DATA#3 LIMITED — AGM Information 2002

Nov 25, 2002

Data#3 Limited 2002 AGM Chairman's Address 26 November 2002

Ladies and Gentlemen

Welcome to this 2002 Annual General Meeting of Data#3 Limited.

As was the case last year we are particularly delighted to welcome you to the company's Corporate and Brisbane Office, the second occasion on which the annual meeting has been held here.

The company's annual report issued with the notice of today's meeting presents the results and financial position of the past year. Together with the half-year and other announcements made during the past twelve months the report reveals the excellent result achieved by the company for the 2002 financial year. The profit reported by the company is the largest in the company's history reflecting a very welcome recovery from the losses of the last two financial years.

Last year I referred to disappointments from earlier acquisitions and the need for significant improvement from the New South Wales and Victorian businesses. Pleasingly the achievement of our primary goal in 2002, the return to acceptable and continuing overall profitability, was aided considerably by improvements in these areas.

Performance in key areas such as receivables collections, cash management and cost control continues to be first rate. While never easy in the volatile markets we are experiencing, improvements in budgeting and forecasting have been achieved during the year so that now, in addition to the areas to which I referred last year, we have confidence in all major aspects of our daily and monthly management reporting.

Our prime objective for the current financial year is to build sustainability into this record profitability. We aim to do this by improving strength and consistency of earnings across all businesses and locations.

At the end of the first quarter an excellent start has been made towards achieving this goal.

Whereas in 2002 above expected results in some areas were offset by losses in other areas we are now achieving profitability in most of the businesses we operate. Overall the company results are in profit for each of the first three months of trading and are ahead of budget. All aspects of the company's operations are being closely monitored and corrective action is being taken where performance is not satisfactory.

As seems to have been the case for several years the global and Australian economic and business climates remain uncertain, this year trapped by drought, terrorism and security concerns and by related stock market downturns. In spite of this uncertainty, for Data#3, positive signs are providing encouragement that the months ahead will see a continuation of solid trading results.

As you will know from earlier announcements the company was severely impacted in August this year by the collapse of our partner in the former joint ventures Queensland Desktop Services and Queensland Software Services due to the appointment of an Administrator and subsequently a Receiver to Powerlan Queensland. We have today announced that agreement has been reached with both the Receiver and Administrator to settle all outstanding claims and issues between Data#3 and the Receivership and Administration of Powerlan Queensland. Due to tax and accounting considerations the final impact on Data#3's projected results in the current year is not yet able to be determined exactly. We will do so as soon as we can. However we do know that it is at the low end of our projections, i.e. \$2 million. This may be further reduced by funds flowing from the administration or liquidation of Powerlan Old. The administrator has indicated an amount ranging from 15 to 60 cents in the dollar of our claim of \$3.1 million could flow depending on the course of action creditors agree to take.

Excluding the losses associated with the rescue of the businesses of these former joint ventures we are confident of a result for the current half-year around that achieved in the first half of the 2002 financial year. This is particularly pleasing given the impact of the difficulties triggered through the receivership of Powerlan Queensland.

It has been a great disappointment that, having achieved a record result in 2002, we have deemed it prudent not to declare a dividend. Assuming achievement of the expected outcome for the current half year the board expects to reinstate the payment of dividends in April 2003.

The policy of geographic and service expansion set out in 1997 when the company listed on the ASX has been pursued through various acquisitions and investments.

All opportunities that reasonably may be expected to enhance the company's results and financial position continue to be examined. The board believes that with the return to profitability it is now opportune to further develop future strategy. The senior management will be asked to participate with the board to complete develop this strategy over the coming months.

The Senior Management Team led by John Grant continues to comprise the General Managers of the Procurement, Technology, Recruitment and Application Solutions Business Units and the Company Secretary and Chief Financial Officer. This business unit structure of specific product and service divisions together with a strong geographical presence in Queensland, Sydney and Melbourne, together with the ACT established during 2002, provides the basis for the improved performance. Whilst we will not contemplate unnecessary change to this overall successful structure the proposed strategic review will examine the longer-term viability of all businesses. Where appropriate returns are not evident changes will be made.

The board continues to maintain a strong focus on staff and management remuneration. A significant percentage of the annual remuneration of these executives is subject to the achievement of pre-set performance targets. In 2002 the proportion of the remuneration of the CEO and the five General Managers that is subject to the achievement of performance targets averaged 39%.

