ZIATECH: BACK FROM THE GRAVE

As you may know, Performance Technologies recently acquired the former Ziatech, Inc. from Intel EID. Venture Development Corporation (VDC) has taken a look at this acquisition, and has made an assessment of its potential.

NATICK, MA: September 17, 2002 - On September 12, 2002, Performance Technologies, Inc. (NASDAQ:PT) announced that they had acquired the part of Intel Corporation (NASDAQ:INTC) Embedded Intel Architecture Division (EID) that had formerly been known as Ziatech, Inc., for an aggregate cash consideration of US$ 3.8 million. The transaction is expected to be finalized on or before October 1, 2002. Although the deal appears, at first blush, to be a "slam dunk" score for Performance Technologies, Venture Development Corporation (VDC) has identified several issues that must be addressed in order for Performance Technologies to realize the combined companies' potential in high performance embedded systems for datacom, telecom and other mission critical embedded applications.

Performance Technologies, Inc.

Founded in 1981, Performance Technologies (PT) is a publicly traded supplier of hardware and software networking and communications products for WAN and LAN environments. VDC projects PT's year 2002 revenues to be approximately US$ 26 million, down from the US$ 36.5 million cited in 2001 SEC reports. The company has been profitable every quarter since going public.

The firm has expended considerable effort in the development of the PTMC (PCI Telecom Mezzanine Card) architecture, embodied in the PICMG 2.15 standard, and of Packet Switching Backplane technology, the first switch fabric backplane interconnect to have significant market impact. The latter is the subject of PICMG standard 2.16. Performance Technologies operates a printed circuit board surface mount technology line, located at its facility in Rochester, NY, where they manufacture board level products. Exhibit 1 provides details of Performance Technologies expected performance in year 2002, as forecast by VDC.

Exhibit 1 - Performance Technologies, Year 2002

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To view the entire press release including exhibits and charts go to
www.vdc-corp.com/embedded/press/02/pr02-35.html

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Performance's previous strategic direction included a discontinuation of VME products in favor of CompactPCI, PICMG 2.16 and PMC products. They also plan to transition their board products from PCI to PCI-X.

Ziatech: The Source for High Performance CompactPCI

Ziatech (San Luis Obispo, CA) was founded in 1976 by a gentleman named Bert Forbes. Ziatech operated as a closely held, private company until August of 2000, when it was purchased by Intel Corporation for US$ 241 million in cash. Although not a wildly profitable concern, Ziatech built an excellent reputation as a supplier of high-end embedded computing products and systems. The company was creative and highly responsive to customer needs. Ziatech also struggled with some persistent challenges, including: high prices and uneven lead times. In addition to being the inventors of CompactPCI, Ziatech had also invented STD-32, a 32-bit extension to the original 8/16-bit STD bus, in 1989. (Just prior to the Intel acquisition, Ziatech had announced that they planned to exit the STD-32 market by year 2006.)

The primary source of revenue for Ziatech is CompactPCI single board computers (SBCs). In year 1999, merchant computer boards represented approximately 65% of the firms total revenues. Exhibit 2, below, provides some details about the Ziatech operation, both for year 2000 (during which they were acquired by Intel), and for year 2002, as an operating unit of Intel EID.

Exhibit 2 - Ziatech / Intel EID

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To view the entire press release including exhibits and charts go to
www.vdc-corp.com/embedded/press/02/pr02-35.html

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A significant share of Ziatech's merchant computer boards have been outsourced and shifted overseas. This strategy was executed during the Intel EID period. The company maintains significant engineering, test, final assembly and advanced integration capabilities in California.

Revenue Down 65% in Two Years! What happened?

It has been a long, strange trip for Ziatech from 2000-2002. Ziatech went from being an independent company, known as the technology leader in an exploding CompactPCI market, to one of many components of the Intel Ventures portfolio, and one of the smallest operations in the US$ 1 billion embedded division of the world's ultimate technology bellwether. For nearly a year, Ziatech and Intel executives debated the future of Intel EID, Ziatech, branding, CompactPCI, next-generation embedded systems architectures, fully integrated systems business possibilities, the telecom/datacom market, other embedded markets, and a host of other issues large and small.

