BRERETON AND COMPANY, INCORPORATED Page 1 Electronic Contract Manufacturing – A Mixed Rebound Electronic Contract Manufacturing – A Mixed Rebound Electronic Contract Manufacturing Industry Reporter - July 2004 Introduction to the Brereton Electronic Contract Manufacturing Industry Reporter The Brereton Industry Reporter is a quarterly journal designed to assist management and investors in the electronic contract manufacturing industry. The journal attempts to address and explain current and anticipated market influences, investor sentiment and the valuation implications of the economic environment; including private company acquisition activity. By introducing quarterly data and highlighting critical market issues, we hope that the Brereton Industry Reporter can help management and investors gain effective insight into the valuation and organization of their business. Table of Contents I. Executive Summary II. An Industry Divided: The Divergence of Top and Mid-Tier Strategies III.The Tax Cut of 2003: A Gift to Private Business Owner’s? IV. The Asian Pull V. Mergers and Acquisition Review Executive Summary In the present era of competition and technology driven business, companies are increasingly leveraging collaboration as a strategic tool for business growth. To succeed as an electronic contract manufacturer (ECM) in this low margin and high volume environment, you need to continuously design and build sophisticated products to beat the competition. This demands working across enterprise boundaries with speed, accuracy, innovation, and efficiency. Among the many trends confronting the electronic manufacturing industry, several issues and challenges have emerged as key determinants of success. In this issue we will focus on the growing gap between top-tier and mid-tier manufacturers, the continuing development of offshore manufacturing capabilities, and the rampant consolidation of mid-sized, niche manufacturers. Private Investment Banking Source: Capital IQ M&A Database. *2004 Estimated from 232 deals as of 5/31/04. Electronic Manufacturing Services M&A Deal Volume 2003 and 2004 have brought a resurgence in M&A activity An Industry Divided: The Divergence of Top and Mid-Tier Strategies They trace their origins to a simpler time, when outsourcing was not yet a politically charged word. That was then. Today, the electronics manufacturing services industry is a cutthroat global business that operates on razor-thin margins and has fundamentally redefined relationships up and down the supply chain. Indeed, many of the top-ranked ECM providers dwarf their OEM customers. Take Flextronics International Ltd. (Singapore), the top- ranked company on the list of Top 50 ECM providers (contact us for full list). By encouraging its major customers to tear down their vertical in-house manufacturing structures in the 1990s, Flextronics absorbed manufacturing operations and built itself into a $13 billion powerhouse. Twelve short years ago, Flextronics reported revenue of just $93 million. During the past decade, Flextronics' annual revenue growth has averaged 48%. By contrast, the entire ECM market grew by 27% during the same period. Is Flextronics satisfied with its No. 1 position? Not by a long shot. Indeed, the EMS provider has been pushing for new revenue streams in areas once closed to contract manufacturers. It has expanded into medical and industrial markets and has begun actively marketing itself as a full-fledged original design manufacturer (ODM). The company is adding new plants in China and Malaysia to service new business that it expects to win from OEMs in North America and elsewhere. It is also engaged in discussions with Nortel Networks Inc. (Toronto) for a previously announced contract that could add $2 billion annually to its top line. (Continued on Page 2) We would like to invite your insight on these or other industry related topics. Our contact information is on the back cover.

