Maintel Regulatory News (MAI)

Maintel Holdings Plc

("Maintel", "the Company" or "the Group")

Final audited results for the year to 31 December 2016

Maintel Holdings Plc, the leading systems integrator and managed services provider, is pleased to announce its final results for the 12 month period to 31 December 2016.

Highlights

· Revenue growth of 114% to £108.3m (2015: £50.6m), including £57.8m contribution from Azzurri[1)

· Organic revenue growth of 1%, reflecting positive momentum through the year and a strong second half recovery.

· Increase in recurring revenue to 73% (2015: 69%).

· Group adjusted EBITDA increased 63% to £12.6m (2015: £7.7m), including £4.9m contribution from Azzurri.

· Group adjusted profit before tax increased 52% to £11.1m (2015: £7.3m).

· Adjusted earnings per share [2] of 78.0p (2015: 60.3p).

· Strong cash performance, with operating cash flow of £10.6m (2015: £6.8m) and underlying cash conversion [3] of 104% of adjusted EBITDA.

· Period end net debt [4] of £20.1m, equivalent to 1.6x adjusted EBITDA, comfortably ahead of board expectations.

· Proposed final dividend per share of 17.4p (2015: 16.5p), taking full year dividend per share to 30.8p (2015: 29.3p), an increase of 5%, in line with the stated dividend policy.

Operational Highlights

· Transformational acquisition of Azzurri completed 4 May 2016.

· Pleasing performance post-acquisition with notable contract wins.

· 63% growth in the number of contracted seats on ICON Communicate, our Unified Communications cloud platform.

· Integration progressing well, with £2.2m of synergies realised in the current year and an annualised effect of £5.0m, ahead of stated targets at the time of the transaction.

Key Financial Information

Commenting on the Group's results, Eddie Buxton, CEO, said:

"I am pleased to report a good set of results for Maintel in what has been a very busy year for the Group. The highlight was the acquisition of Azzurri, supported by the robust performance of the core Maintel business in the second half, demonstrating the strength of our diversified product portfolio and our ability to respond to changing market conditions.

The integration of the businesses is largely accomplished with one organisational structure now in place and migration of the business onto one set of systems complete. The Group now goes to market under the Maintel brand with the Azzurri name having been retired in October 2016.

During the year, the organic Maintel business recovered strongly in the second half to report moderate organic growth for the year as a whole. In addition the initial synergies targeted from Azzurri have been greater than expected, allowing us to report stronger cash flow and a lower than expected net debt figure at the period end. "

Outlook:

"The combination of the enlarged customer base and the broader technological platform positions Maintel well for an exciting growth trajectory in the cloud environment and we look forward to 2017 with cautious optimism.

Whilst we continue to focus on bedding down Azzurri, maximising cross sell, new business opportunities and reducing debt levels, the Group is well placed to take advantage of other acquisition opportunities that arise should they complement the existing product set and provide clear value to our shareholders."

Notes

[1] Azzurri Communications Limited (Azzurri) is the principal trading operation for Warden Holdco Limited, which was acquired on 4 May 2016 (note 13).

[2] Adjusted earnings per share is basic earnings per share of 16.0p (2015: 38.0p), adjusted for intangibles amortisation, exceptional costs and deferred tax charges on Datapoint and Azzurri profits (note 11). The weighted average number of shares in the period increased to 13.1m (2015: 10.8m) arising from the equity raise in May 2016 to support the Azzurri acquisition.

[3] Cash conversion is adjusted EBITDA to operating cash flow excluding acquisition costs of £2.5m.

[4] Interest bearing debt (excluding issue costs of debt) minus cash.

[5] Adjusted profit before tax of £11.1m (2015: £7.3m) is basic profit before tax, adjusted for intangibles amortisation and the exceptional costs.

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I am very pleased to report that Maintel delivered a strong financial performance in 2016, with eight months' contribution from Azzurri underpinning a 114% increase in revenues to £108.3m (2015: £50.6m) and adjusted profit before tax increasing by 52% to £11.1m (2015: £7.3m). Adjusted EPS rose by 29% to 78.0p (2015: 60.3p). Cash performance was particularly strong, with operating cash flow of £10.6m (2015: £6.8m) delivered resulting in period end net debt of £20.1m, comfortably ahead of board expectations.

Contracted revenue made up 73% of 2016 revenues (2015: 69%) including the contribution from Azzurri, which brought a higher level of recurring revenue to the Group.

Excluding Azzurri, the Group's core business was able to achieve 1% organic growth year on year, in a highly competitive market. After a softer performance in the first half, the business saw a significant improvement in the second half as we benefited from a number of major contract wins. As a result, revenue in the second half grew by 22% compared to the levels recorded in the first half.

The managed service and technology division delivered a 62% increase in revenue to £64.1m, with managed services revenue up 45% year on year and technology sales up 88%, both benefiting significantly from the contribution from Azzurri. The underlying Maintel business, excluding Azzurri, grew by 4% to £41.2m (2015: £39.6m) aided by strong sales at the end of the first half and in the remainder of the year. These sales were driven by contracts awarded under the government procurement framework and three large private sector client wins.

Gross margin within the division decreased to 33% in the year from 40%, driven by the expected impact of Azzurri and lower margins earned on two major installation projects.

Network services revenue increased by 346% year on year, driven by the contribution from Azzurri. Excluding Azzurri, Maintel's underlying revenue declined by 8% as the Group managed its fixed voice services in the context of a declining market, while proactively migrating customers to the replacement SIP based service. The acquisition of Azzurri has strengthened our offer in this division with ICON Connect, a managed data network service, which delivers secure, reliable and dependable access to essential services monitored 24/7 from our in-house network operations centre.

Mobile revenue increased by 147% to £6.9m again due to the significant contribution from Azzurri, the impact of which also led to an increase in gross margin to 49% (2015: 42%). Gross profit within mobile increased by £2.2m to £3.4m (2015: £1.2m).

We completed the purchase of Azzurri, a highly complementary business, in May 2016. This acquisition enhances the Group's ability to offer a broader range of new services, in particular accelerating our move into cloud based services where we see strong growth. The integration of the business has progressed well, with the Group now migrated onto one set of operating systems and trading under the Maintel brand, the Azzurri name having been retired in October 2016. We have achieved cash synergies of £2.2m during the year, above our initial expectation of £1.9m, and expect annualised synergies of £5.0m for 2017 versus an initial expectation of £4.6m.

This significant acquisition and its successful integration has transformed our business and we are pleased with its performance so far. We continue to monitor the market for further acquisition opportunities, particularly within the managed data and hosted services arena, where we see the most complementarity with our existing business and a robust outlook for growth.

Maintel enjoyed strong cash generation in 2016 with 84% of adjusted EBITDA converted to headline operating cash flow or 104% when restated to exclude exceptional acquisition costs of £2.5m. Net debt stood at £20.1m at year-end, comfortably ahead of board expectations. While increased profits as a result of the contribution from Azzurri were the major factor, we also saw an improvement in working capital, which benefited from a positive impact of £1m of receipts related to overpayments from customers and timing differences on VAT payments.

The board proposes to pay a final dividend of 17.4p per share, resulting in a total ordinary dividend for the year of 30.8p per share (2015: 29.3p per share), an increase of 5% in line with our existing policy. As stated at the time of the acquisition of Azzurri, we expect to grow the dividend by 10% in 2017.

Finally, in what has been a period of significant and exciting change, I would like to welcome new colleagues and express the board's appreciation for the effort and dedication shown by all Maintel employees during the year. 

J D S Booth

Chairman

17 March 2017

This has been a transformational year for the Group following the acquisition of Azzurri, with reported revenues increasing by 114% to £108.3m (2015: £50.6m), and adjusted profit before tax (as described below) increasing by 52% to £11.1m (2015: £7.3m).