The combined effects of this complex agenda caused Ziatech to atrophy. And while the markets were not kind, neither were the parenting skills of Intel EID as regards its creative and free-spirited adopted child.

The initial strategy made sense. Telecom and datacom were exploding. CompactPCI was fast becoming the architecture of choice for high availability platforms in next generation networks. Intel needed its silicon to be the heart of those new systems. Ziatech could provide a strong channel-to-market for Intel silicon, and a solid platform on which to build new board-level and integrated systems capabilities at Intel EID.

It never happened. A short list of factors that contributed to Ziatechs contraction, includes:

· The telecom and datacom markets imploded. After doubling shipments from 1999-2000, to more than US$ 700 million, the CompactPCI market shrunk by more than half to US$ 300 million in 2002.

· Two key barriers to CompactPCI's entry into new markets: continued variation of the CompactPCI standard and the relatively high cost of CompactPCI versus competing technologies.

· The Ziatech brand was killed, and with it much of the good will and brand loyalty that Ziatech had developed over 20 years. Rather than being perceived as the source of innovation for CompactPCI, the company was seen as a silicon channel for Intel.

· The reticence of certain segments of the embedded systems marketplace to conduct board-level and systems integration business (the traditional Ziatech value-add) with a new competitor, Intel. Competition was not the only barrier. Intel's incredible brand strength in silicon did not translate easily to boards, or systems.

· The poor fit between Ziatech's innovation-driven, lower-volume, systems business with Intels productivity-obsessed, high volume, silicon business.

So US$ 70 million became US$ 25 million, and US$ 241 million became US$ 3.8 million. Is that a deal?

A recent presentation by PT outlined the strategy behind the acquisition, highlighting the following points:

· Ziatech has strong talent, quality products, excellent reputation
· Immediately increases revenue size of Performance Technologies
· Creates a highly complementary product line with no overlap
· Increases total available market by providing a broader product offering to the embedded market
· Target markets now include telecom, datacom, medical, transportation and military
· Many mutual customers, immediate ability to sell more product
· Creates a combined entity that is stronger and in a more competitive position than either individual unit
· Leverage combined skills to develop packet processing and switching products for use in emerging IP-based embedded system platforms and networks

Product lines acquired include:

· CompactPCI and PICMG 2.16 Intel x86 SBCs, including six modules with fourteen variants;
· Five chassis models;
· Six power supply models;
· One management module;
· STD-32 EOL product line, with "significant potential" to generate short-term positive cash flow.

In addition, Performance Technologies has already outlined a number of initiatives aimed at maximizing the growth and profitability prospects of the combined companies for 2003:

· Maintaining both existing facilities in Rochester, NY and San Luis Obispo, CA as centers of competency for boards and systems integration, respectively.

· Evaluating current commodity sourcing strategies and reviewing options for consolidation, outsourcing, and internal development.

· Re-establishing the Ziatech brand for CompactPCI boards and systems as a line of products within the Performance Technologies portfolio.

· Developing product roadmaps that support a number of architectures in addition to CompactPCI, including STD-32, PCI and others

· Supplementing the current datacom / telecom focus with vertical markets and applications from other market segments where customers share the need for high-quality, high-performance embedded computing systems and support services.

VDC's Strategic Fit M&A Model

VDC has developed a model that evaluates the effect of a merger or acquisition across six basic dimensions along which a transaction can impact an acquirer's business model and competitive position, providing a quantitative assessment of potential. As applied to the present case:

· Product Offering Impact - Will the acquisition increase PT's capabilities in its core offerings? Will Ziatech expand PT's core capabilities into new (related and complementary) offerings?

· Service Offering Impact - Will Ziatech increase PT's capabilities in basic services? Will Ziatech expand PT's capabilities in key applications, vertical markets or service offerings?

· Served Market Impact - Will Ziatech increase PT's share in its currently served markets? Will Ziatech expand PT's currently served market by providing access to related and complementary applications, market segments, vertical or regional markets?

