M2 TELECOMMUNICATIONS GROUP LTD ANNUAL REPORT 2012m2.com.au/media/2193/AnnualReport-2012.pdf ·...

M2 TELECOMMUNICATIONS GROUP LTD

ANNUAL REPORT 2012

M2 TELECOM

MUNICATIONS GROUP LTD ANNUAL REPORT 2012

Featured on the cover and in our timeline are some of our newly expanded M2 team.Photographers: Santoso Hendradinata, Ron Phrakhoungheaung, Andrew Barnard and John Warren (Warren Photography, www.warrenphotography.com.au)Graphic Design: ADMAD www.admad.com.au

M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012 1

Timeline 2

Chairman’s Letter 4

CEO Review 6

Directors’ Report 14

Remuneration Report 20

Auditor’s Independence Declaration 29

Corporate Governance Statement 30

Corporate Social Responsibility 36

Financial Statements 37

Consolidated Statement Of Comprehensive Income 38

Consolidated Statement Of Financial Position 39

Consolidated Statement Of Changes In Equity 40

Consolidated Statement Of Cash Flow 41

Notes to the Consolidated Financial Statements 42

Director’s Declaration 87

Independent Audit Report 88

ASX Additional Information 90

Corporate Directory 92

CONTENTS

M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 20122

13 years as an sMB specialist

December 1999M2 established

OctOber 2004 M2 listed on ASX

OctOber 2007 Orion Telecommunications

acquired

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

APrIL 2009People Telecom

acquired

December 2009M2 celebrated its 10th anniversary

JUNe 2009 Telecom business assets of

Commander acquired

65

55

45

35

25

15

5

-5

30

25

20

15

10

5

0

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

EBITDA NPAT EBITDA FY12 NPAT FY12 DPS EPS DPS FY12 EPS FY12

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

EBITDA & NPAT EPS & DPS


mAy 2010Share Placement completed, raising $20m

FebrUAry 2011 M2 acquires the assets of

Clear Telecoms

JUNe 2012 M2 completes

acquisition of Primus Telecom

FebrUAry 2010 Dividend Reinvestment Plan introduced JUNe 2012

M2 added to the S&P/ASX200

16th consecutive dividend declared

Recorded NPAT of $33m, increase of 20%

APrIL 2012 Renounceable Entitlement

Offer completed, raising $83m

2010 2011 2012

600

500

400

300

200

100

0

2005 2006 2007 2008 2009 2010 2011 2012

“Another significant achievement this year was the completion of the company’s largest and most transformational acquisition to date - Primus telecom Holdings Pty Ltd.”

Market Capitalisation


On behalf of the Board of M2

Telecommunications Group Ltd (“M2”, “the

Company”), I am pleased to present to you

our Annual Report for the period 1 July 2011

to 30 June 2012 (“FY12”).

In last year’s report I commented that

Geoff Horth possessed the exceptional

capability to implement the systems,

processes and organisational structure

necessary to equip M2 to move to the next

level whilst maintaining its lean, hungry,

“challenger” culture. I am pleased to

report that this capability has been proven,

with a more streamlined M2 formed and

performing, delivering to shareholders

another year of double-digit growth in both

earnings before interest, tax, depreciation

and amortisation (“EBITDA”) and net profit

after tax (“NPAT”).

Another significant achievement this year

was the completion of the Company’s

largest and most transformational

acquisition to date - Primus Telecom

Holdings Pty Ltd (“Primus”), an acquisition

led by founding CEO, now Executive

Director Vaughan Bowen, indicative of the

success of his transition into this role. The

addition of Primus to the M2 Group takes

the Company to the next level in terms of

scale, capability and NBN preparedness.

Through the traditional Renounceable

Entitlement Offer completed to partially

fund the acquisition, it has also contributed

to M2’s June entry into the S&P/ASX 200,

a notable and pleasing achievement eight

years after listing.

Whilst much work remains to be done for

the Primus business to be fully integrated,

our outstanding team has made excellent

progress in the short time following

completion. Essential to maintaining the

dedicated focus of team members as

well as the successful cultural integration

has been the immediate formation of

logical business units with clearly defined

strategies for their target segments, as

well as the rapid combination of teams and

consolidation of premises. More details

regarding the integration and business

strategy are contained the CEO’s review.

The following are amongst other key

achievements of another busy and

productive year at M2, including:

> Earnings Before Interest, Tax,

Depreciation and Amortisation

(“EBITDA”) increased to $60.1 million,

up 24% on the previous corresponding

period;

> EBITDA margin (EBITDA / Revenue) was

maintained at 15%, the level achieved in

the previous corresponding period and a

95% increase on FY10 results, reflecting

the benefits of the businesses focus on

efficiency;

> Net Profit After Tax (“NPAT”) rose to

$33.0 million, an increase of 20%;

> An increase of 15% to 25.9 cents

Earnings Per Share (“EPS”);

CHAIRMAN’S LETTER

DEAR SHAREHOLDER,

Craig L Farrow, Chairman

Adam Stewart, Account Manager Lee Shan Shiu, Senior Accountant


> Revenues have been maintained within

guidance range, an 8% reduction on the

previous corresponding period, following

elimination of a high volume of low or

no margin revenue associated with the

EDirect acquisition;

> The transition of the majority of

customer support functions to our

Hobart “Centre of Excellence” from our

Adelaide operations;

> Completion and integration of two

smaller, “bolt-on” acquisitions: the

assets of both Time Telecom and Flextalk ;

> Refinement of the appointment-setting

process, feeding highly qualified sales

into our Commander channel;

> Phase one deployment of our Company-

wide Business Support System (“BSS”),

nicknamed “Ninja” by our team;

> Successful completion of a

Renounceable Entitlement Offer to raise

$83.1 million, the Company’s second

capital raising since listing;

> Declaration and payment of the

Company’s 15th and 16th dividend,

maintaining Board policy at 70% of NPAT.

As always, these results could not have

been achieved without the dedication

and hard work of our talented team, now

approximately 950 members strong across

our sites in Australia and New Zealand, as

well as the “extended” team that is our

dealer channel. I would like to thank to

each team member for their contributions

towards making the M2 business what it

is today.

We begin this year with greater scale, a

product suite that has expanded into next

generation products and services, a skilled

and customer-oriented team and a vibrant,

successful sales force. We are confident

that the M2 business is well-positioned for

future growth, for continuing to deliver to

shareholders and customers, as well as to

benefit from industry developments such

as the NBN. As exciting as M2’s future

may be, we remain inherently conservative

in our strategy development and oversight

of the expanded business, in order to

maintain the Company’s historically strong

balance sheet and record of delivering from

complementary acquisitions.

To our valued shareholders, I would like to

sincerely thank you for choosing to be a

shareholder of our Company and for your

continued support throughout another

exciting and successful year for M2.

Yours faithfully,

Craig L Farrow

Chairman

“We begin this year with greater scale, a product suite that has expanded into next generation products and services, a skilled and customer-oriented team and a vibrant, successful sales force.”

Johnathan Eele, M2NZ Managing Director/CEOAzme Karim, Account Manager

Tom Mazerski, Chief Customer OfficerDhruman Mehta, Finance Operations Manager


IntroductIon

It gives me great pleasure to present to

shareholders a review of the highlights

and notable events of the 2011/12 financial

year, along with a snapshot of the current

business and our strategy for the future.

As stated by the Chairman in his opening

letter, the past year has been one of

improvement of internal systems and

processes for the benefit of our customers

and our business, whilst ensuring our

external dealer channel has greater access to

high quality sales opportunities and valuable

products to take to our customers. These

activities, together with a strong balance

sheet, ensured that M2 was very well placed

for its largest transaction since acquiring

People Telecom and the business assets of

Commander in 2009 – the completion of the

acquisition of Primus Telecom Holdings Pty

Ltd on 1 June.

We enter the year having met our guidance

released in August 2011, including the stated

decrease in revenue. As advised, this decrease

was due to the decision to eliminate some

high volume, low margin revenues following

the acquisition of EDirect in April 2011.

Importantly, the Company delivered on

EBITDA, NPAT and EPS guidance, with

double-digit percentage increases on all profit

measures as a result of our continual focus on

internal improvements, supplier arrangements

and synergies from acquisitions.

The year ahead for M2 is one in which our

inherent process of business optimisation

and synergy realisation will continue as the

Company moves forward as a larger but also

better organisation which is well prepared

for future developments within the industry.

The business has never been better

positioned to continue its journey as the pre-

eminent challenger in the SMB market.

A yeAr of focus on growth And effIcIency

The 2011/12 financial year (“FY12”) was

a year in which we made significant

investments in building our sales capability

at the same time as implementing some

important business efficiency initiatives,

designed to create a scalable and efficient

platform for growth. During this time, some

difficult decisions were taken which were

critical to ensure the long-term health of the

business, specifically in the consolidation

CEO REviEw

The Numbers ThaT maTTer

Geoff Horth, CEO

“the past year has been one of improvement of

internal systems and processes, for the benefit of our

customers and our business”

EBITDA rose 24% in comparison with

the previous corresponding period,

giving an EBITDA margin of 15%. This

outstanding result was achieved through

continual focus on internal business

improvements, favourable supplier

arrangements and the realisation of

synergies from earlier acquisitions.

A decrease of 8% on the previous

corresponding period, in line with

guidance, due to the elimination

of some high volume, low margin

revenues associated with the

Edirect acquisition.

At 30 June 2012, M2 had 956

team members in sites around

Australia and New Zealand. Some

members of our team are featured

on the cover and scattered

throughout this report.

EBITDA REvEnuE TEAm

60.1393.5956


of our contact centres. As an action that

affected a number of team members, it was

very carefully considered and, pleasingly,

several of the Adelaide team members

accepted roles in Hobart.

Following is a summary of the key FY12

activities:

> Our entire dealer channel was

consolidated under the Commander brand,

our leading brand in our core small to

medium business (“SMB”) market. This

initiative allowed us to focus our activities

on, and arm our sales teams with, our

strongest and most trusted brand. These

activities have delivered year-on-year

growth in the size of our dealer channel

and in turn the volume of sales generated;

> Successful completion of our appointment-

setting trial with subsequent roll-out

of a 25 person dedicated team in the

fourth quarter. This team generates

highly qualified appointments with SMB

customers, providing our dealer channel

with greater capacity to “see more people

and do more deals”;

> We further expanded our Inside Sales

team growing this team to in excess

of 60 people in the period. The Inside

Sales team is a directly employed team

with a focus on contacting our current

customers to ensure that we are

meeting all of their telecommunications

requirements; in the process increasing

product penetration and reducing churn;

> Our Wholesale division implemented

its “Defend and Extend” strategy,

recontracting existing customers and

winning four new customers in its core

target market (annual spend of between

$1 million and $10 million);

> Consolidation of our Adelaide contact

centre into our Hobart “Centre of

Excellence”. Bringing these two customer

support teams together in Hobart has

improved communication between

departments as well as delivering real

scale benefit and operational efficiency;

> Phase one of our next generation

Business Support System, “Ninja”, was

deployed in the third quarter of FY12, this

phase of the project was delivered on

budget and provides billing, provisioning

and customer support systems to replace

the first of our legacy platforms with a

schedule for others to follow;

> Completion of the aquisition and

successful integration of the assets of Time

Telecom and Flextalk, these two earnings

accretive “bolt on” transactions increase

our penetration into our core SMB segment

and provide valuable cross sell opportunities

for our Inside Sales teams.

The benefits of these activities can already

be seen in our results for the period; in

the longer term they will ensure that the

business has an efficient and scalable

platform for growth.

Throughout these busy and challenging

times our team responded with great spirit

and dedication, giving the business their

best and consistently going above and

beyond. As a business that has experienced

rapid growth both organically and through

acquisition, capacity to change has become

a feature of our culture and, in fact, part of

our core IP. The ability to adapt, to respond

to constantly evolving products and market

conditions has been a major factor in the

success that this business has enjoyed.

“throughout these busy and challenging times our team responded with great spirit and dedication.”

Continuing to deliver strong returns

to shareholders, the full year dividend

for the 2011/2012 financial year was

18c, fully franked, an increase of 13%

on the previous corresponding period

and the Company’s 16th consecutive

dividend payment.

An increase of 15%, continuing

the outstanding track record of

continual growth in earnings per

share.

NPAT increased 20% on the

previous corresponding period, an

excellent result achieved without

contribution from Primus (due to

cost of acquisition).

DIvIDEnDEPSnPAT

18c25.933.0

Sarah McDonough, Team Leader & Marla Giacon, Brand Manager


To see the way our team responded to

the significant change programs of the

last year demonstrates that the “change

and achieve” culture is alive and well - the

strongest indicator that the M2 success

story has only just begun.

I would like to thank our skilled and loyal

team for their work over the last year. I

would also like to once again warmly

welcome our newest team members who

joined M2 through the acquisition of Primus

Telecom Holdings Pty Ltd.

the AcquIsItIon of PrImus telecom

On 1 June 2012, M2 completed the

acquisition of 100% of Primus Telecom

Holdings Pty Ltd and its subsidiaries for

an all cash consideration of $192.4 million

($182 million net of restricted cash).

The acquisition was funded through

a combination of the proceeds of a

Renounceable Entitlement Offer, raising

$83.1 million, and a senior lending facility.

The Renounceable Entitlement Offer was

selected by our Board as the best method

to allow all shareholders equal participation

in and benefit from the offer. Shareholder

support for the offer was high with

participation well above average at both

institutional and retail levels.

The strategic and highly complementary

acquisition contributed the following to M2:

> Approximately 500 talented and engaged

team members;

> In excess of 165,000 residential and

small business customers;

> Approximately $40 million EBITDA based

on audited calendar year 2011 results;

> Next generation IP and Hosted Voice

technologies, ensuring that M2 is well

prepared for the opportunities presented

by the deployment of the National

Broadband Network (“NBN”);

> Three data centres, located in

Melbourne and Sydney, currently

totalling approximately 8,230 raised

square metres providing the opportunity

to take advantage of the emerging

demand for cloud-based services in our

core SMB segment;

> The well-recognised and trusted iPrimus

brand.

Further to the above, the Primus business

has been a strong generator of cash flow

and will further contribute to earnings

through a program of identified synergies

over the course of the next three years.

This transaction consolidates M2’s position

as the leading challenger in the SMB market.

The expanded business is equipped with the

capacity to access our core target markets

and the capability to meet their changing

technology needs over time.

Our Primus business integration program

was developed adopting a cooperative

approach leveraging the knowledge of both

the M2 and Primus Executive Management

teams. Our program principles specified

that the strategy and structure would be

clearly defined, the teams quickly and

respectfully combined, margins would

be maintained, synergies would be

realised and that communication would be

consistent, regular and open. The below

list of milestones support the view that

the integration program to date has been a

resounding success:

> Secured employment of key executive

and senior management team members

to ensure continuity of operations;

> Business unit and functional strategies

refined to ensure continued focus on the

core earnings-contributing markets of

SMB and Consumer;

> Corporate reorganisation communicated

to all team members within days of

acquisition completion;

> Premises consolidation completed

for Melbourne headquarters within

two weeks of completion and Sydney

consolidation completed within two

months;

> Improvements in service levels arising

from process redesign and load sharing

across the Hobart and Melbourne

contact centres;

> Key synergy realisation initiatives

commenced, with an ongoing monitoring

and control process implemented.

An extraordinary amount of work is involved

in integrating a business of this size; during

such a busy time we were mindful that

there is a possibility of both businesses

losing momentum due to distraction.

What was therefore most pleasing about

this integration program is that the team

remained focused on core activities during

this time of intensive change, including

achieving record sales results in our core

SMB Sales division.

“I would like to thank our skilled and loyal team for their work over the last year.”

Yolanda Bryce, HR CoordinatorNick Jensen, Server Administrator


lookIng forwArd

The business activites in the coming year will

be centred on the following strategic pillars:

> Focus on our core SMB market, continue

to grow the depth and breadth of our

dealer channel to grow share of market;

leverage our inside sales and customer

marketing capability to drive product

penetration;

> Drive our managed voice and data

services capability in the medium

business segment (21- 200 seats),

productising these offerings for sale in

the small business segment (1-20 seats)

as demand arises;

> Retain our profitable residential customer

base through targeted marketing and

superior customer service, establish a first

mover position in new markets (eg NBN);

> Be Number 1 in customer satisfaction

> Deliver on further synergies and

operational efficiencies.

The M2 business has never been in a better

position to take advantage of industry

developments and customer preparedness

for managed services. We are future

ready and look forward to delivering to our

customers and shareholders.

fInAl words

I trust that this review provides you with

some insight into the business and helps you

to understand the reasons for our confidence

in the future of M2. Following a year in

which we made significant improvements in

our sales organisation, executed important

efficiency initiatives and acquired critical next

generation services capability, the business

is very well positioned to continue its

remarkable success story.

I would like to close by stating that while we are confident in our position and future, we do move forward with appropriate caution, aware of the challenges which may be presented in both the integration of a sizeable business and the impending changes in the industry. We remain conservative in our approach to investing in our assets and intent to maintain the strongest possible financial position.

Finally, I would like to thank you, our shareholders, for your continued support of M2. Closing out my first term as CEO, I am pleased to have delivered another year of record earnings and as reflected in the FY13

guidance, I am confident in our ability to deliver

on increased profits again in the year ahead.

Yours faithfully,

Geoff Horth

CEO

the new m2

M2 will continue to be structured under Retail and Wholesale divisions, with two leading brands under Retail and one under Wholesale.

Our primary objective remains unchanged – to be the pre-eminent provider in the SMB market. A summary of our brand strategy and path

to market is follows:

retAIlwholesAle

SMB RESIDENTIAL

Brand

Proposition Local Presence, Superior Customer Service, Account Management,

Managed voice and data services

Value and certainty, Superior Customer Service (three times Roy

Morgan award winner)

A true partner for business growth with value-added advisory services

Path to market 2-20 seats via National Dealer Network, supported by sizeable

Inside Sales Team, 21-200 seats via National direct sales team

Targeted local area marketing approach to leverage strength in on-

net areas

Direct Sales

Objective Grow Retain and lead new markets (eg NBN)

Grow

Customer Characteristics

2-200 seat businesses up to $500,000 per annum spend

Suburban families with a minimum of two telecoms products

Reseller service providers with $1-10 million per annum spend

“We made significant improvements in our sales organisation.”

Dimitrios Papadakis, Customer Service Team Manager


SERVICE EXCELLENCE

commAnder centres

> SMB specialists

> Strong physical presence, knocking on the doors of SMBs across Australia

> 450+ representatives in Dealers and Dealer support, nationwide

> Providing local advice and assistance

> Approximately 30 years expertise in servicing and supporting SMBs

our hobArt contAct centre

> Our Hobart-based consumer and SMB specialists

> Includes a dedicated NZ team working to NZ hours

> Houses part of our Inside Sales team, meeting changing customer needs

and promoting M2 brands, products and services

> Uses “Ninja”, the improved customer management, billing and self-service

system being rolled out across all brands

our melbourne contAct centre

> Our Melbourne-based consumer and Corporate specialists

> Skilled and experienced in supporting Managed Services

> Inside Sales Team focusses on promoting new and improved products and

services to existing iPrimus customers

> Online ordering is available for customer convenience

> High level of specialised support is provided to our M2 Wholesale customers

Our objective is to be No 1 in customer satisfaction.

All business customers receive account management – friendly advice to customers on complementary products and services, improving product penetration and customer tenure.


A partnership for growth

At M2 Wholesale we are dedicated to supporting our partners, sharing our knowledge and experience to assist them to grow and succeed. We provide support and advisory services for our partners, which includes:

Complete portfolio of telecommunications services Training and onboarding Customer Lifecycle Management Advice and strategies for growth Credit management tools

M2 Wholesale provides the complete range of reseller solutions, to help you maximise the return on your brand and distribution networks

Call 1300 767 977 m2wholesale.com.au

Broadband & Data

Inbound 13/1300/1800 Services

IP & Fixed Phone Services

Mobile Services & Handsets


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moBile

With our 100% Australian based callcentre, 24x7 Technical Support and our own Broadband and Phone network, iPrimus delivers great value, reliability and great customer service you can rely on.

iPrimus is also NBN certified and ready, future-proofing our customers’ Broadband and Home Phone services for many years to come.

Visit

iprimus.com.au /iprimusau

100% AUSTRALIAN BASED CALL CENTRE

24x7 TECHNICAL SUPPORT

NBN CERTIFIED AND READY

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With our 100% Australian based call centre, 24x7 Technical Support and ourown Broadband and Phone network, iPrimus delivers great value, reliabilityand great customer service you can rely on.

iPrimus is also NBN certified and ready, future-proofing our customers’ Broadbandand Home Phone services for many years to come.

iPrimus have been providing residential Broadband, Home Phoneand Mobile services to Australian families for over 14 years.

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TAKE COMMAND OFYOUR BUSINESSCommander has been connecting Australian businesses for close to 30 years. We focus solely on

business phones, mobile, broadband and data to provide the tools, connectivity, infrastructure

and support your business needs to stay connected and competitive – now and into the future.

At Commander, we connect all forms of communication and work with you to create a simple,

integrated solution.

We understand how vitally important communication is to your business. That’s why, if you ever

require assistance, our Commander Centres and Customer Care team are here to help you with

personalised service and Australian based support. It’s just another way we help you take command

of your business.

Our customers choose us to improve one of their core functions – communications – and they stay

with us because they can rely on us as they grow. With an integrated solution from Commander,

you can take command of your business like never before.