The year has benefited from eight months' contribution from Azzurri, which was acquired in May 2016 and as a result contributed £57.8m revenue to the Group results.

Second half momentum in the organic business, pre-Azzurri, has been particularly pleasing. Organic revenue growth of 1% was achieved year on year, with a significant improvement in performance, and a return to growth, in the second half, as delayed contracts came on board.

Adjusted earnings per share (EPS) increased by 29% to 78.0p (2015: 60.3p) based on an increased weighted average number of shares in the period following an equity raise in May 2016 to support the Azzurri acquisition. In addition, the Group benefited from utilisation of various tax reliefs from Azzurri amounting to £0.9m, representing an uplift to EPS of 6.9p.

Excluding exceptional costs, adjusted EBITDA of £12.6m - an increase of 63% over 2015 - was delivered, the rise being mainly due to the contribution from Azzurri.

On an unadjusted basis, the profit before tax decreased by 49% to £2.1m (2015: £4.2m) and basic EPS by 58% to 16.0p (2015: 38.0p). This includes £4.2m of exceptional costs associated with the Azzurri acquisition and related restructuring activities (2015: £0.9m), and intangibles amortisation of £4.7m (2015: £2.2m), the increase in the latter due to the acquired Azzurri intangible.

(a) Adjusted profit before tax after adding back net finance expense and depreciation

(b) After management charges

(c) Adjusted profit after tax divided by weighted average number of shares (note 11)

Strong cash performance

The Group delivered strong operating cash flows in the year, with net cash flows from operating activities of £10.6m (2015: £6.8m) compared to adjusted EBITDA of £12.6m (2015: £7.7m), representing a cash conversion rate of 84% (2015: 88%) or 104% restated to exclude the legal and professional fees relating to the acquisition of Azzurri of £2.5m. The increase was primarily driven by increased profits as a result of the contribution from Azzurri and an improvement in working capital, offset by exceptional costs associated with the acquisition.

In addition, the Group benefited from the timing effect of £1.0m of receipts related to overpayments from customers and timing differences on VAT payments due to a change in Group registration, both of which unwound in January 2017. As a result, the Group ended the year with net debt of £20.1m (2015: £3.2m) or 1.6x (2015: 0.4x) adjusted EBITDA, comfortably ahead of our expectations.

Azzurri

Maintel completed the acquisition of Azzurri on 4 May 2016 for an aggregate cash consideration of £1 and with a commitment that the Company procure the repayment of Azzurri's then existing senior debt and other indebtedness immediately following completion. This equated to an enterprise value for Azzurri of £48.5m. In total £57.8m of revenue and £4.9m of adjusted EBITDA were recognised in 2016 relating to the acquisition.

Azzurri was a transformational acquisition for Maintel, providing additional scale and product capability, with an attractive customer base. The combined Group now has a comprehensive and compelling services portfolio including managed data, mobility and cloud based services. The enlarged Group offering will also allow customers to choose public or private hosted cloud services and will accelerate the shift in business mix to these high growth areas of the market.

Azzurri has performed well since its acquisition by Maintel, and we are pleased with its progress and integration into the Group. As we reported previously, ICON Communicate, Azzurri's cloud unified communications proposition, has seen strong growth and this continued into the second half of 2016 with further wins with a national retailer and a large NHS Trust. Our Skype for Business and Mitel hosted unified communications propositions are well established and our Avaya offering is now ready for service. In 2016 we saw the number of contracted seats grow by 63% over the previous year.

We continue to invest in the business, especially the ICON cloud platform where we have seen an increase in customer demand for greater bandwidth. The launch of a new hosted security as a service proposition has been successful, with three contracts won from a combination of existing and new large customers. We have also extended the scope of the network operations centre in the Burnley facility to provide in house 24/7 customer support to our customers, and added a security operations centre in support of our managed security offering. All customer interactions are now carried out in the UK.

The acquisition of Azzurri has also consolidated the Group's presence and accreditations with its major partners. Maintel now carries the highest levels of accreditation with both Avaya and Mitel, taking a significant position with both of these leading vendors in the UK market.

The Group's mobile offering has also been brought together and is now focussed on the same target market as the unified communications, connectivity and contact centre offers wrapped around the delivery of managed services.

There has been some customer churn in the Azzurri base with two large customers signalling their intent to move; however this is in line with our expectations at the time of acquisition. These contracts will phase out over the next 12 months. It is worth noting that during the period Azzurri's largest recurring revenue customer extended its contract ahead of expectations.

The integration of the business is largely complete, with the Group now managed under one organisational structure and the migration onto one set of systems now complete. The Group now goes to market under the Maintel brand with the Azzurri name having been retired in October 2016.

As a consequence of the acquisition and integration we have seen Group headcount move down from 751 at the acquisition date to 662, a reduction of 12%.

Exceptional costs of £4.2m were incurred by the Group, of which £2.8m of legal and professional fees related to the acquisition and ensuing integration, as detailed in note 12. In addition, as part of the integration process, there have been a number of redundancies across the Group in 2016.

The Group exceeded its original synergy target of £1.9m, delivering savings of £2.2m in the current year with an annualised effect of £5.0m now expected, compared to the previous reported estimate of £4.6m. The exceptional costs associated with realising these synergies in the year amounted to £1.3m, as detailed in note 12. These costs have been disclosed as an exceptional item in the income statement.

Review of operations

Excluding Azzurri, Maintel's revenues, restated to include a full year of its mobile division, amounted to £51.1m or 1% organic growth. As expected we saw improved trading in H2 with revenues increasing by 22% over H1 as the delayed contracts previously reported came on board.

The table below summarises the revenue performance of the three operating segments of the Group. The 2016 numbers include eight months' contribution from Azzurri.

In Q4 2016, as part of the restructuring of the Group, Maintel's mobile division was hived up into Azzurri. The Q4 revenue performance of that division amounted to £0.5m.

(d) Technology includes revenues from hardware, software, professional services and other sales.

(e) Maintel mobile division in 2016 represents 9 months' performance only, with Q4 2016 performance included under Azzurri.

(f) Maintel mobile division for Q4 2016 restated to reflect organic growth.

(g) Azzurri was acquired on 4 May 2016, and therefore 8 months' of its financial performance has been considered post-acquisition.

The level of recurring revenue increased to 73% (2015: 69%), including the eight months' contribution from Azzurri, which as anticipated brought a higher level of recurring revenue to the Group. Azzurri's standalone business was 79% recurring in the period since acquisition.

Overall gross margin for the Group reduced to 32% (2015: 38%) driven predominantly by the lower margin contribution from Azzurri in the period, which was partially offset by the synergies realised through the integration of Azzurri into the Group, the full benefit of which will be seen in 2017. The reduction in gross margin in the managed services and technology division in Maintel is as a result of lower margins earned on some larger high value orders.

Detailed divisional performance is described further below.

The managed services and technology division provides the management, maintenance, service and support of unified communications, contact centre and local area networking technology both on customer premises and from the cloud, across the UK and internationally, on a contracted basis. It also supplies and installs the same technology together with providing professional and consultancy services, both to our direct clients and through our partner relationships.

Revenue in this division increased by 62% to £64.1m, with managed services related revenue up 45% year on year and technology sales up 88%, both benefiting significantly from the contribution from Azzurri.

The underlying Maintel business, excluding Azzurri, grew by 4% to £41.2m (2016: £39.6m) as a strong H2 performance more than offset the slow reported start to the year.

Group gross profit increased by £5.7m compared with 2015, driven by the contribution from Azzurri.

Gross margin within the division decreased to 33% in the period from 40%, driven by the expected impact of Azzurri and lower margins earned on two major installation projects.