As discussed at last years meeting, in addition to the annual remuneration arrangements the company has in place an option plan and a share scheme. The purpose of both the Share Scheme and the Option Plan is to provide to eligible employees incentive to achieve performance on behalf of the company beyond that required and recognised by their total annual remuneration. In this way the employees personal interests are aligned with the interests of the company and, when performance leads to an increased share price, all shareholders benefit.

The proposals approved at last years meeting have been implemented so that all of the 280,000 options previously issued have either lapsed or have been rescinded and a total of 210,000 new options have been issued at an exercise price of 91 cents. None of these new options has been issued to directors. Also as discussed last year the arrangements will now be reviewed again to ensure that the terms of any further issues remain in keeping with both performance and market conditions in the longer term.

During the year, following his retirement from employment with the company, Terry Powell returned as a member of the board. All current directors continue to be non-executive directors. We continue to consider the composition, spread of experience, location and skills and the number of members of the board to ensure that the effectiveness of its work continues to be maximised. As I said last year the company's present business and geographic spread indicates that five is the appropriate membership for the board and the policy that a clear majority of members will be non-executive directors will continue.

Based on this we have undertaken a search for suitable directors to complement and enhance the current board. Whilst further appointments have been delaved through the difficulties caused by the Powerlan Queensland receivership we expect to progress the matter in the near future. Advice received during this process is the basis for the proposal today to increase total directors fees.

Whilst the results of the company's efforts have improved significantly in an operational sense the same has not yet consistently emerged on the stock exchange. Whilst many of the factors that affect stock market movements are outside our control we believe that recognition through an improved price for the company's shares should follow.

We intend through continued improvement in results, the reinstatement of dividends and through measures outlined in the annual report and here today to seek improved recognition and value on behalf of all shareholders.

I will now ask our Chief Executive Officer, Mr John Grant, to the microphone to address operational aspects of the company's 2002 performance and expected 2003 results. At the completion of his address I will invite your comments and questions regarding the annual report and further information that we have released today. Whilst the Australian Corporations Act 2001 does not require shareholders to vote on the Financial Report, Directors Report and Report of the Auditors we welcome any questions that you may wish to raise today.

$\ddot{\phantom{1}}$

Data#3 Limited 2002 AGM CEO's Review of Operations 26 November 2002

Ladies and Gentlemen

Firstly let me endorse the Chairman's welcome to you. It's a pleasure to have you all - our shareholders and other supporters - to our head office once again.

As you are aware and as the Chairman has indicated, 2002 was an excellent year both in financial and operational terms – our best ever.

Revenue increased significantly driven by product sales of \$145 million compared to \$99 million in the previous year. We have focused strongly on this part of our business since February 2001 and were handsomely rewarded in 2002 qualifying for substantial supplier rebates – probably more than our fair share - that offset an overall decrease in sales margin and provided an increase in profitability. Services revenues have remained relatively constant over the last few years in the main reflecting lower technology project services and increasing application services revenues.

While revenue is one indicator of marketshare, it can at times be misleading and we tend to look at least equally at gross margin and more particularly expenses as a % of gross margin.

In the 2000 financial year as the global IT market started its collapse, we discovered out of necessity, on a more sophisticated level, what a difference real pressure on expenses could make. This discipline has been applied with considerable rigor and as the graph shows, we lowered expenses over the previous year by 8.6%. As we enter the next period, our key measure is expenses as a % of gross margin from sales.

With an EBITDA of \$5.475 million and Net Profit after Tax of \$3.17 million, the graph shows both the dramatic improvement over the previous year and puts into context the 2000 and 2001 financial years.

The factors that contributed to this record performance were:

Product sales of \$145 million compared to \$99 million in the previous year as already mentioned.

• Strong performance in our Queensland, enterprise technology and licensing businesses underpinning an excellent year for Technology Solutions
• □ Our best ever result in our SAP related application business that, while not offsetting an overall disappointing performance in Application Solutions, contributed strongly to the company's performance
• $\Box$ An improvement in overall performance in the second half with positive contribution from our NSW technology business and the recruitment business delivering a better balance of earnings
• $\Box$ The reduction in operating expenses
• $\Box$ Positive net operating cash flow of \$810,000 even given a reduction in vendor trade debt facilities of around \$2M, a 23% improvement in the key measure of debtor days outstanding and a reduction in debtors aged greater than 90 days by 80%

I said at last year's AGM that our focus through the 2002 financial year was on lowering our cost structure, re-aligning our business to those areas of customer need and market opportunity that will best position us to return to expected and sustainable levels of profitability and focusing on disciplined management and operations. We remained firmly focused on these goals, have achieved the vast majority of them. and as a consequence, had a great year.