Data

Systems

Support


DIRECTORS’ REPORT

Craig Farrow Chairman B Ec, Dip FS, CPMgr, SA Fin, FCA, FAICD

Appointed director 18 February 2000

Appointed Chairman 28 April 2006

Craig is Managing Partner of Brentnalls

SA, Chartered Accountants and former

National Chairman of the Brentnalls

National Affiliation of Accounting Firms. He

is also currently President of the Institute

of Chartered Accountants in Australia and

Chairman of AIRR Holdings Limited and

Tonkin Consulting Engineers. In addition,

Craig is a director and Board adviser to

several private consulting and trading

enterprises across the agribusiness,

software and manufacturing sectors.

Within the last three years, Craig has held

no other listed company directorships.

Craig is Chair of M2’s Nomination and

Remuneration Committee and a member of

the Audit & Risk Committee.

Vaughan Bowen Executive Director B Com, MAICD

Appointed 14 February 2000

Vaughan co-founded M2 in late 1999. In

his nearly 12 years as Managing Director /

CEO, he successfully steered M2 from a

start-up technology enterprise to become

a fast-growing and profitable national

telecommunications company. With a

proven ability to successfully execute

and integrate acquisitions, Vaughan was

appointed Executive Director in October

2011 and maintains a focus on mergers

and acquisition opportunities and was

instrumental in negotiating the acquisition

of Primus Telecom Holdings in early 2012.

Vaughan is also currently Chairman of the

Telco Together Foundation, a charitable

foundation he established and seeded in

2011. A member of the Australian Institute

of Company Directors, Vaughan was named

as a finalist in the Entrepreneur of the Year

Southern Region in 2004 and 2009 and

most recently in July 2012 he received the

ACOMMS Communications Ambassador

award for outstanding contributions to the

Australian telecommunications industry.

Within the last three years, Vaughan has

held no other listed company directorships.

In compliance with the provisions of the Corporations Act 2001 (‘Corporations Act’), the directors

of M2 Telecommunications Group Ltd (‘M2’ or ‘the Company’) submit the following report for the

Company and its controlled entities for the financial year ended 30 June 2012 (‘FY12’).

dIrectors

The names and details of the directors of M2 during FY12 and at the date of this report are as follows:


John Hynd Non-Executive Director LLB, MAICD


John is founding partner of Hynd & Co, a

commercial law firm in Adelaide. He has

over 30 years experience in commercial

transactions, corporate advice, corporate

governance, insolvency and property

development. John is a fellow of the

Australian Taxation Institute and a former

member of the Council of the Law Society

of South Australia.

Within the last three years, John has held


John is a member of M2’s Audit & Risk

Committee and is also a member of the

Nomination and Remuneration Committee.

Michael Simmons Non-Executive Director BCom FCPA ACIS

Appointed 26 November 2009

Michael brings to the Board considerable

experience in the telecommunications

sector, having previously held the position

of Chief Executive Officer of ASX-listed

SP Telemedia Limited (‘SPT Group’, now

known as TPG Telecom Limited (‘TPG’))

from 2001 until May 2008, following its

acquisition of TPG. Prior to 2001, Michael

served in executive roles for nearly 26

years within the SPT Group, including as

Chief Financial Officer and Chief Executive

Officer.

Following the acquisition of TPG, Michael

was the Managing Director of TERRiA,

a telecommunications consortium of

infrastructure based telecommunications

carriers, formed to bid for the contract

to build the National Broadband Network

(NBN). He currently consults to various

companies and government bodies in the

area of telecommunications strategy and

business opportunities.

Within the last three years, Michael has

held no other listed company directorships.

Michael is Chair of M2’s Audit & Risk

Committee.

Max Bowen Non-Executive Director


Retired 28 October 2011

During his directorship with M2, Max

provided the Board with valuable

experience gained in a management and

business career spanning five decades.

Founding Chairman of M2, Max Bowen

spent over 20 years developing commercial

property throughout Sydney and overseas.

Following this, Max acted in a senior

advisory capacity to various corporations

and public utilities in NSW. Max retired as a

director on 28 October 2011.

Within the last three years, Max has held


“the directors expect that the financial performance of the business will remain strong in the financial year ending 30 June 2013 (‘Fy13’)”


comPAny secretAry

Kellie Dean BA, LLB, Grad Dip App Corp Gov, FCIS,

MAICD

Appointed 30 November 2007

Kellie is Company Secretary for the

M2 group of companies as well as

leading the corporate services division

for M2, in which she is responsible for

governance, legal and regulatory affairs,

human resources, investor relations and

corporate communications. Prior to her

appointment, Kellie was Company Secretary

for Orion Telecommunications Limited,

which was acquired by M2 in October

2007. A fellow of Chartered Secretaries

Australia and a member of the Australian

Institute of Company Directors, Kellie has

particular expertise in the areas of merger

and acquisitions, corporate governance,

compliance and risk management.

former AudIt PArtners

No directors or officers of M2 have been

a partner or director of Ernst & Young, the

Company’s auditor.

dIrectors’ shAreholdIngs

The following table sets out the details

of each director’s relevant interest in M2

shares as at the date of this report. There

are no options held by any directors of M2.

directornumber of ordinary

shares

Craig Farrow 603,583

Vaughan Bowen 6,042,420

John Hynd 2,553,000

Michael Simmons 11,988

Max Bowen (1) 32,274

TOTAL 9,243,265

1. Max Bowen retired as a director on 28 October 2011

PrIncIPAl ActIVIty

The principal activity of the consolidated

entity during the financial year was the

supply of telecommunications services to

residential and business customers within

the Australian and New Zealand markets.

There was no significant change to the

principal activity of the consolidated entity

during the year, however, from 1 June

2012, Primus Network (Australia) Pty Ltd

became a wholly owned subsidiary of M2

and it holds a carrier licence under the

Telecommunications Act 1997.

reVIew of oPerAtIons And results

Please refer to the Chairman’s Letter and

CEO’s Review for further details relating to

M2’s operations and results for FY12. This

information is to be read in conjunction with

the Directors’ Report.

sIgnIfIcAnt chAnges In stAte of AffAIrs

On 1 June 2012, M2 acquired all the shares

in Primus Telecom Holdings Pty Ltd (“Primus’)

for a total cash consideration of $192.4 million,

which was funded via a new three year senior

bank facility and proceeds received from a one-for-four renounceable rights issue to existing and new shareholders (‘Entitlement Offer’).

On 21 May 2012, M2 issued 31,255,544 ordinary shares following the successful completion of the fully underwritten Entitlement Offer, at an offer price of $2.66 per share.

On 1 March 2012, Southern Cross Telco Pty Ltd, a wholly owned subsidiary of M2, acquired selected business assets of Time Telecom Pty Ltd and its related entities (‘Time Group’) for a cash consideration of $19.9 million (including an amount paid for additional customer contracts post completion). Total payment was comprised of an upfront payment and a deferred payment schedule, which is subject

to the achievement of certain minimum

performance milestones. The assets acquired

were the customer contracts of Time Group.

sIgnIfIcAnt eVents After bAlAnce dAte

On 24 August 2012 the directors declared a

final dividend on ordinary shares in respect

of FY12. The total amount of the dividend is $14,090,961, which represents a fully franked dividend of 9 cents per share (on shares issued as at 30 June 2012). This

final dividend is scheduled be paid to

shareholders on 26 October 2012.

lIkely future deVeloPments And results

The directors expect that the financial

performance of the business will remain

strong in the financial year ending 30 June 2013 (‘FY13’), particularly through the expected growth in revenue and earnings as a result of organic growth and the recent

acquisition of Primus.


enVIronmentAl regulAtIon And PerformAnce

M2 is not subject to any significant environment regulation under any law of the Commonwealth or of a State or Territory.

dIVIdends

Details of dividends paid during FY12 and the final dividend declared for payment are as follows:

Payment date cents Per share frankingtotal dividend Paid /

declared (1)

Dividends Paid

Final dividend 28 October 2011 9.00 100% $11,142,925

Interim dividend 16 April 2012 9.00 100% $11,208,904

TOTAL 18.00 $22,351,829

Dividend Declared

Final dividend 26 October 2012 9.00 100% $14,090,961

(1) Represents the gross dividend entitlement of all shareholders

shAre oPtIons

Options granted

In December 2011, M2 granted 1,500,000 options over unissued shares.

Details of options granted to the five most highly remunerated officers of the Company (other than directors), granted as part of

remuneration, include:

Name Number of options granted

Geoff Horth 300,000

Darryl Inns 100,000

Steve Wicks 100,000

Scott Carter 250,000

Alistair Carwardine 250,000

Unissued shares under option

As at the date of this report, M2 has 2,650,000 unissued ordinary shares under option, including 1,500,000 options which were granted in

December 2011. The details of these options are as follows:

number of unissued shares under option exercise price of option expiry date of options

125,000 1.64 1 January 2013

325,000 1.74 1 January 2014

700,000 1.84 1 January 2015

499,998 (1) 2.99 1 January 2015

499,998 (1) 3.14 1 January 2016

500,004 (1) 3.29 1 January 2017

Total: 2,650,000

(1) Option is only available to exercise subject to the achievement of key performance indicators by the relevant holder in the preceding financial year

Michelle Courtney & Guy Roberts, Customer Order Management Agents

Nick Murfet, Billing Analyst


Rights to participate in share issues

Under the terms of the M2 Executive Management Team Share Option Plan, option holders have a right to participate in share issues.

In the event of a bonus issue of shares, option holders will receive a bonus issue of options, such that the proportion which the number of options held by holder bears to the number of shares on issue is the same both prior to and following the bonus issue of Shares.

If there is a pro rata share issue (except a bonus issue) to the holders of shares in the Company before the exercise of options, the exercise

price applicable to each then outstanding option will be reduced according to a specified formula, which is consistent with the ASX Listing Rules.

Shares issued following exercise of option

M2 has issued 674,000 ordinary shares during and since FY12 as a result of the exercise of an option, including 10,000 in July 2012. The

details of these exercised options are as follows:

number of share issuedAmount paid

for sharesAmount unpaid

for shares

299,000 $209,300 Nil

175,000 $297,750 Nil

200,000 $350,750 Nil

Total: 674,000 $857,700 Nil

IndemnItIes And InsurAnce

M2’s Constitution provides that except as may be prohibited by the Corporations Act, every officer and auditor of the Company shall be

indemnified against any liability incurred by them in their capacity as an officer or auditor of M2 or a related body corporate.

Directors of M2 are also party to a deed of access and indemnity.

During FY12, M2 paid a premium in respect of a contract insuring the directors and officers of the Company and any related body corporate

against any liability that may arise from the carrying out of their duties and responsibilities to the extent permitted by the Corporations Act.

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

dIrectors’ meetIngs

The number of directors’ meetings, including meetings of each Board committee held during FY12 and the number of meetings attended by

each director is as follows:

director board meeting Audit & risk committeenomination & remuneration

committee

eligible to Attend Attended eligible to Attend Attended eligible to Attend Attended

Craig Farrow 17 17 5 5 3 3

Vaughan Bowen 17 17 - - - -

John Hynd 17 16 5 5 3 3

Michael Simmons 17 16 5 5 - 1

Max Bowen (1) 4 4 - - - -

(1) Mr M Bowen retired as a director on 28 October 2011

“Our primary objective remains unchanged - to be the pre-eminent challenger in the Smb market. “

Scott Carter, Corporate/Wholesale Director


remunerAtIon rePort

Refer to page 20 of this report for the Remuneration Report, which forms part of the directors’ report.

ProceedIngs on behAlf of the comPAny

No proceedings have been brought on behalf of M2, nor has any application been made in respect of the Company under s.237 of the

Corporations Act.

non-AudIt serVIces

Details of amounts paid to M2’s external auditor, Ernst & Young, for non-audit services are set out in note 30 to the financial statements.

The services to the Company related to the acquisition of Primus.

In accordance with written and signed advice from the Audit & Risk Committee, pursuant to a resolution of this Committee, the directors

are satisfied that the provision of non-audit services by Ernst & Young is compatible with the general standards of independence for auditors

imposed by the Corporations Act. The reasons being:

> The provision of non-audit services by Ernst & Young was considered by the directors prior to the commencement of the engagement

and it was determined that it would not impact the independence or integrity of the external auditor; and,

> the nature of the services provided do not undermine the general principles relating to external auditor independence, including

reviewing and auditing the auditor’s own work, acting in a management or decision making capacity for M2 or as an advocate, or jointly

sharing in economic risk and rewards.

Further, the services provided are consistent with the provisions of M2’s Non-Audit Services Policy.

AudItor’s IndePendence declArAtIon

The auditor’s independence declaration is included on page 29 of this report.

roundIng off of Amounts

M2 is a company of the kind referred to in ASIC Class Order 98/0100, dated 10 July 1998 and in accordance with that Class Order, amounts

in the Directors’ Report and the financial report are rounded off to the nearest thousand dollars, unless otherwise indicated.

This directors’ report is signed in accordance with a resolution of the directors made pursuant to s.298(2) of the Corporations Act.

On behalf of the directors,

Craig Farrow

Chairman

Melbourne, 24 August 2012

Sean Devota, Collections Manager Laurice Tongol, Accounts Payable Officer


REMUNERATION REPORT

IntroductIon

This remuneration report for FY12,

which forms part of the directors’ report,

outlines the remuneration arrangements

of the Company in accordance with

the requirements of s.300A of the

Corporations Act and its regulations.

This report has been audited as required

by s.308(3C) of the Corporations Act.

The key sections of this report include:

1. Key Management Personnel

2. Remuneration Policy

3. Remuneration Governance

(a) Nomination and Remuneration

Committee

(b) Remuneration Consultants

(c) Remuneration Report approval

at 2011 Annual General Meeting

(‘AGM’)

(d) Hedging of incentive remuneration

(e) Employment Agreements

4. Remuneration Arrangements

(a) Non executive director remuneration

(b) Business Executive remuneration

(c) M2’s financial performance

5. Remuneration of Key Management

Personnel

1. Key Management Personnel

This report sets out the remuneration

details of key management personnel.

‘Key management personnel’ is defined

as “those persons having authority and

responsibility for planning, directing and

controlling the activities of the entity,

directly or indirectly, including any director

(whether executive or otherwise) of that

entity” (‘KMP’). M2 has defined its KMP

to include directors, Chief Executive

Officer, Chief Financial Officer and those

people who drive and are responsible for

the principal business activities of the

Company (`Business Executive’).

The KMP for M2 during and since the end

of FY12 include:

Directors:

Craig Farrow

Chairman

Vaughan Bowen (1)

Executive Director

John Hynd

Non-executive director

Michael Simmons


Max Bowen (2)


(1) Mr V Bowen previously held the position of Managing Director/CEO up until 28 October 2011

(2) Mr M Bowen retired as a director on 28 October 2011

Anthony Daniel, Team Leader & Mark Ceccato, Account Manager

Marco Shiro, Technical Support Representative


Business Executives:

Geoff Horth (1)

Chief Executive Officer

Darryl Inns

Chief Financial Officer

Steve Wicks

Business Director

Scott Carter (2)

Corporate/Wholesale Director

Johnathan Eele (2)

Managing Director/CEO – M2 NZ

Tom Mazerski (3)

Chief Customer Officer

Except as otherwise noted, the above

KMP held their position during and since

the end of FY12.

(1) Mr G Horth was appointed Chief Executive Officer on 29 October 2011. He previously held the position of Chief Operating Officer.

(2) Appointed as KMP in the first half of FY12

(3) Appointed as KMP on 1 June 2012

2. Remuneration Policy

The performance of the Company

depends upon the quality of its KMP.

Remuneration levels are set to enable M2

to attract and retain appropriately qualified

and experienced people, who will create

sustainable value for shareholders and

other stakeholders.

M2 embodies the following principles in

its KMP remuneration framework:

> provide competitive rewards to attract

and retain skilled people;

> link executive rewards to shareholder

value;

> have a significant portion of executive

remuneration ‘at risk’, dependent upon

meeting pre-determined individual and

Company performance benchmarks;

> establish appropriate and demanding

performance hurdles for variable

executive remuneration; and,

> establish clear distinction between

non-executive director and other KMP

remuneration.

3. Remuneration Governance

Nomination and Remuneration Committee

The Nomination and Remuneration

Committee (‘Committee’) is responsible

for determining and reviewing

remuneration arrangements for KMP

for recommendation to the Board. They

assess the appropriateness of the nature

and amount of remuneration on a periodic

basis by reference to relevant employment

market conditions with the overall objective

of ensuring maximum stakeholder benefit

from the retention of high quality directors

and other KMP. Specific details relating

to the structure and membership of this

Committee can be found in the Corporate

Governance Statement, immediately

following the Directors’ Report.

Remuneration Consultants

M2 did not seek the advice or

recommendation from a remuneration

consultant in relation to any KMP’s

remuneration during FY12.

Remuneration Report approval at 2011

Annual General Meeting (‘AGM’)

The remuneration report contained within

the 2011 annual report received positive

shareholder support at the AGM on 28

October 2011, with the resolution passed on

a show of hands and on proxies received,

only 0.95% voted against (1). No particular

comments were made by shareholders in

respect of the remuneration report at the

AGM or otherwise.

(1) Based on proxies voted in favour and against, excluding discretionary votes and those abstaining.

Hedging of incentive remuneration

In accordance with provisions of the

Corporations Act, KMP and their closely

related parties are prohibited from hedging

any element of remuneration that is

unvested (due to time or other conditions)

or is vested but subject to restriction on

disposal.

Callum Mackintosh, Customer Service Representative

Carol Thompson, Business Analyst

Larissa Mundy-James, Account Manager

Alistair Carwardine, Technology Director


Employment Agreements

The following key terms are contained in employment agreements for the Executive Director, Chief Executive Officer (“CEO”), Chief

Customer Officer (“CCO”) and other Business Executives:

Duration of agreement: Executive Director Two years from 1 July 2011. In the event the contract is not renewed or

extended on or prior to 1 July 2013, it shall continue for rolling terms of

three months.

Chief Executive Officer Three years from 1 July 2012.

Chief Customer Officer A minimum term of 12 months from 1 June 2012. In the event the

agreement is not terminated or renewed on or prior to the expiry of

the minimum term, it shall continue for rolling terms of three months.

Other Business Executives From 1 July 2011 for no fixed term.

Period of notice required

to terminate agreement (by

the relevant KMP):

Executive Director, CCO and

Other Business Executives

Chief Executive Officer

Three months.

Six months.

Termination

payments:

Executive Director Upon termination for convenience by the Company, the Executive

Director shall be entitled to an amount equal to what he would be

entitled to as per relevant legislation.

Chief Executive Officer (1) Upon termination for convenience by the Company, the CEO shall

be entitled to a sum equal to six months base salary (inclusive of a

notice period).

(2) Upon termination (for any reason excluding just cause) within 12

months of a “corporate event”, the CEO shall be entitled to a payment

equal to 12 months base salary (inclusive of a notice period).

Chief Customer Officer Upon termination for convenience by the Company prior to the expiry

of the minimum term, the CCO shall be entitled to a sum the greater

of:

(1) the amount due up until the expiry of the minimum term; or

(2) six months base salary (inclusive of notice period).

Other Business Executives Upon termination for convenience by the Company, the Executive shall

be entitled to a sum the greater of:

(1) six months base salary (inclusive of notice period); or

(2) an amount calculated in accordance with the redundancy provisions

of the Fair Work Act or its equivalent.

“the business has never been better positioned to continue its journey as the pre-eminent challenger in the Smb market.”

Steve Wicks, Business Director


4. Remuneration Arrangements

Non-executive director remuneration

Non-executive directors are paid fees for their services. The aggregate remuneration of non-executive directors shall be determined from time to time by a general meeting of shareholders. An amount not exceeding the amount determined is then divided between the directors as agreed.

The current aggregate remuneration is set at $600,000 per year, which was approved by shareholders at the 2010 AGM.

Non-executive directors also receive reimbursement of all reasonable and proper expenses incurred while carrying out their director duties. In addition, the Board provides $2,000 each financial year for each director to utilise for the purpose of attending training or professional development courses and events. These amounts are not incorporated in the aggregate sum.

Non-executive directors are not entitled to retirement or termination benefits.

The amount of aggregate remuneration and the manner in which it is apportioned amongst directors is reviewed annually. The Board considers individual director contributions and performance and the fees paid to non-executive directors of comparable companies when undertaking

the annual review process.

Non-executive directors did not receive an

increase to their fees during FY12. The fees for FY13 are as follows:

Chairman:

$210,000 per annum (1)

Non-executive director:

$70,000 per annum

Committee Chair:

$10,000 per annum

Committee Member:

$5,000 per annum

(1) Inclusive of all Committee fees

Bonus Plan

The Chairman is currently entitled to receive a cash bonus following the commencement of each calendar year, which is calculated in reference to the share price of M2 shares (as at a date in January) as compared to the exercise price of options granted by the Company in 2010. This Bonus Plan was put in place by the Board to further remunerate the Chairman for his services, based upon the Company’s performance. The amount paid is included within the aggregate remuneration sum for non-executive directors.

The Board has agreed to continue the Bonus Plan during FY13 for the Chairman. It is not possible to determine the possible maximum or minimum total value of this bonus, as it calculated based on share price, which is unable to be determined.

The remuneration of non-executive directors, including the amount of bonus paid to the Chairman in FY12 is detailed in section 5 of this report.

