GORDON CAPITAL PTY LTD Lvl 9, 440 Collins St, Melbourne, Vic, 3000  Ph: (03) 9607 1371  www.gordoncapital.com.au

ARMIDALE INVESTMENT CORPORATION LIMITED

Active management and new investment opportunities to drive growth

DIRECTORS

KEY POINTS

Bruce Hatchman, Chairman Andrew Grant, Executive Director Mark Smith, Non-Executive Director Steve White, Non-Executive Director

MARKET DATA

ASX Code: Current Price 52 week Share Price Range: Market Capitalisation (listed):

CAPITAL STRUCTURE Shares on Issue:

260.1 million

FINANCIAL SUMMARY Y/E June

AIK $0.115 $0.07 - $0.12 $29.9 million

2013(A)

2014(A)

Net Profit ($m)

11.1

3.7

EPS (c) NTA (c)

6.4 14.2

1.7 14.3

1.8 0.8

6.8 0.8

PER (x) P/NTA (x)

SHAREHOLDERS

GEGM Investments Citicorp Nominees One Managed Investment Funds

SENIOR ANALYST Michael Gordon (03) 9607 1371 February 2015

Gordon Capital Pty Ltd

33.1% 17.1% 5.0%



Armidale is an investment company with interests in the commercial lease finance, telecoms, retail sectors and e-commerce



The strategy is to maximise returns through passive, strategic or active management of its investees and providing funding support for their respective growth strategies.



Over the past three years, the operations, balance sheets and equity structures of its investee companies have been substantially restructured driving a 40% increase in NTA.



NTA is the key valuation metric – currently at a substantial premium to the share price.



Reported profit is very volatile due to the impact of valuation gains and does not relate to the underlying performance of the businesses in which it has invested.



Valuation and NTA ultimately reflects the embedded profit in the lease book and the sustainable profit of the operating businesses of its investee companies.



Written lease volume doubled in FY 2014 and the book is on track to double in size over the next two years which will deliver considerable additional value to Armidale.



Armidale is largely debt free and raises capital to invest in loans and equity in its investee companies and new investments.



Now seeking to leverage its operating and technical experience in key sectors to identify new investment opportunities.

Page 1 of 14

INVESTMENT PROPOSITION Armidale Investment Corporation has a relatively small portfolio of interests and may be characterised as operating more as a holding company and private equity investor rather than as a traditional fund manager. Its interests cover some diverse business activities including lease finance, telecoms sales channels and retail, which provide sound opportunities for growth and income generation. Over the past three years, the Armidale management team has undertaken major restructuring of the operations, balance sheets and equity structures of its core investments, returning them to profitability and thereby driving a substantial increase in their valuations. As Armidale is structured as an investment company, its primary valuation metric is NTA which is currently 19% above its current share price. Further, a recently published independent experts report concluded that the NTA was at the lower end of its valuation. Armidale is now seeking to leverage its operating and technical experience in key

sectors (finance, telecommunications/technology and retail) to identify new investment opportunities. Armidale’s share price has consistently traded at a substantial discount to NTA due to poor visibility of the underlying investments and a lack of transparency regarding their performance and business profiles. This is now changing as management provides greater insight into the operations of its various investments, engages with the investment community and drives growth through its leasing operations and seeks new investment opportunities. Accordingly, a higher profile and greater visibility should be a catalyst for a marked narrowing in the gap in the share price discount to a growing NTA.