As an aside it is interesting to note Data#3's performance compared to the performance of all companies in the information technology index. Of the 136 listed companies that make up the index, only 34 made a profit last year. It is no wonder perception with the sector is poor. As at last Saturday, the ASX $P/E$ ratio was 14.1 and Data#3's $P/E$ ratio was 4.7. The P/E ratio of Volante Group, the company most like Data#3 in the index was $17.8$ . Data#3 was one of very few that upgraded forecasts last year. I'm not suggesting shareholders draw conclusions from this, as we understand the extenuating circumstances that engulf us at the moment, but clearly finalizing the situation with Powerlan, maintaining performance and returning to dividends should see some adjustment in Data#3's position relative to others in the sector.

As the Chairman commented, the most disappointing aspect of the year was our inability to declare a dividend to shareholders due only to the implications for Data#3 of the administration and receivership of Powerlan (Old) Pty Limited, our partner in the Queensland Desktop and Queensland Software Services joint ventures. This deserves separate comment and I'll elaborate later.

The Annual Report provides more detail on the 2002 financial year. I'll spend the rest of my time on the outlook for the business – both financially and strategically. In this context I will spell out the implications of the failure of Powerlan (Old) for Data#3. I'll also provide additional insight into executive remuneration strategies given the Chairman's comments and the attention that has quite rightly been paid to it in many listed companies.

IMMEDIATE FINANCIAL OUTLOOK

In reviewing the outlook, I need to make the point that this is prior to any effect the administration and receivership of Powerlan Old has.

The graph shows actual performance of the various areas of the business for the first quarter and projected performance for the second before allocation of corporate costs totalling around \$2.2 million. As you can see the Technology Solutions business, which is the largest by far and includes the outsourcing, licensing and Enterprise infrastructure businesses, is our strongest contributor. However, more importantly, we anticipate all businesses will be positive contributors in the current halfyear, which contrasts with the corresponding period of the previous year and that performance in the second quarter will exceed that in the first. The Chairman spoke about this 'balance in earnings' objective. Achieving this provides more consistent profit flow and lowers the risk of poor performance.

Based on our forecasts and excluding the effect of the administration and receivership of Powerlan (Qld), the first half outlook is for an EBITDA slightly below the previous year's \$2.46 million. In this forecast, as you would expect there are a couple of significant transactions scheduled for finalisation prior to the end of the half year. Circumstances outside our control could effect their conclusion and hence would affect this forecast but on balance we are comfortable to put this number forward.

Presuming this outlook holds, this will be an outstanding result for a number of reasons:

$\Box$ Profit contribution from supplier rebates on product sales will be around 25% of the previous year. The level of rebates depends entirely on our performance against purchasing targets set by our vendors. In the 2002 financial year, we benefited from higher rebates than would normally be received. Conversely, while we expected this to be lower in the first half of the current year, we believe it is unreasonably low and we expect it to improve in the second half.

• $\Box$ In this result, we will have absorbed legal and other expenses associated with the Powerlan (Old) situation of around \$350,000 and will have avoided the potential for this issue to distract management attention to any significant degree
• $\Box$ We will continue to have managed cash well and made significant prepayments to joint venture creditors in advance of a settlement with the receiver and administrator to Powerlan (Old)

EFFECT OF POWERLAN (OLD)'S RECEIVERSHIP AND ADMINISTRATION

Let me move on to the receivership and administration of Powerlan Qld.

Suffice to say, Powerlan (Qld) our partner in the joint ventures Queensland Desktop Services and Queensland Software Services was placed in voluntary administration and went into receivership on 15 August. This action by Powerlan effectively froze the business and assets of the OSS and ODS joint ventures. This had the effect of leaving staff uncertain of whether they had a job including some who were unpaid, customers with orders for equipment and software in limbo and with no clarity as to who would meet the obligations under their supply agreements with the joint ventures, and joint venture creditors particularly I must say Microsoft - unpaid and unable to be paid.