Business Executive remuneration

M2 rewards other Business Executives

with a level and mix of remuneration

commensurate with their position and

responsibilities within the Company. In

addition, it aims to:

> reward Business Executives for Company,

business unit and individual performance

against targets set by reference to

appropriate benchmarks;

> align the interests of Business Executives

with those of shareholders;

> link rewards with the strategic goals and

performance of the Company; and

> ensure total remuneration is competitive

by market standards.

It is also M2’s policy that employment

agreements are entered into with all

Business Executives.

Business Executive remuneration consists of

the following key elements:

> Fixed Remuneration

> Variable Remuneration - Short-Term

Incentive (‘STI’)

> Options

The proportion of fixed remuneration,

variable remuneration and any issue of

options is established for each Business

Executive by the Committee and approved by

the Board.

The level of fixed and variable remuneration

is linked to Company performance, as

described below.

Fixed Remuneration

The level of fixed remuneration is set each

year in accordance with the remuneration

policy.

It is determined in reference to the Business

Executive’s and Company’s performance

during the past financial year, the Business

Executive’s responsibilities and the external

compensation environment.

Business Executives may also receive non-

monetary benefits such as the provision of

motor vehicles and car parking.

The amount of fixed remuneration paid to

Business Executives during FY12 is detailed

in section 5 of this report.

Michael Speglic, Commercial Director Liparo Finocchiaro, Operations Manager (Consumer)


Short term incentives (STI)

The objective of STIs is to link the

achievement of M2’s operational targets

with the remuneration received by the

Business Executives responsible for

meeting those targets.

The total potential STI available for each

Business Executive is set at a level so as to

provide sufficient incentive to the Business

Executive to achieve the operational targets

and such that the cost to the Company is

reasonable in the circumstances.

Actual STI payments granted to a Business

Executive depend on the extent to which

specific operating targets set at the

beginning of the financial year are met, in

addition to achievement of overall Company

performance metrics, specifically net profit

after tax (‘NPAT’).

The individual operational targets consist

of a number of key performance indicators

(KPIs) covering both financial and non-

financial measures of performance. Typical

measures include contribution to earnings,

sales targets, customer service levels,

risk management, product management,

completion of specific projects and leadership

and team contribution. Such KPIs are

chosen as they are representative of the key

performance metrics of the business, which

drive overall NPAT growth and earnings for

shareholders.

On an annual basis, after consideration

of performance against KPIs, as well an

assessment of overall Company performance,

a performance rating for the Business

Executive is nominated by the Chairman and/

or the Chief Executive Officer.

This performance rating determines the

amount, if any, of the STI that is paid to

a Business Executive. This method of

assessing performance against KPIs ensures

that the STI granted to a Business Executive

is based upon the actual achievement of

metrics.

Under the terms of each Business Executive’s

STI arrangements, an STI payment is only

made upon the Company achieving its

pre-determined NPAT target. Achievement

of an NPAT target is linked to growth in

shareholder wealth and returns.

The amount of annual STI available to each

Business Executive is subject to approval

of the Board, following consideration by the

Committee. Payments made are usually

delivered as a cash bonus in the following

reporting period.

As noted earlier, the Board has put in place a

Bonus Plan for the Chairman. This has also

been offered to the Executive Director on

the same terms.

STI outcomes for FY11

The STI paid to Business Executives during

FY12 (for FY11 performance) is detailed

in section 5 of this report. This table also

discloses the percentage of remuneration

directly related to performance (in proportion

to total remuneration).

The table below outlines the percentage

of STI that was earned by the Executive

Director and Business Executives for

FY11 performance (in accordance with the

relevant employment agreement), and the

percentage that was forfeited.

Note, Scott Carter, Johnathan Eele and Tom

Mazerski were not classified as Business

Executives during FY11.

Proportion of maximum stI earned for fy11

Proportion of maximum stI forfeited for fy11

Vaughan Bowen (1) 83.3% 16.7%

Geoff Horth 85% 15%

Darryl Inns 75% 25%

Steve Wicks 75% 25%

(1) STI only refers to the STI payable as a percentage of base salary. It does not include the STI paid in respect of the Bonus Plan, which was $186,750, and paid in January 2012. The terms of this plan have not altered since this date.

“m2’s performance has remained strong and consistent.”

Con Papageorgiou, Channels Manager (Corporate)

Sangram Singh, Database Administrator

Lisa Gerding, Customer Service Representative


Rose Rimon-Kerr, Customer Service Representative

Kelly Tian, Accounts Payable Officer

For each Business Executive, the STI was delivered as a cash bonus, and was granted (paid) in October 2011. There have been no

alterations to the terms and conditions of the STI since this date.

STI outcomes for FY12

The table below outlines the percentage of STI that was earned by Business Executives for FY12 performance (in accordance with the

relevant employment agreement) and the percentage that was forfeited.

business executiveProportion of maximum stI

earned for fy12 Proportion of maximum STI

forfeited for FY12

Geoff Horth (1) 85% 15%

Darryl Inns 92.5% 7.5%

Steve Wicks 75% 25%

Scott Carter 100% 0%

Tom Mazerski (2) NA NA

Johnathan Eele 81% 19%

(1) Mr Horth is also entitled to receive a payment of $50,000 upon the completion of 12 months service as CEO, which will be 29 October 2012.(2) Mr Mazerski joined M2 on 1 June 2012 and no STI was applicable for that period.

For each Business Executive listed above the STI will be delivered as a cash bonus and granted (paid) in or before October 2012. There have

been no alterations to the terms and conditions of the STI since this date.

STI arrangements for FY13

STI arrangements that have been put in place for each Business Executive for FY13 performance are as follows:

business executivemaximum stI Value for

fy13 performanceminimum stI Value for

fy13 performance

Geoff Horth $200,000 $0.00

Darryl Inns $90,000 $0.00

Steve Wicks $125,000 $0.00

Scott Carter $130,000 $0.00

Johnathan Eele $38,895 $0.00

Tom Mazerski $180,000 $0.00

(1) STI is paid to a company related to Johnathan Eele, and value is in New Zealand dollars. This amount represents the Australian dollar value (as at the date of this report).

The Board has agreed to extend the Bonus Plan to the Executive Director during FY13. It is not possible to determine the possible

maximum or minimum total value of this bonus, as it calculated based on share price, which is unable to be determined.

(1)


M2’s financial performance

The tables below set out M2’s earnings and movements in shareholder returns over the last five years:

2012 2011 2010 2009 2008

Earnings per share 25.8 cents 22.56 cents 14.49 cents 8.76 cents 7.01 cents

Share price at end of financial year $3.36 $3.28 $1.69 $0.715 $0.595

Interim dividend 9 cents 7 cents 5 cents 2.5 cents 2 cents

Final dividend 9 cents 9 cents 5 cents 3 cents 3 cents

M2’s performance has remained strong and consistent over the last five reporting periods and the remuneration arrangements for Business Executives are reflective of this.

Options

M2 maintains an Executive Management Team Share Option Plan (‘ESOP’). The purpose of the ESOP is to provide a further avenue for the alignment of executive objectives with those of shareholders and to provide an additional element to executive remuneration that was competitive to the external compensation environment. The issue of options under ESOP further allows an opportunity for the Board to reward executives and Business Executives for their performance in a given period.

From December 2011, the issue of options to Business Executives was specifically linked to individual performance, whereby the options (once vested) may only be exercised subject to the minimum achievement of a Business Executive’s individual KPIs in the preceding

financial year prior to the relevant vesting date. The individual KPIs are the same KPIs that are used to assess performance under the STI.

1. The table below outlines the options that were granted to Business Executives during FY12.

executives number granted exercise Price Vesting date expiry date fair Value at grant date $

Geoff Horth 300,000100,000 at $2.99 100,000 at $3.14 100,000 at $3.29

1 January 2013 1January 20141January 2015

1 January 2015 1 January 2016 1 January 2017

0.38 per option0.38 per option0.41 per option

Darryl Inns 100,00033,333 at $2.99 33,333 at $3.14 33,334 at $3.29




Steve Wicks 100,00033,333 at $2.99 33,333 at $3.14 33,334 at $3.29




Scott Carter 250,00083,333 at $2.99 83,333 at $3.14 83,334 at $3.29




Johnathan Eele 150,00050,000 at $2.99 50,000 at $3.14 50,000 at $3.29




Tom Mazerski (1) - - - - -

(1) Appointed a KMP on 1 June 2012

No options lapsed during FY12 (including as a result of performance).

“remuneration levels are set to enable m2 to attract and retain appropriately qualified and experienced people.”

Kirby Radford, Customer Order Management Agent

Ohad Morag, Project Manager


2. The table below outlines the options that vested and were exercised by Business Executives during FY12, including the total held as at the date of this Report.

number Vested

exercise Price

expiry date

number exercised

Amount paid

total amount of options

held as at date of report

Geoff Horth 75,000 $1.74 1-Jan-14 75,000 $123,000 475,000

Darryl Inns 75,000 $1.74 1-Jan-14 75,000 $130,500 200,000

Steve Wicks 75,000 $1.74 1-Jan-14 75,000 $130,500 200,000

Scott Carter - - - - - 250,000

Johnathan Eele - - - - - 150,000

Tom Mazerski (1) - - - - - -

(1) Appointed 1 June 2012

5. Remuneration of Key Management Personnel

The following tables outline the remuneration received by KMP in FY12. A comparison with the financial year ended 30 June 2011

(‘FY11’) is also included.

No payments were made to KMP before they took office as part of the consideration for the person agreeing to hold office.

Charlie Brown, Customer Acquisition Marketing Manager

Verity White, Paralegal

Sarah Curtis, Product Marketing Director


Directors’ remuneration:

short term Post employment total

salary & fees (1) cash stIrelated to

performance (2)

non-monetary benefits

superannuationother post-

employment benefits

$ $ % $ $ $ $

Craig Farrow 2012 206,667 101,250 49.0 - - - 307,917

2011 206,666 85,500 41.4 - - - 292,166

Vaughan Bowen (3) 2012 365,320 311,750 85.3 34,864 25,000 - 736,934

2011 600,000 137,500 22.9 35,763 25,000 - 798,263

John Hynd 2012 55,125 - - - - - 55,125

2011 51,667 - - - - - 51,667

Michael Simmons 2012 52,500 - - - - - 52,500

2011 50,000 - - - - - 50,000

Max Bowen (4) 2012 27,708 - - - - - 27,708

2011 46,667 - - - - - 46,667

TOTALS 2012 707,320 413,000 - 34,864 25,000 - 1,180,184

2011 955,000 223,000 - 35,763 25,000 - 1,238,763

(1) Includes all amounts paid and accrued to companies related to the director, for director services (2) The proportion of FY12 salary and fees related to performance, either Company or individual. (3) Mr V Bowen appointed Executive Director from 29 October 2011 (4) Mr M Bowen retired as a director on 28 October 2011

Business Executive remuneration:

short term Post employment share based Payments total

base salary cash stIrelated to

performance (3)

non-monetary benefits

superannuationtermination

benefitValue

ascribed (1)

Value that consists of

options

$ $ % $ $ $ $ %

Geoff Horth 2012 489,807 89,250 18.2 34,896 24,999 - 76,723 12.0 715,675

2011 350,000 90,000 25.7 26,730 25,625 - 40,347 7.6 532,702

Darryl Inns 2012 310,000 33,750 10.9 21,456 24,999 - 43,055 11.0 433,260

2011 300,000 40,000 13.3 26,057 25,000 - 40,347 9.4 431,404

Steve Wicks 2012 298,076 90,000 30.2 19,353 24,047 - 43,055 10.0 474,531

2011 300,000 100,000 33.3 12,937 25,000 - 40,347 8.4 478,284

Scott Carter (2) 2012 319,999 20,000 6.3 - 15,775 - 31,773 8.9 387,547

2011 - - - - - - - - -

Tom Mazerski (2) 2012 29,166 - - - 2,083 - - - 31,249

2011 - - - - - - - -

Johnathan Eele (2)(4) 2012 139,377 33,403 19,064 11.0 191,844

2011 - - - - - - - -

TOTALS 2012 1,586,425 266,403 - 75,705 91,903 213,670 - 2,234,106

2011 950,000 230,000 - 65,724 75,625 121,041 - 1,442,390

(1) The remuneration value ascribed to share options has been calculated in accordance with AASB 2 Share-based Payment (2) Business Executive was not KMP during FY11 (3) The proportion of FY12 remuneration directly related to performance (4) Includes amounts paid for services to a New Zealand company associated with Johnathan Eele (in $AU at date of report)


CORPORATE GOVERNANCE STATEMENT

M2 Telecommunications Group Ltd (‘M2’

or ‘the Company’) is a strong advocate

for corporate governance. We believe in

transparency, accountability and integrity

for the benefit of our shareholders,

employees, customers and all other

interested stakeholders.

M2 continually reviews and refines its

corporate governance policies and charters

in light of the Corporate Governance

Principles and Recommendations,

as developed by the ASX Corporate

Governance Council (‘ASX Guidelines’ or

‘recommendations’).

During FY12, M2 believes it achieved

reasonable compliance with the

recommendations based on M2’s

circumstances, its size and activities.

Where recommendations have not

been implemented, a full explanation is

disclosed, based upon the “if not, why not”

approach adopted by the Council.

Over the course of FY11, M2 reviewed its

corporate governance program in light of the

changes to the ASX Guidelines, which were

adopted by the ASX Corporate Governance

Council in June 2010. As a result, the Board

was an “early adopter” of many of the

changes to gender diversity, board selection

and analyst briefings, as it recognised the

value and importance of maintaining a strong

corporate governance framework that would

assist the Company in its growth phase.

This Statement is dated 24 August 2012.

PrIncIPle 1: lAy solId foundAtIons for mAnAgement And oVersIght

The Board of Directors is accountable to

shareholders for the proper management of

the business and affairs of M2. The Board

and executives use their diverse skills to

work together to consistently operate in the

best interests of the Company.

The Board has confirmed its role and

responsibilities in a written charter. They

undertake the following functions and

responsibilities:

> approve, monitor and modify the

strategic direction of M2;

> ensure the principles of corporate

governance are upheld and consistently

reviewed;

> monitor the performance of Executives;

> ratify the appointment or removal of

the Chief Executive Officer and the

Company Secretary;

> ensure that appropriate risk

management systems, internal control

and reporting systems are in place and

are operating effectively;

> approve and monitor financial results;

> approve decisions concerning

acquisitions and capital, including capital

restructures and dividend policies of

M2; and,

> comply with the reporting and other

requirements of the law.

The Board has delegated the daily financial

and operational management to executives,

who are responsible to the Board. They too

operate in the interests of the Company

and all its stakeholders.


During the reporting period, Executives’

performance was assessed in accordance

with the process disclosed within the

Remuneration Report (for performance

during the financial year ended 30 June

2011). Executive performance for FY12 was

formally assessed in August 2012.

The Nomination & Remuneration

Committee is responsible for ensuring

that Board and executive performance

is assessed and also that the process is

effective in improving deliverable outcomes.

PrIncIPle 2: structure the boArd to Add VAlue

M2’s Board comprises four directors:

Chairman, Executive Director and two non-

executive directors.

Board Size and Composition

M2 is confident its current Board size is

adequate, in reference to the size and

structure of the Company and it allows the

Board to effectively and efficiently discharge

its role and responsibilities.

The Board has adopted a Diversity Policy,

which sets out M2’s commitment to the

principles of diversity within its Board

and wider team member base. The

Board recognises the benefit that it and

the Company gain from having a diverse

range of individuals and skill sets within

its composition. A range of perspectives

is imperative to making good balanced

decisions that are in the interests of

the Company as a whole, including

shareholders, team members, customers

and other stakeholders.

Skills, Experience & Expertise

The skills, experience and expertise relevant

to the position of director, held by each of

M2’s directors at the date of this Statement,

are detailed in the Directors’ Report.

Term of Office

The term of office for each director during

the reporting year is detailed in the

Directors’ Report.

Director Independence

An independent director is a non-

executive director who is not a member

of management and who is free of any

business or other relationship that could

materially interfere with, or could reasonably

be perceived to materially interfere with, the

independent exercise of their judgment.

In considering whether a director is

independent, the Board has regard to

the series of relationships affecting

independence, as outlined in Box 2.1 in

Principle 2, and the interests disclosed by

them. Based upon this information, the

following table outlines the independent

status of each M2 director during the

reporting period.

Chairman

The Chairman of M2, Craig Farrow, is

classed as an “independent director” (in

accordance with ASX Guidelines). Craig

is responsible for the leadership of the

Board and for the efficient organisation and

conduct of the Board’s functioning.

dIrector tItle IndePendent reAson

Craig Farrow Chairman Yes Independent from management and free of any material(1)

business or other relationship.

Vaughan Bowen Executive Director No Employed in an executive capacity and a substantial shareholder

of the Company.

John Hynd Non-Executive

Director

Yes Independent from management and free of any material(1)


Michael Simmons Non-Executive

Director

Yes Independent from management and free of any material(1)


Max Bowen (2) Non-Executive

Director

No Former substantial shareholder of the Company and father of

Vaughan Bowen

(1) The Company considers materiality in the context of annual consolidated revenue (2) Mr M Bowen retired from the Board on 28 October 2011

Athina Calagis, Data Networks Coordinator

Suzie Wai, Engineer


Separate Role of Chair & CEO

In accordance with ASX Guidelines, the

role of the Chair and Chief Executive

Officer is not exercised by the same

individual, with Craig Farrow acting as

Chair for the Company, Vaughan Bowen

as Managing Director/CEO up until 28

October 2011 and Geoff Horth from

29 October 2011. The Chair and CEO

have clear lines of responsibility and

accountability.

Independent Advice & Access to Company Secretary

Each member of the Board and the

Board Committees has the right to seek

independent legal and other professional

advice, at M2’s expense, concerning any

aspect of the Company’s operation or

undertakings, if it is considered necessary

for the execution of their functions and

responsibilities.

Executives supply the Board with

information and reports on a regular

basis as part of Board reporting. The

directors are entitled to request additional

information and are encouraged to contact

an Executive where further information or

clarification is required.

The Company Secretary is appointed

by and reports to the Board on all

corporate governance issues. Ms Dean

Dean is responsible for the provision of

timeframes and information to enable the

Board to effectively discharge its duties and

responsibilities. All directors, and Board

committees, have access to Ms Dean to

assist them in carrying out their role.


The selection and appointment process

of future directors is deemed to be the

responsibility of the whole Board, in

accordance with the provisions of the

Board Selection Policy. However, M2 has

established a Nomination and Remuneration

Committee for the purpose of identifying

potential candidates for Board selection.

In nominating candidates, the Committee

shall take into consideration such factors as

judgement, skill, diversity and experience

and also the extent to which the candidate

would be a desirable addition to the Board

and any Board Committee.

During the financial year, the Nomination

and Remuneration Committee consisted of

two (independent) non-executive directors:

Craig Farrow (Chair) and John Hynd, which

is appropriate given the size of the Board.

The role and responsibilities of the


are detailed in the Nomination and

Remuneration Committee Charter. The

meetings and attendance of the Board

Committees are detailed in the Directors’

Report.

Evaluating Board Performance

The Nomination and Remuneration

Committee is responsible for the

establishment of process for Board

evaluation, with the Chairman providing

leadership in the execution of any review.

The Board will undertake an evaluation

in September 2012. All directors will be

given an opportunity to provide input on

the effectiveness of board processes,

meetings, board composition and

performance and reporting. This will take

the form of a questionnaire, with directors

having an opportunity to discuss and

comment on such matters individually with

the Chairman.

The Company has implemented an

education policy for its directors, with

each director having access to an

allowance of $2,000 per year for the

purpose of attending and/or participating

in professional development activities

relevant to their duties as a director.

PrIncIPle 3: Promote ethIcAl And resPonsIble decIsIon mAkIng

Code of Conduct

All directors, executives and employees

of M2 are expected to act with integrity

and objectivity, striving at all times to

enhance the reputation and performance

of the Company. A Code of Conduct

has been established, which guides

directors, executives and employees in the

performance of their duties.

Share Trading

M2’s policy in the trading of securities

regulates dealings by the Company’s

directors, executives and employees

in shares issued by M2. Consistent

with legal prohibitions relating to insider

trading, all of M2’s directors, executives

and employees are prohibited from

trading in the Company’s shares whilst in

possession of unpublished price sensitive

information which concerns M2.

The policy also prohibits Key Management

Personnel from trading in securities during

the following “black-out” periods:

> between 1 January each year until such

time as the half year financial results of

the Company are released to ASX; and,

> between 1 July of each year until such

time as the full year financial results of

the Company are released to ASX.

Bhavesh Desai, Accountant Janos Kecskemeti, Junior Account Manager


Gender Diversity

As noted above, the Board has adopted a Diversity Policy which sets out the Board and the Company’s commitment and objectives in

respect of diversity, and more specifically gender diversity. Diversity at M2 is valued and encouraged and the Company recognises the

benefit that it gains from having a diverse range of individuals and backgrounds involved in the management of its organisation and its

business activities.

The Board has set gender objectives in the interests of achieving good corporate governance in a dynamic and evolving industry.

They are as follows:

objectIVe tArget dAte

Board:

At least one of the next two director appointments desirably should be female,

with the appropriate skills and attributes

When it is appropriate to

expand the Board or replace an

existing director

Executive Team and Senior Management Team:

To improve or at least maintain current male/female ratio statistics.