EXECUTIVE SUMMARY Armidale Investment Corporation is a listed investment company (LIC). Its management style is active and in some respects the company resembles a diversified holding company (notwithstanding that it has only two primary investments) and private equity investor rather than a portfolio based investment manager. In December 2014, the company took a small investment in an early stage technology company, ReadingRoom Inc, which suggests that Armidale is now looking to build a portfolio with strong long term prospects to sit alongside its core investments. Armidale emerged from the wreckage of the listed Wallace Absolute Return Ltd, an LIC, which collapsed in 2010. Wallace’s main investments were listed ASX investments, representing the majority of its portfolio and debt and equity in lease financier, Hal Data Services (HDS). A private company associated with a present director of Armidale, Mark Smith, made a takeover offer for Wallace in June 2010 and secured control by September of that year. Reflecting the apparent dire situation of the company at that time the declared NTA as at 30 September 2010 was 2.2 cents per share. In June 2011, the NTA was assessed at 10.0 cents per share following a revaluation of investments based on valuation work undertaken by Deloitte’s. Over the following three years NTA has risen to 14.23 cents (November 2014) as management restored value to its two primary investments. Armidale acquired management control over its investments and restructured their respective balance sheets and equity structures as well as their operations. In effect, the Gordon Capital Pty Ltd

Page 2 of 14

Armidale management team has undertaken a massive rescue and business turnaround over the past few years which has delivered a considerable increase in value. A major outcome, especially with regard to the restructuring of the balance sheets, has been a substantial boost in Armidale’s share of the equity in each of these companies. Armidale now owns 98% of HDS and 31.78% of Riverwise. Hal, which is the engine room of the company and accounts for over 70% of Armidale’s NTA, provides equipment lease financing predominantly to small and medium sized businesses but also to corporates and governments. It struggled in the post GFC environment and only recently has been able to secure independent lines of finance, that would enable it to grow its loan book. New lease origination accelerated in calendar 2014 and the lease book is on track to double in size to nearly $60 million in FY 2015 and reach $80 - 100 million by end of calendar 2016. This growth will markedly boost the profitability of the business and its underlying valuation. Riverwise owns the Leading Edge Group which operates commercial and retail sales channels for the leading telecommunications companies in Australia, New Zealand and the UK as well as a retail buying group for more than 1,00 independent retailers throughout Australia. These retailers operate in many market segments including appliances, computers, telecoms, jewellery, books, music and videos. Leading Edge has been restructured and recapitalised and has now achieved sustainable profitability. The business is stable, generates good cash flows and pays management fees to Armidale. Armidale continues to boost its holding, typically at prices less than Riverwise’s NTA which contributes to an increase in its own NTA through valuation gains. HDS and Riverwise have been successfully turned around and both are now sustainably profitable. In addition to strong valuation gains, they also provide Armidale with useful cash flows from debt repayments (HDS) and management fees (Riverwise). Whilst these investments are expected to continue to deliver good valuation gains, management has signalled that it is now looking to make other investments and to build a more diversified portfolio to deliver additional growth. The December 2014 investment in ReadingRoom Inc is an early stage technology play and the exposure is very small but it does signal how the company may pursue opportunities. Although, management is yet to outline its investment strategy the small investment in ReadingRoom suggests a willingness to take small, and even inconsequential positions with a view to injecting further capital and building a more significant position as its own confidence builds. We understand that management is targeting investment opportunities in sectors where it has operational and technical experience.

VALUATION Armidale generates income from multiple sources including interest on loans, management fees, surplus cash flow from HDS and unrealised gains on the value of its investments. Accordingly, its reported profit is volatile on a year to year basis and very difficult to forecast with any degree of certainty. Further there is little apparent relationship between the underlying operating performance of its investments and its own income. Reported FY 2014 net profit of $3.7 million was markedly lower than the $11.1 million achieved in the prior year mostly due to a much lower valuation gain. Accordingly, NTA is the company’s key valuation metric and performance indicator. Net assets as at 30 June 2014 were $36.3 million compared with $28.2 million a year earlier. However, due to a 29% increase in the number of issued shares during the year, NTA per Gordon Capital Pty Ltd

Page 3 of 14

share at 30 June 2014 of 14.3 cents per share was only slightly higher than the 14.2 cents per share a year earlier. The valuations are based on work undertaken by an independent valuer, Moore Stephens, with the Directors typically using the mid-point of the valuation range provided by the valuer. Valuation gains provided a relatively modest boost to NTA in FY 2014 after very strong growth in the prior year. The table below shows the contributions to the increase in NTA in FY 2014.