BRERETON AND COMPANY, INCORPORATED Page 2 Electronic Contract Manufacturing Industry Reporter - July 2004 Private Investment Banking We would like to invite your insight on these or other industry related topics. Our contact information is on the back cover. An Industry Divided: The Divergence of Top and Mid-Tier Strategies (Continued) Another Distinct World Most of the recent growth in the ECM market has been concentrated at a handful of the largest companies, mainly because they count the top OEMs among their customers. The 50 biggest companies accounted for 87% of the sector's global revenue of $90 billion in 2003, according to Electronics Supply & Manufacturing estimates. Analysts believe hundreds of companies operating in the electronics sector describe themselves as ECM providers, though many of those are largely pc-board and subassembly services providers. These companies' revenues hardly register on most analysts' radar. Revenues in the sector range from the billions to the hundreds of thousands. Only the top 11 companies can boast revenue of more than $1 billion. While most top-tier ECM providers appear to have recovered from the 2001 downturn, it's a different picture among their mid-tier rivals, which we define as companies with sales between $25 and $250 million. Since 2000, several ECM providers with annual revenue below $1 billion have disappeared; some filed for bankruptcy, and others were gobbled up by bigger rivals (We will detail some of these acquisitions later). Many ECM providers are still struggling. For instance, 17th on the list, Pemstar Inc. (Rochester, Minn.), and 29th, SMTC Corp. (Toronto), have seen dramatic revenue declines after major OEMs began consolidating their manufacturing operations at the top-tier contract manufacturers. The fact is, mid-tier contract manufacturers are struggling to carve out a new role for themselves. In many cases, these companies have had to branch out into specialized fields, such as medical equipment and industrial automation systems. Targeting low-volume, high- precision markets, these mid-tier ECM providers can distinguish themselves and often blaze the trail for the whole sector, according to industry executives. Top 50 Snapshot As clearly outlined below, the top-tier manufacturers were the only group to grow incremental revenue in While much of this was organic growth, an increasingly aggressive acquisition strategy is also often a factor. It is also interested to note that twelve of the top twenty- five manufacturers are foreign, eight of which are in Asia. Our next segment discusses this trend in more detail. Source: Electronic Supply and Manufacturing.

BRERETON AND COMPANY, INCORPORATED Page 3 Electronic Contract Manufacturing Industry Reporter - July 2004 The Tax Cut of 2003: A Gift to Private Business Owners? Basic Tenets of the New Tax Bill Narrowly passed by the Senate, President Bush has called the tax cut "a vital action" that will stimulate the economy and create jobs. Just how big a cut is it? The new tax bill contains a 10-year, $350 billion tax cut, making it the third- largest tax cut in the nation's history. While there are many components of the Bill, ranging from marriage penalty reductions to child credit increases, business owners will likely be most affected by two provisions relating to the sale of their business: 1. The capital gains tax rate cut. 2. The rate cut on shareholder dividends. Among other provisions, the Bill temporarily reduces the rate on both corporate dividends and capital gains. The Bill lowers the rate on income from dividends and net long-term capital gains to just 15% for individuals. The new Bill marks the first time in at least the past 60 years that we can enjoy a capital gains tax rate below 20%. In addition, it is the first time that dividends are taxed at rates below income tax rates. But, these benefits are temporary. Both rates are subject to a sunset clause. The reduced rates are due to expire after 2008 and revert to current levels in The tax cuts could affect the private business owner on several levels. At a macro level, if the tax bill does its job, businesses and M&A could benefit from a boost in the economy. The tax changes also produce direct financial benefits when selling a business. We estimate that under the new capital gains tax rate, most business owners will see a 5%-8% increase in their after-tax proceeds following a sale. There is also the potential for tax savings from the change in the dividend income tax rate. Under the new bill, the rate is dropping from a maximum of 38.6% (personal income tax) to 15%, a 61% decline in the rate for eligible dividends. Private business owners looking to partially cash-out may be able to initiate a self-recapitalization so that the returns are treated as dividends and are taxed at the new, lower tax rate. Whether a company is structured as an S-Corp or a C-Corp and initiates a traditional recapitalization, a self recapitalization or an outright sale, the bottom line is that this tax bill creates new opportunities for the private business owner to partially or fully exit his company in a tax advantaged manner. (Continued on Page 4) Private Investment Banking We would like to invite your insight on these or other industry related topics. Our contact information is on the back cover. The Asian Pull The practice of outsourcing electronics manufacturing gained popularity in the 1970s - largely in the United States, and today most of the world’s largest contract manufacturers are headquartered in North America. Yet the never ending search for lower cost manufacturing has prompted these companies to shift manufacturing to other regions--primarily to Asia. In fact, electronics manufacturing strategist Technology Forecasters Inc. (TFI) estimates that today more than a third of the world’s outsourced electronic products are built in China, and that by 2007 the portion will increase to half. While further off-shore manufacturing is commonly expected, there are several issues that have dampened growth expectations, these include intellectual property protection, quality and design concerns and specific customer service capabilities. Technology Forecasters recently conducted a survey to identify what contract manufacturing is expected to remain in North America. These are the top categories: Medical products Aerospace/Defense products Products with high intellectual property content Homeland security products Products requiring collaboration with design teams Design services New product introduction centers Prototyping services Projects requiring local content High-mix and low-volume production Products requiring advanced manufacturing technology Customers requiring high service levels Gaming industry products Industrial controls Warranty services