Annually

In accordance with the provisions of the ASX Guidelines, the proportion of female directors, executives and senior management, and team

members at M2 as at the date of this Statement are as follows:

As At August 2011 As At August 2012(1)

Role By Number By Percentage By Number By Percentage

Female Directors 0 0% 0 0%

Female Executives 1 12.5% 2 22.2%

Female Senior

Management

4 50% 11 25%

Female Team

Members

200 41% 341 36%

(1) Includes employees of Primus, acquired in June 2012

M2 is pleased to report the improvement in gender diversity within its Executive Team over the course of FY12. The Company is committed

to reviewing its policies and practices to assist with improving diversity across its senior management team and wider group, particularly

given the increased number of team members following the Primus acquisition.

Moira Henderson, State Sales Manager (Corporate)


PrIncIPle 4: sAfeguArd IntegrIty In fInAncIAl rePortIng

M2 is committed to safeguarding

the integrity of its financial reporting.

Structures and procedures are in place

to ensure the truthful and factual

presentation of the Company’s financial

position. The Board also undertakes to

monitor and assess the integrity of the

financial reports.

Audit & Risk Committee

M2’s Audit & Risk Committee is

responsible for reviewing the Company’s

policies and procedures for compliance

with international reporting standards,

reviewing audit plans, accounting policies

and the integrity of the financial reports

and ensuring the independence of external

auditors. It also works closely with

the Company’s internal audit function,

to review and assess the controls,

procedures and risks around business

activities and functions.

During the reporting year, the Audit &

Risk Committee consisted of three non-

executive directors: Michael Simmons

(Chair), Craig Farrow and John Hynd. Their

qualifications and experience are outlined

in the Directors’ Report.

The Audit & Risk Charter details the

Committee’s role and responsibilities,

composition, structure and membership

requirements. Further, it also contains

information on the procedures for the

selection and appointment of the external

auditor and for the rotation of external

audit engagement partners.

The meetings and attendance of the Audit

& Risk Committee are detailed in the

Directors’ Report.

PrIncIPle 5: mAke tImely And bAlAnced dIsclosure

In compliance with the continuous

disclosure requirements of the

Corporations Act and ASX Listing Rules,

M2 is committed to the principles of

timely and balanced disclosure through

the adoption and adherence of a

comprehensive Continuous Disclosure and

Communications Policy.

M2’s Chief Executive Officer and

the Company Secretary carry the

responsibility and accountability to ensure

the principles of continuous disclosure are

upheld and maintained. They ensure ASX

and media releases are timely, reviewed,

do not omit any material information and

that they are factual and presented in a

clear and balanced way.

PrIncIPle 6: resPect the rIghts of shAreholders

M2 recognises the importance of this

principle and will at all times strive to

communicate regularly and clearly with

shareholders.

The investor relations section of M2’s

website clearly details and provides links

to all of M2’s ASX and company releases,

general meeting information, financial

reports and investor presentations. This is

updated regularly to ensure shareholders

have ready access to Company

information.

M2’s Continuous Disclosure and

Communications Policy promotes

positive communication with

shareholders, outlining the Company’s

commitment to its obligations relating

to the communication of price sensitive

information. M2 maintains a strict policy

in relation to disclosure of information

during analyst briefings (with all investor

presentations released to the market) and

will consider, where practical and cost

effective, webcasting or other forms of

communication to allow all shareholders

an opportunity to participate in significant

group briefings.

Shareholders are encouraged to attend

and participate at general meetings. They

must also vote on the appointment and

aggregate remuneration of directors, the

granting of options and shares to directors

and changes to M2’s Constitution.

M2 will arrange for its external auditors to

always attend the Annual General Meeting

and to be readily available to answer

shareholder’s questions about the conduct

of the audit and the preparations and

content of the auditor’s report.

“m2 is committed to safeguarding the integrity of its financial reporting.”

Jacqui Stennings, Collections Officer

Russell Peters, Support & Faults Contact Centre Manager


PrIncIPle 7: recognIse And mAnAge rIsk

The Board, together with executives,

constantly seeks to identify, monitor and

mitigate risk.

The Board has adopted a Risk

Management Policy, which documents

the Company’s commitment to risk

management and sets out the risk

management framework that M2 operates.

This framework includes the development

and maintenance of a risk register with

associated delegation and reporting

mechanisms. The Audit & Risk Committee

has delegated authority to oversee the

risk management framework, providing

reporting to the Board on a periodic basis.

Risk management controls are further

embedded in M2’s management and

reporting systems, including an annual

insurance program, business continuity,

internal audit, annual budgeting and

forecasting, due diligence and strategic

planning.

During the reporting period, the Board

received relevant reports on the risk

register and also reports on particular risks

within business divisions. In the interests

of continuous improvement and to ensure

that the risk management frameworks

works within M2’s growing business,

further developments and enhancements

on the risk register and reporting take

place on a periodic basis.

Following a reporting period, M2‘s Chief

Executive Officer and Chief Financial

Officer are required to state to the Board,

in writing, that:

> the integrity of financial statements

is founded on a sound system of risk

management and internal compliance

and control; and,

> M2’s risk management and internal

compliance and control system is

operating efficiently and effectively in

all material aspects.

During the reporting period, the Board

received the assurance from the Chief

Executive and Chief Financial Officer, for

the year ended 30 June 2012 and the half-

year period ended 31 December 2011.

PrIncIPle 8: remunerAte fAIrly And resPonsIbly

M2’s current remuneration practices are

set to enable the Company to attract

and retain highly talented and motivated

directors, executives and employees.

The Remuneration Report details and

discloses the annual remuneration for key

management personnel of M2.

M2 has established a Nomination and

Remuneration Committee to assist the

Board to adopt and review remuneration

policies which will:

> enable M2 to attract and retain

directors (executive and non-executive)

and executives who will create

sustainable value for shareholders and

other stakeholders; and,

> fairly and responsibly reward

executives and directors, having regard

to the performance of the Group, the

performance of the individual and the

external compensation environment.

The role and responsibilities of the


are detailed in the Nomination and

Remuneration Committee Charter. As

mentioned previously, this Committee

consisted of two non-executive directors,

Craig Farrow (Chair) and John Hynd.

Details relating to the meetings held

during the financial year are contained

within the Directors’ Report.

Remunerations arrangements for non-

executive directors and executives

are distinct, as described within the

Remuneration Report. In particular, non-

executive directors receive fees for their

director services, they do not receive

equity or bonus compensation (excluding

the Chairman), nor are they are entitled to

retirement or termination benefits.

Brendan Wilson, Business Analyst Ella Rogers, Collections Officer

Cecilia Cheng, Accounts Payable Officer


M2 Corporate SoCial reSponSibility StateMent

our customers

> To care for our customers in a manner which is respectful,

professional and solutions oriented.

> To be innovative in the services we offer our customers and in

the means by which we promote our offerings.

our teAm

> We are committed to promotion from within, to the

encouragement of mutual respect amongst team members and

“accountable autonomy” in decision making.

the communIty

> To remain committed to the support of charitable and community

organisations in recognition of our broader

place in the community.

the enVIronment

> To not only be mindful of our collective effect on the environment

but to reduce consumption and waste wherever possible.

our suPPlIers

> To make responsible purchasing decisions, ensuring our impact

on the environment is minimal and positive supplier relationships

are maintained.

to treat each other, our customers, the community and the environment with respect.to be proactive, innovative and solutions-driven.


Consolidated Statement Of Comprehensive Income 38

Consolidated Statement Of Financial Position 39

Consolidated Statement Of Changes In Equity 40

Consolidated Statement Of Cash Flow 41

Notes To The Consolidated Financial Statements 42

1: Corporate Information 42

2: Summary Of Significant Accounting Policies 42

3: Financial Risk Management Objectives And Policies 55

4: Significant Accounting Judgements, Estimates And Assumptions 59

5: Operating Segments 61

6: Revenue And Expenses 63

7: Income Tax 64

8: Dividends Paid And Proposed 66

9: Earnings Per Share 67

10: Cash And Cash Equivalents 67

11: Trade Receivables 69

12: Inventories 70

13: Other Assets 70

14: Plant And Equipment 70

15: Intangible Assets And Goodwill 71

16: Trade And Other Payables 73

17: Provisions 73

18: Interest Bearing Loans And Borrowings 74

19: Deferred Consideration 74

20: Other Non-Current Liabilities 75

21: Contributed Equity 75

22: Related Party Disclosure 76

23: Key Management Personnel 77

24: Share-Based Payment Plans 80

25: Business Combinations 83

26: Commitments 85

27: Contingencies 86

28: Events After Balance Date 86

29: Information Relating To M2 Telecommunications Group Ltd (“The Parent Entity”) 86

30: Auditor’s Remuneration 86

FINANCIAL STATEMENTS


Note 2012 $000

2011 $000

Revenue 6(a) 393,468 427,912

Cost of Sales (265,159) (322,335)

Gross profit 128,309 105,577

Other income 6(b) 5,047 (79)

Employee benefits expenses 6(c) (45,395) (37,854)

Depreciation and amortisation 6(d) (10,187) (6,024)

Share based payments 24 (425) (282)

Other expenses 6(e) (27,547) (19,078)

Financing costs 6(f) (2,792) (1,852)

Profit before income tax 47,010 40,408

Income tax expense 7 (14,047) (12,776)

Profit after tax 32,963 27,632

Net profit and total comprehensive income for the period 32,963 27,632

Net profit and total comprehensive income for the period is attributable to:

- Non-controlling interest (66) (52)

- Owners of the parent 33,029 27,684

32,963 27,632

Earnings per share for profit attributable to the ordinary equity of the holders of the parent:

- Basic earnings per share (cents) 9 25.84 22.56

- Diluted earnings per share (cents) 9 25.31 22.23

The above Statement of Comprehensive Income should be read in conjunction with the accompanying notes.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEFOR THE YEAR ENDED 30 JUNE 2012


Note 2012 $000

2011 $000

ASSETS

Current Assets

Cash and cash equivalents 10 24,957 12,542

Trade receivables 11 66,325 51,135

Inventories 12 886 362

Other current assets 13 14,906 9,312

Total Current Assets 107,074 73,351

Non-Current Assets

Other receivables 4 36

Plant and equipment 14 51,108 3,421

Intangible assets and goodwill 15 299,430 116,615

Deferred income tax asset 7 9,151 6,397

Other non-current assets 13 4,545 1,563

Total Non-Current Assets 364,238 128,032

TOTAL ASSETS 471,312 201,383

LIABILITIES

Current Liabilities

Trade and other payables 16 86,120 53,469

Interest-bearing loans and borrowings 18 22,330 12,488

Deferred consideration 19 5,400 6,193

Income tax payable 7 13,112 5,389

Provisions 17 7,975 3,682

Total Current Liabilities 134,937 81,221

Non-Current Liabilities

Interest-bearing loans and borrowings 18 127,923 17,252

Deferred tax liability 7 15,511 4,627

Provisions 17 851 502

Other non-current liabilities 20 3,352 4,008

Total Non-Current Liabilities 147,637 26,389

TOTAL LIABILITIES 282,574 107,610

NET ASSETS 188,738 93,773

EQUITY

Contributed equity 21 150,911 66,761

Reserves 535 332

Retained earnings 37,403 26,725

Parent interests 188,849 93,818

Non-controlling interests (111) (45)

TOTAL EQUITY 188,738 93,773

The above Statement of Financial Position should be read in conjunction with the accompanying notes.

CONSOLIDATED STATEMENT OF FINANCIAL POSITIONAS AT 30 JUNE 2012


CONSOLIDATED STATEMENT OF CHANGES IN EQUITYFOR THE YEAR ENDED 30 JUNE 2012

Note

Ordinary shares

Retained earnings

Employee equity

benefits reserve

Foreign currency

translation reserve

Owners of the parent

Non- controlling

interest

Total

$000 $000 $000 $000 $000 $000 $000

At 1 July 2011 66,761 26,725 410 (78) 93,818 (45) 93,773

Profit for the period - 33,029 - - 33,029 (66) 32,963

66,761 59,754 410 (78) 126,847 (111) 126,736

Options exercised 1,036 - (198) - 838 - 838

Share option reserves - - 425 - 425 - 425

Net translation during the year - - - (24) (24) - (24)

Shares issued 83,140 - - - 83,140 - 83,140

Transactions cost on shares (3,229) - - - (3,229) - (3,229)

Dividends paid - (19,148) - - (19,148) - (19,148)

Dividend reinvestment plan 3,203 (3,203) - - - - -

At 30 June 2012 150,911 37,403 637 (102) 188,849 (111) 188,738

At 1 July 2010 62,936 13,778 342 (54) 77,002 - 77,002

Profit for the period - 27,684 - - 27,684 (52) 27,632

62,936 41,462 342 (54) 104,686 (52) 104,634

Options exercised 1,242 - (214) - 1,028 - 1,028

Share option reserves - - 282 - 282 - 282

Net translation during the year - - - (24) (24) - (24)

Shares issued - - - - - 7 7

Dividends paid - (12,114) - - (12,114) - (12,114)

Dividend reinvestment plan 2,623 (2,623) - - - - -

Deferred tax adjustment (40) - - - (40) - (40)

At 30 June 2011 66,761 26,725 410 (78) 93,818 (45) 93,773

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


Note 2012 $000

2011 $000

CASH FLOWS FROM OPERATING ACTIVITIES

Receipts from customers 400,287 425,598

Payments to suppliers and employees (346,999) (380,974)

Interest received 809 1,065

Interest paid (2,792) (1,851)

Income tax paid (9,745) (4,097)

Net cash flows from operating activities 10 41,560 39,741

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of plant and equipment (1,604) (1,188)

Purchase of intangibles (4,523) (37,245)

Acquisition payments, net cash acquired (195,212) -

Proceeds from disposal of plant and equipment 119 (5,910)

Net cash flows used in investing activities (201,220) (44,343)

CASH FLOWS FROM FINANCING ACTIVITIES

Repayment of borrowings (9,067) (6,923)

Proceeds from borrowings 119,541 20,089

Proceeds from issue of shares 83,978 1,028

Transaction costs of issue of shares (3,229) -

Dividends paid (19,148) (12,114)

Net cash flows from financing activities 172,075 2,080

Net increase/(decrease) in cash and cash equivalents 12,415 (2,522)

Cash and cash equivalents at beginning of period 12,542 15,064

Cash and cash equivalents at end of period 10 24,957 12,542

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

CONSOLIDATED STATEMENT OF CASH FLOWSFOR THE YEAR ENDED 30 JUNE 2012


1: CORPORATE INFORMATION

The consolidated financial report of M2 Telecommunications Group Ltd (the “Company”, “M2”, “the Group”) for the year ended 30 June 2012 was authorised for issue in accordance with a resolution of the directors on 24 August 2012.

M2 is a for profit company limited by shares incorporated and domiciled in Australia whose shares are publicly traded on the Australian Securities Exchange (ASX).

2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) 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 and other authoritative pronouncements of the Australian Accounting Standards Board. The financial report has also been prepared on a historical cost basis.

The financial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars ($’000) unless otherwise stated.

(b) Statement of compliance

The financial report complies with Australian Accounting Standards as issued by the Australian Accounting Standards Board and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board.

The Group has adopted the following new and amended Australian Accounting Standards and AASB Interpretations as of 1 July 2011:

> AASB 124 (Revised) Related Party Disclosures

> AASB 1054 Australian Additional Disclosures

> AASB 2009-12 Amendments to Australian Accounting Standards [AASBs 5, 8, 108, 110, 112, 119, 133, 137, 139, 1023, 1031 and Interpretations 2, 4, 16, 1039 & 1052]

> AASB 2010-4 Further Amendments to Australian Accounting Standards arising from Annual Improvements Project [AASB 1, 7, 101,134 and Interpretation 13]

> AASB 2010-5 Amendments to Australian Accounting Standards [AASB 1, 3, 4, 5, 101, 107, 112, 118, 119, 121, 132, 133, 134, 137, 139, 140, 1023 & 1038 and Interpretations 112, 115, 27, 132, & 1042]

> AASB 2010-6 Amendments to Australian Accounting Standards – Disclosures on Transfers of Financial Assets [AASB 1 & 7]

> AASB 2011-1 Amendments to Australian Accounting Standards arising from the Trans-Tasman Convergence Project [AASB 1, 5, 101, 107, 108, 121, 128, 132, 134 and Interpretation 2, 112 & 113]

None of the above standards resulted in a change in accounting policies. The accounting policies adopted are consistent with those of the previous financial year.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012


2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUEd)

Accounting Standards and Interpretations issued but not yet effective

Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet effective and have not been adopted by the Group for the annual period ended 30 June 2012 are outlined below:

Reference Title SummaryApplication

date of standard

Impact on Group financial report

Application date for Group

AASB 2011-9

Amendments to Australian Accounting Standards – Presentation of Other Comprehensive Income [AASB 101]

This Standard requires entities to group items presented in other comprehensive income on the basis of whether they might be reclassified subsequently to profit or loss and those that will not.

1 July 2012 The Group has not yet fully assessed the impact of the changes but expects the impact on the financial statements to be minimal.

1 July 2012

AASB 9 Financial Instruments

AASB 9 includes requirements for the classification and measurement of financial assets. It was further amended by AASB 2010-7 to reflect amendments to the accounting for financial liabilities.

These requirements improve and simplify the approach for classification and measurement of financial assets compared with the requirements of AASB 139. The main changes are described below.

(a) Financial assets that are debt instruments will be classified based on (1) the objective of the entity’s business model for managing the financial assets; (2) the characteristics of the contractual cash flows.

(b) Allows an irrevocable election on initial recognition to present gains and losses on investments in equity instruments that are not held for trading in other comprehensive income. Dividends in respect of these investments that are a return on investment can be recognised in profit or loss and there is no impairment or recycling on disposal of the instrument.

(c) Financial assets can be designated and measured at fair value through profit or loss at initial recognition if doing so eliminates or significantly reduces a measurement or recognition inconsistency that would arise from measuring assets or liabilities, or recognising the gains and losses on them, on different bases.

(d) Where the fair value option is used for financial liabilities the change in fair value is to be accounted for as follows:

> The change attributable to changes in credit risk are presented in other comprehensive income (OCI)

> The remaining change is presented in profit or loss

If this approach creates or enlarges an accounting mismatch in the profit or loss, the effect of the changes in credit risk are also presented in profit or loss.

Consequential amendments were also made to other standards as a result of AASB 9, introduced by AASB 2009-11 and superseded by AASB 2010-7 and 2010-10.

1 January 2015 The Group has not yet fully assessed the impact of the changes but expects the impact on the financial statements to be minimal.

1 July 2015


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2012



date of standard



AASB 10 Consolidated Financial Statements

AASB 10 establishes a new control model that applies to all entities. It replaces parts of AASB 127 Consolidated and Separate Financial Statements dealing with the accounting for consolidated financial statements and UIG-112 Consolidation – Special Purpose Entities.

The new control model broadens the situations when an entity is considered to be controlled by another entity and includes new guidance for applying the model to specific situations, including when acting as a manager may give control, the impact of potential voting rights and when holding less than a majority voting rights may give control.

Consequential amendments were also made to other standards via AASB 2011-7.


1 July 2013

AASB 12 Disclosure of Interests in Other Entities

AASB 12 includes all disclosures relating to an entity’s interests in subsidiaries, joint arrangements, associates and structures entities. New disclosures have been introduced about the judgements made by management to determine whether control exists, and to require summarised information about joint arrangements, associates and structured entities and subsidiaries with non-controlling interests


1 July 2013

AASB 13 Fair Value Measurement

AASB 13 establishes a single source of guidance for determining the fair value of assets and liabilities. AASB 13 does not change when an entity is required to use fair value, but rather, provides guidance on how to determine fair value when fair value is required or permitted. Application of this definition may result in different fair values being determined for the relevant assets.

AASB 13 also expands the disclosure requirements for all assets or liabilities carried at fair value. This includes information about the assumptions made and the qualitative impact of those assumptions on the fair value determined.



1 July 2013

AASB 119 Employee Benefits The main change introduced by this standard is to revise the accounting for defined benefit plans. The amendment removes the options for accounting for the liability, and requires that the liabilities arising from such plans is recognised in full with actuarial gains and losses being recognised in other comprehensive income. It also revised the method of calculating the return on plan assets.

The revised standard changes the definition of short-term employee benefits. The distinction between short-term and other long-term employee benefits is now based on whether the benefits are expected to be settled wholly within 12 months after the reporting date.



1 July 2013

AASB 2011-4

Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements

This Amendment deletes from AASB 124 individual key management personnel disclosure requirements for disclosing entities that are not companies.


1 July 2013




date of standard



AASB 1053 Application of Tiers of Australian Accounting Standards

This Standard establishes a differential financial reporting framework consisting of two Tiers of reporting requirements for preparing general purpose financial statements:

(a) Tier 1: Australian Accounting Standards

(b) Tier 2: Australian Accounting Standards – Reduced Disclosure Requirements

Tier 2 comprises the recognition, measurement and presentation requirements of Tier 1 and substantially reduced disclosures corresponding to those requirements.

The following entities apply Tier 1 requirements in preparing general purpose financial statements:

(a) For-profit entities in the private sector that have public accountability (as defined in this Standard)

(b) The Australian Government and State, Territory and Local Governments

The following entities apply either Tier 2 or Tier 1 requirements in preparing general purpose financial statements:

(a) For-profit private sector entities that do not have public accountability

(b) All not-for-profit private sector entities

(c) Public sector entities other than the Australian Government and State, Territory and Local Governments.

Consequential amendments to other standards to implement the regime were introduced by AASB 2010-2.