Given the application of common resource across both managed service and technology sales, profit breakdown within the division is not provided; however the shared resource cost is monitored closely internally.

Managed services

At the half year, organic managed service revenues (i.e. excluding any contribution from Azzurri), were down 6% year on year due to the delay in signing three multiyear managed services contracts with a total value of over £11.0m. All of these contracts closed successfully at the end of H1. As a result, organic managed service revenues at £12.6m are up 12% on the revenues reported in the first half. The managed service base stood at £25.5m at the year end, up £1.1m or 4.6% on 2015.

We ended 2016 with a strong backlog of orders going into 2017 and a good pipeline of opportunities.

Technology

Excluding Azzurri, the second half showed a strong recovery with growth of 69% over the first half, bringing the full year to £17.3m, a 10% increase on 2015. This was driven by strong sales at the end of H1 and during the remaining part of the year, including a £0.9m project to upgrade a LAN network for a large university, a £1.8m contract for a greenfield data and unified communications roll out for a large construction group and a £1.4m contact centre upgrade for a major utility company.

As with managed services, the backlog of sales moving into 2017 is healthy, in particular under the public sector procurement framework, with two significant customer wins in the healthcare sector for major upgrades of their unified communications infrastructure. We are continuing to see some margin pressure, especially on the larger projects.

We are also starting to see some impact of cloud based opportunities on equipment sales. The pipeline of opportunities is growing and we are well placed with Azzurri's ICON platform to take advantage of this trend.

We are in discussions with a number of large customers about moving their on-premise unified communications infrastructure to the cloud over the next 2 years. This drives the opportunity for a more comprehensive managed service proposition as companies are increasingly moving services to the cloud.

Network services division

The network services division sells a portfolio of connectivity and communications including managed MPLS networks, security as a service, internet access services, SIP, ISDN and PSTN telephony services, inbound call routing services, inbound and outbound telephone calls and hosted IP telephony solutions. These services complement the on-premise and cloud solutions offered by the managed service and technology division and the mobile division's services.

(h) VoIP of £381,000 (2015: £370,000) and inbound calls of £172,000 (2015: £182,000) have been reclassified from Other to Data connectivity services and Call traffic respectively.

Network services revenues increased by 346% year on year, driven by the contribution from Azzurri.

Excluding Azzurri, Maintel revenues declined by 8%, but excluding a one-off £235,000 equipment sale associated with a WAN optimisation project in H1 2015, underlying revenue only declined by 5%. Divisional gross margin increased by 1% to 28% largely due to the H1 2015 equipment sale being at low margin.

The Group manages its fixed voice services in the context of a declining market while proactively migrating customers to the replacement SIP based service. In the year, the number of SIP lines has increased 32%. Overall fixed revenues (calls and line rental) were down 11% year on year to £5.2m as a result of the move to SIP, combined with the on-going market decline.

Data connectivity services revenue primarily consists of MPLS networks, internet access and access circuits to support SIP trunking and hosted telephony services. Data and SIP trunking sales are strong in multiple sectors including health, education and charities and the traction that we are gaining as an official supplier on the public sector framework agreement further enhances our position as a key partner in this sector. Excluding Azzurri, data revenues declined by 3% due to the impact of the one-off equipment sale previously mentioned and the proactive move of new customer opportunities to the ICON connect proposition. Restated, to exclude the one-off sale, data grew by 7% year on year.

Moving forward, the acquisition of Azzurri strengthens our position in this sector with ICON Connect, a managed data network service, which delivers secure, reliable and dependable access to essential services monitored 24/7 from our in-house network operations centre.

Mobile division

Maintel mobile derives its revenue primarily from commissions received under its dealer agreements with Vodafone and O2. and from value added services such as mobile fleet management and mobile device management.

As highlighted earlier in the report, as part of integrating Azzurri, the Group has undertaken a strategic review of its mobile business, resulting in the decision to reduce its presence in the small business space. This reduces the exposure of mobile for the Group and re-focuses our sales activity in line with the other product propositions in the target mid-market sector. As a result, the ongoing exposure to mobile is expected to reduce to under 6% of Group turnover. As part of this review, the Azzurri small business mobile operation in East Kilbride was closed and these customers have now been removed from the Azzurri base.

Mobile revenue increased by 147% to £6.9m due to the significant contribution from Azzurri, the impact of which also drove an increase in gross margin to 49% (2015: 42%).

Gross profit increased by £2.2m to £3.4m (2015: £1.2m).

Maintel's revenue represents only 9 months' activity as operationally the mobile division was merged with Azzurri and fully integrated from this point. Restated to include the £0.5m revenue contribution from Q4 2016, organic Mobile revenue decreased by 21% to £2.2m, partly due to the changes in roaming charges but largely due to the reduction in small business customer acquisition and retention as the Group refocused on mid-market customers.

Whilst the level of new customer additions has been good, we have seen the base consolidate down as we re-focus our proposition on the mid-market. The mobile base of the Group now stands at 51,935 connections of which 88% are on the O2 network.

Other operating income

This comprised a full year rental income of £151,000 (2015: £12,000) generated as a result of sub-letting a part of the new London premises. The sub lease commenced in December 2015, and is expected to generate annual rental income for at least three years.

Administrative expenses, excluding intangibles amortisation and exceptional expenses

(i) Excluding intangibles amortisation, management recharges and exceptional expenses.

Total administrative expenses for the Group increased to £23.1m (2015: £11.5m). Excluding Azzurri, Maintel's costs are in line with 2015 at £11.5m.

Some of Azzurri's inherited costs are now shared across the Group, and so the above figures reflect the costs in respect of the entity to which they are contracted, rather than the entity which obtains the benefit, and as such are indicative only, with a view to showing the control that continues to be exercised over administrative expenses and the more significant movements.

Maintel sales expenses decreased by £0.4m (7%) in the period, partly due to reclassification of the Group sales director to other administrative expenses amounting to £0.2m. The remaining sales expense reduction of £0.2m was primarily driven by lower headcount due to the consolidation and restructuring of the sales force. This was offset by higher commissions on higher sales orders and a change in the commission plan, which had a one-off timing effect of £0.2m.

Maintel's other administrative expenses increased by £0.4m or 9% in the year. Restated to exclude the reclassification of sales personnel, the increase was £0.2m. Part of the increase was due to higher rental costs, taking into account sub lease income derived from our London office, which is classified in other operating income, there was no net increase. Other increases in costs related to accounting for share options (cost £0.1m) and licence costs (£0.1m), which were offset by headcount savings as a result of the restructuring process.

Azzurri administration costs are tightly controlled, with a number of components, particularly premises, benefiting from lower regional costs compared with the London-based costs of most of the rest of the Group. Significant savings have already been delivered during the year as Azzurri has been integrated into the Group, including director costs, sales staff and marketing costs.

Exceptional costs

A breakdown of the exceptional costs of £4.2m (2015: £0.9m) shown in the income statement is provided in note 12, the main elements being the legal and professional fees associated with the acquisition of Azzurri (£2.5m) and redundancy costs incurred primarily on the integration of the Azzurri business (£1.3m).

Intangibles amortisation

The intangibles amortisation charge increased in the year due to the 8 month charge in respect of Azzurri. Impairment and amortisation charges are discussed further below.

Foreign exchange

The Group's reporting currency is sterling; however it trades in other currencies, notably the euro, and has assets and liabilities in those currencies. The euro rate moved from €1.36 = £1 at 31 December 2015 to €1.17 = £1 at 31 December 2016. The effect of this and other movements in the period was a net gain to the income statement of £33,000 (2015: charge of £44,000), which is included in other administrative expenses.