Sources of growth in FY 2014 NTA ($m) New Capital

4,216

Valuation Gain

1,440

Other

2,108 8,064

As new shares issued to investors through the capital raising were priced at a discount to NTA, the effect of the capital raisings was to dilute overall NTA. However, a partially offsetting factor is the opportunistic acquisition of additional equity in Riverwise on a case by case basis and where pricing determines, re-valuing these newly acquired shares to reflect an independent valuation. The components of the valuation gain were: Valuation of the HDS Loan Note

-$0.587 million (1)

Valuation of Riverwise

+$2.029 million

Net

+$1.44 million

(1) This valuation was adjusted after receiving Loan Note repayments of $1.639m The valuation of the HDS Loan Note fell due to a reassessment of the assumption regarding income tax. Had there not been a reassessment the valuation would have increased by 6%. Although Armidale’s NTA comprises a number of items, especially with regard to the investment in HDS, the valuation is essentially driven by the embedded profit in the HDS loan book and Leading Edge’s (Riverwise) maintainable earnings. About 70% of the Armidale’s value is embedded in HDS (as both loans and equity) as shown in the table below. COMPOSITON OF AIK INVESTMENTS

$m

Loans to HDS

11.6

Implicit value of equity in HDS

14.7

Value of equity in Riverwise

10.3 36.6

Gordon Capital Pty Ltd

Page 4 of 14

The fair value of the loans to HDS and the value of the equity in Riverwise are detailed in note 25 in Armidale’s annual accounts. What we have described as “The implicit value of the equity in HDS” is identified in note 25.2 in the accounts as a Loan Note. Armidale wrote off its investment in the equity of HDS some time ago and this residual value is in fact the value of the Loan Note, which entitles Armidale to approximately 94.83% of HDS’ surplus cash flow pursuant to a loan agreement between them. Inasmuch as Armidale owns 98% of HDS’ equity, the value of the Loan Note is in effect (if not in a legal sense) the implied value of the Armidale’s equity in HDS. Further, as all the enterprise value of HDS other than short term debt provided by Armidale or finance provided by external parties accrues to the value of the Loan Note, and the equity is unlikely to have any value for quite some time, our view of this value as being implicit equity is reinforced. In other words, in our view the Loan Note in effect represents Armidale’s ownership of HDS. In October 2014, shareholders were provided with a valuation of Armidale undertaken by corporate advisers, Titan Partners. This valuation was undertaken as part of a process involving the restructuring of a major shareholding in the company. The valuation report gave considerable insight into the valuation process, especially with regard to the valuation of the debt and equity in HDS and the equity value of the holding in Riverwise. The conclusion of the authors (Titan Partners) was “ we subsequently derive a value for each of the Company’s shares at between 14.37 and 16.17 cents per share”. Accordingly, the company’s own valuation has been affirmed and is arguably conservative. HDS is the key valuation driver as it accounts for about 70% of Armidale’s NTA. The HDS business is growing strongly and with loan origination currently at a pace that will double the size of the lease book (based on original value) over the next year or so. HDS’ lease book generates a stable, but growing annuity stream with most of its profit generated from the monthly rental payments after the lease has formerly expired and from revenue from the final sale of the equipment. The vast majority of leases extend beyond their formal expiry and the return is on average about 20% of the original value. Accordingly, there is considerable embedded profit in the loan book and good reason to expect that this anticipated growth will lead to a similar increase in valuation over the next two years.

INVESTMENTS OVERVIEW Armidale Investment Corporation is a listed investment company and has significant interests in the finance, telecoms, and retail industries through direct investment in two companies. Its primary investments are equity and loans to Hal Data Services (98% owned) and Riverwise (31.78% owned). It’s strategy is to maximise returns through passive, strategic and active management and by providing funding support for their respective growth strategies and in this regard it also provides management services to both companies.