1 July 2013

AASB 2012-2

Amendments to Australian Accounting Standards – Disclosures – Offsetting Financial Assets and Financial Liabilities

AASB 2012-2 principally amends AASB 7 Financial Instruments: Disclosures to require disclosure of information that will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements, including rights of set-off associated with the entity’s recognised financial assets and recognised financial liabilities, on the entity’s financial position.


1 July 2013

AASB 2012-5

Amendments to Australian Accounting Standards arising from Annual Improvements 2009–2011 Cycle

AASB 2012-5 makes amendments resulting from the 2009-2011 Annual Improvements Cycle. The Standard addresses a range of improvements, including the following:

• repeatapplicationofAASB1ispermitted(AASB1);and

• clarificationofthecomparativeinformationrequirements when an entity provides a third balance sheet (AASB 101 Presentation of Financial Statements).


1 July 2013

AASB 2012-3

Amendments to Australian Accounting Standards – Offsetting Financial Assets and Financial Liabilities

AASB 2012-3 adds application guidance to AASB 132 Financial Instruments: Presentation to address inconsistencies identified in applying some of the offsetting criteria of AASB 132, including clarifying the meaning of “currently has a legally enforceable right of set-off” and that some gross settlement systems may be considered equivalent to net settlement.


1 July 2015



(c) Basis of consolidation

The consolidated financial statements comprise the financial statements of M2 Telecommunications Group Ltd and its subsidiaries as at and for the period ended 30 June each year (“the Group”). Subsidiaries are all those entities over which the Group has the power to govern the financial and operating policies so as to obtain benefits from their activities. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether a group controls another entity.

The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. In preparing the consolidated financial statements, all intercompany balances, transactions, unrealised gains and losses resulting from intra-group transactions and dividends have been eliminated in full.

Subsidiaries are fully consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group.

Investments in subsidiaries held by M2 Telecommunications Group Ltd are accounted for at cost in the separate financial statements of the parent entity less any impairment charges. Dividends received from subsidiaries are recorded as a component of other revenues in the separate income statement of the parent entity, and do not impact the recorded cost of the investment. Upon receipt of dividend payments from subsidiaries, the parent will assess whether any indicators of impairment of the carrying value of the investment in the subsidiary exist. Where such indicators exist, to the extent that the carrying value of the investment exceeds its recoverable amount, an impairment loss is recognised.

The acquisition of subsidiaries is accounted for using the acquisition method of accounting. The acquisition method of accounting involves recognising at acquisition date, separately from goodwill, the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. The identifiable assets acquired and the liabilities assumed are measured at their acquisition date fair values (see note 2(d)).

The difference between the above items and the fair value of the consideration (including the fair value of any pre-existing investment in the acquiree) is goodwill or a discount on acquisition.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.

Non-controlling interests are allocated their share of net profit after tax in the statement of comprehensive income and are presented within equity in the consolidated statement of financial position, separately from the equity of the owners of the parent.

Losses are attributed to the non-controlling interest even if that results in a deficit balance.

A change in the ownership interest of a subsidiary that does not result in a loss of control is accounted for as an equity transaction.

(d) Business combinations

Business combinations are accounted for using the acquisition method. The consideration transferred in a business combination shall be measured at fair value, which shall be calculated as the sum of the acquisition-date fair values of the assets transferred by the acquirer, the liabilities incurred by the acquirer to former owners of the acquiree and the equity issued by the acquirer, and the amount of any non-controlling interest in the acquiree. For each business combination, the acquirer measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred, and included in administrative expenses.

When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with contractual terms, economic conditions, the Group’s operating or accounting policies and other pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree.

Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability will be recognised in accordance with AASB 139 either in profit or loss or in other comprehensive income. If the contingent consideration is classified as equity, it should not be remeasured until it is finally settled within equity.




(e) Operating segments

An operating segment is a component of an entity that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity), whose operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance and for which discrete financial information is available. This includes start up operations which are yet to earn revenues. Management will also consider other factors in determining operating segments such as the level of segment information presented to the board of directors.

Operating segments have been identified based on the information provided to the chief operating decision makers – being the executive management team.

Operating segments that meet the quantitative criteria as prescribed by AASB 8 are reported separately.

(f) Foreign currency translation

Functional and presentation currency

Both the functional and presentation currency of M2 Telecommunications Group Ltd and its Australian subsidiaries are Australian dollars ($). The New Zealand subsidiary’s functional currency is New Zealand dollars which is translated to the presentation currency (see below for consolidated reporting).

Transactions and balances

Transactions in foreign currencies are initially recorded in the functional currency by applying the exchange rates at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange at the reporting date.

Translation of Group Companies’ functional currency to presentation currency

The results of the New Zealand subsidiary are translated into Australian dollars (presentation currency) as at the date of each transaction. Assets and liabilities are translated at exchange rates prevailing at reporting date.

Exchange variations resulting from the translation are recognised in the foreign currency translation reserve in equity.

On consolidation, exchange differences arising from the translation of the net investment in the New Zealand subsidiary are taken to the foreign currency translation reserve. If the New Zealand subsidiary were sold, the proportionate share of exchange differences would be transferred out of equity and recognised in the statement of comprehensive income.

(g) Cash and cash equivalents

Cash and cash equivalents in the statement of financial position comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

For the purposes of the statement of cash flow, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. Bank overdrafts are included within interest–bearing loans and borrowings in current liabilities on the statement of financial position.

(h) Trade receivables

Trade receivables, which generally have 14-60 day terms, are recognised initially at fair value and subsequently measured at amortised cost which is the original invoice amount less an allowance for impairment.

Collectability of trade receivables is reviewed on an ongoing basis at an operating unit level. Individual debts that are known to be uncollectible are written off when identified. An impairment provision is recognised when there is objective evidence that the Group will not be able to collect the receivable. All debts are reviewed by management for impairment. Financial difficulties of the debtor, default payments and information provided by collection agents are considered objective evidence of impairment. The amount of the impairment loss is the receivable carrying amount compared to the present value of estimated future cash flows, discounted at the original effective interest rate.




(i) Inventories

Inventories are valued at the lower of cost and net realisable value. Costs are accounted for on a first-in, first-out basis. Cost of finished goods comprise of cost of direct materials assigned on the basis of weighted average costs.

Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale.

(j) Investments and other financial assets

Investments and financial assets in the scope of AASB 139 Financial instruments: Recognition and Measurement are classified as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, or available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired or originated. Designation is re-evaluated at each financial year end, but there are restrictions on reclassifying to other categories.

When financial assets are recognised initially, they are measured at fair value, plus, in the case of investments not at fair value through profit or loss, directly attributable transactions costs.

Recognition and derecognition

All regular way purchases and sales of financial assets are recognised on the trade date i.e., the date that the Group commits to purchase the asset. Regular way purchases or sales are purchases or sales of financial assets under contracts that require delivery of the assets within the period established generally by regulation or convention in the market place. Financial assets are derecognised when the right to receive cash flows from the financial assets has expired or when the entity transfers substantially all the risks and rewards of the financial assets. If the entity neither retains nor transfers substantially all of the risks and rewards, it derecognises the asset if it has transferred control of the assets.

Subsequent measurement - Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in profit or loss when the loans and receivables are derecognised or impaired, as well as through the amortisation process. These are included in current assets, except for those with maturities greater than 12 months after reporting date, which are classified as non-current.

(k) Plant and equipment

Plant and equipment is stated at historical cost less accumulated depreciation and any accumulated impairment losses. Such cost includes the cost of replacing parts that are eligible for capitalisation when the cost of replacing the parts is incurred. Similarly, when each major inspection is performed, its cost is recognised in the carrying amount of the plant and equipment as a replacement only if it is eligible for capitalisation. All other repairs and maintenance are recognised in profit or loss as incurred.

Depreciation is calculated on a straight-line basis over the estimated useful life of the specific assets as follows:

Plant and equipment – over 2 to 10 years

Motor vehicles – over 4 to 8 years, determined by the life of the lease

Leased equipment – over 2 to 5 years, determined by the life of the lease

Switch cables – over 15 years

The assets’ residual values, useful lives and amortisation methods are reviewed, and adjusted if appropriate, at each financial year end.

Derecognition

An item of plant and equipment is derecognised upon disposal or when no further future economic benefits are expected from its use or disposal.

Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in statement of comprehensive income in the year the asset is derecognised.



(l) Leases

The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset, even if that right is not explicitly specified in an arrangement.

Group as a lessee

Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised as an expense in profit or loss.

Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term.

Operating lease payments are recognised as an expense in the Statement of Comprehensive Income on a straight-line basis over the lease term. Operating lease incentives are recognised as a liability when received and subsequently reduced by allocating lease payments between rental expense and reduction of the liability.

(m) Impairment of non-financial assets other than goodwill and indefinite intangibles

Non-financial assets other than goodwill and indefinite life intangibles are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

The Group conducts an annual internal review of asset values, which is used as a source of information to assess for any indicators of impairment. External factors, such as changes in expected future processes, technology and economic conditions, are also monitored to assess for indicators of impairment. If any indication of impairment exists, an estimate of the asset’s recoverable amount is calculated.

An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows that are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets other than goodwill that suffered impairment are tested for possible reversal of the impairment whenever events or changes in circumstances indicate that the impairment may have reversed.

(n) Goodwill and intangibles

Goodwill

Goodwill acquired in a business combination is initially measured at cost of the business combination being the excess of the consideration transferred over the fair value of the Group’s net identifiable assets acquired and liabilities assumed. If this consideration transferred is lower than the fair value of the net identifiable assets of the subsidiary acquired, the difference is recognised in profit or loss.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses.

For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated represents the lowest level within the Group at which the goodwill is monitored for internal management purposes, and is not larger than an operating segment determined in accordance with AASB 8.

Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash-generating units), to which the goodwill relates.

The Group performs its impairment testing annually, or more frequently if events or changes in circumstances indicate that the carrying value may be impaired, using discounted cash flows under the value in use methodology. Further details on the methodology and assumptions used are outline in note 15.

When the recoverable amount of the cash-generating unit (group of cash-generating units) is less than the carrying amount, an impairment loss is recognised.

Impairment losses recognised for goodwill are not subsequently reversed.




Intangibles

Intangible assets acquired separately or in a business combination are initially measured at cost. The cost of an intangible asset acquired in a business combination is its fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses.

The useful lives of these intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over their useful life and tested for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with finite useful life is reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for prospectively by changing the amortisation period or method, as appropriate, which is a change in accounting estimate. The amortisation expense on intangible assets with finite useful lives is recognised in profit or loss in the expense category consistent with the function of the intangible asset.

Indefeasible Rights to Use (IRUs) of capacity are intangible assets amortised on a straight line basis over the remaining life of the contracts.

Trademarks, licenses and customer contracts are amortised over the period of expected future sales from the related asset. Software purchased is amortised over a period of between 2 years and 10 years, being the estimated useful life of the asset.

Brands have indefinite useful lives. Intangible assets with indefinite useful lives are tested for impairment annually either individually or at cash-generating unit level consistent with the methodology outlined for goodwill above. Such intangibles are not amortised. The useful life of an indefinite life is reviewed each reporting period to determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is accounted for as a change in an accounting estimate and is thus accounted for on a prospective basis.

Software includes capitalised development costs. Research costs are expensed as incurred. An intangible asset arising from development expenditure on an internal project is recognised only when the Group can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete the development and the ability to measure reliably the expenditure attributable to the intangible asset during its development. Following the initial recognition of the development expenditure, the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses. Any expenditure so capitalised is amortised over the period of expected benefit from the related project.

The carrying value of an intangible asset arising from development expenditure is tested for impairment annually when the asset is not yet available for use or more frequently when an indication of impairment arises during the reporting period.

Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in profit or loss when the asset is derecognised.

Expenditures on advertising and promotional expenses are recognised as a component of marketing expense in the statement of comprehensive income when the Group has either the right to access the goods or has received the services.

(o) Trade and other payables

Trade and other payables are carried at amortised cost and due to their short-term nature they are not discounted. They represent liabilities for goods and services provided to the Group prior to the end of the financial year that are unpaid and arise when the Group becomes obliged to make future payments in respect of the purchase of these goods and services. The amounts are unsecured and are usually paid within 30 days of recognition.

(p) Interest-bearing loans and borrowings

All loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs.

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date.



Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (i.e. an asset that necessarily takes a substantial period of time to get ready for its intended use or sale) are capitalised as part of the cost of that asset. All other borrowing costs are expensed in the period they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds. The Group does not currently hold qualifying assets but, if it did, the borrowing costs directly attributable with this asset would be capitalised (including any other associated costs directly attributable to the borrowing and temporary investment income earned on the borrowing).

(q) Provisions and employee leave benefits

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

When the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the statement of comprehensive income net of any reimbursement.

Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the reporting date. The discount rate used to determine the present value reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision resulting from the passage of time is recognised in finance costs.

Employee leave benefits

(i) Wages, salaries, annual leave and sick leave

Liabilities for wages and salaries, including non-monetary benefits and annual leave expected to be settled within 12 months of the reporting date are recognised in other payables in respect of employees’ services up to the reporting date. They are measured at the amounts expected to be paid when the liabilities are settled. Expenses for sick leave are recognised when the leave is taken and are measured at the rates paid or payable.

(ii) Long service leave

The liability for long service leave is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures, and periods of service. Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity and currencies that match, as closely as possible, the estimated future cash outflows.

(r) Share-based payment transactions

Equity settled transactions

The Group has provided benefits to its employees in the form of share-based payments, whereby employees rendered services in exchange for shares or rights over shares (equity-settled transactions).

There are currently two plans in place to provide these benefits:

> the Executive Management Team Share Option Plan (ESOP), which provides benefits to directors, executives and selected employees

> the Employee Share Loan Plan (ESP), which provides benefits to selected employees

The cost of these equity-settled transactions with employees is measured by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by an external valuer using a binomial model; further details are given in note 24.

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




At each subsequent reporting date until vesting, the cumulative charge to the statement of comprehensive income is the product of:

(i) The grant date fair value of the award

(ii) The current best estimate of the number of awards that will vest, taking into account such factors as the likelihood of employee turnover during the vesting period and the likelihood of non-market performance conditions being met

(iii) The expired portion of the vesting period.

The charge to the Statement of Comprehensive Income for the period is the cumulative amount as calculated above less the amounts already charged in previous periods. There is a corresponding entry to equity.

Until an award has vested, any amounts recorded are contingent and will be adjusted if more or fewer awards vest than were originally anticipated to do so. Any award subject to a market condition is considered to vest irrespective of whether or not that market condition is fulfilled, provided that all other conditions are satisfied.

If the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. An additional expense is recognised for any modification that increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee, as measured at the date of modification.

If an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award, as described in the previous paragraph.

The dilutive effect, if any, of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share (see note 9).

Shares in the Group reacquired on-market and held by the ESLP are classified and disclosed as reserved shares and deducted from equity.

(s) Contributed equity

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds.

(t) Revenue recognition

Revenue is recognised and measured at the fair value of the consideration received or receivable to the extent it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised:

Rendering of services

The Group principally obtains revenue from providing the following telecommunication services: fixed wire, mobile, data services and equipment sales. Products and services may be sold separately or in bundled packages.

Revenue for fixed wire, mobile and data services are recognised as revenue, as services are performed. Revenue from services provided, but unbilled, are accrued at end of each period and unearned revenue (revenue billed in advance) for services to be provided in future periods is deferred.

Revenue for equipment sales is recognised when the device is delivered to the end customer and the sale is considered complete.

Commission income

Commissions are received as incentives from upstream suppliers for connecting new customers. Revenue from such commissions is deferred and recognised over a period of life in line with the average period related to the customers’ contracts.

Licence fees

Licence fees are brought to account as revenue in accordance with the terms of the licence agreement when substantially all obligations arising from the licence arrangement have been fulfilled.



Interest

Revenue is recognised as interest accrues 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.

(u) Income tax and other taxes

Current tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the taxation authorities based on the current period’s taxable income. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date.

Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.

Deferred income tax is provided on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred income tax liabilities are recognised for all taxable temporary difference except:

> When the deferred liabilities arise from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss.

> When the taxable temporary difference is associated with investments in subsidiaries, associates or interest in joint ventures, and the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry-forward of unused tax credits and unused tax losses can be utilised, except:

> When the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss.

> When the deductible temporary differences is associated with investments in subsidiaries, associates and interests in joint ventures, in which case a deferred tax asset is only recognised to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilised.

The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised.

Unrecognised deferred income tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.

Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same taxation authority.

Tax consolidation legislation

M2 Telecommunications Group Ltd and its wholly-owned Australian controlled entities implemented the tax consolidation legislation as of 1 July 2004.

The head entity, M2 Telecommunications Group Ltd, and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. The Group has applied the “stand-alone taxpayer” approach in determining the appropriate amount of current taxes arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group.




In addition to its own current and deferred tax amounts, M2 Telecommunications Group Ltd 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 via an intercompany account. Details of the tax funding agreement are detailed in note 7.

Any difference 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.

Other taxes

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

> When 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.

> 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 statement of financial position.

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.

(v) Earnings per share

Basic earnings per share is calculated as net profit attributable to members of the parent, adjusted to exclude any costs of servicing equity (other than dividends) and preference share dividends, divided by the weighted average number of ordinary shares, adjusted for any bonus element.

Diluted earnings per share is calculated as net profit attributable to members of the parent, adjusted for:

> Costs of servicing equity (other than dividends) and preference share dividends.

> The after tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses.

> Other non-discretionary changes in revenues or expenses during the period that would result from the dilution of potential ordinary shares divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, adjusted for any bonus element.

(w) Customer loyalty programme

In certain circumstances, for every dollar spent on certain types of phone calls or plans by the customer, up to 15% of the eligible calls or plans can be redeemed for travel booked through M2 Travel. The customer has up to 60 days to redeem their travel dollars upon termination or expiration of their contract, after which the travel dollars are forfeited.

For dollars earned by the customers, the Group defers a portion of the revenue and recognises a liability at fair value to fulfil its obligation to supply the redemption.

When the obligation to supply the travel dollars is fulfilled the deferred revenue is recognised in the profit or loss in the period in which the obligation was fulfilled and the liability is extinguished.

(x) Deferred acquisition cost

Deferred acquisition cost pertains to upfront commissions paid to internal and external sales personnel upon acquiring new service contracts. Upfront commissions paid to internal and external sales personnel are initially recognised at cost in the statement of financial position as Other Assets (note 13) and subsequently amortized over the average term of the customer’s contract which is from 22 to 24 months. The amortization is included in cost of sales.



(y) Derivative financial instruments and hedging

The Group uses derivative financial instruments to hedge its risks associated with interest rate fluctuations. Such derivate financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently re-measured to fair value.

Derivates are carried as assets when their fair value is positive and as liabilities when their fair value is negative.

The fair values of interest rate swaps are determined using a valuation technique based on cash flows discounted to present value using current market interest rates. Any gains or losses arising from changes in the fair value of derivatives are taken directly to profit or loss for the year.

3: FINANCIAL RISK MANAGEMENT OBJECTIVES ANd POLICIES

The Group’s principal financial instruments comprise receivables, payables, bank loans and overdrafts, finance leases, and cash and short-term deposits.

Risk Exposures and Responses

The Group manages its exposure to key financial risks in accordance with the Group’s financial risk management policy. The objective of the policy is to support the delivery of the Group’s financial targets whilst protecting future financial security.

The main risks arising from the Group’s financial instruments are interest rate risk, liquidity risk and credit risk. The Group uses different methods to measure and manage different types of risks to which it is exposed. Such methods include monitoring levels of exposure to interest rate risk and assessments of market forecasts for interest rate. Aging analyses and monitoring of specific credit allowances are undertaken to manage credit risk. Liquidity risk is monitored through the development of future rolling cash flow forecasts.

The Board reviews and agrees policies for managing each of these risks as summarised below.

Primary responsibility for identification and control of financial risks rests with the Audit and Risk Committee under the authority of the Board. The Board reviews and agrees policies for managing each of the risks identified below, including setting of limits for credit allowances and future cash flow forecast projections.

(a) Interest rate risk

The Group’s exposure to market interest rates relates primarily to the Group’s long-term debt obligations. The level of debt is disclosed in note 18.

At the reporting date, the Group has the following mix of financial assets and liabilities exposed to Australian variable interest rate risk:

2012 $000

2011 $000

Financial assets

Cash and cash equivalents 24,957 12,542

Financial liabilities

Interest-bearing loans and borrowings (77,193) (29,740)

Net exposure (52,236) (17,198)

The Group constantly analyses its interest rate exposure. Within this analysis, consideration is given to potential renewals of existing positions and alternative financing. In addition, the Group has sound and prudent interest rate risk management policies which include an interest rate risk philosophy governing the extent to which the Group is willing to assume interest rate risk and explicit and prudent limits on the Group’s rate risk exposure.

Derivative financial instruments are used by the Group in the normal course of business in order to hedge exposure to fluctuations in interest rates. These are economic hedges and do not satisy the requirements for hedge accounting.

At the balance sheet date, the Group held interest rate swaps to hedge their variable interest rate borrowings for a notional amount $73.06 million (2011: NIL).



3: FINANCIAL RISK MANAGEMENT OBJECTIVES ANd POLICIES (CONTINUEd)

The following sensitivity analysis is based on the interest rate risk exposures in existence at the reporting date.