The exchange difference arising on the retranslation at the reporting date of the equity of the Group's Irish subsidiary, whose functional currency is the euro, is recorded in the translation reserve as a separate component of equity, being a charge of £40,000 in the period (2015: gain of £41,000).

Interest

The increase in the net interest charge to £0.9m in the year (2015: £0.3m), reflects the increase in the Group's borrowings to finance the acquisition of Azzurri in May 2016.

Taxation

The consolidated statement of comprehensive income shows a tax charge of £13,000 (2015: £69,000) which results in a tax rate of 0.6% (2015: 1.7%) for the reasons described below. Each of the Group companies is taxed at 20%, other than Maintel International Limited, which is taxed at 12.5% (2015: 20.25%; 12.5%). Certain recurring expenses that are disallowable for tax raise the effective rate above this.

The tax charge in the period benefited from some adjustments, including (a) £0.5m credit to the income statement on a reappraisal of the ability to use Datapoint tax losses and (b) £0.3m credit to the income statement arising from the revaluation of the liability against intangible assets reflecting the impact of reduced future tax rates.

The tax charge includes a deferred tax charge, relating to (a) the tax losses arising from the acquisition of the Datapoint companies, whereby the UK companies do not currently pay corporation tax on their profits and (b) tax losses and unused capital allowance pool arising from the acquisition of Azzurri, whereby a tax asset in respect of the historic losses and unused capital allowances are charged to the income statement as the losses are used.

For the Datapoint companies, the deferred tax charge in the year was £0.5m (2015: £0.5m) in relation to the brought forward losses. In addition there is also a £0.5m deferred tax credit included in the income statement, reflecting an increase in the deferred tax asset, based on the directors' assessment that more tax losses are likely to be useable than was assumed at the date of Datapoint's acquisition.

In relation to Azzurri, the deferred tax charge in the year was £0.6m in relation to the brought forward losses and £0.1m related to capital allowances.

This is described further in note 21.

Dividends and adjusted earnings per share

A second interim dividend for 2015 of 16.5p per share (£1.8m in total) was paid on 5 April 2016.

An interim dividend for 2016 of 13.4p (£1.9m) was paid on 12 October 2016. In line with the board's intention of increasing the dividend per share by 5% for the current financial year, a final dividend of 17.4p per share is proposed. This takes the total dividend payment for 2016 to 30.8p.

In accordance with accounting standards, the final dividend is not accounted for in the financial statements for the period under review as it had not been committed as at 31 December 2016.

The board is pleased to re-iterate its intention to increase the dividend by 10% for the financial year ending 31 December 2017.

Consolidated statement of financial position

Net assets, including Azzurri, increased by £21.7m in the year to £28.2m at 31 December 2016 due to the equity raise, total comprehensive income in the period offset by dividends paid.

Intangible assets at £63.1m, increased by £45.0m, driven by intangibles arising on the acquisition of Azzurri (see note 14).

The net book value of property, plant and equipment has increased by £2.6m to £3.3m (2015: £0.7m) as a result of the acquisition of Azzurri. Included in the acquired assets is a freehold property valued at £1.6m. Post-acquisition, Azzurri incurred £0.4m of expenditure relating to the ICON platform and expanding capacity in its data centre infrastructure. Maintel incurred minimal capital expenditure, with its tangible asset value remaining in line with the year end 2015 balance at £0.7m.

Trade receivables increased by £10.2m in the year to £17.3m with £9.7m attributable to Azzurri. Excluding Azzurri, the increase of £0.5m is due to the net effect of a number of phasing differences in both technology and managed service invoicing spanning the year end.

Prepayments and accrued income increased by £7.7m to £11.6m. Excluding Azzurri the increase was £0.7m, most of this being driven by several large projects in progress at year end and an increase in commissions resulting from higher sales in the second half of the year.

Inventories are valued at £4.9m, an increase of £3.6m in the year, with Azzurri contributing £3.3m. Excluding Azzurri, Maintel inventories have increased by £0.3m, to £1.6m. The value of stock held for resale increased by £0.6m due to the timing of customer deliveries, offset by provisioning which continues to be applied to older maintenance stock driving a reduction of £0.3m.

Trade payables have increased by £4.8m since 31 December 2015 to £9.9m (2015: £5.1m). Excluding Azzurri, trade payables have decreased by £2.0m with a number of different supplier and delivery timing factors affecting the balance.

Other tax and social security liability has increased by £3.0m, with £2.7m attributable to Azzurri. Excluding Azzurri, the other tax and social liability for Maintel increased by £0.3m, the VAT liability being higher due to increased Q4 customer invoicing in 2016 (£0.6m) compared to 2015, offset by a slight drop in PAYE/NIC liability due to lower headcount.

Accruals are at £9.2m and excluding Azzurri have increased by £2.0m year on year. The bulk of the increase is attributable to several large projects in progress at the year-end (£1.8m), plus a higher level of bonus accrued (£0.2m).

Other payables are at £4.3m compared to £0.6m in 2015, with Azzurri contributing a balance of £4.0m.The Azzurri balance is driven by the level of hardware funds and cash advances of £2.8m, linked to the mobile business, and property dilapidation provisions of £0.6m.The Maintel balance reduced by £0.3m relating to the mobile division which is now included under Azzurri.

Deferred managed service income has increased to £16.0m, with £6.7m attributable to Azzurri. Excluding Azzurri, the balance has increased by £0.3m, in the main due to invoice timing differences and to a lesser extent the increase in size of the customer base.

Other deferred income has increased by £5.3m to £6.0m, with £5.6m attributable to Azzurri. The Azzurri balance is made up of deferred amounts associated with the recurring mobile and data revenue streams. The Maintel balance reduced by £0.3m due to invoice timing differences.

Corporation tax liabilities have increased by £0.2m to £0.5m (2015: £0.3m) driven by a lower proportion of profit emanating from the Datapoint companies with their associated historical tax losses and the settlement of 2015 tax liability of £0.3m.The effect of the additional taxable profit emanating from Azzurri has been offset by the utilisation of its historical tax losses and unused capital allowances.

The deferred tax liability has increased by £1.2m to £2.0m (2015: £0.8m). This is partly due to the creation of a net deferred tax liability of £1.7m associated with the intangibles acquired of £4.3m, offset by an asset of £2.6m associated with unused capital allowances and other tax losses of Azzurri.

The remaining movement of £0.5m in the year is due to the application of £1.1m of deferred tax assets relating to both Datapoint and Azzurri profits in the year, and £0.1m deferred tax arising on capital expenditure, net of the following credits to the income statement: (a) £0.9m relating to the intangibles amortisation charge as shown in note 21, (b) £0.3m relating to the revaluation of the liability associated with intangible assets, and (c) £0.5m additional asset established in relation to the projected use of Datapoint tax losses.

Intangible assets

The Group has five intangible asset categories covering customer contracts and relationships acquired from third party companies, brand, product platforms, software and goodwill relating to those acquisitions.

The intangible assets represented by purchased customer contracts and relationships, brand value, product platforms and software were carried at £27.0m at the period end (2015: £8.3m). The intangible assets are subject to an amortisation charge of 18% of cost per annum in respect of the managed service and technology division, 13% per annum in respect of the network services division and 16% per annum in respect of mobile customer relationships, with £4.7m being amortised in 2016 (2015: £2.2m), the increase being attributable to the Azzurri intangibles acquired in May 2016.

Goodwill of £36.1m (2015: £9.9m) is carried in the consolidated statement of financial position, which is subject to an impairment test at each reporting date. The increase of £26.2m is as a result of the Azzurri acquisition. No impairment has been charged to the consolidated statement of comprehensive income in 2016 (2015: £Nil).