HAL DATA SERVICES Hal Data Services (HDS) was established in 1993 and provides equipment lease finance to small and large businesses, corporations and governments. There are over, 3,000 lease agreements in place with a lease book currently at about $50 million (original equipment value). The business struggled to secure funding in the post GFC environment and ran into

Gordon Capital Pty Ltd

Page 5 of 14

difficulties but after several years of winding down the portfolio and restructuring its debt, HDS is once again growing its lease book and is expanding its origination activities. In a highly competitive finance market, HDS’s value proposition is based on flexibility and tailored solutions and the preparedness to finance a wide spectrum of assets. Accordingly, the company has been able to build a strong position with small and medium sized businesses where traditional bank finance can be difficult to secure. Interestingly, HDS has also built a niche presence with government and larger corporations, where specific requirements may be required for specialised equipment. Virtually all business equipment maybe financed. A key feature of the business model, and no doubt the value proposition, is the flexible range of options available to the lessee at the conclusion of the lease, which typically runs for 36 months. These options range from purchase of the equipment, to continuing to rent the equipment and handing the equipment back to HDS. Indeed, the experience is that most rentals will extend beyond the loan expiry and on average the equipment will be returned to HDS after about 3 months beyond the expiry date. Accordingly, these “excess” rentals and the ultimate sale of the equipment are large contributors to the company’s profit, typically, generating a return equivalent to about 20% of the original value of the lease. Aside from the banks, competitors include Alleasing, Macquarie Equipment Rentals, Bank of Queensland, GE Capital, Flexigroup, Thorn Group, the finance arms of equipment suppliers (notably truck manufacturers) and some small independent financiers. Loan origination is driven by five internal BDM’s in Sydney and Melbourne and as well as through brokers and agents. Lease origination doubled in FY 2014 to $14 million and is on track to double again in FY 2015. The original value of the lease book now exceeds $50 million and is expected to double, to more than $80 million, over the next two years. Access to funding is the principal constraint on growth. Since the GFC, funding has been difficult to secure but over the past two years, the company has secured new sources of finance, which together with additional capital provided by Armidale, has markedly increased HDS’ funding capacity. HDS’ balance sheet and funding capacity is supported by equity provided by Armidale as well as debentures issued to a number of private investors, sale of receivables and credit lines from a number of funding sources including several banks . The ability to access new facilities has been a major factor driving the growth in the lease book over the past year and will underpin future growth. Funding is matched against leases written for both timing and cost, thereby locking in margins. Risk is further mitigated with receivables sold, from time to time, to a funder. Although not particularly large, the lease portfolio is highly diversified with over 3,000 contracts across numerous industry groups. The average lease size is about $75,000 and the level of arrears is unremarkable at about 3%. Accordingly, operational risk appears to be well managed. Whilst demand for finance generally matches the economic cycle, a very small market share coupled with a relatively high exposure to small and medium sized businesses and a benign economic environment are favourable factors in terms of HDS’ short to medium term growth objectives.

Gordon Capital Pty Ltd

Page 6 of 14

Loan Note Agreement In November 2009, Wallace Absolute Return’s (WAB’s) investment in direct equity and debt in HDS was restructured into a Loan Note. At the time of this agreement WAB’s investment in HDS comprised an unsecured loan with a principal of approximately $37 million and equity of $4.6 million, amounting to 11% of HDS’ capital. This equity was written down to nil value at 30 June 2009. Under the terms of the agreement, HDS was to apply 85% of its free cash flow to repayment of this Loan Note subject to minimum payments in each of FY 2010, FY 2011 and FY 2012. The agreement also provided an option to WAB to convert outstanding debt into equity. HDS did not meet the minimum debt repayment in FY 2011 and therefore defaulted on the agreement. A modified agreement was announced in June 2012 whereby Armidale (by which time new management had secured control of WAB and renamed the company) was allotted shares (at no cost) in HDS to take its shareholding to about 86%. Armidale also acquired some residual interests in the Loan Note to take its interest in the agreement to 94.83%. Armidale now owns 98% of the equity in HDS, following the purchase of some minority holdings. As the Loan Note agreement remains in place, requiring HDS to apply 85% of its free cash flow to repayment of the Loan Note, the book value of this investment remains at nil. As Armidale owns 98% of the equity in HDS, the practical implications of the Loan Note agreement are minor. In an accounting sense however, especially as HDS is not consolidated in Armidale’s accounts, the implications are significant in that Armidale’s income reflects the cash flow payments under the terms of this agreement, which can vary from year to year, rather than a dividend or merely the operating profit were the accounts to be consolidated. In FY 2013 and FY 2014, loan repayments amounted to $750K and $2.1 million respectively. Notwithstanding that HDS is almost a wholly owned subsidiary, Armidale is classed as an investment company and HDS’ accounts are not consolidated.