BRERETON AND COMPANY, INCORPORATED Page 4 Electronic Contract Manufacturing Industry Reporter - July 2004 The Tax Cut of 2003: A Gift to Private Business Owners? (Continued) Let’s examine the effect of the capital gains rate reduction on a business sale. The maximum capital gains tax rate will fall from 20% to 15%, resulting in greater after-tax proceeds following the sale of a business. The following example shows the effect of the new tax rate on a hypothetical business sale. In this example, the company sells for $8 million (on a debt-free basis). Because of the difference in tax structures between an S-Corp and a C-Corp, the capital gains tax reduction will have a varying degree of impact on individual companies. Let us assume that the two companies in our example are identical, with the exception that one was a C-Corp, and the other an S-Corp, from inception. Both companies were started with an initial investment of $100,000 and no additional outside capital was invested thereafter. Both companies have book equities of $2 million (with neither company using accelerated depreciation) and $2 million in debt. Because of their different tax structures, the taxable basis for the two companies is different. For the S-Corp, the basis in the company's stock is equal to the firm's equity, $2 million (the basis in the company's assets is $4 million). For the C-Corp, the basis in the company's stock is simply equal to the initial investment, $100,000 (the basis in the company's assets is $4 million). The following example shows the effect of the change in the capital gains tax rate on our hypothetical business sale, whether the company is structured as an S-Corp or as a C-Corp. In the above example, under the new tax rate, the net due owner to our S-Corp seller increases 3.9%. The net due owner gain for our C-Corp seller is even more dramatic, 6.2%. In other words, in this example, the new capital gains tax rate results in the seller keeping about an additional quarter of a million dollars when he sells his company. This tax bill, while encouraging, is not the final word on taxes. In the case of dividends and capital gains, the rate cuts are effective only through Whether or not the new rates will be extended beyond that date, or raised before that date, is anyone’s guess. Some believe the cuts will be made “permanent” beyond the sunset date. Others believe the rates will rise again, citing the narrow margin by which the Act passed, and considering that the Fed will soon be wrestling with a way to fully fund Social Security retirement and Medicare benefits for the baby boom generation. The new Bill marks the first time in at least the past 60 years that we have enjoyed a capital gains tax rate below 20%. In addition, it is the first time that dividends are taxed at rates below income tax rates. Because it can take anywhere from 6-18 months to sell a business (on average, one year), business owners thinking of selling should prepare for market now, so they can take advantage of what we believe to be a unique and probably impermanent opportunity. Private Investment Banking We would like to invite your insight on these or other industry related topics. Our contact information is on the back cover.