Property

Following the acquisition of Azzurri, the Group benefits from a freehold property in Burnley valued at £1.6m, two main additional property leases for offices located in Weybridge and Aldridge and a smaller serviced office in Fareham. The Burnley property serves as the central warehouse facility and core back office operations are also based here.

As reported last year, Maintel completed its move from its long-term headquarters at Webber Street at the end of 2015 to a new location at 160 Blackfriars Road. The short term lease in the Webber Street premises, entered into to accommodate the Group's London stores operation, was terminated in October, with the stores being relocated to the Burnley warehouse facility, delivering a saving of approximately £0.1m per annum.

As part of management's review and consolidation of its property locations, in March 2017 the lease of the Weybridge property was assigned to a new tenant and Maintel has sub let a much reduced space. The termination date of the sub lease is in line with the existing lease, June 2019, and contains a break clause that could be exercised in September 2018. The estimated saving over the remaining term of the lease is approximately £1.0m.

Cash flow

The Group had net debt of £20.1m, excluding issue costs of debt, at 31 December 2016 (2015: £3.2m), equating to a net debt: adjusted EBITDA ratio of 1.6x (2015: 0.4x). Excluding £1.0m relating to one-off timing differences, as noted earlier in the strategic report, the restated ratio is 1.7x.

An explanation of the £16.9m increase in net debt is provided below.

The Group generated £13.3m of cash from operating activities excluding acquisition costs of £2.5m, with a £2.4m positive working capital impact in the period (2015: £1.0m). This was underpinned by a high cash conversion rate of 104% of operating cash flow, excluding acquisition costs of £2.5m, compared to adjusted EBITDA. As mentioned earlier in the report, working capital benefited from one-off timing effects amounting to £1.0m which unwound in January 2017.

The Group incurred exceptional costs of £4.2m during 2016 (2015: £0.9m), covering primarily acquisition, restructuring and redundancy costs associated with the Azzurri acquisition (described above and in note 12).The net effect of the equity raised and new borrowing facilities associated with the acquisition of Azzurri together with repaying existing borrowing facilities, acquisition related costs and settlement of the 2015 second interim dividend consumed £3.8m in cash and cash equivalents.

The increase in the net debt position compared with December 2015 is a result of the borrowings acquired in May 2016 to fund the acquisition of Azzurri.

Further details of the Group's RCF and overdraft facility are given in note 20.

The Group's objective is to maximise shareholder returns over the short, medium and long term through providing communication solutions to mid-market and enterprise businesses either on-premise or cloud-based.

Maintel has long lasting relationships and retains the highest level of accreditations with its core vendors. With more than 20 years' experience, Maintel specialises in combining the skills and technologies from its vendors with the capabilities of its in-house experts to provide complete end-to-end solutions to its customers. Its technology portfolio encompasses unified communications, contact centre, workforce optimisation, networking and security, mobile and connectivity services for mid-market and enterprise businesses in the private and public sector.

The Group has moved towards increasing its exposure to managed services and technology and professional services which are of a higher recurring revenue nature, and to embracing current high-growth services such as cloud, hosting and network security, all delivered within a managed service. There is a progression from legacy services (e.g. traditional calls and lines) into these higher value products and services. The Group has a high level of recurring revenue, at 73%. The Company's customer contracts are typically multiyear on a rolling renewal basis.

While the majority of services are provided in the UK, the Group also services a range of customers overseas. The Group's Irish subsidiary is well established, trades in euros and operates from offices in Dublin servicing multinational companies that trade across Europe. The Irish subsidiary is seen as a benefit in the current uncertain environment created by the UK's decision to leave the EU.

The Group has a contracted customer base of £80m per annum and there is considerable scope to cross-sell the broader portfolio into this base. The managed services base in particular provides opportunity to sell local and wide area networking services, managed security, additional equipment and professional services, and also to transition that base from on-premise to cloud based solutions. The Group combines these revenue streams into a single business unit.

Organic growth is targeted in each financial year, and will be supplemented by the acquisition of complementary companies or client bases where clear shareholder value can be created. Acquisitions may be funded out of cashflow, borrowings or the issue of shares, dependent on a range of factors considered at the time. Targeted acquisitions will also bring extended capabilities, such as cloud based services or enhanced contact centre expertise.

Principal risks and uncertainties

The directors consider that the principal risks to the Group relate to technological advance, marketplace relationships, pricing strategies and integration risk. Some risks may be unknown to the Group and others may be more, or less, material than currently envisaged by the directors, and so the following may not give a comprehensive view of all the risks and uncertainties affecting the business.

Telecommunications hardware continues to be replaced by telecommunications software offering services that extend the traditional PBX capability towards unified communications and collaboration. This continues a trend that started 15 years ago with the transition from proprietary signalling to the use of existing IP networks, and the trend is now underway for customers to transition their traditional on-premise deployments to hosted and cloud services.

Maintel is well positioned to capitalise on that change, having invested in the skills of its people and in adding capability through a number of acquisitions in recent years. In particular, the acquisition of Azzurri in 2016 brought with it strong capability in unified communications as a service, cloud and managed services.

Offering these cloud services places a responsibility on the Group to ensure the continuous operations of the platforms from which they are delivered. Investment during the previous year in additional data centre and network capacity now means that the whole of the ICON platform is fully resilient and capable of withstanding catastrophic failure in any of the core data centres. The platform, and the networks that support it, are monitored 24/7 by the in house network operations centre for rapid response to any outage.

We have also invested in our product development function, under the direction of the Chief technology and strategy officer, to ensure that the product portfolio is competitively positioned and anticipates technological change. We regularly discuss product roadmaps and initiatives with analyst houses to test our assumptions with respected third parties, and maintain strong networks with the consultant and vendor communities.

We have also sought to protect our high levels of recurring revenues by offering increasingly differentiated and value added services to our clients, enabling them to transfer responsibility for the management of their core communications platforms to us, including the inherent risk. We have developed a comprehensive set of managed service offers including managed cyber security, PCI compliance and system and mobile fleet management that ensure our service offerings remain relevant and compelling.

In telecommunications, regulation plays a key role in the setting of prices and tariffs, particularly in the mobile area. To that end, we have reduced our dependency on revenue from mobile voice and data services, replacing it with cloud and managed service revenues. In addition to regulatory activity, fixed and mobile pricing and margins can also be impacted by the activities of both competitors and suppliers. We mitigate these risks by assessing anticipated regulatory and technology change and its impact on pricing strategies, amending our own pricing policies accordingly. We also continue to maintain multiple supplier relationships across both the fixed and mobile sector, to ensure we have access to competitive services. In telecommunications, we continue to see the transition from traditional PSTN and ISDN services towards SIP, a migration we consider increases value for the Company.

One of the Group's principal vendor relationships is with Avaya, whose parent company is currently restructuring its debt through a filing which provides protection under the bankruptcy provisions of Chapter 11 in the US. During this process we are continuing to receive support from Avaya while they operate as business as usual, but remain well balanced in terms of portfolio should there be a dip in sales of the Avaya product range while they go through the restructuring process.

The Group has close partner relationships with organisations such as O2/Telefonica and Vodafone, such that these companies and their clients constitute a significant share of its managed service base. Should these relationships be terminated, the managed service base would reduce to that extent over a period of time, necessitating a commensurate reduction in costs. Partnerships with other integrators continue to be developed to reduce the percentage weighting of business with these partners.

The Group's managed service contracts have a natural finite life, and are subject to competitive attack, so that there is inevitable customer churn. The directors monitor the rate and causes of churn and implement strategies with the objective of minimising attrition and growing the customer base organically and by way of acquisition if cost effective.

The Group has stated that it will acquire suitable companies which fit certain criteria, and recognises that there is a risk of operational disturbance in the course of integrating acquired companies into the Group's existing operations. The Group mitigates this risk by way of due diligence and detailed planning involving senior management, drawing on the experience of previous acquisitions.

