SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended June 30, 2004 Commission File No. 1-9399 RESEARCH FRONTIERS INCORPORATED (Exact name of registrant as specified in charter) Delaware 11-2103466 (State of incorporation or organization) (IRS Employer Identification No.) 240 Crossways Park Drive, Woodbury, N.Y. 11797 (Address of principal executive offices) (Zip Code) (516) 364-1902 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No __ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of August 9, 2004, there were outstanding 12,802,059 shares of Common Stock, par value $0.0001 per share. RESEARCH FRONTIERS INCORPORATED Consolidated Balance Sheets June 30,2004 Assets (Unaudited) Dec.31,2003 Current assets: Cash and cash equivalents $ 4,163,601 5,072,290 Marketable investment securities-available for sale 4,875 7,875 Royalty receivable, net of reserves of $50,000 216,709 159,891 Prepaid expenses and other current assets 82,828 82,027 Total current assets 4,468,013 5,322,083 Investment in SPD Inc. -- 209,704 Fixed assets, net 121,946 135,878 Deposits and other assets 22,605 22,605 Total assets $ 4,612,564 5,690,270 Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 81,726 85,821 Deferred revenue 81,154 23,683 Accrued expenses and other 202,487 111,339 Total liabilities 365,367 220,843 Shareholders' equity: Capital stock, par value $0.0001 per share;authorized 100,000,000 shares,issued and outstanding 12,802,059 shares at June 30, 2004 and 12,683,413 shares at December 31, 2003 1,280 1,268 Additional paid-in capital 57,512,019 56,395,409 Accumulated other comprehensive loss (7,625) (4,625) Accumulated deficit (53,258,477)(50,922,625) Total shareholders' equity 4,247,197 5,469,427 Total liabilities and shareholders' equity $ 4,612,564 5,690,270 See accompanying notes to consolidated financial statements. RESEARCH FRONTIERS INCORPORATED Consolidated Statements of Operations (Unaudited) Six months ended Three months ended June 30,2004 June 30,2003 June 30,2004 June 30,2003 Fee income $ 93,327 149,317 $ 56,008 63,189 Operating expenses 1,228,989 1,241,662 564,946 660,208 Research and development 1,003,698 1,044,004 504,329 471,766 Charge for reduction in value of investment in SPD Inc. 209,704 255,200 -- -- 2,442,391 2,540,866 1,069,275 1,131,974 Operating loss (2,349,064) (2,391,549) (1,013,267) (1,068,785) Net investment income 13,212 17,032 6,229 7,195 Net loss $(2,335,852) (2,374,517) $(1,007,038) (1,061,590) Basic and diluted net loss per common share $ (.18) (.19) $ (.08) (.09) Weighted average number of common shares outstanding 12,780,001 12,282,477 12,794,718 12,328,920 See accompanying notes to consolidated financial statements. RESEARCH FRONTIERS INCORPORATED Consolidated Statements of Cash Flows (Unaudited) Six months ended June 30,2004 June 30, 2003 Cash flows from operating activities: Net loss $(2,335,852) (2,374,517) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 38,526 55,629 Charge for reduction in value of investment in SPD Inc. 209,704 255,200 Expense relating to cashless exercise of stock options 15,708 40,987 Expense relating to issuance of stock options and warrants for services performed -- 27,900 Changes in assets and liabilities: Royalty receivable (56,818) (172,503) Prepaid expenses and other current assets (801) (61,547) Deferred revenue 57,471 148,681 Accounts payable and accrued expenses 87,053 28,378 Net cash used in operating activities (1,985,009) (2,051,792) Cash flows from investing activities: Investment in SPD Inc., at cost -- (74,902) Purchase of fixed assets (24,594) (37,908) Net cash (used in) provided by investing activities (24,594) (112,810) Cash flows from financing activities: Proceeds from issuances of common stock 1,100,914 1,998,850 Net cash provided by financing activities 1,100,914 1,998,850 Net decrease in cash and cash equivalents (908,689) (165,752) Cash and cash equivalents at beginning of year 5,072,290 5,117,571 Cash and cash equivalents at end of period $ 4,163,601 4,951,819 See accompanying notes to consolidated financial statements. RESEARCH FRONTIERS INCORPORATED Notes to Consolidated Financial Statements June 30, 2004 (Unaudited) Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature. Operating results for the six months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2004. For further information, refer to the consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K (Form 10-K) relating to Research Frontiers Incorporated (the Company) for the fiscal year ended December 31, 2003. Business The Company operates in a single business segment which is engaged in the development and marketing of technology and devices to control the flow of light. Such devices, often referred to as "light valves" or suspended particle devices (SPDs), use colloidal