· Distribution Channel Impact - Will Ziatech increase the breadth or depth of PT's current distribution channel architecture? Will Ziatech expand PT's distribution channel to include unserved or marginally served distribution channels?

· Organization Impact - Will Ziatech augment the management skill set of PT's current managers? Will Ziatech provide new, related and complementary managerial experience and skills to PT's organization?

· Financial Impact - Will Ziatech add to PT's current revenue sources? Will Ziatech generate new sources of profitable revenues for PT?

Each of the above criteria is scored on a scale from zero to five, providing a maximum score of 30 for the acquisition.

Performance Technologies -- Ziatech Acquisition Analysis

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To view the entire press release including exhibits and charts go to
www.vdc-corp.com/embedded/press/02/pr02-35.html

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Additional Caveats and Comments

Systems Integration - In a recent interview with VDC personnel, Performance Technologies stated that they planned to develop their systems integration capabilities, and Ziatech does bring some experience in this respect to the table. However, in today's marketplace, systems integration is not simply a matter of stuffing boards into a box. The firm must define what they will provide in terms of integration, and develop not only a solid roadmap but skilled project management methodology as well.

Mechanical / Electrical Engineering - Key differentiators, which can mean the difference between success and failure, comprise custom capabilities in both mechanical and electrical subsystem design and manufacture. These issues must be addressed immediately; a false start can only damage long-term potential.

Boards and Systems - PT indicated an intention to bring some of Ziatech's board manufacture in-house to their facility in Rochester. We suspect that their surface mount line may, at present, be underutilized. If so, this appears on the surface to be a sound move. However, systems integration will still be performed in San Luis Obispo. There is a great deal of risk in separating board and systems manufacture by such a large distance.

Outsourcing versus Manufacture - A great deal of the SBC market comprises low-end boards, such as PCI single processor Pentium 2/3 units. These comprise commodity products, and cannot be manufactured competitively in the United States. If the firm plans to offer this type of product, these must be outsourced to the Far East, which carries an additional set of risks in terms of supplier instability, design and quality control issues. Again, a sound roadmap must be developed.

STD-32 and Military / Aerospace - Although STD-32 may represent a "cash cow," Ziatech's earlier and well-publicized decision to phase out these products may have already minimized this opportunity. Regaining market share may require a substantial marketing effort, which carries with it the risk that the Ziatech unit will become perceived as specializing in this architecture and/or its legacy markets. A lower profile may be preferable.

PCI and CompactPCI are Different Businesses - Although Ziatech has a great deal of experience in CompactPCI, most of Performance's marketing experience lies with PCI. CompactPCI is an entirely different animal, and many market segments still consider this technology to be experimental. Therefore, PT must develop a separate marketing strategy for these products, and a well-trained sales force to support it.

Real Experience Means Wins - Today's embedded marketplace puts a great deal of emphasis on the suitability of products for specific applications, which is as it should be. However, this means that customers won't simply go to a catalog or web site and order a bunch of stuff. Applications Engineers and sales people must be well armed with case studies of design wins specific to the relevant applications segment, and be able to speak in the vernacular of that segment. This is particularly true in the systems integration field. Customization experience and capability is also vital.

The Bottom Line

The financial risk in this deal appears minimal. The potential for strategic distraction and operating confusion are considerable. Our bet: Performance Technologies' penchant for profitability and Ziatech's technical talent will create a lot of opportunity for growth in profitable revenues, market share and shareholder equity.

ABOUT VDC

   VDC has 30 years of experience in providing market research, strategic analysis, and consulting services to technology companies worldwide. VDC has been analyzing the embedded systems industry since 1982. Our initial focus on embedded single board computers used in industrial automation, telecommunications, and military/aerospace applications has been expanded to cover the market for commercial embedded operating systems, software development tools and related products. VDC research efforts in embedded software and hardware include:
   
· The Worldwide Market for Merchant Computer Boards in Real-time and Embedded Applications Planning Service, a research program with numerous annual deliverables ongoing since 1982.

For further information regarding the "Ziatech: Back from the Grave" contact:

J. Eric Gulliksen, Project Director
ericg@vdc-corp.com

Marc Regberg, Senior Vice President
msr@vdc-corp.com

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