RIVERWISE PTY LTD Over the past two years, Armidale’s holding in and relationship with Riverwise has markedly changed. Over this period, Armidale increased its holding in Riverwise from 12.9% to 31.78% following the conversion of an outstanding loan, including capitalised interest and associated costs in November 2012, the acquisition in June 2013 of shares through an offer to Riverwise shareholders and a partially underwritten capital raising in November 2013 and the further acquisition of shares from other holders. Further, Andrew Grant and Raylee Carruthers, Executive Director and CFO respectively of Armidale were appointed to manage the Leading Edge Group, in November 2012, under a management agreement between Riverwise and Armidale. This agreement now includes an incentive profit sharing arrangement, payable in shares to Armidale. Armidale’s actions were driven by the need to protect its investment against a background of poor financial results and a desire to more closely align their respective interests. Under the management of Armidale’s executive team, Riverwise, or more specifically Leading Edge has been restructured and is now sustainably profitable.

Gordon Capital Pty Ltd

Page 7 of 14

Riverwise’s sole investment is a 100% interest in Leading Edge Group, which operates business to business and retail sales channels for leading telecommunications companies in Australia, New Zealand and the UK as well as a leading retail buying group supporting over 1,000 independent retailers in numerous market segments. Annual revenue is approaching $300 million and comprises sales commissions, services and membership fees, and supplier rebates as well as sales of goods. FY 2014 EBITDA was $4.5 million.

The Telecoms business The telecoms business, which generates an estimated 60% of revenue, is a business sales channel partner to Telstra (Australia), Spark New Zealand (formerly Telecom New Zealand) and BT (UK). These businesses primarily sell hardware, services and increasingly data to businesses and consumers (NZ) in their respective markets. Services are increasingly important in the commercial and business space as fixed line revenue is in structural long term decline whilst revenue from mobiles and data has matured. However, opportunities are growing in network services, cloud services, security, unified communications and integrated service management. Reflecting the changing role of the sales channel and priorities for the telecoms, sales commissions now comprise a much greater share of income, displacing sales revenue, whilst each of the telecoms use a range of quality driven customer service metrics in, at least partially, determining sales commissions. The New Zealand unit, which contributes about 50% of the telecoms business unit revenue, services a sector of businesses outside of the top 400 companies in that market in addition to a number of retail outlets. In Australia, Leading Edge operates Telstra’s largest Business Centre, in Melbourne’s eastern suburbs and another relatively small office in Sydney. These offices sell products and services only to companies listed on databases provides by Telstra. In the UK, the company operates 3 regions in the south west, with the largest centred on Bristol. The performance of the respective business units is almost entirely driven by the day to day management of the operations, as the company has limited ability to develop strategies independently of the telecoms. As demonstrated by the restructuring in New Zealand and the change in income structures, strategic decisions affecting the business units are largely beyond the control of the company. Notwithstanding these issues, the telecoms business generates relatively reliable returns.