Outlook

2016 was a transformational and successful year for Maintel. Our organic achievements were complemented by the Azzurri acquisition, which has delivered significant value, both financially and strategically, as it has accelerated our move into cloud and hosted managed services.

After a slow H1 we have seen encouraging and improving levels of new business, and we finished FY 2016 with a record Q4 in terms of business signed.

Whilst the Group currently remains focused on bedding down the integration of Azzurri, maximising the cross sell and new business opportunities and reducing debt levels, it will continue to be opportunistic in regards to acquisitions. The main focus remains on strategic acquisitions that complement the existing product set and provide clear value to our shareholders. The Group is well placed to take advantage of opportunities as they arise.

We go into 2017 with an encouraging pipeline of signed and unsigned business. The first weeks of the year show that the momentum carried through from the fourth quarter has been maintained and the board is confident that the business will meet market expectations for 2017.

The continued financial strength of the Group has enabled the board to declare a final dividend of 17.4p per share resulting in a total dividend for the year of 30.8p per share, an increase of 5% over the previous year. The Board's intention is to grow the dividend progressively and by a further 10% in the next financial year.

On behalf of the board

E Buxton

Chief executive

17 March 2017

A description of the main governance policies and procedures adopted by the Group is set out below.

Board of directors

The Group is led by an effective board which comprises five executive directors and three non-executive directors, the latter being John Booth, who is chairman, Annette Nabavi and Nicholas Taylor. The chairman is responsible for the effective running of the board, which reviews its effectiveness on an ongoing basis. The chief executive is ultimately responsible for all operational matters and the financial performance of the Group. Mrs Nabavi is the senior independent director.

Other than in respect of Mr Booth's and Mr Taylor's shareholdings in the Company, the non-executive directors are independent of management and are free from any business or other relationship which could materially interfere with the exercise of their independent judgement. During 2016 Anchusa Consulting Limited, a company owned by Mrs Nabavi, and Hopton Hill Limited, a company owned by Mr Taylor, provided consultancy support related to the acquisition of Azzurri; however, given the limited nature of these engagements, the board does not consider it to have compromised their independence.

The board is satisfied that each of the non-executive directors commits sufficient time to the fulfilment of their duties as a director of the Company.

The executive directors are Eddie Buxton who is Chief executive, Stuart Legg (Group sales and marketing director), Kevin Stevens (Group integration and transformation director), Mark Townsend (Chief financial officer) and Angus McCaffery who has responsibility for business development.

The board meets regularly, normally monthly, and both reviews operations and assesses future strategy for the operating subsidiaries and for the Group as a whole. It operates to a schedule of matters specifically reserved for its decision.

During the year, the Chairman also held meetings with the other non-executive directors in the absence of the executive directors, and with the CEO in the absence of the other non-executive directors. Mrs Nabavi and Mr Taylor also met in the absence of the Chairman.

Although not required to retire this year in accordance with the articles, corporate governance guidance recommends that non-executive directors with more than 9 years' service are re-elected annually, and John Booth and Nicholas Taylor, having been directors since 1996 and 2006 respectively, offer themselves for re-election. The board's view is that both directors bring a valuable external contribution to the board, remain independent and are able effectively to challenge as well as support the executive directors.

The Company has purchased insurance to cover its directors and officers against any costs they may incur in defending themselves in any legal proceedings instigated against them as a direct result of duties carried out on behalf of the Company. The insurance does not provide cover in the event that a director is proved to have acted fraudulently or dishonestly.

The directors are able to seek independent professional advice as necessary, for the furtherance of their duties, at the Company's expense within designated financial limits.

The following committees deal with specific aspects of the Group's affairs:

Audit committee

Membership of the Audit committee is restricted to non-executive directors and comprises Nicholas Taylor (Chairman), John Booth and Annette Nabavi.

The board is satisfied that for the year under review and thereafter Mr Taylor has adequate recent and relevant commercial and financial knowledge and experience to chair the committee; it also considers that Mrs Nabavi and Mr Booth have such knowledge and experience.

The remit of the committee is to:

· consider the continued appointment of the external auditors, and their fees, terms of engagement and independence, including the appointment of the auditors to undertake non-audit work;

· liaise with the external auditors in relation to the nature and scope of the audit;

· review the form and content of the financial statements and any other financial announcements issued by the Group;

· review any comments and recommendations received from the external auditors and considers any other matters which might have a financial impact on the Group;

· review the Group's statements on internal control systems and the policies and processes for identifying and assessing business risks and the management of those risks by the Group.

The audit committee convenes at least twice a year to review the 6 monthly and annual financial statements.

Attendees at committee meetings held in 2016 included: Chief financial officer, Chief executive officer, Group financial controller and representatives of the external auditors. All of these attended at the invitation of the chairman of the committee.

In 2016 it also liaised informally with the executive directors in relation to published financial information, the Azzurri acquisition and other audit-related matters. Nicholas Taylor and Annette Nabavi also met separately with the external auditors in the absence of executive management.

The principal issues addressed by the committee during the year were:

· the external auditors' year-end report for 2015, the review of the Group's preliminary results in 2016 and the disclosures in the 2015 annual report;

· the external audit plan for the 2016 financial statements which included a review of the audit objectives, scope, timetable and deliverables;

· accounting matters and compliance with IFRS 3 (Business combinations) associated with the acquisition of Azzurri;

· the re-appointment of BDO LLP as external auditors, their independence and objectivity and their fees;

· consideration of the external auditors' observations on the internal financial controls arising from their annual audit.

BDO LLP is retained to perform audit and audit-related work for the Group. The committee monitors the nature and extent of non-audit work undertaken by the auditors, including reviewing the letter of independence provided by the auditors annually which includes details of audit and non-audit work undertaken. The committee is satisfied that there are adequate controls in place to ensure auditor independence and objectivity. Details of audit and non-audit fees for the period under review are shown in note 7 of the financial statements.

Remuneration committee

Annette Nabavi is chair of the remuneration committee, its other members being John Booth and Nicholas Taylor. The committee met four times during the year. The committee's report to shareholders on directors' remuneration is set out below.

Nomination committee

The nomination committee had two members during 2016, both non-executive, being John Booth, chairman, and Nicholas Taylor. The committee meets as required and met twice in 2016, Annette Nabavi also attending each meeting by invitation. Its terms of reference include:

· reviewing the structure, size and composition of the board;

· identifying and nominating suitable candidates to fill vacancies on the board.

Board attendances

The following table shows the attendance of the directors at meetings of the board and the Audit, Remuneration and Nomination committees during the year.

In addition to the regular monthly meetings, additional meetings were held during the year relating to the acquisition of Azzurri and the transfer of investments in subsidiaries between Group companies. D Todd resigned as a director in April 2016 and Stuart Legg and Mark Townsend were appointed in April 2016.

Conflicts of interest

The Group has established procedures for the disclosure and review of any conflicts, or potential conflicts, of interest which the directors may have and for the authorisation of such conflict matters by the board. The board considers that these procedures are operating effectively.

Relationship with shareholders

The Chairman's statement and the Strategic report above include a detailed review of the business and future developments.

In addition to regular financial reporting, significant matters relating to trading or development of the business are released to the market by way of Stock Exchange announcements as required.

The directors meet with institutional and other shareholders when possible, usually following the announcement of the Company's results, to keep them informed about the performance and objectives of the business. Annette Nabavi also attended certain shareholder meetings during 2016, representing the non-executive directors, to better understand the shareholders' views and to ensure there is an independent channel for their views, should that be necessary.

The annual general meeting provides a further forum for shareholders to communicate with the board. Details of resolutions to be proposed at the annual general meeting are set out in the notice of meeting.

