RAE Systems Inc

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RAE Systems Inc.

3775 North First Street
San Jose, California 95134
U.S.A.
Telephone: (408) 952-8200
Fax: (408) 952-8480
Web site: http://www.raesystems.com

Public Company
Incorporated: 1991 as RAE Systems Inc.
Employees: 774
Sales: $60.29 million (2005)
Stock Exchanges: American
Ticker Symbol: RAE
NAIC: 334519 Other Measuring and Controlling Device Manufacturing

RAE Systems Inc. produces systems for detecting hazardous chemicals and radiation. Its sensors, some of which can be rapidly deployed and connected through wireless networks, help security and safety personnel respond to and manage incidents such as chemical spills. In addition to products for homeland security and public safety use, RAE also makes sensors for industrial applications. A pioneer in producing compact photoionization detectors (PIDs), RAE has integrated its environmental hazard detection equipment with technologies such as GPS and wireless networking, allowing field commanders an unprecedented picture of dynamic situations.

RAE is based in California and boasts low-cost manufacturing capabilities at plants in Shanghai and Beijing, China. It also has research ties with Shanghai University. In 2005, 56 percent of revenues came from the Americas. Asia (primarily China) was RAE's next biggest region, accounting for a third of revenues. Chief customers include government agencies and large corporations. In addition to selling products outright, RAE makes systems available for lease or rental.

ORIGINS

The company was originally incorporated in California in March 1991 as RAE Systems Inc. (this was later replaced by a Delaware corporation). Its founders were Robert I. "Bob" Chen and Dr. Peter C. Hsi, who would become CEO and chief technology officer, respectively. RAE was based in Sunnyvale, California, for its first 14 years before moving a few miles to San Jose.

RAE was not Chen's first entrepreneurial venture. Ten years earlier he had formed a computer-aided test system business called Applied Optoelectronic Technology Corporation, where Dr. Hsi had been the top systems architect. Chen sold this company to Hewlett-Packard. Chen's educational background included a baccalaureate from Taiwan National Cheng Kung University and advanced engineering degrees from the South Dakota Schools of Mines and Technology and Syracuse University, as well as a stint studying business at Harvard.

RAE's mission was to produce high-tech devices for detecting environmental hazards such as toxic gases and radiation. The company pioneered the technology of photoionization detectors (PIDs). These devices were also much more compact and easier to maintain than the previous standard, which required a hip-mounted motorcycle battery for power and had to be cleaned daily. In 1999, RAE raised industry sensitivity standards by developing PIDs capable of readings of parts per billion rather than parts per million. This allowed for earlier warnings than had been previously possible.

RAE started production at its WaRAE subsidiary in Shanghai, China, in 1995, giving it a low-cost manufacturing base. The company became profitable in 1997 with net income of $1.2 million on sales of $6.6 million. Growing quickly, it ended the 1990s with 200 employees and annual revenues of $10.8 million. A convergence of revolutionary technologies and world events would help quadruple the company's sales in the next few years.

Originally pitched as mining and industrial safety devices, the PIDs would find new applications in the growing homeland security industry after the September 11, 2001 terrorist attacks on the United States. This would become a $40 billion industry by 2006. Corporations and large venues increasingly turned to environmental detection equipment for security and safety reasons, while RAE also competed in some traditional industrial applications.

SWEEPING CHANGES IN 2002

RAE introduced the first wireless network of chemical sensors, AreaRAE, in 2002. This transmitted to a base station up to two miles away and could be controlled over the internet. It soon added the capability for GPS technology to provide field commanders a comprehensive picture of an evolving situation in real time. Its relatively low cost also made it an alternative to hard-wired industrial monitoring systems. In 2002, RAE also opened an office in Denmark to provide better service to its increasing number of European customers.

At the same time, RAE was undergoing changes to its corporate structure. It became a public company in April 2002 through a reverse merger with Nettaxi.com.Nettaxi.com, a Nevada corporation which was trading publicly over-the-counter, was the surviving entity and was reincorporated in Delaware as RAE Systems Inc. RAE's shares migrated to the American Stock Exchange in 2003.

Nettaxi, based in Campbell, California, had been incorporated in Nevada in 1995 and was formerly known as Swan Valley Snowmobiles. Though unprofitable, it operated some popular web sites and attained revenues of $9.4 million in 2000. It fell on hard times after the tech bubble burst, however. In 2001 Nettaxi lost nearly $9 million on revenues of $2 million. A private company, Nettaxi LLP, took over the internet marketing portal after the RAE merger.

PROTECTION FOLLOWING THE
2001 TERRORIST ATTACKS ON
THE UNITED STATES

RAE's products were gaining acceptance in an increasing number of applications. Marines carried MultiRAE units with them during the U.S. invasion of Iraq to detect the presence of chemical weapons. These were able to detect a number of different gases. At home, a growing number of state and federal agencies were incorporating RAE systems in their disaster preparedness planning. At the same time, a marketing official told Purchasing, the Severe Acute Respiratory Syndrome (SARS) crisis had caused some inventory challenges along RAE's supply chain.