BRERETON AND COMPANY, INCORPORATED Page 5 Electronic Contract Manufacturing Industry Reporter - July 2004 Private Investment Banking We would like to invite your insight on these or other industry related topics. Our contact information is on the back cover. Merger and Acquisitions Review The worldwide electronics manufacturing services market rebounded in 2003, as the worldwide electronics market experienced a broad-based recovery. The market is expected to continue growing even more robustly in 2004, and then settle into solid growth in the following years, according to Electronic Trend Publications. They estimate that total electronics assembly value was $648 billion in 2003 and will grow to $875 billion in Fueled by this huge market, Electronic Trend Publication believes that the ECM industry will grow from $140 billion in 2003 to $244 billion in As seen on page one, 2003 and the first half of 2004 has been a very active time for electronic manufacturers in terms of mergers and acquisitions (“M&A”) activity. However, it should be noted that while there are more deals getting done, they are generally smaller transactions. Factors Affecting Activity There are several factors that may assist in the resurgence of deal activity within the sector. Some of these factors include: Rebounding Credit Market The credit markets remain tight, but they appear to have bottomed out, as average total debt/EBITDA leverage ratios in transactions rose to 4.0x in Acquisition financing continues to be predominantly through asset- backed loans as a majority of the debt component, however recently lenders are showing increasing support for cash flow lending, which should help stimulate deal activity. Increased Activity from Private Equity Groups Despite a decline in fundraising in 2003, analysts confirm that there is no shortage of capital in the hands of private equity groups, who still have an estimated $100 billion, raised during the golden fundraising years of 1998–2001, to invest. In fact, the abundance of uncommitted capital has become an issue for private equity firms, many of which are behind their forecast investment pace. As a result, they are scrambling to make investments in quality companies. Private Equity Groups are actively looking for attractive electronic manufacturing companies with stable cash flows to invest in. This is exemplified by the recent barrage of deal activity. Increase in Offer Multiples Not only have the number of middle-market deals increased, but offer multiples have risen as well. In 2003, the International Mergers and Acquisition Partners (IMAP) reported a jump of over 20% in EBIT multiples. They also reported an average hi-tech, non-proprietary EBIT multiple in 2003 of 5.5x. Source: Loan Pricing Corporation (A Reuters Company) Transaction >$100 million Borrower Revenues >$500 million (a)Multiples of Earnings Before Interest and Taxes (EBIT) were used in the comparisons above. EBIT was calculated using trailing 12 months earnings before interest and taxes, adjusted for non-recurring expenses and discretionary owner distributions including compensation in excess of market rates. Seller notes, etc., were discounted present values.

BRERETON AND COMPANY, INCORPORATED Page 6 Electronic Contract Manufacturing Industry Reporter - July 2004 Private Investment Banking Merger and Acquisitions Review (Continued) Recent activity reflects the strong interest from both strategic and financial buyers. It should be noted that in the last twelve months, publicly traded electronic manufacturers have seen a 48% increase in valuation, providing a much more effective acquisition currency.

BRERETON AND COMPANY, INCORPORATED Page 7 Electronic Contract Manufacturing Industry Reporter - July 2004 Private Investment Banking Merger and Acquisitions Review (Continued)

BRERETON AND COMPANY, INCORPORATED Page 8 Private Investment Banking  Strategic and Financial advisors to businesses seeking value Maximization  Hands-on attention from experienced senior dealmakers who stay with your deal to closing  Founded in 1995 drawing from prior investment banking experience  Empathetic professionals who have acquired, operated and divested businesses for their own account  Broad industry experience in middle market Mergers & Acquisitions  Strategic planning framework for evaluation of financial alternatives  Structured timelines and processes for multiple bidder-based value maximization Attention Brereton and Company is a boutique investment bank dedicated to maximizing the value and liquidity of closely held businesses. Expertise Process If you are:  Undercapitalized and experiencing explosive demand for your product  Facing a difficult transition after many years at the helm  Unsure about how to best maximize the value of your business for your heirs  Ready to harvest your business investment to diversify your net worth Please give us a call. Our initial discussions and analysis are strictly confidential and complimentary. Brandt Brereton, Managing Director Telephone: (408) Facsimile: (408) Brereton and Company, Inc N. Tenth Street, Suite 110 San Jose, CA Member: International Network of Mergers and Acquisitions Partners (