Since the 15 August we have spent a great deal of time and money in understanding the rights we have and the various courses of action available, the objective being to secure the best financial outcome for Data^*3 and for joint venture staff and creditors. In the Annual Report, Note 41 set out the detail, as we understood it at that time. In broad terms we assessed the impact on Data ^$4$ as ranging from \$2 million to \$8 million.

As the Chairman has indicated, today we are delighted to report that we have achieved a resolution with the receiver and the administrator that allows Data^*3 to continue to operate the previous business of the joint ventures and crystallises the financial impact on Data^*3. In order to achieve this outcome, we have agreed to make a payment to the receiver for Powerlan Qld's share of the assets and projected net income of the joint ventures, and in return have taken control of all assets and liabilities of the joint ventures. This arrangement delivers certainty to Data^*3 and its customers and would not have been possible without the fantastic support and patience firstly of our Government customers and secondly of the major creditors, particularly Microsoft, but also Hewlett Packard, Tech Pacific and Ingram Micro. They have allowed us the flexibility to negotiate with the receiver and administrator (which has in

itself been a 'learning experience') and have maintained supply arrangements with Data^#3 for our direct business at the same time. This has allowed the deal to be put in place and is an overwhelming endorsement of the close and constructive relationships we have had over many years.

To repeat the Chairman's comments, due to tax and accounting considerations we cannot quantify today exactly the final impact on Data^*3's projected results in the current year. We will do so as soon as we can. However we do know that it will at the low end of our projections, i.e. \$2 million. This may be further reduced by funds flowing from the administration or liquidation of Powerlan Old depending on the course of action creditors agree to take. The administrator has indicated an amount ranging from 15 to 60 cents in the dollar return against our claim of \$3.1 million.

In any case, we have achieved what we believe to be the best possible outcome for shareholders and the business and I turn this page of Data^*3's history over with relief and relish in the knowledge that we now have certainty and can move forward strongly.

STRATEGY GOING FORWARD

So let me turn our attention now to the future.

Our Vision is to be "Australia's leading IT Solutions Company – the one that everyone wants to work for, buy from or own shares in."

As an IT Solutions Company, we seek to provide value for our customers from their IT investment by providing expertise in:

• □ Business solutions delivered through application software
• □ The design, implementation and management of reliable IT infrastructure
• □ Cost effective procurement of IT hardware and software products, and
• $\Box$ Sourcing the right IT people.

Applying this expertise in its broadest sense provides a total solution to our customers' business and technology needs.

In broad terms our strategy has four elements:

□ Gain our customers' commitment by understanding their needs better than our competitors

• $\Box$ Improve our competitive positioning by rapidly bringing to market products and services that meet those needs
• $\Box$ Ensure staff commitment by nurturing and developing them and applying their expertise to deliver results, and
• Accelerate organisational development by continuously reviewing and improving our performance.

We believe that by focusing on these four elements we will achieve the financial performance that is imperative for us to achieve our vision.

Within each of these key areas we have defined a number of targets that spell out our strategy in more specific terms. Specific targets have been set for such as:

• $\Box$ Growing revenue from key customers
• Increasing the number of Preferred Supplier agreements for IT product
• $\Box$ Increasing services revenue under contract
• $\Box$ Improving services utilisation rates
• Lowering expenses as a % of Gross Margin
• $\Box$ Improving debtors and cash management
• $\Box$ Improving forecasting accuracy
• n Increasing the adoption internally of electronic workflow processes and document management
• $\Box$ Improving customer and staff satisfaction
• $\Box$ Share Price/Earnings ratio

We have all heard that market conditions for the IT industry are forecast to remain subdued for some considerable time. Our belief is that, while the perception of our industry by investors and customer executives is as poor as it has ever been and sustained action needs to be taken by the industry to change this, there are no 'silver bullets' on the horizon that are going to deliver growth beyond that of business generally. Our industry needs to adjust to this reality and to be viewed in this light. Expectations need to be tempered so that it and the listed companies within it are viewed realistically. When this happens price/earnings ratios should stabilise in a range in line with the general industrial sector.