Leading Edge Buying Group Leading Edge is one of Australia’s largest retail buying groups with over 1,000 independent retail members across a wide variety of segments. The market segments are jewellery, electronics, computers, telecoms, appliances, music, video and books. It is represented in metropolitan and urban centres but is especially well represented in regional and rural towns. The Leading Edge model enables small retailers to enjoy the advantages of group wholesale buying whilst maintaining high levels of independence. In addition to providing group buying, Leading Edge also provides access to a wide range of other financial and business related services. Generally members retain their own independent branding although the Leading Edge name is available for members to use,

Gordon Capital Pty Ltd

Page 8 of 14

Leading Edge operates a central buying office in Sydney and members purchase inventory on LEG’s account but all purchases are shipped directly to the retailer. Whilst there is a credit risk LEG insures a portion of this risk. There are quite a number of retail buying groups servicing independent retailers although most service a narrow range of market segments and none appear to be as diverse as Leading Edge. The largest groups claim to have about 600 members, considerably less than Leading Edge. The main groups are Frontline Stores (sport, outdoors, camping, fishing, men’s and ladies wear), Associated Retailers (camping, fishing, sports, menswear, shoes, toys, manchester), NARTA (electrical goods), United Convenience Buyers (petrol and convenience stores), Pharmacy Alliance, and Australian Independent Rural Retailers. In contrast to Leading Edge, most of these groups have strong brands through which the retailers operate. Whilst some national and regional chains and some franchise groups operate through buying groups, most members are typically fiercely independent retailers. Accordingly, the influence and support from the buying groups tends to be quite limited, although this will vary from group to group. In contrast retailers operating within a franchise group are typically subject to high levels of control with management in accordance with procedures determined by the franchisor. Accordingly, there is a trade-off between support and independence and that support usually comes at a cost. The large number of market segments serviced by Leading Edge as well as the relatively high exposure to regional and rural areas provides a degree of protection against some of the trends that have disrupted retailing in metropolitan markets. For example, the books, music and video markets are in long term decline due to the impact of the internet and online retailing. Whilst these trends are evident in regional and rural Australia they are generally occurring at a slower pace. Further, in some sectors such as appliances and computers, relative stability is also provided by the absence of or limited large scale competition (such as Harvey Norman), whilst other market segments such as jewellery are relatively stable and highly fragmented. Accordingly, although there is wide variation in trends and performance between the various market segments, they tend to balance out and the overall performance is relatively stable. Whilst Leading Edge continues to build membership numbers, underlying growth is only moderate. An online retailing presence and/ or the acquisition of other buying groups could provide growth opportunities although we are not aware of either of these options being on the company’s agenda. Riverwise Financial history The Leading Edge Group operates low margin businesses with a relatively high fixed cost base. Accordingly, profitability is highly leveraged to scale. Considerable restructuring occurred during 2013 and 2014 to both improve underlying profitability and to manage a changing revenue mix in the telecoms business away from sale revenue to commission revenue. After several years of losses, the company returned to profitability in FY 2013. Although EBITDA appears to have slipped backwards in 2014, from $6.7 million to $4.5 million, some $2 million in non-recurring expenses masked what was otherwise a relatively steady result.

Gordon Capital Pty Ltd

Page 9 of 14

An annual snapshot of the balance sheet at 30 June suggests that the company is highly geared, however, as evidenced by the low level of interest payments, debt appears to fluctuate widely through the year, peaking at the end of June each year. Nonetheless, end of financial year debt levels have been falling and the capital base has been rising. As at 30 June 2014 net debt to equity was 65.8% compared with 116.7% a year earlier. The Leading Edge businesses would appear to have relatively stable short to medium term prospects with maintainable EBITDA of between $6.5 million and $7.0 million or about $3.0 million to $3.5 million net profit.