RAE's products were deployed in a number of major public gatherings, including the 2002 Winter Games in Salt Lake City and later the Super Bowl and baseball's World Series. The EPA credited AreaRAE with helping manage a dangerous sulfuric acid spill at a dock in Texas City, Texas, in November 2003. In China, an AreaRAE network was formed to monitor the archeological exploration of the famous terra cotta warriors of Xi'an.

RAEWatch, a permanently installed collection of wireless sensors, was unveiled in 2004. It was intended for monitoring public venues and shipping containers and could be expanded to include a variety of sensors, such as accelerometers. Another new wireless product was AreaRAE Gamma, which included a radiation detector with sensors for multiple gases. Also in 2004, full motion color video capability was introduced for the AreaRAE family of products.

COMPANY PERSPECTIVES

RAE Systems, founded in 1991, is a leading global developer and manufacturer of rapidly deployable chemical and radiation detection monitors and multi-sensor networks for homeland security and industrial applications. RAE Systems' technologically advanced products are based on proprietary technology, and include a full line of portable, wireless and fixed atmospheric monitors and photo-ionization detectors and gamma and neutron radiation detectors for the detection and early warning of hazardous materials.

RAEWatch was being tested for use in monitoring shipping containers as they made their way through terminals, trucks, and ocean vessels. RAE had developed a customized version of its MultiRAE system to warn air force mechanics of hazardous conditions near aircraft fuel tanks.

The PlumeRAE product was introduced around 2005. This was computer modeling software designed to work with the AreaRAE system to accurately measure and forecast gas spills.

The company was also boosting its production and marketing capabilities in the booming economy of China. In 2004 RAE acquired a 64 percent interest in Ke Li Heng Security Equipment Co., Ltd. (KLH), a state-owned manufacturer of monitoring devices, for $9 million. KLH had been formed in 1996 and employed 280 people. It had developed proprietary technology for monitoring several gases and had a plant in Beijing and a countrywide sales network. With its growth in chemical and energy industries, China was also becoming a large market for the kind of monitoring offered by RAE. After gaining Chinese government approval, RAE agreed to raise its stake in its RAE-KLH Co. Ltd. unit from 64 percent to 96 percent by 2011, paying an estimated $8 million for the additional shares.

RAE took advantage of relatively low real estate prices by buying a 67,500-square-foot headquarters building in San Jose for $5 million. The firm had 150 employees at its headquarters and 370 worldwide, including two plants in the United States and two in China. RAE was also buying out its distributors in Europe.

DEVELOPING NEW TOOLS
THROUGH PARTNERSHIPS

In 2004 RAE signed up with Austin, Texas-based Net-Botz to develop a solution for incorporating data from different monitoring sites into one "big picture" via the internet. This was a key step in the company's vision of "pervasive sensing."

In 2006 RAE continued to forge partnerships with other companies to develop new applications for its sensors. San Antonio security technology provider MDI Inc. agreed to integrate a number of RAE's tools with its ONE Unified Technology management platform. Another partner was VivoMetrics, maker of the LifeShirt, a strap that first responders wore to relay their physical conditions to a command center via modem.

RAE bought Aegison Corp., a supplier of digital video surveillance equipment, for $2 million in July 2006. RAE had begun working with Aegison on an integrated sensor data and video system.

Frederick C. Ingram

PRINCIPAL SUBSIDIARIES

RAE Systems Inc.; RAE Systems (Asia) Limited (Hong Kong); RAE Systems (Hong Kong) Limited; RAE Systems Europe ApS (Denmark); RAE United Kingdom Limited; RAE France; Renex Technology Limited (Hong Kong); RAE Systems (Shanghai) Incorporated (China); RAE-KLH (Beijing) Co., Ltd. (China).

PRINCIPAL COMPETITORS

BW Technologies Ltd.; Draeger Safety Inc.; Industrial Scientific Corporation; Ion Science Ltd.; Mine Safety Appliances Company.

KEY DATES

1991:: RAE Systems is formed in Sunnyvale, California, by Robert Chen and Peter Hsi to produce environmental hazard detection equipment.
1995:: Company adds production in Shanghai.
1996:: RAE introduces world's first multi-sensor chemical detection unit.
1997:: Company becomes profitable.
1999:: Photoionization detectors (PIDs) capable of parts-per-billion readings introduced.
2002:: RAE becomes publicly traded through reverse merger with Nettaxi.com, introduces wireless networking of sensors.
2004:: Majority interest in Chinese manufacturerKLH is acquired.
2005:: RAE moves into new San Jose headquarters.
2006:: RAE develops video capabilities, acquires Aegison Corp.