Growth can come however through increased market share. We believe we can achieve this by fiercely defending and nurturing existing customer relationships, by acquiring new customers through our specialty areas in application and technology solutions and by

acquisition of specialist businesses that are complementary to our existing operations and provide additional strong customer relationships.

We also see geographic opportunity through the rationalisation of the competitors in our key market of Queensland and in the ACT in the expectation that this market will 'loosen up' as the current large Government outsourcing contracts unwind through 2003 and 2004. Accordingly we have increased staff numbers, particularly in sales in these areas this year. New South Wales remains our most difficult market however we are in the black and working hard to improve this position. In Victoria we lack the critical mass to be a substantial player and are looking at opportunities to scale up quickly as we did recently with the acquisition of the Navision Solution Centre business from Stockford Limited.

In terms of the opportunities available to particular areas of our business going forward:

• $\Box$ As has been reported recently, growth opportunities in the application sector are constrained. We believe that this is more in line with our customers' willingness and ability to spend at the moment rather than a long-term situation and that, given that application software is key to all organisations in order to do business, growth will return. In the interim we see our customers investing further in their existing applications to get more from them and we have been looking at how we can adapt to increase the scale of our services capability accordingly
• $\Box$ In technology solutions we see projects remaining scarce and will continue to align our costs with opportunity. However we see the specialist areas of outsourcing, enterprise technology and software licensing offering opportunity for increased market share – outsourcing and enterprise as our customers consolidate IT infrastructure and address issues around cost, security and continuity, and licensing through the rationalisation of competitors and a renewed focus on the small to medium business sector
• $\Box$ With the investments we have made over the last 18 months in CustomerNet, our customer e-business system, and the supply chain generally, and given that we believe hardware and software purchases will remain a large part of our customers' budgets, we see ongoing opportunity in the procurement area. We have recently opened a new logistics and configuration centre in Brisbane to address this and will look to do similarly in New South Wales in the next financial year
• While recruitment has improved in the current year over last year, it will remain tough as long as the demand for resources remains

scarce, which we believe will be the case for some time. Hence we will keep costs in line with the opportunity and are moving into the more specialist areas in software.

SALARIES AND INCENTIVES

And finally let me add to the Chairman's comment on salaries and incentives. Much space has been recently given in the media to issues of remuneration of executives at all level of business and the related corporate governance issues. Our philosophy is to reward skills and results in a disciplined and even-handed manner, and as such the framework we have in place has a fixed salary component and a variable or 'at risk' component, the combination of which makes for what we call 'On target' earnings. In 2003, the variable or 'at risk' component for the management team is around 40% of the 'on target' earnings.

At the start and mid-point of each year we set and re-set our business targets which, while heavily weighted to financial performance, also include objectives in non-financial areas such as staff and customer satisfaction, organisational development and competitive positioning. Payment of the variable component of remuneration is aligned with achievement of these targets. Clearly targets are a function of what we have experienced and how we view the future. In the 2002 financial year we came off a very poor previous year and the industry projections were not strong. Hence our targets were low. We over-achieved them considerably even given that we increased them at the half-year and as a result our staff shared in this success. In the current year, targets are considerably higher and for an outcome in line with last year, the total of the variable component will be lower. We believe this is a fair and realistic approach aligning remuneration with the changing needs of recovery and sustainability.

Aside from remuneration we have our executive option and staff share purchase plans. These have been used sparingly, more due to our changing fortunes over the last three financial years than to any philosophical position. Given that the number of shares that we can allocate to employees under existing ASIC guidelines is very low, we do not see any risk that the issue of options or shares can create misalignment of objectives between staff and shareholders and we will continue to apply them appropriately to provide recognition and incentive.

CONCLUSION

In closing, in 2002, as I said at the start, we had a terrific result both in financial and operational terms – certainly one of the best in the Information Technology sector. We are comfortable about the outlook for the half-year particularly, and given that we have removed the uncertainty around the receivership and administration of Powerlan Old albeit at some cost, we are comfortable that we can apply our energies with commensurate results to the full year.

My sincere thanks go once again to the people who make up the Data^#3 team – they have proven to be durable and resourceful in the best and worst of times; to our customers whose business challenges continue to provide us with the incentive to exceed our previous achievements; to our suppliers upon whose technical excellence our solutions depend; and to our shareholders whose faith in our ability to weather market storms has underscored all our efforts.

Thankyou

John Grant CEO Data#3 Limited