At 30 June 2012, if interest rates had moved, as illustrated in the table below, with all other variables held constant, post tax profit would have been affected as follows:

Judgements of reasonable possible movements:Post tax profit and equity

higher/(lower)

2012 $000

2011 $000

Consolidated

+1% (100 basis points) (522) (172)

-.5% (50 basis points) 261 86

The movements in profit are due to higher interest costs from variable rate debt and cash balances. The sensitivity is higher in 2012 than in 2011 due to the increase in borrowings in order to fund the Primus acquisition.

Significant assumptions used in the interest rate sensitivity analysis include:

> Reasonably possible movements in interest rates were determined based on the Group’s current credit rating and mix of debt in Australia, relationships with financial institutions, the level of debt that is expected to be renewed as well as a review of the last two year’s historical movements and economic forecaster’s expectations.

> The net exposure at reporting date is representative of what the Group is expecting to be exposed to in the next 12 months from balance sheet date.

(b) Credit risk

Credit risk arises from the financial assets of the Group, which comprise cash and cash equivalents and trade and other receivables. The Group’s exposure to credit risk arises from potential default of the counter party, with a maximum exposure equal to the carrying amount of these financial assets (as outlined in each applicable note).

The Group does not hold any credit derivatives to offset its credit exposure.

The Group trades only with recognised, credit-worthy third parties, and as such collateral is not requested nor is it the Group’s policy to securitise its trade and other receivables.

It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures including an assessment of their independent credit rating, financial position, past experience and industry reputation. Risk limits are set for each individual customer in accordance with parameters set by the board. These risk limits are regularly monitored.

In addition, receivable balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is not significant.

There are no significant concentrations of credit risk within the Group.


3: FINANCIAL RISK MANAGEMENT OBJECTIVES ANd POLICIES (CONTINUEd) (c) Liquidity risk

Liquidity risk arises from the financial liabilities of the Group and the Group’s subsequent ability to meet their obligations to repay their financial liabilities as and when they fall due.

The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of credit facilities, bank loans, finance leases and committed available credit lines.

The Group minimises liquidity risk by maintaining a significant level of cash and cash equivalents as well as ensuring the Group has access to the use of credit facilities as required. The Group monitors total cash inflows and outflows expected on a monthly basis.

Non-derivative financial liabilities

The following liquidity risk disclosures reflect all contractually fixed pay-offs, repayments and interest resulting from recognised financial liabilities as of 30 June 2012. For the other obligations, the respective undiscounted cash flows for the respective upcoming fiscal years are presented. The timing of cash flows for liabilities is based on the contractual terms of the underlying contract.

However, where the counter party has a choice of when the amount is paid, the liability is allocated to the earliest period in which the Group can be required to pay. When the Group is committed to make amounts available in instalments, each instalment is allocated to the earliest period in which the Group is required to pay.

The risks implied from the values shown in the table below, reflect a balanced view of cash inflows and outflows. Leasing obligations, trade payables and other financial liabilities mainly originate from the financing of assets used in ongoing operations such as plant and equipment and investments in working capital (e.g., inventories and trade receivables).

Liquid non-derivative assets such as cash and receivables are considered in the Group’s overall liquidity risk. The Group ensures that sufficient liquid assets are available to meet all the required short-term cash payments.

< 6 months $000

6-12 months $000

1-5 years $000

> 5 years $000

TOTAL $000

Year ended 30 June 2012

Liquid financial assets

Cash and cash equivalents 24,957 - - - 24,957

Trade and other receivables 66,325 - - - 66,325

91,282 - - - 91,282

Financial Liabilities

Trade and other payables (74,290) - (636) - (74,926)

Interest bearing loans and borrowings (10,569) (11,761) (127,923) - (150,253)

(84,859) (11,761) (128,559) - (225,179)

Net inflow/(outflow) 6,423 (11,761) (128,559) - (133,897)


Liquid financial assets

Cash and cash equivalents 12,542 - - - 12,542

Trade and other receivables 51,135 - - - 51,135

63,677 - - - 63,677

Financial Liabilities

Trade and other payables (41,611) - - - (41,611)

Interest bearing loans and borrowings (5,500) (6,000) (18,240) - (29,740)

(47,111) (6,000) (18,240) - (71,351)

Net inflow/(outflow) 16,566 (6,000) (18,240) - (7,674)



3: FINANCIAL RISK MANAGEMENT OBJECTIVES ANd POLICIES (CONTINUEd)

(d) Foreign currency risk

The Group has a subsidiary operating in New Zealand. The operation is small and does not materially impact the Group financial statements. For this reason, the management believes the exposure to New Zealand Dollar currency fluctuations is not material.

The Group has transactional currency exposures resulting from the purchase of intangible assets. This transaction is denominated in United States Dollars (USD).

The Group is considering several options to mitigate the effect of this foreign currency exposure. One option is to enter into forward contracts to hedge fluctuations in foreign currency rates. Another option is to re-negotiate the USD denominated contracts to change the denomination to AUD.

At the balance sheet date, the Group had the following exposure to USD foreign currency that is not designated in cash flow hedges:

2012 $000

2011 $000

Financial liabilities

Other financial liabilities 9,831 -

Net exposure 9,831 -

The following sensitivity is based on the foreign currency risk exposures in existence at the reporting date:

At 30 June 2012, had the Australian Dollar (AUD) moved, as illustrated in the table below, with all other variables held constant, post tax profit would have been affected as follows:

Judgements of reasonable possible movements:Post tax profit and equity

higher/(lower)

2012 $000

2011 $000

Consolidated

AUD to USD +15% (2011: NIL) 1,282 -

AUD to USD -15% (2011: NIL) (1,735) -

The sensitivities of post-tax profit in 2012 are greater than in 2011 due to the acquisition of Primus. Included in the net identifiable assets acquired are financial liabilities payable in USD.

Significant assumptions used in the foreign currency sensitivity analysis include:

> The reasonably possible movement was calculated by taking the USD spot rate as at balance sheet date, moving this spot rate by the reasonably possible movements and then re-converting the USD into AUD with the “new spot rate”. This methodology reflects the translation methodology undertaken by the Group.

> The net exposure at balance sheet date is representative of what the Group was and is expecting to be exposed to in the next 12 months from balance sheet date.


4: SIGNIFICANT ACCOUNTING JUdGEMENTS, ESTIMATES ANd ASSUMPTIONS

The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements and estimates on historical experience and on other various factors it believes to be reasonable under the circumstances, the result of which form the basis of the carrying values of assets and liabilities that are not readily apparent from other sources.

Management has identified the following critical accounting policies for which significant judgements, estimates and assumptions are made. Actual results may differ from these estimates under different assumptions and conditions and may materially affect financial results or the financial position reported in future periods.

Further details of the nature of these assumptions and conditions may be found in the relevant notes to the financial statements.

(a) Significant accounting judgements

Recovery of deferred tax assets

Deferred tax assets are recognised for deductible temporary differences as management considers that it is probable that future taxable profits will be available to utilise those temporary differences. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits over the next four years.

Impairment of non-financial assets other than goodwill and indefinite life intangibles

The Group assesses impairment of all assets at each reporting date by evaluating conditions specific to the Group and to the particular asset that may lead to impairment. These include product performance, technology, economic and political environments and future product expectations. If an impairment trigger exists, the recoverable amount of the asset is determined.

Taxation

The Group’s accounting policy for taxation requires management’s judgement as to the types of arrangements considered to be a tax on income in contrast to an operating cost. Judgement is also required in assessing whether deferred tax assets and certain deferred tax liabilities are recognised on the statement of financial position. Deferred tax assets, including those arising from unrecouped tax losses, capital losses and temporary differences, are recognised only where it is considered more likely than not that they will be recovered, which is dependent on the generation of sufficient future taxable profits.

Assumptions about the generation of future taxable profits depend on management’s estimates of future cash flows. These depend on estimates of future carrier costs, commissions and sales volumes, operating costs, restoration costs, capital expenditure, dividends and other capital management transactions. Judgements are also required about the application of income tax legislation. These judgements and assumptions are subject to risk and uncertainty, hence there is a possibility that changes in circumstances will alter expectations, which may impact the amount of deferred tax assets and deferred tax liabilities recognised on the statement of financial position and the amount of other tax losses and temporary differences not yet recognised. In such circumstances, some or all of the carrying amounts of recognised deferred tax asset and liabilities may require adjustment, resulting in a corresponding credit or charge to the statement of comprehensive income.

(b) Significant accounting estimates and assumptions

Impairment of trade and other receivables

Management reviews its trade and other receivables for objective evidence of impairment regularly. Significant financial difficulties of the debtor, the probability that the debtor will enter bankruptcy, and default or significant delay in payments are considered objective evidence that a receivable is impaired. In determining this, management makes judgement as to whether there is observable data indicating that there has been a significant change in the payment ability of the debtor, or whether there have been significant changes with adverse effect in the technological, market, economic or legal environment in which the debtor operates in.

Where there is objective evidence of impairment, management makes judgements as to whether an impairment loss should be recorded as an expense. In determining this, management uses estimates based on historical loss experience for assets with similar credit risk characteristics. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between the estimated loss and actual loss experience.



4: SIGNIFICANT ACCOUNTING JUdGEMENTS, ESTIMATES ANd ASSUMPTIONS (CONTINUEd)

Impairment of goodwill and intangibles with indefinite useful lives

The Group determines whether goodwill and intangibles with indefinite useful lives are impaired at least on an annual basis. This requires an estimation of the recoverable amount of the cash-generating units, using a value in use discounted cash flow methodology, to which the goodwill and intangibles with indefinite useful lives are allocated.

Share-based payment transactions

The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined with the assistance of an external valuer using a binomial model. The accounting estimates and assumptions relating to equity-settled share-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact expenses and equity.

Estimation of useful lives of plant and equipment

The charge in respect of periodic depreciation is derived after determining an estimate of an asset’s expected useful life and the expected residual value at the end of its life. Increasing an asset’s expected life or its residual value would result in a reduced depreciation charge in the consolidated income statement.

The useful lives and residual values of Group assets are determined by management at the time the asset is acquired and reviewed annually for appropriateness. The lives are based on historical experience with similar assets as well as anticipation of future events which may impact their life such as changes in technology.

Historically, changes in useful lives and residual values have not resulted in material changes to the Group’s depreciation charge.

Estimation of useful lives of intangible assets

The useful life used to amortise intangible assets relates to the future performance of the assets acquired and management’s judgement of the period over which economic benefit will be derived from the asset. The basis for determining the useful life for the most significant categories of intangible assets is as follows:

> Customer contracts. The estimated useful life principally reflects management’s view of the average economic life of the customer base and is assessed by reference to customer churn rates. An increase in churn rates may lead to a reduction in the estimated useful life and an increase in the amortisation charge. Historically, changes to the estimated useful lives have not had a significant impact on the Group’s results and financial position.

> Software. The useful life is determined by management at the time the software is acquired and brought into use and is regularly reviewed for appropriateness. For computer software licences, the useful life represents management’s view of expected benefits over which the Group will receive benefits from the software, but not exceeding the licence term. For unique software products controlled by the Group, the life is based on historical experience with similar products as well as anticipation of future events which may impact their life such as changes in technology. Historically, changes in useful lives have not resulted in material changes to the Group’s amortisation charge.

> Indefeasible Rights to Use (IRUs). The useful life is determined by the remaining life of the contracts. The assets will be fully amortised once the contracts expire.


5: OPERATING SEGMENTS

Identification of reportable segments

The Group has identified its operating segments based on the internal reports that are reviewed and used by the executive management team (chief operating decision makers) in assessing performance and in determining the allocation of resources.

The operating segments are identified by management based on the manner in which the product is sold, whether Retail or Wholesale. Discrete financial information about each of these operating businesses is reported to the executive management team on at least a monthly basis.

The reportable segments are based on aggregated operating segments determined by the similarity of the products produced and sold and/or the services provided, as these are the sources of the Group’s major risks and have the most effect on the rates of return.

Primus Telecom Holdings Pty Ltd was acquired on 1 June 2012. As at 30 June 2012, management was in the process of updating M2’s management reporting to incorporate the Primus operations. As a result, the contribution of Primus has been included within the retail and wholesale segments based on the nature of the Primus customers and underlying risks of the Primus operations. Detail regarding Primus’ contributed assets and liabilities, and financial contribution to the group can be found separately in Note 25 “Business Combinations”.

Types of products and services

The Group has two operating segments, Retail and Wholesale. The Group’s risks and rates of return are affected predominantly by differences in the markets served by these business units.

The Retail business segment offers unique packaged telecommunications services, targeted particularly to small and medium sized enterprises, offering fixed line voice services, including line rental services, mobile voice and data services, terrestrial dial-up and high speed broadband internet services as well as mobile telephone hardware.

The Wholesale business segment offers the full suite of fixed line voice services, including line rental services, mobile voice and data services, terrestrial dial-up and high speed broadband internet services and mobile telephone hardware to the telecommunications reseller market at wholesale rates.

Accounting policies and inter-segment transactions

The accounting policies used by the Group in reporting segments internally are the same as those contained in note 2 to the accounts and in the prior periods except as detailed below:

Corporate charges

Corporate charges comprise non-segmental expenses incurred by the various business functions that support both Retail and Wholesale operations. Some of these business functions include IT, finance, facilities and equipment, commercial, and head office.

Except for head office charges, all other corporate charges are allocated to each business segment on proportionate basis linked to segment revenue so as to determine a segment result. Head office charges remain unallocated due to the difficulty in obtaining a reliable measurement of amounts that can be reasonably allocated between Retail and Wholesale.

Income tax expenses

Income tax expense is calculated based on the segment operating net profit using a notional charge of 30% (2011: 30%). No effect is given for taxable or deductible temporary differences.

Unallocated items

It is the Group’s policy that if items of revenue and expenses are not allocated to operating segments, then any associated assets and liabilities are also not allocated to segments. This is to avoid asymmetrical allocations within segments which management believe would be inconsistent.


5: OPERATING SEGMENTS (CONTINUEd)

Major customers

The Group has no significant clients that individually account for more than 10% of external revenue.

The following tables present revenue and profit information for the years ended 30 June 2012 and 30 June 2011.

Retail Wholesale Total

2012 $000

2011 $000

2012 $000

2011 $000

2012 $000

2011 $000

Revenue

Sales to external customers 320,122 258,948 73,346 168,964 393,468 427,912

Total revenue per the statement of comprehensive income

393,468 427,912

Result

Segment net operating profit after tax 34,437 23,024 8,153 6,368 42,590 29,392

Reconciliation of segment net profit after tax to net profit before tax

Income tax expense - current and deferred 14,047 12,776

Head office charges - employee benefits (4,148) (2,327)

Head office charges - miscellaneous (5,479) 567

Net profit before tax per the statement of comprehensive income

47,010 40,408

Retail Wholesale Unallocated Total

2012 $000

2011 $000

2012 $000

2011 $000

2012 $000

2011 $000

2012 $000

2011 $000

Depreciation 1,947 1,439 157 4 66 - 2,170 1,443

Amortisation 7,998 4,188 19 393 - - 8,017 4,581

Income tax expense - current 12,080 10,969 3,150 3,066 (1,116) (4,395) 14,114 9,640

Segment assets and liabilities as of 30 June 2012 and 30 June 2011 are as follows:

Retail Wholesale Total

2012 $000

2011 $000

2012 $000

2011 $000

2012 $000

2011 $000

Segment assets

Segment operating assets 399,559 169,268 47,138 31,015 446,697 200,283

Working capital - Head office 15,571 891

Other 9,044 209

Total assets per the statement of financial position 471,312 201,383

Segment liabilities

Segment operating liabilities 255,910 71,257 8,285 6,333 264,195 77,590

Borrowings - Head office 10,226 29,567

Other 8,153 453

Total liabilities per the statement of financial position 282,574 107,610



6: REVENUE ANd EXPENSES

2012 $000

2011 $000

(a) Revenue

Rendering of services 392,659 426,085

Interest income 809 1,065

License fees - 762

393,468 427,912

(b) Other income

Gain on disposal of plant and equipment 34 (79)

Other 5,013 -

5,047 (79)

(c) Employee benefits expense

Wages and salaries 39,308 32,507

Defined contribution superannuation expense 3,080 2,704

Annual leave provision 2,689 2,433

Long service leave provision 318 210

45,395 37,854

(d) Depreciation and amortisation

Depreciation 2,170 1,443

Amortisation of software 2,285 837

Amortisation of customer contracts 5,114 3,744

Amortisation of IRUs 618 -

10,187 6,024

(e) Other expenses

Selling and marketing 934 1,134

Business development 2,370 1,981

Facilities and equipment 3,808 2,528

Corporate 1,497 1,486

Professional fees 5,215 2,591

Bank fees 1,455 472

Bad debts 7,914 4,726

Operating lease 4,210 3,504

Other 144 656

27,547 19,078

(f) Finance costs

Finance charges payable under finance leases and hire purchase contracts 129 111

Finance charges payable on bank loan 2,663 1,741

2,792 1,852


7: INCOME TAX

(a) Income tax expense

The major components of income tax expense are:

2012 $000

2011 $000

Statement of comprehensive income:

Current income tax

Current income tax charge 14,114 9,640

Adjustments in respect of current income tax of previous years (70) -

Deferred income tax

Relating to origination and reversal of temporary differences 3 3,136

Income tax expense reported in the statement of comprehensive income 14,047 12,776

(b) Numerical reconciliation between aggregate tax expense recognised in the statement of comprehensive income and tax expense calculated per the statutory income tax rate

A reconciliation between tax expense and the product of accounting profit before income tax multiplied by the Group’s applicable tax rate is as follows:

2012 $000

2011 $000

Accounting profit before income tax 47,010 40,408

At the Group’s statutory income tax rate of 30% (2011: 30%) 14,103 12,122

Non-temporary differences (35) 973

Share based payments 128 85

Losses carried forward (367) (652)

Adjustments in respect of current income tax of previous years (21) -

Other 239 248

Aggregate income tax expense at effective tax rate of 30% (2011: 32%) 14,047 12,776



7: INCOME TAX (CONTINUEd)

(c) Recognised deferred tax assets and liabilities

2012 2012 2011 2011Current

Income Taxdeferred

Income TaxCurrent

Income Taxdeferred

Income Tax $000 $000 $000 $000

Opening balance (5,389) 1,770 (413) 5,473

Charged to income (14,044) (3) (9,640) (3,136)

Payments 9,745 - 4,664 -

Acquisitions (3,424) (8,127) - (567)

Closing balance (13,112) (6,360) (5,389) 1,770

Tax expense in statement of comprehensive income 14,047 12,776

Amounts recognised in the statement of financial position:

Deferred tax asset 9,151 6,397

Deferred tax liability (15,511) (4,627)

(6,360) 1,770

Deferred income tax at 30 June relates to the following:

2012 $000

2011 $000

Deferred tax assets

Trade receivables 2,682 1,353

Plant and equipment 268 255

Intangibles 297 152

Trade and other payables 1,881 1,048

Unearned income 214 -

Other provisions 2,647 1,522

Transaction cost on issue of shares 124 198

Tax losses and temporary differences 1,038 1,869

Gross deferred tax assets 9,151 6,397

Deferred tax liabilities

Trade receivables 9 -

Plant and equipment 18 21

Other assets - deferred acquisition cost 4,226 2,620

Intangibles 11,134 1,986

Leases 124 -

Gross deferred tax liabilities 15,511 4,627


7: INCOME TAX (CONTINUEd)

(d) Tax consolidation

Members of the tax consolidated group and the tax-sharing agreement

M2 Telecommunications Group Ltd and its 100% owned Australian subsidiaries formed a tax consolidated group with effect from 1 July 2004. M2 Telecommunications Group Ltd is the head entity of the tax consolidated group. Members of the Group have entered into a tax sharing agreement that provides for the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. No amounts have been recognised in the financial statements in respect of this agreement on the basis that the possibility of default is remote.

Tax effect accounting by members of the tax consolidated group

Measurement method adopted under AASB Interpretation 1052 Tax Consolidated Accounting

The head entity and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. The Group has applied the stand-alone taxpayer approach in determining the appropriate amount of current taxes and deferred taxes to allocate to members of the tax consolidated group. The current and deferred tax amounts are measured in a systematic manner that is consistent with the broad principles in AASB 112 Income Taxes. The nature of the tax funding agreement is discussed further below.

In addition to its current and deferred tax amounts, the head entity also recognises 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.

Nature of the tax funding agreement

Members of the tax consolidated group have entered into a tax funding agreement. The tax funding agreement requires payments to/from the head entity to be recognised via an inter-entity receivable/(payable) which is at call. To the extent that there is a difference between the amount charged under the tax funding agreement and the allocation under AASB Interpretation 1052, the head entity accounts for these as equity transactions with the subsidiaries.

8: dIVIdENdS PAId ANd PROPOSEd

2012 $000

2011 $000

Recognised amounts

Declared and paid during the year

Dividends on ordinary shares:

Final franked dividend for 2011: 9.0 cents (2010: 5.0 cents) 11,143 6,112

Interim franked dividend for 2012: 9.0 cents (2011: 7.0 cents) 11,208 8,625

22,351 14,737

(b) Unrecognised amounts

Dividends on ordinary shares:

Final franked dividend for 2012: 9.0 cents (2011: 9.0 cents) 14,091 11,125

After the reporting date, the above dividend was declared. This amount has not been recognised as a liability as at 30 June 2012 but will be brought to account during the 2013 financial year.

The tax rate at which paid dividends have been franked is 30% (2011: 30%).

Dividends proposed will be franked at the rate of 30% (2011: 30%).



