Frequency Electronics, Inc. Business Information, Profile, and History

Company Perspectives:

With the ongoing worldwide expansion of telecommunications capabilities, Frequency Electronics is well positioned to meet the demands of this rapidly expanding marketplace.

History of Frequency Electronics, Inc.

Based in Mitchel Field, New York, Frequency Electronics, Inc. (FEI) is a leading research and development company devoted to the advanced control of time and frequency. Precise timing is key to proper synchronization in communications and data transfer for spacecraft systems, military applications, and telecommunications networks. FEI makes such timing products as oscillators and distribution amplifiers based on quartz, rubidium, and cesium technology. For most of its history, FEI has served the government sector but in recent years has taken steps to apply its products to wireless communications systems. Because there is a growing demand for cellular service in the world, but a limited amount of bandwidth, precise timing becomes a crucial factor in the synchronization of voice and data transfer. To serve this market, FEI manufactures a Rubidium Atomic Standard, an atomic clock, and temperature stable quartz crystal oscillators. FEI also provides synchronization products for wireline systems such as fiber optic networks. Further, FEI manufactures several products used by satellites involved in communications, navigation, weather forecasting, and video and data transfer. They include master clocks, made from quartz, rubidium, or cesium; DC-DC power converters for instrumentation power control; hybrid assemblies used for onboard spacecraft command, control, and power distribution; and oven-controlled crystal oscillators, needed for satellite transmission and GPS systems. In addition to its main facility and headquarters on Long Island, New York, publicly traded FEI operates plants in Belgium, France, and China.

Company Started in 1961

FEI was founded and incorporated in New York in 1961 by Martin Bloch. A City College of NY graduate, he worked for seven years during the 1950s for watchmaker Bulova, where as chief electronics engineer he was heavily involved in the development of the Accutron, the world's first electronic watch. Early in the decade the first battery-powered watches came onto the market, but they still relied on a balance-wheel movement and were no more accurate than traditional spring-wound watches. Bulova researchers developed a tuning fork movement that was a revolutionary departure from previous methods and resulted in the first timing devices capable of providing the accuracy required by the emerging space program. Bulova launched the Accutron wristwatch in 1961, the same year that Bloch left to found his own company to apply new timing technologies to spacecraft.

During the first 20 years of its history, FEI, operating out of a facility in New Hyde Park, Long Island, concentrated on the development of timing devices to be used by the space programs of the National Aeronautics and Space Administration, including the Apollo moon landings, all of which required pinpoint precision for navigation in space. In 1968 FEI reincorporated in Delaware and went public. A year later the company took a major step when it acquired the Atomichron product line from National Radio Company for $733,000 in cash and notes. National Radio had been in the electronics business since 1914, when it started out in the early days of radio producing shortwave and amateur receivers. During the 1950s National Radio joined the quest to develop the atomic clock and its pioneering efforts in quantum mechanics and nuclear theory led to the 1956 introduction of the Atomichron, the world's first commercial atomic clock. It was accurate to within one billionth of a second, and was the direct ancestor of today's cesium beam clocks found on GPS satellites.

The market for FEI's high-tech products was small, but by 1980 new customers emerged in the form of the military, which needed the company's timing and frequency control devices for navigational purposes, guidance systems, and encryption needs. FEI was involved in three major military programs. Navstar was a military navigation system developed for use by non-Communist countries. Another program, named The Tiger, provided secure digital transmission of data for use by satellites and other military applications. Finally, FEI's quart crystal oscillators were incorporated into the radar warning systems of fighter aircraft. As a result of these defense contracts, FEI saw its annual revenues increase to $9.3 million in 1980 and $14.2 million a year later. Net income grew from $784,000 to $2.2 million in 1981. Moreover, FEI caught the attention of investors who bid up the company's stock. In anticipation of even greater growth, the company began to construct its present-day Mitchel Field facility, a 131,000-square-foot site that boasted a shipping capacity of $125 million a year. FEI moved to Mitchel Field in December 1981. The land was leased from Nassau County, New York, and was partially built and equipped with the proceeds of a $5 million bond from the county. In 1988 FEI opened a contiguous 90,000-square-foot facility, financed by another $3.5 million bond arranged by the Nassau County Industrial Development Agency.

During the 1980s FEI established an alliance with TRW, Inc., acting as a subcontractor on satellites built for the U.S. government. In 1987 FEI bought a TRW unit, TRW Microwave, paying approximately $16.7 million. This acquisition was the start of a shift away from dependence on business from the Department of Defense and an effort to fill the need for private-sector satellite hardware as well as ground-based communications systems. Also of note during this transitional phase was the establishment in late 1989 of an Employee Stock Ownership Plan, which gave employees a 10 percent stake in the company.