THE READINGROOM, INC In December 2014, Armidale made a small investment in an early stage company, The ReadingRoom Inc. It is a social network and E-commerce business. The company describes itself as “… one of the fastest growing curated social book discovery platforms in the world with over 1.3 million registered users and growing rapidly! TheReadingRoom delivers a trusted and entertaining social experience for readers to discover, review, purchase and discuss books. We aggregate and curate content around the world from members, bloggers and trusted published sources. TheReadingRoom enables writers, publishers, authors, readers, educators and advertisers to reach a dedicated audience.” The ReadingRoom is building a far more engaging experience with its users, compared with Amazon and other online book retailers, and will generate income from advertising and sponsorship, E-commerce and data licensing. Armidale has acquire about 1% of The ReadingRoom’s capital at a cost of $200K. This is a small initial investment in a very high growth opportunity and Armidale’s management team will be able to observe the company and build its comfort zone ahead of a potentially larger investment in the future.

FINANCIAL SUMMARY As Armidale is an investment company, its subsidiary, HDS, is not consolidated into its accounts. Accordingly, most of the balance sheet and cash flow activity relates to its investment activities. Further, reported profit is very volatile due to the impact from unrealised gains in valuation which varies widely from year to year. Armidale is effectively debt free and uses its capital for investment and in FY 2014, it raised new capital for the first time since the current management team took control in 2010. Some $4 million was raised and reinvested in HDS and Riverwise. The company has a small corporate overhead which is easily covered by cash flows from its investments. Surplus cash flow is therefore also available for reinvestment. HDS (98% owned) funds its activities from factoring its receivables, bank finance, debentures and capital. Its financial risk is mitigated by effectively matching its funding against new leases, whilst its funding costs are fixed for the length of the lease. As was evident during the post GFC environment, the greater risk is access to new funding to support growth in the lease book. New sources of funding have been secured that provide the capacity to double the book to around $80 - $100 million over the next two years. Gordon Capital Pty Ltd

Page 10 of 14

INCOME STATEMENT 2012-13

2013-14

Interest Unrealised Gains Repayment HDS Other Revenue

0.7 10.3 0.8 11.8

1.1 1.4 2.1 0.9 5.5

EBITDA Deprn, & Amort Finance Cost PRE TAX PROFIT Tax NET PROFIT

11.4 -0.3 11.1 11.1

4.3 -0.3 4.0 0.4 3.6

($m)

Armidale’s reported income can be divided into two elements reflecting their relative predictability and stability. Firstly, core income is generated from interest on short term working capital loans to HDS and management fees (other) from Leading Edge Group, which are underpinned by commercial agreements. On the other hand, Loan Note repayments by HDS, incentive profit share from Riverwise and unrealised gains on investments can, and do vary widely from year to year and cannot be predicted with any degree of certainty. Notwithstanding, overall income volatility, core income, at about $2 million is adequate to cover operating expenses which amount to about $1.5 million. This is largely reflected in the net cash from operations in the Cash Flow table below. CASH FLOW ($’000) Net Cash Flow From Operations Net Cash Flow From Investing Net cash Flow From Financing Net Change In Cash

2012-13

2013-14

168

846

-1,342

-6,043

-

4,203

-1,174

-995

The company’s investing activities will tend to be a significant net user of cash. However, there has been a considerable recycling of investment cash flows over the past two years as proceeds of the Loan Note repayment and working capital loans have been reinvested into both HDS and RIverwise. Operating cash flows and the recycling of investment flows only partially fund the capital needs of the company. Accordingly, additional capital was required in FY 2014 to fund

Gordon Capital Pty Ltd

Page 11 of 14

growth in the HDS business and increased investment in Riverwise. Armidale’s overall funding strategy is to hold debt in the operating businesses (HDS and Riverwise) and to keep its own balance sheet debt free (see Balance Sheet table below). Therefore further capital raisings may be undertaken in the future to support the growth of HDS and to expand its investment portfolio. The Armidale balance sheet is relatively straight forward in that the bulk of the assets are represented by investments, which in turn, is funded by shareholder capital. However, the balance sheet is reported on an unconsolidated basis and does not include any of the HDS balance sheet, notwithstanding that HDS is 98% owned by Armidale. This issue is mitigated inasmuch as Armidale is not a guarantor of HDS’ external debt. BALANCE SHEET ($’000) Current Assets Cash & Equivalents Receivables Other Non-Current Assets Plant & Equipment Intangibles Financials Total Assets Current Liabilities Payables Debt Other Non-Current Liabilities Shareholders’ Equity Liabilities & Equity