particles that are either incorporated within a liquid suspension or a film, which is usually enclosed between two sheets of glass or plastic having transparent, electrically conductive coatings on the facing surfaces thereof. At least one of the two sheets is transparent. SPD technology, made possible by a flexible light-control film invented by RFI, allows the user to instantly and precisely control the shading of glass/plastic manually or automatically. SPD technology has numerous product applications, including: SPD-Smart windows, sunshades, skylights and interior partitions for homes and buildings; automotive windows, sunroofs, sun-visors, sunshades, rear-view mirrors, instrument panels and navigation systems; aircraft windows; eyewear products; and flat panel displays for electronic products. SPD-Smart light control film is now being used in architectural, automotive, marine, aerospace and appliance applications. Investment in SPD Inc. During the second quarter of 2001, the Company, through its wholly- owned subsidiary, SPD Enterprises, Inc., invested approximately $750,000 for a minority equity interest in SPD Inc., a subsidiary of Hankuk Glass Industries Inc., Korea's largest glass manufacturer, which was dedicated exclusively to the production of suspended particle device (SPD) light-control film and a wide variety of end- products using SPD film. In April 2003, the Company's wholly-owned subsidiary, SPD Enterprises, Inc., invested $74,902 in SPD Inc., raising its equity ownership from 6.67% to 6.91%. SPD Inc.'s parent company invested at the same time and at the same price, $748,931, raising its equity ownership in SPD Inc. from 66.67% to 69.09%. During 2003, the Company recorded total non-cash accounting charges of $615,200 against income to reflect a reduction in the value of its investment in SPD Inc. These non-cash charges were determined as follows: During the first quarter of 2003, the Company recorded a non- cash charge against income of $255,200 to reflect a reduction in the value of its investment in SPD Inc. determined based upon recent financing activity of SPD Inc. The Company also recorded a further non-cash charge against income of $360,000 as of the end of 2003 to reflect a reduction in the value of its investment in SPD Inc. determined based upon its review of the financial position and results of operations of SPD Inc. as of and for the year ended December 31, 2003. On April 28, 2004, SPD Inc. informed the Company that it is planning to sell its equipment and other assets and cease its business activities. As a result, the Company wrote off its entire remaining investment in SPD Inc. of $209,704 in the first quarter of 2004. The Company's license agreement with Hankuk Glass Industries provides for the payment of minimum annual royalties to the Company in 2002 and 2003. As of June 30, 2004 and December 31, 2003, the Company has a receivable of $50,000 from Hankuk Glass Industries for 2003 minimum annual royalties. Patent Costs The Company expenses costs relating to the development or acquisition of patents due to the uncertainty of the recoverability of these items. Revenue Recognition The Company has entered into a number of license agreements covering its light control technology. The Company receives minimum annual royalties under certain license agreements and records fee income on a ratable basis each quarter. In instances when sales of licensed products by its licensees exceed minimum annual royalties, the Company recognizes fee income as the amounts have been earned. Certain of the fees are accrued by, or paid to, the Company in advance of the period in which they are earned resulting in deferred revenue. Such excess amounts are recorded as deferred revenue and recognized into income in future periods as earned. Stock-Based Compensation In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation as originally provided by SFAS No. 123, "Accounting for Stock-Based Compensation." Additionally, SFAS No. 148 amends the disclosure provisions of SFAS No. 123 to require prominent disclosure in both the annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The Company adopted the disclosure provisions of this statement in the fiscal quarter ended March 31, 2003. The exercise price for stock options granted are generally set at the average of the high and low trading prices of the Company's common stock on the trading date immediately prior to the date of grant, and the related number of shares granted are fixed at the date of grant. Under the principles of APB Opinion No. 25, the Company does not recognize compensation expense associated with the grant of stock options. SFAS No. 123 requires the use of option valuation models to determine the fair value of options granted after 1995. Pro forma information