9: EARNINGS PER SHARE

The following reflects the information used in the basic and diluted earnings per share computations:

2012 $000

2011 $000

(a) Earnings used in calculating earnings per share

For basic and diluted earnings per share:

Net profit attributable to ordinary equity holders of the parent 33,029 27,684

(b) Weighted average number of shares

‘000 ‘000

Weighted average number of ordinary shares for basic earnings per share 127,820 122,694

Effect of dilution:

Share options 2,660 1,849

Weighted average number of ordinary shares adjusted for the effect of dilution 130,480 124,543

There have been no transactions (e.g., share options) excluded from the calculation of diluted earnings per share that could potentially dilute basic earnings per share in the future because they are antidilutive for either of the periods presented.

There have been no transactions involving ordinary shares or potential ordinary shares that would significantly change the number of ordinary shares or potential ordinary shares outstanding between the reporting date and the date of completion of these financial statements.

(c) Information on the classification of securities

Options granted to employees (including KMP) as described in note 24 are considered to be potential ordinary shares and have been included in the determination of diluted earnings per share to the extent they are dilutive. These options have not been included in the determination of basic earnings per share.

10: CASH ANd CASH EQUIVALENTS

2012 $000

2011 $000

Cash at bank and in hand 23,922 11,009

Short-term deposits 1,035 1,533

24,957 12,542

(a) Reconciliation to statement of cash flows

For the purposes of the statement of cash flows, cash and cash equivalents comprise the following at 30 June:

2012 $000

2011 $000

Cash at bank and in hand 23,922 11,009

Short-term deposits 1,035 1,533

24,957 12,542


10: CASH ANd CASH EQUIVALENTS (CONTINUEd)

Cash at bank includes restricted cash of $2.6 million (2011: NIL).

Cash at bank earns interest at floating rates based on daily bank deposit rates.

Included within short-term deposits is an amount of $1.0 million (2011: $1.5 million) which is held in trust for the Phone & Fly travel dollars loyalty program.

Short-term deposits are made for varying periods of between one day and three months, depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates.

(b) Reconciliation of net profit after tax to net cash flows from operations

2012 $000

2011 $000

Net profit 32,963 27,632

Adjustments for :

Depreciation and amortisation 10,187 6,024

Share based payments 425 282

Gain on disposal of plant and equipment (34) 79

Foreign currency translation (420) -

Other revenue (5,013) (372)

Non cash acquisition items - (7,021)

Changes in assets and liabilities

(Increase)/decrease in trade receivables 7,596 4,617

(Increase)/decrease in inventories (20) (24)

(Increase)/decrease in other assets (2,761) (3,563)

(Increase)/decrease in other receivables 32 26

Increase/(decrease) in trade and other payables (5,307) 3,252

Increase/(decrease) in provisions (395) 130

Increase/(decrease) in current income tax payable 4,299 4,976

(Increase)/decrease in deferred tax asset 820 350

Increase/(decrease) in deferred tax liability (812) 3,353

Net cash flow from operating activities 41,560 39,741

(c) Non-cash financing and investing activities

2012 $000

2011 $000

Issue of shares under ESOP (note 24) 425 282

Dividend reinvestment plan (note 21) 3,203 2,623

Purchase of plant and equipment under finance lease (note 14) 111 43



11: TRAdE RECEIVABLES

2012 $000

2011 $000

Trade receivables 75,265 55,646

Allowance for impairment loss (a) (8,940) (4,511)

66,325 51,135

(a) Allowance for impairment loss

Trade receivables are non-interest bearing and are generally on 14-60 day terms. A provision for impairment loss is made when there is objective evidence that a trade receivable is impaired. An impairment loss of $7.9 million (2011: $4.7 million) has been recognised by the Group in the current year. This amount has been included in the distribution expense item. No individual amount within the impairment allowance is material.

Movements in the provision for impairment loss were as follows:

2012 $000

2011 $000

At 1 July 4,511 2,667

Charge for the year 7,914 4,726

Amounts written off (3,485) (2,882)

At 30 June 8,940 4,511

At 30 June, the aging analysis of trade receivables is as follows:

2012 2011

Gross $000

Allowance $000

Gross $000

Allowance $000

Consolidated

Current 52,155 165 34,901 54

31 - 60 days 5,619 298 6,698 129

61 - 90 days 2,729 624 6,153 161

91 days and over 14,762 7,853 7,894 4,167

Closing balance 75,265 8,940 55,646 4,511

Trade receivables that are past due but not considered impaired amounted to $9 million (2011: $9.7 million). Each operating unit has been in direct contact with the relevant debtor and is satisfied that the payment will be received in full.

Other balances within trade and other receivables do not contain impaired assets and are not past due. It is expected that these other balances will be received when due.

(b) Fair value and credit risk

Due to the short-term nature of these receivables, their carrying value is assumed to approximate their fair value.

The maximum exposure to credit risk is the fair value of receivables. Collateral is not held as security, nor is it the Group’s policy to transfer (on-sell) receivables to special purpose entities.


12: INVENTORIES

2012 $000

2011 $000

Finished goods (at cost) 886 362

Total inventories at the lower of cost and net realisable value 886 362

Inventory recognised as expense for the year ended 30 June 2012 totalled $3.5 million (2011: $5.3 million) for the Group. This expense has been included in cost of sales in the Statement of Comprehensive Income.

13: OTHER ASSETS

2012 $000

2011 $000

Bartercard trade balance 346 252

Prepayments 3,153 1,331

Security deposit 285 108

Deferred acquisition cost 10,872 7,171

Other 250 450

Total current other assets 14,906 9,312

Deferred acquisition cost 4,236 1,563

Other 309 -

Total non-current other assets 4,545 1,563

Total other assets 19,451 10,875

Bartercard is a program which allows customers to pay a percentage of their bills with barter dollars. Bartercard trade balance refers to those receivables from such customers.

14: PLANT ANd EQUIPMENT

The reconciliation of carrying amounts at beginning and end of the period are as follows:

2012 $000

2011 $000

COST

At 1 July 9,984 8,912

Additions 1,604 1,188

Acquisition 48,338 -

Disposals and write-offs (342) (116)

Other - -

At 30 June 59,584 9,984

ACCUMULATED DEPRECIATION

At 1 July 6,563 5,192

Depreciation charge for the year 2,170 1,443

Disposals and write-offs (257) (72)

Other - -

At 30 June 8,476 6,563

NET BOOK VALUE 51,108 3,421

Plant and equipment with carrying amount of $13.7 million (2011: $0.2 million) for the Group are pledged as securities for non-current liabilities as disclosed in note 18.



15: INTANGIBLE ASSETS ANd GOOdWILL

(a) Reconciliation of carrying amounts at the beginning and end of the period

Software Customer Contracts

IRUs Brands Goodwill Total

$000 $000 $000 $000 $000 $000


At 1 July 2011,

Net of accumulated amortisation and impairment 8,343 6,557 - 1,503 100,212 116,615

Additions

Software 4,523 - - - - 4,523

Acquisitions (provisional) 3,724 35,668 32,500 19,838 94,579 186,309

Total additions 8,247 35,668 32,500 19,838 94,579 190,832

Amortisation charge for the year (2,285) (5,114) (618) - - (8,017)

At 30 June 2012,

Net of accumulated amortisation and impairment 14,305 37,111 31,882 21,341 194,791 299,430

At 30 June 2012

Cost (gross carrying amount) 18,563 42,762 32,500 21,341 194,791 309,957

Accumulated amortisation and impairment (4,258) (5,651) (618) - - (10,527)

Net carrying amount 14,305 37,111 31,882 21,341 194,791 299,430


At 1 July 2010,


Additions

Software 8,200 - - - - 8,200

Acquisitions (provisional) - 5,990 - - 36,590 42,580

Total additions 8,200 5,990 - - 36,590 50,780

Adjustments to fair value from provisional accounts - - - - 314 314

Write-offs (355) - - - - (355)

Amortisation charge for the year (837) (3,744) - - - (4,581)

At 30 June 2012,


At 30 June 2012

Cost (gross carrying amount) 11,182 13,852 - 1,503 100,212 126,749

Accumulated amortisation and impairment (2,839) (7,295) - - - (10,134)

Net carrying amount 8,343 6,557 - 1,503 100,212 116,615


15: INTANGIBLE ASSETS ANd GOOdWILL (CONTINUEd)

(b) Description of the Group’s intangible assets and goodwill

Software

Software purchased in the normal course of business is amortised over a 2 to 10 year period.

Customer contracts

Customer contracts are acquired through the acquisition of businesses and are amortised over a 2 to 4 year period.

Indefeasible Rights to Use (IRUs)

IRUs are acquired through the acquisition of a business and are amortised over the remaining life of the contracts which range from 3 to 13 years.

Brands

Brands are acquired through the acquisition of businesses and have indefinite useful lives. Brands are not amortised but are subject to impairment testing on an annual basis or whenever there is an indication of impairment.

Goodwill

After initial recognition, goodwill acquired in a business combination is measured at cost less any accumulated impairment losses. Goodwill is not amortised but is subject to impairment testing on an annual basis or whenever there is an indication of impairment.

(c) Impairment tests for goodwill and intangibles with indefinite useful lives

Description of cash generating units and other relevant information

Goodwill acquired through business combinations has been allocated to and are tested at the level of their respective cash generating units for impairment testing as follows:

> Retail cash generating unit

> Wholesale cash generating unit

> Primus

The recoverable amount of the cash generating units has been determined based on a value in use calculation using cash flow projections based on financial budgets approved by senior management covering a five year period.

The pre-tax, risk-adjusted discount rate applied to cash flow projections is 12% (2011: 13%). The same discount rates are applied to both retail and wholesale segments.

The long-term growth rate used to extrapolate the cash flows of the retail and wholesale sales units beyond the five-year period is 2.5%. The senior management of both units believes the growth rate is justified based on the acquisitions during the financial year, which resulted in increased customer base.

Carrying amount of goodwill allocated to each of the cash generating units

2012 $000

2011 $000

Cash generating units

Retail cash generating units 103,870 85,202

Wholesale cash generating units 15,010 15,010

Primus 75,911 -

Total Goodwill 194,791 100,212

Brands are wholly allocated to the retail cash generating units.



15: INTANGIBLE ASSETS ANd GOOdWILL (CONTINUEd)

Key assumptions used in value in use calculations for the cash generating units for 30 June 2012 and 30 June 2011.

The following describes each key assumption on which management has based its cash flow projections when determining the value in use of the above mentioned cash generating units:

> Budgeted gross margins – the basis used to determine the value assigned to the budgeted gross margin is the average gross margin achieved in the year immediately before the budgeted year adjusted for the budgeted growth.

> Budgeted overheads – the basis used to determine the value assigned to the budgeted overheads is the average overheads achieved in the year immediately before the budgeted year adjusted for budgeted increase.

> Discount rates – discount rates reflect management’s estimate of the time value of money and the risks specific to each unit. This is the benchmark used by management to assess operating performance and to evaluate future investment proposals. In determining appropriate discount rates for each unit, regard has been given to the yield on a ten-year government bond at the beginning of the budgeted year and a risk premium.

> Growth rate estimates – the basis used for growth rates reflect management’s estimate, determined by future investment in sales generation methods and by growth rates achieved within the previous period.

16: TRAdE ANd OTHER PAYABLES

2012 $000

2011 $000

Trade payables 43,668 23,375

Accrued expenses 21,486 3,436

Withholding tax payable 445 345

Goods and services tax payable 1,344 846

Unearned income 8,224 6,270

Deferred commission revenue 9,006 11,781

Other payables 1,947 7,416

86,120 53,469

Trade and other payables are non-interest bearing and are normally settled on 30-day terms.

Due to the short-term nature of these payables, their carrying value is assumed to approximate their fair value.

Information regarding interest rate and liquidity risk exposure is set out in note 3.

17: PROVISIONS

2012 $000

2011 $000

Current

Annual leave 4,243 2,067

Long-service leave 3,732 1,615

7,975 3,682

Non-Current

Annual leave - -

Long-service leave 851 502

8,826 4,184

Refer to note 2(q) for the relevant accounting policy and a discussion of significant estimations and assumptions applied in the measurement of these provisions.


18: INTEREST BEARING LOANS ANd BORROWINGS

2012 $000

2011 $000

Current

Obligations under finance leases and hire purchase contracts (note 26) 350 988

Bank loans 19,483 11,500


22,330 12,488

Non-Current

Obligations under finance leases and hire purchase contracts (note 26) 210 102

Bank loans 120,379 17,150


127,923 17,252

(a) Fair values

The carrying amounts of the Group’s current and non-current borrowings approximate their fair values.

(b) Interest rate and liquidity risk

Details regarding interest rate and liquidity risk are disclosed in note 3.

(c) Defaults and breaches

During the current and prior years, there were no defaults or breaches on any of the loans.

(d) Assets pledged as security

Bank borrowings are secured by fixed and floating charges over the business assets of the entities within the Group. Business assets include debtors (less than 90 days), inventory and plant and equipment.

19: dEFERREd CONSIdERATION

2012 $000

2011 $000

Current 5,400 6,193

The deferred consideration for the acquisition of the Clear assets has been adjusted downward by $6.2 million based on actual performance milestones.



20: OTHER NON-CURRENT LIABILITIES

2012 $000

2011 $000

Deferred commission revenue 2,716 4,008

Other payables 636 -

3,352 4,008

21: CONTRIBUTEd EQUITY

2012 $000

2011 $000

Ordinary shares - issued and fully paid 150,911 66,761

Fully paid ordinary shares carry one vote per share and carry the right to dividends.

No. (‘000) $000

Movements in ordinary shares on issue

At 30 June 2010 121,522 62,936

Share issue due to exercise of share options 1,198 1,242

Share issue due to dividend reinvestment plan 897 2,623

Adjustments - (40)

At 30 June 2011 123,617 66,761

Share issue due to exercise of share options 664 1,036

Share issue due to dividend reinvestment plan 1,036 3,203

Share issue 31,255 83,140

Transaction costs - (3,229)

At 30 June 2012 156,572 150,911

Capital management

When managing capital, management’s objective is to ensure the entity continues as a going concern as well as to maintain optimal returns to shareholders and benefits for other stakeholders. Management also aims to maintain a capital structure that ensures the lowest cost of capital available to the entity.

Management are constantly adjusting the capital structure to take advantage of favorable costs of capital or high returns on assets. As the market is constantly changing, management may change the amount of dividends to be paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

During 2012, management paid dividends of $22.4 million (2011: $14.7 million).

The Group is not subject to externally imposed capital requirements.


22: RELATEd PARTY dISCLOSURE

(a) Subsidiaries

The consolidated financial statements include the financial statements of M2 Telecommunications Group Ltd and the subsidiaries listed in the following table.

Name Country of incorporation

% Equity interest

Investment $000

2012 2011 2012 2011

M2 Telecommunications Pty Ltd Australia 100 100 2,955 2,955

– People Telecom Pty Ltd Australia 100 100 - -

– People Telecommunications Pty Ltd Australia 100 100 - -

– People Mobile Pty Ltd Australia 100 100 - -

– M2 Mobile Services Pty Ltd Australia 100 100 - -

– M2 NZ Limited New Zealand 68 70 - -

– Southern Cross Telco Pty Ltd Australia 100 100 - -

– Orion Telecommunications Ltd Australia 100 100 - -

– M2 Clear Pty Ltd Australia 100 100 - -

– M2 Viptel Pty Ltd Australia 100 100 - -

M2 Loyalty Programs Pty Ltd Australia 100 100 - -

M2 Wholesale Pty Ltd Australia 100 100 - -

– Wholesale Communications Group Pty Ltd Australia 100 100 - -

– M2 Wholesale Services Pty Ltd Australia 100 100 - -

M2 Commander Pty Ltd Australia 100 100 - -

Primus Telecom Holdings Pty Ltd Australia 100 - - -

– Primus Telecom Pty Ltd Australia 100 - - -

– Hotkey Internet Services Pty Ltd Australia 100 - - -

– Primus Telecommunications Pty Ltd Australia 100 - - -

– 0014 Pty Ltd Australia 100 - - -

– Primus Online Pty Ltd Australia 100 - - -

– Primus Telecommunications (Australia) Pty Ltd Australia 100 - - -

– Primus Network (Australia) Pty Ltd Australia 100 - - -

2,955 2,955



22: RELATEd PARTY dISCLOSURE (CONTINUEd)

(b) Ultimate parent

M2 Telecommunications Group Ltd is the ultimate parent entity.

(c) Key management personnel (KMP)

Details relating to KMP, including remuneration paid, are included in note 23.

(d) Transactions with related parties

Refer to note 23(d) for the total amount of transactions that were entered into with related parties for the relevant financial year.

Terms and conditions of transactions with related parties

Outstanding balances at year-end are unsecured, interest free and settlement occurs in cash.

Allowance for impairment loss on trade receivables

For the year ended 30 June 2012, the Group has not made any allowance for doubtful debts relating to amounts owed by related parties as there were no indicators to trigger such action (2011:$nil). An impairment assessment is undertaken each financial year by examining the financial position of the related party and the market in which the related party operates to determine whether there is objective evidence that a related party receivable is impaired. When such objective evidence exists, the Group recognises an allowance for the impairment loss.

23: KEY MANAGEMENT PERSONNEL

(a) Compensation for key management personnel

2012 $000

2011 $000

Short-term employee benefits 3,084 2,459

Post employment benefits 117 101

Share-based payment 214 121

Total compensation 3,415 2,681


23: KEY MANAGEMENT PERSONNEL (CONTINUEd)

(b) Option holdings of key management personnel

30 June 2012Balance at

1 July 2011Granted as

remunerationOptions

exercisedNet change

Balance at 30 June 2012

Directors

Craig Farrow - - - -

Vaughan Bowen - - - -

Max Bowen (2) - - - -

John Hynd - - - -

Michael Simmons - - - -

Executives

Geoff Horth 250,000 300,000 (75,000) 225,000 475,000

Darryl Inns 175,000 100,000 (75,000) 25,000 200,000

Steve Wicks 175,000 100,000 (75,000) 25,000 200,000

Scott Carter - 250,000 - 250,000 250,000

Johnathan Eele - 150,000 - 150,000 150,000


Total 600,000 900,000 (225,000) 675,000 1,275,000

30 June 2011Balance at

1 July 2010Granted as

remunerationOptions

exercisedNet change


Directors

Craig Farrow - - - -

Vaughan Bowen - - - -

Max Bowen (2) - - - -

John Hynd - - - -

Michael Simmons - - - -

Dennis Basheer (1) - - - -

Executives

Geoff Horth 250,000 - - - 250,000

Darryl Inns 250,000 - (75,000) (75,000) 175,000

Steve Wicks 250,000 - (75,000) (75,000) 175,000

Total 750,000 - (150,000) (150,000) 600,000

(1) Mr. Basheer retired as director on 29 October 2010. (2) Mr. Max Bowen retired as director on 28 October 2011. (3) Mr. Mazerski was appointed on June 1 2012.




(c) Shareholdings of key management personnel

30 June 2012 Balance at 1 July 2011

Granted as remuneration

On exercise of options

Net change


Directors

Craig Farrow 582,780 - - 20,803 603,583

Vaughan Bowen 8,376,641 - - (2,334,221) 6,042,420

Max Bowen (2) 32,274 - - - 32,274

John Hynd 2,332,524 - - 220,476 2,553,000

Michael Simmons 9,591 - - 2,397 11,988

Executives

Geoff Horth 44,500 - 75,000 86,125 130,625

Darryl Inns 282,678 - 75,000 (48,664) 234,014

Steve Wicks 1,842,083 - 75,000 (53,209) 1,788,874

Scott Carter - - - - -

Johnathan Eele 13,250 - - 3,312 16,562


Total 13,516,321 - 225,000 (2,102,981) 11,413,340

30 June 2011 Balance at 1 July

2010 Granted as

remuneration On exercise of

options Net change


Directors

Craig Farrow 958,522 - - (375,742) 582,780

Vaughan Bowen 10,935,641 - - (2,559,000) 8,376,641

Max Bowen (2) 32,274 - - - 32,274

John Hynd 2,832,524 - - (500,000) 2,332,524

Michael Simmons 3,591 - - 6,000 9,591

Dennis Basheer (1) 5,044,906 - - (250,000) 4,794,906

Executives

Geoff Horth 44,500 - - - 44,500

Darryl Inns 589,333 - 75,000 (306,655) 282,678

Steve Wicks 2,780,996 - 75,000 (938,913) 1,842,083

Total 23,222,287 - 150,000 (4,924,310) 18,297,977

All KMP balances include spouse shareholdings.(1) Mr. Basheer retired as director on 29 October 2010.(2) Mr. Max Bowen retired as director on 28 October 2011. (3) Mr. Mazerski was appointed on June 1 2012.



(d) Other transactions and balances with key management personnel and their related parties

The following table provides the total amount of transactions that were entered into with related parties for the relevant financial year.

Sales to related parties

$000

Purchases from related parties

$000

Directors

Craig Farrow (1) 2012 25 -

2011 32 -

Max Bowen (2) 2012 1 -

2011 3 -

Dennis Basheer (3) 2012 - -

2011 9 174

John Hynd (4) 2012 4 -

2011 5 -

Michael Simmons (5) 2012 1 -

2011 1 -

(1) Telecommunications services were provided to Brentnalls SA and Petcraky Pty Ltd on commercial terms. Mr Farrow is a director of both companies. (2) Telecommunications services were provided to MGB Holdings Pty Ltd on commercial terms. Mr Bowen is a director of MGB Holdings Pty Ltd. Mr

Bowen retired as director on 28 October 2011.(3) Sales commissions were paid and telecommunications services were provided to Dennis N Basheer Nominees on commercial terms.