Internal control

The board is ultimately responsible for the Group's systems of internal control, and for reviewing their effectiveness. Such systems can provide reasonable, but not absolute, assurance against material misstatement or loss. The board believes that the Group has internal control systems in place appropriate to the size and nature of its business.

The directors do not consider that an internal audit function is required, given the size and nature of the business at this time. This situation is reviewed annually.

The Group maintains a comprehensive process of financial reporting. The annual budget is reviewed and approved by the board before being formally adopted, following which the board receives at least monthly financial reports of the Group's performance compared to the budget, with explanations of significant variances. Monthly cash flow forecasts are provided to the board, as are budget reforecasts if deemed appropriate.

The executive directors monitor key performance indicators on a monthly basis, management of these being delegated to the Group's senior management.

The board undertakes a rolling review of known and potential risks, and addresses newly identified risks as they arise, with controls put in place to minimise their potential effect on the Group.

The key operational functions of the Group are subject to processes established and externally audited under ISO9001, ISO20000, ISO18001 and ISO27001, which the directors consider to be a valuable additional internal and external control tool of the business.

Operating control

Each executive director has defined responsibility for specific aspects of the Group's operations. The executive directors, together with key senior executives, meet regularly - both at weekly management and monthly operational board meetings - to discuss day-to-day operational matters.

Investment appraisal

Capital expenditure is controlled via the budgetary process, the budget being approved by the board. Expenditure is approved as required by the chief executive. Acquisitions and significant unbudgeted capital expenditure are reviewed by the board as they arise.

Risk management

The board is responsible for identifying the major business risks faced by the Group and for determining the appropriate course of action to manage these risks. The Group's approach to financial risk management is further explained in note 22 to the financial statements.

Going concern

The Group has a sound financial record including strong operating cash flows derived from a substantial level of recurring revenue across a range of sectors and as a consequence, and after reviewing cash balances, borrowing facilities and projected cash flows, the directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the financial statements.

Scope of the report

The remuneration report summarises the remuneration committee's activities during the year, the outcomes for directors' remuneration and the Group's remuneration policy. The report also describes how the Group applies the principles of good corporate governance in relation to directors' remuneration.

The remuneration committee

The remuneration committee is appointed by the board and comprises only non-executive directors. The committee meets regularly to determine, on behalf of the board, the framework of executive remuneration.

During the year, the membership of the committee comprised three non-executive directors, Annette Nabavi (chairman), John Booth and Nicholas Taylor.

The committee's terms of reference are approved by the board. These are available for inspection at the Group's registered address. The members of this committee do not have any conflicts from cross-directorships that relate to the business of the committee. The members do not have any day to day involvement in the running of the Group.

The remuneration committee's remit is to measure the performance of, and determine remuneration policy relating to directors and senior employees. To support this responsibility it has access to professional and other advice external to the Group. Taking these factors into account, it then makes recommendations to the board.

During the year the committee met on four occasions.

To assist the work of the committee, the views of the chief executive officer are also invited where appropriate. However, he does not participate in any decision related to his own remuneration.

Remuneration policy

The Group is committed to the governing objective of maximising shareholder value over time. Each year the remuneration framework and the packages of the directors are reviewed to ensure they continue to achieve this objective.

The Group operates in large competitive markets with areas of significant growth potential. The Group's executive director remuneration policy is designed to attract and retain directors of the calibre required to maintain the Group's position in its marketplace.

The key features of remuneration and the policy for each element of the packages for executive directors are shown in the table below:

Eddie Buxton, Mark Townsend, Stuart Legg and Kevin Stevens have been granted share options, details of which are shown below.

Directors' service agreements

Executive directors' service agreements, which include details of remuneration, will be available for inspection at the annual general meeting. Each executive director has a six month rolling service agreement.

Non-executive directors

John Booth and Nicholas Taylor each have a 3 month rolling contract. Annette Nabavi has a contract which expires in normal circumstances on 26 June 2017 but which is terminable on 3 months' notice.

The remuneration of the non-executive directors is agreed by the executive directors, and is based upon the level of fees paid at comparable companies and taking account of the directors' evolving responsibilities. Taking these factors into account, the remuneration of the non-executive directors was reviewed in 1 February 2017. The non-executives receive no payment or benefits other than their fees and associated auto-enrolment pension contributions, although Mrs Nabavi and Mr Taylor were beneficiaries of consultancy fees during the year as described below (2015: Mrs Nabavi and Mr Taylor).

Directors remuneration

The remuneration of the directors in office during the year was as follows:

(1) Excluding social security costs in respect of the above amounting to £152,000 (2015: £102,000), and excluding gains on the exercise of share options in the year of £Nil (2015: £291,000).

(2) Total 2015 remuneration of £846,000 includes bonuses of £27,000, employer pension contributions of £20,000 and benefits of £56,000, so that salaries amounted to £743,000.

(3) In 2016, Proximity Communications Ltd paid £13,000 (2015: £64,000) to a company of which Mr Boyce is a shareholder and director in respect of consultancy services provided to Proximity following its acquisition.

(4) In addition to her fees as a director stated above, the Company paid £57,000 (2015: £11,000) to a company of which Mrs Nabavi is a shareholder and director in respect of consultancy services provided to the Company during the year.

(5) In 2016, in addition to his fees as a director stated above, the Company paid £61,000 (2015: £20,000) to a company of which Mr Taylor is a shareholder and director in respect of consultancy services provided to the Company during that year.

The directors are the only employees of the Company.

Directors' interests in ordinary shares

The directors' interests in the ordinary shares of the Company are shown in the report of the directors below. These include holdings under the Company's Share Incentive Plan, to which all of the executive directors subscribe.

Share options

On 18 May 2009 the directors of the Company approved the adoption of the Maintel Holdings Plc 2009 Option Plan. The following options remain outstanding under the Plan:

All options have vested.

On 20 August 2015 the directors of the Company approved the adoption of the Maintel 2015 Long-Term Incentive Plan. The following options remain outstanding under the Plan:

These options will vest on 27 April 2019 and may be exercised from that date; they are not subject to any performance conditions.

(1) Full vesting for the LTIP grants made to Stuart Legg is subject to three performance conditions being satisfied: (a) a minimum EPS growth in the period before the option vests, and (b) The Company's EV/EBITDA ratio being in excess of its peer group for the majority of the 6 months prior to the option vesting, and (c) achievement of the Group sales target as set in the budget agreed by the board each year.

(2) In the case of Kevin Stevens, full vesting is subject to the achievement of a minimum level of synergies achieved following the acquisition of Azzurri.

(3) In the case of Mark Townsend, full vesting is subject to two performance conditions being satisfied:

(a) a minimum EPS growth in the period before the option vests, and (b) the Company's EV/EBITDA ratio being in excess of its peer group for the majority of the 6 months prior to the option vesting.

If the performance conditions are not fully satisfied at the end of the vesting date, then the options will vest proportionately against the achievement of certain threshold criteria; any portion that has not vested as a consequence of the performance conditions not being satisfied in full or on a threshold basis will lapse.

The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in, share options during the year:

The Company's mid-market share price at 31 December 2016 was 887.5p per share, and the high and low prices during the year were 1130p and 692.5p respectively.

In 2006 the Company established the Maintel Holdings Plc Share Incentive Plan ("SIP"), which was updated in 2016. The SIP is open to all employees with at least 6 months' continuous service with a Group company, and allows employees and executive directors to subscribe for existing shares in the Company at open market price out of their gross salary. The subscribers own the shares from the date of purchase, but must continue to be employed by a Group company and hold their shares within the SIP for 5 years to benefit from the full tax benefits of the plan. At 31 December 2016 there were 62,151 shares held by the SIP, representing 0.4% of the issued share capital of the Company (2015: 86,670 and 0.8%).