regarding net loss and net loss per common share shown below was determined as if the Company had accounted for its employee stock options and shares sold under its stock purchase plan under the fair value method set forth in SFAS No. 123. The fair value of the options was estimated at the date of grant using a Black-Scholes option pricing model. For purposes of pro forma disclosures, the estimated fair value of the options is amortized over the options' vesting periods. The following table illustrates the effect on net loss and loss per common share as if the fair value method had been applied: Six months ended Three months ended June 30,2004 June 30,2003 June 30,2004 June 30,2003 Net loss $(2,335,852) (2,374,517) (1,007,038) (1,061,590) Add: Total stock-based employee compensation expense included in net loss $ 15,708 40,987 15,708 40,987 Deduct: Total stock-based employee compensation determined under fair-value based method for all awards $ (200,733) (760,712) -- (704,437) Pro forma $(2,520,877) (3,094,242) (991,330) (1,725,040) Basic and diluted net loss per common share As reported $ (0.18) (0.19) $ (0.08) (0.09) Pro forma $ (0.20) (0.25) $ (0.08) (0.14) Shareholders' Equity Issuance of Common Stock For the six months ended June 30, 2004, the Company received $1,100,914 of net cash proceeds from the issuance of (i) 99,417 shares of common stock issued upon the exercise of warrants resulting in net proceeds of $954,724; and (ii) 17,500 shares of common stock issued upon the exercise of options resulting in net proceeds of $146,190. In addition, 1,729 shares were issued through the cashless exercise of certain options under which the number of shares issuable upon exercise of such option was reduced by 15,771 shares in payment of the exercise price of options to purchase 17,500 shares. In connection therewith, the Company recorded a non-cash compensation expense of $15,708 during the second quarter of 2004. For the six months ended June 30, 2003, the Company received $1,998,850 of net cash proceeds from (i) the issuance of 25,000 shares of common stock of the Company (along with a ten-year warrant to purchase 25,000 shares of common stock of the Company at an exercise price of $9.00 per share) in a private placement to a director of the Company resulting in net proceeds of $165,000; (ii) 169,700 shares of common stock issued upon the exercise of warrants resulting in net proceeds of $1,418,320; and (iii) the issuance of 58,475 shares of common stock issued upon the exercise of options resulting in net proceeds of $415,530. In addition, 3,754 shares were issued through the cashless exercise of certain options and warrants, resulting in non-cash directors expense of $40,987 being recorded, and 9,995 shares with a value of $108,995 were delivered to the Company and immediately retired in payment of the exercise price of options to purchase 15,000 shares. Treasury Stock The Company did not repurchase any of its stock during the six months ended June 30, 2004 or 2003. Issuance of Options During the second quarter of 2003, the Company issued options to a consultant to purchase 5,000 shares of common stock at an exercise price of $9.54 per share. The Company recorded $27,900 of non-cash expense in connection with the issuance of these options. Comprehensive Loss Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. (SFAS No. 130) requires that companies disclose comprehensive income, which includes net loss, foreign currency translation adjustments, minimum pension liability adjustments, and unrealized gains and losses on marketable securities classified as available- for-sale. The components of comprehensive loss for the three and six months ended June 30, 2004 and 2003 are as follows: Six months ended Three months ended June 30,2004 June 30,2003 June 30,2004 June 30,2003 Net loss $(2,335,852) (2,374,517) (1,007,038) (1,061,590) Unrealized holding gain (loss) arising during period (3,000) (2,000) (1,375) 3,625 Total comprehensive loss $(2,338,852) (2,376,517) (1,008,413) (1,057,965) Management's Discussion and Analysis of Financial Condition and Results of Operations Accounting Policies The following accounting policies are important to understanding our financial condition and results of operations and should be read as an integral part of the discussion and analysis of the results of our operations and financial position. For additional accounting policies, see note 2 to our consolidated financial statements, "Summary of Significant Accounting Policies" contained in the Company's Annual Report on Form 10-K. The Company has entered into a number of license agreements covering potential products using the Company's SPD technology. The Company receives minimum annual royalties under certain license agreements and records fee income