options Net change other Balance 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.

52

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

	CONSOLIDATED
	2012 2011
	$ $
23. AUDITOR’S REMUNERATION
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 financial report of the Company and any other entity in the consolidated entity	225,000 215,000 19,300 24,750
– other services in relation to the Company and any other entity in the consolidated entity
	244,300 239,750

24. RELATED PARTY DISCLOSURES

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

R Kaye D Tudehope A Tudehope S Butler[1] J Palfreyman A Darling[2] P James[3]

• 1 Resigned 31 October 2011

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.

53

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

24. RELATED PARTY DISCLOSURES (cont’d)

Amounts due from/payable to wholly owned entities

On 30 June 2012, the Company had current and non-current 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.

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

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.

54

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS AT 30 JU NE 20 12

25. SEGMENT INFORMATION (cont’d)

Segment information on primary operating segments

Revenue Sales to customers outside the consolidated entity Other income Inter-segment revenue Total segment revenue Inter-segment elimination Unallocated revenue Total consolidated revenue Results Segment result before income tax Unallocated revenue and expenses Profit before income tax and finance costs Finance costs Consolidated entity profit before income tax Income tax expense Consolidated entity profit after income tax	Voice Data Hosting Mobiles 2012 $’000 2011 $’000 2012 $’000 2011 $’000 2012 $’000 2011 $’000 2012 $’000 2011 $’000 76,199 85,903 62,428 58,879 58,530 53,715 21,706 28,213 - 450 16 307 49 69 - - - - - - - - - -	Consolidated 2012 $’000 2011 $’000 218,863 226,710 65 826 - -
	76,199 86,353 62,444 59,186 58,579 53,784 21,706 28,213	218,928 227,536
	17,243 15,922 5,231 3,695 7,819 7,462 3,156 3,417	- - 2,338 3,069
		221,266 230,605
		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

55

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS AT 30 JU NE 20 12

25. SEGMENT INFORMATION (cont’d)

Segment information on primary operating segments

Depreciation Unallocated depreciation Total depreciation Amortisation Unallocated amortisation Total amortisation Other segment information Acquisition of property, plant and equipment and intangible assets Unallocated acquisitions Total acquisitions	Voice Data Hosting Mobiles 2012 $’000 2011 $’000 2012 $’000 2011 $’000 2012 $’000 2011 $’000 2012 $’000 2011 $’000 195 255 4,217 4,152 6,445 6,549 28 31	Voice Data Hosting Mobiles 2012 $’000 2011 $’000 2012 $’000 2011 $’000 2012 $’000 2011 $’000 2012 $’000 2011 $’000 195 255 4,217 4,152 6,445 6,549 28 31	Voice Data Hosting Mobiles 2012 $’000 2011 $’000 2012 $’000 2011 $’000 2012 $’000 2011 $’000 2012 $’000 2011 $’000 195 255 4,217 4,152 6,445 6,549 28 31	Consolidated 2012 $’000 2011 $’000 10,885 10,987
	51 61 922 983 1,120 535 169 119			820 790
				11,705 11,777
				2,262 1,699
	Voice Data Hosting Mobiles 2012 $’000 2011 $’000 2012 $’000 2011 $’000 2012 $’000 2011 $’000 2012 $’000 2011 $’000 69 871 4,491 3,913 44,039 22,073 239 158			2,200 1,943
				4,462 3,642
				Consolidated 2012 $’000 2011 $’000 48,838 27,015 3,034 3,587
				51,872 30,602

56

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

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:

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

57

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

26. FINANCIAL RISK MANAGEMENT (cont’d)

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:

Cash and cash equivalents Trade and other receivables Other current assets Accrued income Trade and other payables	2012 $’000 $’000 USD NZD	2011 $’000 $’000 USD NZD
	2,600 - - - - - - - 279 -	2,499 - - - - - - - 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.

58

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS AT 30 JU NE 20 12

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:

	Floating interest rate	Floating interest rate		Fixed interest rate maturing in	Fixed interest rate maturing in	Fixed interest rate maturing in	Fixed interest rate maturing in	Fixed interest rate maturing in	Non-interest bearing	Non-interest bearing	Total carrying amount as per the Balance Sheet	Total carrying amount as per the Balance Sheet	Weighted average effective interest rate	Weighted average effective interest rate
			1 year	or less	Over 1 to 5 years		More than 5 years
	2012 $’000	2011 $’000	2012 $’000	2011 $’000	2012 $’000	2011 $’000	2012 $’000	2011 $’000	2012 $’000	2011 $’000	2012 $’000	2011 $’000	2012 %pa	2011 %pa
(i) Financial assets
Cash	12,703	21,959	18,104	31,503	-	-	-	-	1	1	30,808	53,463	4.85	5.35
Receivables – trade	-	-	-	-	-	-	-	-	6,213	6,327	6,213	6,327	N/A	N/A
Accrued income	-	-	-	-	-	-	-	-	5,600	7,876	5,600	7,876	N/A	N/A
Other – current	-	-	-	-	-	-	-	-	2,378	2,072	2,378	2,072	N/A	N/A
Total financial assets	12,703	21,959	18,104	31,503	-	-	-	-	14,192	16,276	44,999	69,738
(ii) Financial liabilities
Payables	-	-	-	-	-	-	-	-	29,826	34,318	29,826	34,318	N/A	N/A
Total financial liabilities	-	-	-	-	-	-	-	-	29,826	34,318	29,826	34,318

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

59

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS AT 30 JU NE 20 12

26. FINANCIAL RISK MANAGEMENT (cont’d)

(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 57.

Trade receivables Group 1 Group 2 Provision for doubtful debts Group 1 Aged 0–30 days including past due, but not impaired. Group 2 Aged 30+ days against which provision has been made.	Consolidated 2012 2011 $’000 $’000 4,984 5,881 1,647 1,117 (1,095) (963)
	5,536 6,035

(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

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 1, 3 and 6 months for a period of 2 years.

Maturities of financial liabilities

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

60

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS

AT 30 JU NE 20 12

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:

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

61

Macq u ari e T el eco m G ro u p L i mi ted

NOTES TO THE FINANCIAL STATEMENTS AT 30 JU NE 20 12

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.

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.

62

Macq u ari e T el eco m G ro u p L i mi ted

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:

==> picture [82 x 47] intentionally omitted <==

David Tudehope Chief Executive

Sydney, 22 August 2012

63

==> picture [77 x 59] intentionally omitted <==

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.

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. 64

==> picture [77 x 59] intentionally omitted <==

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 7 to 13 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 .

==> picture [139 x 38] intentionally omitted <==

PricewaterhouseCoopers

==> picture [82 x 34] intentionally omitted <==

Scott Walsh Partner

Sydney 22 August 2012

65

==> picture [77 x 59] intentionally omitted <==

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.

==> picture [82 x 34] intentionally omitted <==

Scott Walsh Partner PricewaterhouseCoopers

Sydney 22 August 2012

66