The report of the remuneration committee was approved by the board on 17 March 2017.

A P Nabavi

Chair of the remuneration committee

Report of the directors

for the year ended 31 December 2016

The directors present their annual report together with the audited financial statements for the year ended 31 December 2016.

Results and dividends

The consolidated statement of comprehensive income is set out below and shows the profit of the Group for the year.

During the year the Company paid a second interim dividend of 16.5p per ordinary share in respect of the 2015 financial year, amounting to £1.777m (2014: 11.6p, amounting to £1.243m), and an interim dividend in respect of 2016 of 13.4p per share, amounting to £1.902m (2015: 12.8p and £1.378m respectively). A final dividend for 2016 is proposed of 17.4p per share with a payment date of 18 May 2017.

Directors

The directors of the Company as at 31 December 2016 and their interests in the ordinary shares of the Company at that date were as follows:

John Booth's shareholding includes 4,000 shares inherited by a charitable foundation controlled by him. He is also a shareholder in Herald Investment Trust plc which has an interest in 804,217 1p ordinary shares in the Company; this is in addition to Mr Booth's beneficial holding above.

The non-beneficial holdings above relate to holdings of the Share Incentive Plan, of which the respective directors are trustees.

Since the year-end, the Share Incentive Plan has acquired a net increased holding of 1,374 shares in total, including 178 in respect of E Buxton, 30 in respect of S Legg and 31 in respect of K Stevens. There were no other changes in the directors' shareholdings between 31 December 2016 and 17 March 2017.

In addition to the directors' shareholdings, at 17 March 2017 the Company had been notified of the following shareholdings of 3% or more in the ordinary share capital of the Company:

Details of the share capital of the Company are shown in note 23 of the financial statements.

3,428,572 shares were issued in the year in relation to the acquisition of Azzurri; no shares were repurchased during the year.

The existing authority for the repurchase of the Company's shares is for the purchase of up to 1,614,196 shares. A fresh authority, for the purchase of up to 2,128,139 shares, will be sought at the forthcoming annual general meeting.

Employees

Maintel's success is dependent on the knowledge, experience and motivation of its employees, and so on the attraction and retention of those staff. The Group offers competitive compensation packages, including bonus structures where appropriate, to align employee interest with that of the Group. The Group's management ensures that there is continual investment in external and internal training of employees, and monitors compliance with both statutory regulation and best practice with regard to equal opportunities.

The Group gives full and fair consideration to applications for employment from disabled persons, having regard to their particular aptitudes and abilities and to their training and career development. This includes, where applicable and possible, the retraining and retention of staff who become disabled during their employment.

Periodic updates are distributed to employees, and a Group intranet is core to open communication amongst employees; this continues to be developed.

The Company established a Share Incentive Plan in 2006, allowing employees and executive directors to invest tax effectively in its shares, and so aligning employee interests with those of shareholders. This has now been extended to all employees joining from Azzurri. Under the plan, shares are acquired by employees out of pre-tax salary, with ownership vesting at that time, and are held by trustees on behalf of the employees. The plan is therefore separate from the assets of the Group.

The Group acknowledges its responsibilities to environmental matters and where practicable adopts environmentally sound policies in its working practices, such as recycling paper and packaging waste and using specialist recyclers of scrap telecommunications and IT equipment. A major consideration when replacing company cars is their impact on the environment. The Group also makes use of in-house video-conferencing facilities to reduce the need for regional meetings. The Group has ISO14001:2004 accreditation for its environmental management systems.

Modern Slavery Act policy

The Modern Slavery Act became law in 2015. The Act consolidates slavery and trafficking offences and introduces tough penalties and sentencing for breaches of the Act.

The Group has a zero-tolerance approach to modern slavery and will not knowingly support or deal with any business which is involved in slavery and/or human trafficking.

This policy reflects our commitment to maintaining ethical practices in all of our supply chains and across all of our business, and as part of this commitment we are undertaking various steps to help us manage the risks outlined by this legislation. These steps are detailed in our modern slavery statement and, as required by the act, will be published annually on our website at www.maintel.co.uk/legal/policies.

Financial instruments

Details of the use of financial instruments by the Group are contained in note 22 of the financial statements.

The Annual General Meeting of the Company will be held at its London offices on 15 May at 10.00am.

All of the current directors have taken all the steps that they ought to have taken to make themselves aware of any information needed by the Company's auditors for the purposes of their audit and to ensure that the auditors are aware of that information. The directors are not aware of any relevant audit information of which the auditors are unaware.

A resolution proposing the re-appointment of BDO LLP as auditors of the Company will be proposed at the forthcoming annual general meeting.

On behalf of the board

E Buxton

Director

17 March 2017

Statement of directors' responsibilities

Directors' responsibilities

The directors are responsible for preparing the annual report and financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and the Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards) and applicable law. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss of the Group for that period. The directors are also required to prepare financial statements in accordance with the rules of the London Stock Exchange for companies trading securities on the Alternative Investment Market.

In preparing these financial statements, the directors are required to:

· select suitable accounting policies and then apply them consistently;

· make judgements and accounting estimates that are reasonable and prudent;

· state whether they have been prepared in accordance with IFRSs as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements;

· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the requirements of the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Website publication

The directors are responsible for ensuring the annual report and the financial statements are made available on a website. Financial statements are published on the Company's website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Company's website is the responsibility of the directors. The directors' responsibility also extends to the ongoing integrity of the financial statements contained therein.

Independent auditors' report

TO THE SHAREHOLDERS OF MAINTEL HOLDINGS PLC

We have audited the financial statements of Maintel Holdings Plc for the year ended 31 December 2016 which comprise the consolidated statement of comprehensive income, the consolidated statement of financial position, the consolidated statement of changes in equity, the consolidated statement of cash flows, the company balance sheet, the company reconciliation of movement in shareholders' funds and the related notes. The financial reporting framework that has been applied in the preparation of the consolidated financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).

This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditors

As explained more fully in the statement of directors' responsibilities, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Financial Reporting Council's (FRC's) Ethical Standards for Auditors.

Scope of the audit of the financial statements

A description of the scope of an audit of financial statements is provided on the FRC's website at www.frc.org.uk/auditscopeukprivate.

Opinion on financial statements

In our opinion:

· the financial statements give a true and fair view of the state of the group's and the parent company's affairs as at 31 December 2016 and of the group's profit for the year then ended;

· the consolidated financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;

· the parent company's financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and

· the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

Opinion on other matters prescribed by the Companies Act 2006

In our opinion, based on the work undertaken in the course of the audit:

· the information given in the strategic report and directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and

· the strategic report and directors' report have been prepared in accordance with applicable legal requirements.

Matters on which we are required to report by exception

In the light of the knowledge and understanding of the group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors' report.

We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

· adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or

· the parent company financial statements are not in agreement with the accounting records and returns; or

· certain disclosures of directors' remuneration specified by law are not made; or

· we have not received all the information and explanations we require for our audit.

Julian Frost (senior statutory auditor)

For and on behalf of BDO LLP, statutory auditor

London

United Kingdom

17 March 2017

BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).

Consolidated statement of comprehensive income

 for the year ended 31 December 2016

The results above for both periods are in respect of continuing operations.

The notes following the consolidated statement of cash flows form part of these consolidated financial statements.

Consolidated statement of financial position

 at 31 December 2016

The consolidated financial statements were approved and authorised for issue by the board on 17 March 2017 and were signed on its behalf by:

M Townsend

Director

The notes following the consolidated statement of cash flows form part of these consolidated financial statements.

Consolidated statement of changes in equity

for the year ended 31 December 2016