on a ratable basis each quarter. In instances when sales of licensed products by its licensees exceed minimum annual royalties, the Company recognizes fee income as the amounts have been earned. Certain of the fees are accrued by, or paid to, the Company in advance of the period in which they are earned resulting in deferred revenue. The Company expenses costs relating to the development or acquisition of patents due to the uncertainty of the recoverability of these items. All of our research and development costs are charged to operations as incurred. Our research and development expenses consist of costs incurred for internal and external research and development. These costs include direct and indirect overhead expenses. The Company has historically used the Black-Scholes option- pricing model to determine the estimated fair value of each option grant. The Black-Scholes model includes assumptions regarding dividend yields, expected volatility, expected lives, and risk-free interest rates. These assumptions reflect our best estimates, but these items involve uncertainties based on market conditions generally outside of our control. As a result, if other assumptions had been used in the current period, stock-based compensation expense could have been materially impacted. Furthermore, if management uses different assumptions in future periods, stock-based compensation expense could be materially impacted in future years. On occasion, the Company may issue to consultants either options or warrants to purchase shares of common stock of the Company at specified share prices. These options or warrants may vest based upon specific services being performed or performance criteria being met. In accordance with Emerging Issues Task Force Issue 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, the Company would be required to record consulting expenses based upon the fair value of such options or warrants on the date that such options or warrants vest as determined using a Black-Scholes option pricing model. Depending upon the difference between the exercise price and the market price of the Company's common stock on the date that such options or warrants vest, the amount of non-cash expenses that could be recorded as a result of the vesting of such options or warrants can be material. The Company applies the cost method of accounting for its minority equity interest in SPD Inc., a subsidiary of Hankuk Glass Industries, Inc. Because no public market exists for the common stock of SPD Inc., the Company reviews the operating performance, financing and forecasts for such entity in assessing the net realizable value of this investment. During 2003, the Company recorded total non-cash accounting charges of $615,200 against income to reflect a reduction in the value of its investment in SPD Inc. These non-cash charges were determined as follows: During the first quarter of 2003, the Company recorded a non-cash charge against income of $255,200 to reflect a reduction in the value of its investment in SPD Inc. determined based upon recent financing activity of SPD Inc. The Company also recorded a further non-cash charge against income of $360,000 as of the end of 2003 to reflect a reduction in the value of its investment in SPD Inc. determined based upon its review of the financial position and results of operations of SPD Inc. as of and for the year ended December 31, 2003. On April 28, 2004, SPD Inc. informed the Company that it is planning to sell its equipment and other assets and cease its business activities. As a result, the Company wrote off its entire remaining investment in SPD Inc. of $209,704 in the first quarter of 2004. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. An example of a critical estimate is the full valuation allowance for deferred taxes that was recorded based on the uncertainty that such tax benefits will be realized in future periods. Controls and Procedures We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, as of the end of the quarter ending June 30, 2004. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic Securities and Exchange Commission filings. There were no changes that occurred during the quarterly period ended June 30, 2004 that materially affected, or are reasonably likely to material affect, our internal control over financial reporting. Results of Operations for the Six Month Periods Ended June 30, 2004 and 2003 The Company's fee income from licensing activities for the first six months of 2004 was $93,327 as compared to $149,317 for the first six months of 2003. This difference in fee income was primarily the result of the timing and amount of minimum annual royalties paid, and the date of receipt of such payment on certain license agreements, by end- product licensees. Certain license