Company Indicted in 1993

The costs associated with moving into the commercial sector led in 1991 to FEI reporting its first loss (nearly $6.4 million) since 1979. Annual revenues at this stage topped $56.5 million, but business did not pick up after fiscal 1991, dipping to $53.2 million in 1992 and $43.2 million in 1993. To make matters worse, FEI would soon be saddled with legal bills, which would average over $1 million a year over the next several years. In December 1993 the company was indicted by a federal grand jury for allegedly conspiring to defraud the government in connection with its subcontracting for TRW. In a separate action, Bloch and three other executives faced similar charges. The underlying point of contention was the 1988 termination by TRW of three of the six subcontracts on highly classified government space satellites it had with FEI. As part of the process, FEI submitted statements that laid out in detail the costs the company had incurred on these contracts and for which it was eligible for reimbursement. The FBI began looking into the matter in 1990, sealed indictments were then made in a complaint dated December 1992 and finally became known to FEI in November 1993. The government maintained that the company's officers agreed to defraud the government, submitted false bills, and destroyed records related to FEI's actual costs on the terminated contracts. The company vehemently denied the charges, which were soon matched by a civil suit by the government seeking damages, as well as a shareholder suit that sought reimbursement from the company's officers for the financial damage caused to FEI by their alleged actions. As soon as the government charges were made public, FEI's stock plummeted. In an attempt to maintain its government business, the company rearranged its top rank of officers. For his part, Block resigned as chairman and chief executive officer, and took a leave of absence as president, but he stayed on to serve as FEI's chief scientist. Replacing him as chairman and CEO was board member Joseph P. Franklin, a retired Army Major General who since his retirement in 1987 had been running a Spanish business consulting firm in Madrid, Spain. Despite the changes, a few weeks later FEI was banned from contracting with or acting as subcontractor with any agency of the U.S. government. Moreover, defense spending was already trending downward in the wake of the collapse of Communism.

Revenues fell to $43.2 million in 1993, $27.5 million in 1994, and bottomed out at $24 million in 1995. The company also posted net losses of $8 million, $4.6 million, and $3.8 million during these years. As a cost-cutting measure, the company closed a California plant, moving its operations to the Long Island facility. Business began to pick up in 1995 as sales topped $25 million and net earnings totaled more than $2.8 million, representing FEI's first profitable year since 1992. But legal problems continued to haunt the company. It was not until June 1998 that FEI was able to settle its outstanding criminal and civil cases. In the end, the company pleaded guilty to one count of filing a false statement. It also agreed to pay a $400,000 fine, $1.1 million for investigation costs, and another $6.5 million to settle the government's civil suits. Bloch was able to regain his role as the company's CEO, although Franklin stayed on as chairman of the board.

By this point, FEI was already well on its way to making the transition away from a dependence on defense contracting in favor of commercial work. In keeping with this focus, the company established two new divisions. The intention of FEI Space was to produce off-the-shelf products, as opposed to its traditional custom-designed government projects, suitable for the satellite communications industry. FEI Communications targeted the cellular and personal communications services markets. The company's shifting emphasis away from government contracting was evident in the steadily decline in sales to the public sector. FEI recorded net sales to the U.S. government of nearly $18 million in 1995, but by 1998 that amount dropped to $5.6 million.

Late 1990s Focus on Commercial Customers

Over the final years of the 1990s and into the new century, FEI continued in its efforts to recast itself as a provider of timing and frequency solutions to a range of commercial customers. In September 2000 (fiscal 2001), FEI strengthened its telecommunications business with the acquisition of Gilliam S.A., a Bel- gium company, in a cash and stock deal worth in excess of $12 million. Gilliam was involved in four main areas: the management of timing and interconnectivity for wireline networks; remote network monitoring systems; equipment to connect isolated, primarily rural, customers to telephone networks via satellites; and power supply products for telecom service providers.

FEI integrated Gilliam into its structure and took steps to introduce its wireline synchronization products in the U.S. market. In 2002 the company launched an Asian subsidiary, which began to manufacture components in China. It also invested in Morion, Inc., a Russian maker of high-quality quartz products. FEI also established a German subsidiary to act as a sales and marketing platform in Europe. Moreover, the company established FEI Government Systems, Inc. to handle FEI's renewed interest in government contracts. Sales to the U.S. government bottomed out at $3.7 million in 2001 but began to reverse course, growing to $4.5 million in 2002 and $8.9 million in 2003. In May 2003 FEI completed another acquisition, paying $2.7 million to acquire Anaheim, California-based Zyfer, Inc., a subsidiary of Odetics, Inc. Zyfer offered cutting edge, proprietary global positioning systems (GPS) technology.

Although it was adversely impacted by a lack of investment in telecommunications infrastructure during difficult economic conditions, FEI continued to look forward to what appeared to be a promising future. A large number of satellites were reaching the end of their design life and in need of replacement. There was an opportunity for FEI to transfer its quartz oscillator technology--with a strong track record on space probes to Jupiter and Venus--for use in heavy industry to monitor processes under extreme conditions. Defense contracting also offered strong potential, especially with programs involving secure radio and pilotless vehicles, both of which required sophisticated timing systems. In addition, the high demand in the world for greater telecommunications services, for greater voice, video, and data service, whether it be wireless or wireline, also played to the strengths of FEI.

Principal Subsidiaries: Gilliam-FEI (Belgium); Satel FEI (France); FEI Asia (China); FEI-Zyfer; FEI Europe (Germany); Morion, Inc. (Russia).

Principal Competitors: Agilent Technologies, Inc.; Iteris Holdings Inc.; Symmetricom, inc.

Chronology

• Key Dates:
• 1961: Company is founded by Martin Bloch.
• 1968: Company goes public.
• 1969: Atomichron atomic clock line is acquired.
• 1993: Company is indicted for alleged government fraud.
• 1998: Company pleads guilty to one count in fraud case.