Telecommunications services were provided to M2SA Pty Ltd on commercial terms. Mr Basheer is a director of both companies. Mr. Basheer retired as director of M2 on 29 October 2010.

(4) Telecommunications services were provided to Hynd & Co Pty Ltd on commercial terms. Mr Hynd is a director of the firm Hynd & Co Pty Ltd.(5) Telecommunications services were provided to Luab Pty Ltd (Mr Simmons is a director) on commercial terms.

24: SHARE-BASEd PAYMENT PLANS

(a) Recognised share-based payment expenses

The expense recognised for employee services received during the year is shown in the table below:

2012 $000

2011 $000

Expense arising from equity-settled share-based payment transactions

- M2 Executive Management Team Share Option Plan (ESOP) 425 282

Total expense arising from share-based payment transactions 425 282

The share-based payment plans are described below. There have been no cancellations or modifications to any of the plans during 2012.

(b) Types of share-based payment plans

M2 Executive Management Team Share Option Plan

In February 2007, M2 introduced the M2 Executive Management Team Share Option Plan, and later in May 2009 this was extended to selected employees. The purpose of the ESOP was to provide an avenue for the alignment of Executive and employee objectives with those of shareholders, and to provide an additional element to Executive and employee remuneration that was competitive to the external compensation environment. The issue of options under ESOP further allows an opportunity for the Board to reward Executives and employees for their performance in a given period.

All Executives and selected employees of M2 were eligible to participate in the ESOP. However, the issue of options under the ESOP to executive directors is subject to approval by M2 shareholders.



24: SHARE-BASEd PAYMENT PLANS (CONTINUEd)

Under the ESOP, Executives and selected employees may be offered options to acquire M2 Shares. Any shares issued under the ESOP consequent upon exercise of the options will rank equally with all other M2 Shares and application will be made for them to be quoted on ASX. No application will be made for the options to be quoted on ASX.

Options issued under the ESOP vest (and may only then be exercised) one, two and three years (as determined by the M2 Board) after they are offered to the eligible Executive or employee.

Unless the M2 Board determines otherwise, no fee will be payable on the issue of any option under the ESOP. The exercise price for each option (payable on exercise of the option) will be determined by the Board at the time of issue of the option.

Options issued under the ESOP may be exercised, once they are vested, at any time within two years from the date on which they vest. Other than continuous service conditions with the Company, there are no performance conditions which must be met prior to the vesting or exercise of options.

Options are not generally transferable (and only with board approval) and cease to be exercisable at the end of the exercise period or within a specified time after the cessation of the Executive’s or employee’s employment (which time depends on the circumstances of the cessation).

An option holder may not attend and vote at annual general meetings and other shareholder meetings and is not entitled to participate in any rights issues unless the options have been exercised. Any bonus issue will proportionately increase the number of options held by any Executive or employee who has been granted options.

Employee share plan (ESP)

In April 2007 M2 introduced the ESP to reward the loyalty of employees. All employees of M2, both full-time and permanent part-time, were eligible to participate in the ESP, in which M2 shares were offered at the discretion of M2 Management and the M2 Board. The issue of M2 shares under the ESP is further subject to the approval of the M2 shareholders.

A summary of the ESP is as follows:

(i) Under the ESP, eligible employees were offered M2 shares. The shares issued under the ESP ranked equally with all other M2 shares and application was made for them to be quoted on the ASX.

(ii) The shares were offered to eligible employees at the average weighted closing market price of M2 share’s sold on the ASX during the five business days immediately before invitations to eligible employees were announced or issued.

(iii) The maximum number of shares that were offered to an eligible employee in any twelve month period is 20,000 M2 shares.

(iv) Eligible employees have paid for the shares offered out of their own funds or M2 has provided them with an interest-free, limited recourse loan to finance up to the full cost of the shares.

(v) Eligible employees who have paid for the shares offered out of their own funds may deal with them as they wish.

(vi) Eligible employees who took up the offer of the loan did so on the following terms:

a. The loan is required to be repaid within twenty years after the date of allotment of the shares, or upon the employee ceasing employment with M2;

b. The loan may be repaid in full or part at any time prior to the repayment date;

c. All cash dividends will be put towards repayment of the loan;

d. The employee cannot sell the shares until the loan has been repaid;

e. If the loan becomes repayable M2 may sell the employee’s shares to repay the loan but if the sale proceeds are insufficient to repay the loan then the employee is released from further liability.

(vii) The employee may attend and vote at annual general meetings and other shareholder meetings and is entitled to participate in any bonus or rights issues.


24: SHARE-BASEd PAYMENT PLANS (CONTINUEd)

(c) Summaries of options granted under ESOP

The following table illustrates the number (No.) and weighted average exercise prices (WAEP) of, and movements in, share options issued during the year:

2012 2012 2011 2011

No. WAEP No. WAEP

Outstanding at the beginning of the year 1,849,000 $1.386 3,020,000 $1.363

Granted during the year 1,500,000 $3.030 - $ -

Expired during the year (25,000) $0.700 - $ -

Exercised during the year (664,000) $1.262 (1,171,000) $0.858

Outstanding at the end of the year 2,660,000 $2.489 1,849,000 $1.386

The outstanding balance as at 30 June 2012 is represented by 2,660,000 executive options with exercise price ranging from $1.64 to $3.29, exercisable until dates ranging from 1 January 2011 to 1 January 2017.

(d) Weighted average remaining contractual life

The weighted average remaining contractual life for the share options outstanding as at 30 June 2012 is 3 years (2011: 2 years).

(e) Range of exercise price

The range of exercise prices for all options outstanding at the end of the financial year was $1.64 to $3.29 (2011: $0.70 to $1.95).

(f) Weighted average fair value

The weighted average fair value of options granted during the year is $3.03.

(g) Option pricing model: ESOP

The fair value of the equity-settled share options granted under the ESOP is estimated as at the grant date using a Binomial Model taking into account the terms and conditions upon which the options were granted.

The following table lists the inputs to the Binomial Model used for the year ended 30 June:

ESOP 2012

ESOP 2011

Dividend yield (%) 5.56% 3.93%

Expected volatility (%) 30.32% 46.62%

Risk-free interest rate (%) 2.62% 5.05%

Expected life of option (years) 4 years 3 years

Option exercise price ($) $2.99, $3.14, $3.29 $1.75, $1.85, $1.95

Weighted average share price at measurement date ($) $3.14 $1.40

Model used Binomial Binomial



25: BUSINESS COMBINATIONS

Flex Group

On 1 January 2012, M2 Commander Pty Ltd acquired certain assets (customer contracts and associated records) of Flex Group Pty Ltd (“Flex Group”). The assets were acquired for $3.45 million in cash.

The fair values of the identifiable assets and liabilities of Flex Group as of the date of acquisition were:

CONSOLIdATEd FINAL $000

Intangible assets 1,058

Deferred tax liability (317)

Fair value of identifiable net assets 741

Goodwill arising from acquisition 2,709

3,450

Cost of the combination:

Cash paid 3,450

Total cost of the combination 3,450

From the date of acquisition, Flex Group has contributed $2 million to the revenue the Group.

If the acquisition happened at the beginning of the financial year, Flex Group would have contributed approximately $4 million to the Group revenue. Determining the net profit contribution of Flex Group from the date of acquisition or the beginning of the financial year is not practicable, due to it being fully integrated into the Group.

Key factors contributing to the $2.7 million goodwill are synergies existing within the acquired business, and synergies expected to be achieved as a result of combining Flex Group with the rest of the M2 Group.

Time Group

On 1 March 2012, Southern Cross Telco Pty Ltd acquired certain assets (customer contracts and associated records) of Time Telecom Pty Ltd and related entities (“Time Group”). The assets were acquired for $19.97 million, comprised of an upfront and deferred payment, less certain adjustments including performance related conditions for the deferred payment. The transaction is funded by cash and a debt facility set in place for the purpose of this asset acquisition.

The fair values of the identifiable assets and liabilities of Time Group as of the date of acquisition were:

CONSOLIdATEd FINAL $000


Deferred tax liability (1,721)

Fair value of identifiable net assets 4,015


19,974


Cash paid - upfront payment 14,574

Cash paid - deferred payment 5,400


The deferred payment is payable based on specific performance milestones achieved, the milestone being churn rates. Based on analysis of churn rates, management expects to pay the full deferred consideration on payment date (September 2012).

From the date of acquisition, Time Group has contributed approximately $6 million to the revenue of the Group.

If the acquisition happened at the beginning of the financial year, Time Group would have contributed approximately $18 million to the Group revenue. Determining the net profit contribution of Time Group from the date of acquisition or the beginning of the financial year is not practicable, due to it being fully integrated into the Group.



25: BUSINESS COMBINATIONS (CONTINUEd)

Key factors contributing to the $16 million goodwill are synergies existing within the acquired business, and synergies expected to be achieved as a result of combining Time Group with the rest of the M2 Group.

If the acquisition happened at the beginning of the financial year, Time Group would have contributed $18 million to the Group revenue.

Primus

On 1 June 2012, M2 Telecommunications Group Ltd acquired 100% of Primus Telecom Holdings Pty Ltd (“Primus”) and its subsidiaries, for a total consideration of $192.4 million (including $10.6 million of restricted cash). The acquisition was funded through a combination of the proceeds of a Renounceable Entitlement Offer (“Entitlement Offer”), which raised $83.1 million and a senior lending facility. The fair values of the identifiable assets and liabilities of Primus as of the date of acquisition were:

CONSOLIdATEd PROVISIONAL $000

Cash and cash equivalents 15,212

Trade and other receivables* 25,535

Inventories 504

Other assets 5,792

Plant and equipment 48,338


Deferred tax asset 3,574

Trade and other payables (38,825)

Interest-bearing loans and borrowings (10,458)

Income tax payable (3,424)

Deferred tax liability (9,658)

Provisions (5,037)

Fair value of identifiable net assets 116,489


192,400


Cash paid 192,400


* Gross contractual amount is $27.7 million.

Due to the timing of the acquisition, the fair values currently established are provisional and are subject to further review during the next financial year.

From the date of acquisition, Primus has contributed $21.9 million revenue and $1.3 million net loss (which includes transaction costs incurred during the acquisition) to the Group.

If the acquisition happened at the beginning of the financial year, Primus would have contributed approximately $260 million and $11.7 million to the Group revenue and net profit respectively.

Key factors contributing to the $76 million goodwill are synergies existing within the acquired business, and synergies expected to be achieved as a result of combining Primus Group with the rest of the M2 Group.


25: BUSINESS COMBINATIONS (CONTINUEd)

Prior period acquisitions

There were no adjustments relating to the acquisitions in the prior period except for the deferred consideration resulting from the acquisition of selected assets of Clear Telecoms (Aust) Pty Ltd. The deferred consideration has been adjusted during this financial year as explained in note 19.

26: COMMITMENTS

(a) Leasing commitments

Operating lease commitments – Group as lessee

The Group has entered into commercial leases on offices and certain plant and equipment. Future minimum lease payments under non-cancellable operating leases as at 30 June are as follows:

2012 $000

2011 $000

Within one year 8,682 1,505

After one year but not more than five years 21,031 2,589

After more than five years 10,470 -

Total minimum lease payments 40,183 4,094

Finance lease and hire purchase commitments – Group as lessee

These lease contracts expire within one to four years. Future minimum lease payments under finance lease and hire purchase contracts as at 30 June are as follows:

2012 $000

2011 $000

Within one year 358 1,052

After one year but not more than five years 228 109

Total minimum lease payments 586 1,161

Less amounts representing finance charges (26) (71)

Present value of minimum lease payments 560 1,090

(c) Other financial liabilities

2012 $000

2011 $000

Within one year 2,497 -

After one year but not more than five years 7,334 -

Total other financial liabilities 9,831 -

These financial liabilities relate to the Indefeasible Rights to Use of capacity (IRUs) arising from Primus acquisition.

(c) Capital commitments

The Group had contractual obligations to purchase plant and equipment, software and other value added services for $3.8 million dollars at balance sheet date (2011: NIL) principally relating to soft switches and gateways.


27: CONTINGENCIES

There are no contingent assets or liabilities as at Statement of Financial Position date.

28: EVENTS AFTER BALANCE dATE

On 24 August 2012, the directors declared a final dividend on ordinary shares in respect of the 2012 financial year. The total amount of the dividend is $14,090,961, which represents a fully franked dividend of 9 cents per share (on shares issued as at 30 June 2012). This final dividend will be paid to shareholders on 26 October 2012.

29: INFORMATION RELATING TO M2 TELECOMMUNICATIONS GROUP LTd (“THE PARENT ENTITY”)

2012 $000

2011 $000

Current assets 11,751 1,891

Total assets 319,706 107,841

Current liabilities 32,186 18,424

Total liabilities 162,218 35,586

Issued capital 150,911 66,761

Retained earnings 5,940 5,084

Equity Reserves 637 410

Total shareholders’ equity 157,488 72,255

Profit or loss and total comprehensive income of the parent entity 23,207 17,798

The parent entity has no commitments or contingencies as of reporting date.

30: AUdITOR’S REMUNERATION

The auditor of M2 Telecommunications Group Ltd is Ernst & Young.

2012 $

2011 $

Amounts received or due and receivable by Ernst & Young (Australia) for:

- An audit or review of the financial report of the entity and any other entity within the consolidated group

455,500 321,550

- Other services in relation to the entity and any other entity in the consolidated group

489,061 -

944,561 321,550



DIRECTORS’ DECLARATION

In accordance with a resolution of the directors of M2 Telecommunications Group Ltd:

1. In the opinion of the directors:

(a) The financial statements, notes and the additional disclosures included in the directors’ report designated as audited, of the Company and of the consolidated entity are in accordance with the Corporations Act 2001, including:

(i) Giving a true and fair view of the Company’s and consolidated entity’s financial position as at 30 June 2012 and of their performance for the year ended on that date

(ii) Complying with Accounting Standards (including the Australian Accounting Interpretations) and Corporations Regulations 2001

(b) The financial statements and notes comply with International Financial Reporting Standards as disclosed in note 2(b)

(c) 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 year ended 30 June 2012.

On behalf of the directors

Craig Farrow Chairman

Melbourne, 24 August 2012


Liability limited by a scheme approved under Professional Standards Legislation

Independent auditor's report to the members of M2 Telecommunications Group Limited

Report on the financial report

We have audited the accompanying financial report of M2 Telecommunications Group Limited, which comprises the consolidated statement of financial position as at 30 June 2012, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information, and the directors' declaration of the consolidated entity comprising 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 controls as the directors determine are necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 2(b), 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. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about 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 judgment, 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 controls 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 controls. 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.

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

Independence

In conducting our audit we have complied with the independence requirements of the Corporations Act 2001. We have given to the directors of the company a written Auditor’s Independence Declaration, a copy of which is included in the directors’ report. In addition to our audit of the financial report, we were engaged to undertake the services disclosed in the notes to the financial statements. The provision of these services has not impaired our independence.


2

Opinion In our opinion:

a. the financial report of M2 Telecommunications 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 and the Corporations Regulations 2001; and

b. the financial report also complies with International Financial Reporting Standards as disclosed in Note 2(b).

Report on the remuneration report

We have audited the Remuneration Report included in pages 22 to 30 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.

Opinion In our opinion, the Remuneration Report of M2 Telecommunications Group Limited for the year ended 30 June 2012, complies with section 300A of the Corporations Act 2001.

Ernst & Young

David Shewring Partner Melbourne 24 August 2012


Additional information required by the ASX Listing Rules and not shown elsewhere in this report is as follows. This information is current as at 23 August 2012.

(a) Distribution of equity holders of securities

(i) Ordinary share capital 156,581,954 fully paid ordinary shares are held by 6,888 shareholders

(ii) Options 2,650,000 options are held by 11 individual option holders

The numbers of shareholders, by size of holding, in each class are:

Range Securities No of Holders

100,001 and Over 109,088,202 105

10,001 to 100,000 29,903,151 1,204

5,001 to 10,000 8,759,878 1,174

1,001 to 5,000 8,106,472 2,981

1 to 1,000 724,251 1,424

Total 156,581,954 6,888

Unmarketable Parcels 4,263 151

(b) Substantial holders

Names of the Company’s substantial shareholders and the number of ordinary securities they hold a relevant interest in, as disclosed in the latest substantial holdings notices provided to the Company:

Name of substantial shareholder Name of registered holder(s)Number of

ordinary shares% issued capital

Hunter Hall Investment Management Limited JP Morgan Nominees Australia Limited 11,190,818 9.04

National Australia Bank Limited MLC Investments Limited 8,137,722 5.02

NABInvest Managed Investments Limited

MLC Wealth Management Ltd

National Australia Bank Limited

ASX ADDITIONAL INFORMATION


(c) Twenty Largest Shareholders

Names of M2’s 20 largest shareholders of ordinary shares and the percentage of capital each holds:

Rank Name A/C designation 22 Aug 12 %IC

1 J P Morgan Nominees Australia Limited 27,893,438 17.84%

2 HSBC Custody Nominees (Australia) Limited 11,441,821 7.32%

3 National Nominees Limited 10,889,577 6.96%

4 BNP Paribas Noms Pty Ltd <MASTER CUST DRP> 8,352,182 5.34%

5 UBS Wealth Management Australia Nominees Pty Ltd 5,087,984 3.25%

6 Mr Vaughan Bowen V G BOWEN FAMILY 4,773,750 3.05%

7 Dennis N Basheer Superannuation Pty Ltd <DENNIS N BASHEER S/F A/C> 4,318,032 2.76%

8 Thirty Fourth Zulu Pty Ltd <HAMILTON SUPERFUND A/C> 2,527,855 1.62%

9 Citicorp Nominees Pty Limited 2,047,963 1.31%

10 Citicorp Nominees Pty Limited <COLONIAL FIRST STATE INV A/C> 1,760,394 1.13%

11 AMP Life Limited 1,664,083 1.06%

12 Wicks Group Pty Ltd <WICKS FAMILY A/C> 1,365,540 0.87%

13 Mr Vaughan Garfield Bowen & Mrs Carolina Nunn <BOWEN FAMILY SUPER FUND A/C> 1,185,338 0.76%

14 Emtel Pty Ltd 1,100,000 0.70%

15 Wyatt Pty Ltd 1,000,000 0.64%

16 Hyland Securities Pty Ltd <THE HYLAND A/C> 920,000 0.59%

17 Reven Pty Limited <FAYE HAMILTON-HAMILTON FAMILYA/C> 890,389 0.57%

18Mr Edmond Wing Kin Cheung & Mrs Eliza Siu Ling Cheung

<EDMOND & ELIZA S/F A/C> 871,842 0.56%

19 Mr Marcello Barbaro 835,750 0.53%

20 Suncorp Custodian Services Pty Limited <SGAEAT> 801,726 0.51%

Total 89,727,664 57.37%

Balance Of Register 66,665,344 42.63%

Grand Total 156,393,008 100.00%

Voting Rights – Ordinary Shares

By virtue of the Company’s Constitution, outlined in clause 10, voting rights for ordinary shares are:

(1) on a show of hands, every Member present, in person or by proxy, attorney or representative, has one vote; and

(2) on a poll every Member has:

(i) one vote for each fully paid share; and

(ii) for each partly paid share held by the Member, a fraction of a vote equivalent to the proportion which the amount paid (not credited) is of the total amounts paid and payable (excluding amounts credited) on the share.

Restricted Securities

There are no restricted securities on issue.

On-Market Buy-Back

There is no on-market share buy-back in operation.


Corporate DireCtory

M2 Telecommunications Group Ltd

ACN 091 575 021 ABN 74 091 575 021

M2 is a publicly listed company, limited by shares. It is incorporated and domiciled in Australia.

REGISTEREd OFFICE

Level 10, 452 Flinders Street Melbourne VIC 3000

Telephone: 03 9674 6555Facsimile: 03 9674 6599Web: www.m2.com.au

STOCK EXCHANGE

Australian Securities Exchange Ltd (ASX) Issuer code: MTU

dIRECTORS

Craig Farrow ChairmanVaughan Bowen Executive DirectorJohn Hynd Non-Executive DirectorMichael Simmons Non-Executive Director

CHIEF EXECUTIVE OFFICER

Geoff Horth

CHIEF FINANCIAL OFFICER

Darryl Inns

COMPANY SECRETARY

Kellie Dean

AUdITOR

Ernst & Young 8 Exhibition Strett Melbourne, VIC 3000

SHARE REGISTRY

Link Market Services Limited Level 4, 333 Collins Street Melbourne, VIC 3000

Telephone: 02 8280 7111 or 1300 554 474 www.linkmarketservices.com.au

Featured on the cover and in our timeline are some of our newly expanded M2 team.Photographers: Santoso Hendradinata, Ron Phrakhoungheaung, Andrew Barnard and John Warren (Warren Photography, www.warrenphotography.com.au)Graphic Design: ADMAD www.admad.com.au

M2 TELECOMMUNICATIONS GROUP LTD

ANNUAL REPORT 2012

M2 TELECOM

MUNICATIONS GROUP LTD ANNUAL REPORT 2012

M2 TELECOMMUNICATIONS GROUP LTD ANNUAL REPORT 2012m2.com.au/media/2193/AnnualReport-2012.pdf ·...

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