fees, which are paid to the Company in advance of the accounting period in which they are earned resulting in the recognition of deferred revenue for the current accounting period, will be recognized as fee income in future periods. Also, licensees may offset some or all of their royalty payments on sales of licensed products for a given period by applying these advance payments towards such earned royalty payments. Operating expenses decreased by $12,673 for the first six months of 2004 to $1,228,989 from $1,241,662 for the first six months of 2003. This decrease was primarily the result of lower payroll, legal, depreciation, and directors expenses, partially offset by higher insurance, patent, non-cash compensation, and consulting expenses and higher accounting fees. Research and development expenditures decreased by $40,306 to $1,003,698 for the first six months of 2004 from $1,044,004 for the first six months of 2003. This decrease was primarily the result of decreased payroll and depreciation expenses, partially offset by higher costs associated with licensee support through professional conferences. During the first six months of 2004 and 2003, the Company recorded non-cash charges against income of $209,704 and $255,200, respectively, to reflect a reduction in the value of its investment in SPD Inc. The Company's net investment income for the first six months of 2004 was $13,212, as compared to net investment income of $17,032 for the first six months of 2003. This difference was primarily due to lower interest rates. As a consequence of the factors discussed above, the Company's net loss was $2,335,852 ($0.18 per common share) for the first six months of 2004 as compared to $2,374,517 ($0.19 per common share) for the first six months of 2003. Results of Operations for the Three Month Periods Ended June 30, 2004 and 2003 The Company's fee income from licensing activities for the second quarter of 2004 was $56,008 as compared to $63,189 for the second quarter of 2003. This difference in fee income was primarily the result of the timing and amount of minimum annual royalties paid, and the date of receipt of such payment on certain license agreements, by end- product licensees. Certain license fees, which are paid to the Company in advance of the accounting period in which they are earned resulting in the recognition of deferred revenue for the current accounting period, will be recognized as fee income in future periods. Also, licensees may offset some or all of their royalty payments on sales of licensed products for a given period by applying these advance payments towards such earned royalty payments. Operating expenses decreased by $95,262 for the second quarter of 2004 to $564,946 from $660,208 for the second quarter of 2003. This decrease was primarily the result of lower payroll, consulting, patent, marketing, depreciation, and directors expenses, partially offset by increased accounting fees, and non-cash compensation and insurance expenses. Research and development expenditures increased by $32,563 to $504,329 for the second quarter of 2004 from $471,766 for the second quarter of 2003. This increase was primarily the result of higher costs associated with licensee support through professional conferences and higher insurance costs, partially offset by lower payroll, consulting, depreciation and office expenses. The Company's net investment income for the second quarter of 2004 was $6,229, as compared to net investment income of $7,195 for the second quarter of 2003. This difference was primarily due to lower interest rates. As a consequence of the factors discussed above, the Company's net loss was $1,007,038 ($0.08 per common share) for the second quarter of 2004 as compared to $1,061,590 ($0.09 per common share) for the second quarter of 2003. Financial Condition, Liquidity and Capital Resources During the first six months of 2004, the Company's cash and cash equivalent balance decreased by $908,689 principally as a result of cash used to fund the Company's operating activities of $1,985,009, offset by $1,100,914 of proceeds received, net of expenses, from the private placement of common stock and the issuance of common stock upon the exercise of options. At June 30, 2004, the Company had working capital of $4,102,646 and its shareholders' equity was $4,247,197. The Company occupies premises under an operating lease agreement which expires on January 31, 2014 and requires minimum annual rent which rises over the term of the lease to approximately $138,269. On October 1, 1998, the Company announced that Ailouros Ltd., a London-based institutional money management fund, committed to purchase up to $15 million worth of common stock of the Company through December 31, 2001. This commitment was in the form of a Class