Gordon Capital Pty Ltd

June 2013

June 2014

1,765

770

26 1,350 3,141

43 3,593 4,406

771 25,285 29,197

579 33,025 38,010

94 91 6 191 -

344 64 718 1,126 7

29,006

36,877

29,197

38,010

Page 12 of 14

DIRECTORS AND SENIOR MANAGEMENT BRUCE HATCHMAN, CHAIRMAN Bruce is an experienced financial professional. As the former CEO of Crowe Horwath, he has 40 years experience in providing audit and assurance services to listed companies and large private enterprises. ANDREW GRANT, EXECUTIVE DIRECTOR Andrew is one of the founding members of Hal Data Services. He has more than 28 years financial management experience as well as extensive experience in the computer and finance industries. STEVE WHITE, NON- EXECUTIVE DIRECTOR Steve is the Principal and Director of Noah’s Rule, a specialist risk advisory firm providing independent input and advice on strategy and execution to companies managing significant financial markets exposures. MARK SMITH, NON- EXECUTIVE DIRECTOR Mark is a long term investor and has established a number of successful small businesses in northern NSW.

Gordon Capital Pty Ltd

Page 14 of 14

GENERAL ADVICE WARNING: The information contained in this Report is only of a general nature and does not constitute personal financial product advice. In preparing the advice no account was taken of the objectives, financial situation or needs of any particular person. Therefore, before acting on the advice readers should consider the appropriateness of the advice with regard to their particular objectives, financial situation and needs. Readers should obtain and consider any relevant Product Disclosure Statements before making any decisions about the subject matter of this Report and should seek independent professional advice. DISCLAIMER: Although every attempt has been made to verify the accuracy of information contained in this Report, Gordon Capital Pty Ltd (Gordon Capital) and Pearce Callahan & Associates Pty Ltd (Pearce) make no warranties about the accuracy or completeness of any advice or information. The officers, agents, related affiliates, related body corporate and employees of Gordon Capital and Pearce accept no liability for any loss or damage whatsoever arising from any investment decisions or use of the information or advice in this Report. All information and advice contained in the Report are subject to change without notice. All investment decisions are subject to risks. Past performance should not be taken as an indication of future performance. Any ‘forward looking statements’ contained in this Report are based on current expectations about future events. Words such as “anticipate”, “believe”, “expect”, “project”, “forecast”, “estimate”, “likely”, “intend”, “should”, “could”, “may”, “target”, “plan” may identify forward looking statements. Such forward looking statements are based on views held at the date of publication of this Report and are not guarantees as to future events. Forward looking statements are subject to risks, uncertainties and other factors beyond the control of Gordon or Pearce. Therefore, actual results may differ from those referred to in such statements. DISCLOSURE: This publication has been prepared by Gordon Capital Pty Ltd, AFS Authorised Representative ASIC No. 338899, as Authorised Representative of Pearce Callahan & Associates, ABN 90 053 868 410, Australian Financial Services Licence No. 288877. The registered office of Pearce Callahan & Associates Pty Ltd is Level 1, 2 Main St, Greensborough, VIC 3088. Please note that Gordon Capital has been retained by Armidale Investment Corporation Limited to provide this report for a fixed fee. Gordon Capital does not provide specific investment recommendations and does not receive any additional benefit for the provision of this report. Gordon Capital aims to provide a balanced and objective analysis in this report. Michael Gordon the analyst responsible for this report does not receive any indirect benefits or assistance from Armidale Investment Corporation. Our remuneration is not linked to the views expressed in this report. At the time of writing the report, the author does not owns shares in Armidale Investment Corporation Limited.

Gordon Capital Pty Ltd

Page 14 of 14