A Warrant issued to Ailouros Ltd. which gave the Company the option in any three-month period to deliver a put notice to Ailouros requiring them to purchase an amount of common stock specified by the Company at a price equal to the greater of (A) 92% of the seven- day average trading price per share of common stock, or (B) a minimum or "floor" price per share set by the Company from time to time. The pricing was initially subject to an overall cap of $15 per share, which cap was eliminated by mutual agreement so that the Company could put stock to Ailouros at selling prices in excess of $15 per share. However, the Company was not required to sell any shares under the agreement. Before the beginning of each of a series of three- month periods specified by the Company, the Company determined the amount of common stock that the Company wished to issue during such three-month period. The Company also set the minimum selling or "floor" price, which could be reset by the Company in its sole discretion prior to the beginning of any subsequent three-month period. Therefore, at the beginning of each three-month period, the Company would determine how much common stock, if any, would be sold (the amount of which could range from $0 to $1.5 million during such three-month period), and the minimum selling price per share. In March 2000, Ailouros agreed to expand its commitment beyond the original $15 million, thereby giving the Company the right to raise additional funds from Ailouros so long as the Company did not have to issue more shares than were originally registered with the Securities and Exchange Commission, and in December 2001 the expiration date of the Class A Warrant was extended to December 31, 2003. In December 2003, this expiration date for the Class A Warrant was further extended to December 31, 2005. As of March 31, 2004, the Company issued the remaining 99,417 shares registered and available for issuance under the Class A Warrant, resulting in net proceeds of approximately $1 million in the quarter ended March 31, 2004. Thus, Ailouros has no further obligation to provide funding to the Company. As noted below, while no additional funding is projected to be required by the Company in order to maintain its current levels of expenditures for research and development, market development and other operations until the second quarter of 2005, the Company and Ailouros, which has been the Company's principal source of capital funding since 1999, are in discussions regarding an additional equity investment by Ailouros to provide additional working capital for the Company. During the second quarter of 2001, the Company, through its wholly-owned subsidiary, SPD Enterprises, Inc., invested approximately $750,000 for a minority equity interest in SPD Inc., a subsidiary of Hankuk Glass Industries Inc., Korea's largest glass manufacturer, which was dedicated exclusively to the production of suspended particle device (SPD) light-control film and a wide variety of end-products using SPD film. In April 2003, the Company's wholly-owned subsidiary, SPD Enterprises, Inc., invested $74,902 in SPD Inc., raising its equity ownership from 6.67% to 6.91%. SPD Inc.'s parent company invested at the same time and at the same price, $748,931, raising its equity ownership in SPD Inc. from 66.67% to 69.09%. During 2003, the Company recorded total non-cash accounting charges of $615,200 against income to reflect a reduction in the value of its investment in SPD Inc. These non-cash charges were determined as follows: During the first quarter of 2003, the Company recorded a non-cash charge against income of $255,200 to reflect a reduction in the value of its investment in SPD Inc. determined based upon recent financing activity of SPD Inc. The Company also recorded a further non-cash charge against income of $360,000 as of the end of 2003 to reflect a reduction in the value of its investment in SPD Inc. determined based upon its review of the financial position and results of operations of SPD Inc. as of and for the year ended December 31, 2003. On April 28, 2004, SPD Inc. informed the Company that it is planning to sell its equipment and other assets and cease its business activities. As a result, the Company wrote off its entire remaining investment in SPD Inc. of $209,704 in the first quarter of 2004. The Company expects to use its cash to fund its research and development of SPD light valves and for other working capital purposes. The Company's working capital and capital requirements depend upon numerous factors, including the results of research and development activities, competitive and technological developments, the timing and cost of patent filings, the development of new licensees and changes in the Company's relationships with its existing licensees. The degree of dependence of the Company's working capital requirements on each of the foregoing factors cannot be quantified; increased research and development activities and related costs would increase such requirements; the addition of new licensees may provide additional working capital or working capital requirements, and changes in relationships with existing licensees would have a favorable or negative impact depending upon the nature of such changes. Based upon existing levels of cash expenditures, assumed ten percent annual increases therein, existing cash reserves and budgeted revenues, the Company believes that it would not require additional funding for the next 12 months from June 30, 2004. There can be no assurance that expenditures will not exceed the anticipated amounts or that additional financing, if required, will be available when needed or, if available, that its terms will be favorable or acceptable to the Company. The Company will need to raise additional capital no later than the second quarter of 2005 if operations, including research and development and marketing, are to be maintained at current levels. If the Company cannot raise additional funds, it will be required to reduce expenses during 2004. Eventual success of the Company and generation of positive cash flow will be dependent upon the extent of commercialization of products using the Company's technology by the Company's licensees and payments of continuing royalties on account thereof. New Accounting Pronouncements On April 22, 2003, the Financial Accounting Standards Board (FASB) determined that stock-based compensation should be recognized as a cost in the financial statements of a company, and that such cost be measured according to the fair-value of the stock options granted. The FASB plans to issue an accounting standard relating to this that would become effective in 2005. The Company will continue to monitor communications on this subject from the FASB in order to determine the impact on the Company's consolidated financial statements. The Company currently accounts for its stock-based compensation plans in accordance with APB Opinion No. 25. Therefore, the eventual adoption of this proposed statement, if issued in final form by the FASB, could have a material effect on the Company's consolidated financial statements, depending upon the number and terms of stock options issued by the Company in the future. Item 3. Quantitative and Qualitative Disclosures About Market Risk The information required by Item 3 has been disclosed in Item 7A of the Company's Annual Report on Form 10-K for the year ended December 31, 2003. There has been no material change in the disclosure regarding market risk. Forward Looking Statements The information set forth in this Report and in all publicly disseminated information about the Company, including the narrative contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" above, includes "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and is subject to the safe harbor created by that section. Readers are cautioned not to place undue reliance on these forward-looking statements as they speak only as of the date hereof and are not guaranteed. PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security-Holders The Annual Meeting of Stockholders of Research Frontiers Incorporated was held on June 10, 2004. Listed below is a summary of how the 12,097,811 shares voted at the Annual Meeting on the various proposals voted upon and adopted at the Annual Meeting. For the election of Victor F. Keen as a Class II member of the Company's Board of Directors, 11,824,651 shares were voted in favor of election, and 273,160 votes were withheld. For the election of Albert P. Malvino as a Class II member of the Company's Board of Directors, 11,854,991 shares were voted in favor of election, and 242,820 votes were withheld. For the ratification of the appointment of KPMG LLP as auditors for the 2004 fiscal year, 11,695,301 shares were voted in favor of appointment, 334,399 shares were voted against, and 68,111 shares abstained from voting. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. 31.1 Rule 13a-14(a)/15d-14(a) Certification of Robert L. Saxe- Filed herewith. 31.2 Rule 13a-14(a)/15d-14(a) Certification of Joseph M. Harary- Filed herewith. 32.1 Section 1350 Certification of Robert L. Saxe- Filed herewith. 32.2 Section 1350 Certification of Joseph M. Harary- Filed herewith. (b) Reports on Form 8-K. None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized. RESEARCH FRONTIERS INCORPORATED (Registrant) /s/ Robert L. Saxe Robert L. Saxe, Chairman (Principal Executive Officer) /s/ Joseph M. Harary Joseph M. Harary, President and Treasurer (Principal Financial, and Accounting Officer) Date: August 9, 2004