SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) of
THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005 Commission File Number 1-9399
RESEARCH FRONTIERS INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 11-2103466
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
240 CROSSWAYS PARK DRIVE
WOODBURY, NEW YORK 11797-2033
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 364-1902
Securities registered pursuant to Section 12(b) of the Act:
Name of Exchange
Title of Class on Which Registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0001 Par value
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer[X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of March 29, 2006 there were 13,812,559 shares of Research Frontiers
Incorporated common stock outstanding. The aggregate market value of
the voting and non-voting common equity held by non-affiliates was
$41,433,615 computed in accordance with the rules of the SEC by
reference to the closing price of the Company's common stock as of June
30, 2005 which was $3.17. In making this computation, all shares known
to be owned by directors and executive officers of the Company and all
shares known to be owned by other persons holding in excess of 5% of the
Company's common stock have been deemed held by "affiliates" of the
Company. Nothing herein shall prejudice the right of the Company or any
such person to deny that any such director, executive officer, or
stockholder is an "affiliate."
PART I
ITEM 1. BUSINESS
General
Research Frontiers Incorporated ("Research Frontiers" or
the "Company") was incorporated in New York in 1965 and
reincorporated in Delaware in 1989. Research Frontiers'
business is to develop and license our suspended particle
technology for controlling the amount of light passing through a
device. Such suspended particle devices are often referred to as
"SPDs," "light valves," or "SPD-Smart " products.
SPDs use microscopic light-absorbing particles that are
either in a liquid suspension or a film. The microscopic particles
align when an electrical voltage is applied. This permits light to
pass through the device, and allows the amount of light to be
controlled. The first light valve of this type was invented by Dr.
Edwin Land, founder of Polaroid Corporation, in the 1930s.
Since 1965, Research Frontiers has been actively working to
develop and license its own technology, which it protects using
patents, trade secrets and know-how. Although patent and trade
secret protection is not a guarantee of commercial success,
Research Frontiers currently has approximately 457 patents and
pending patent applications throughout the world protecting its
technology.
As a result of our efforts over the years, Research Frontiers
Incorporated has become the world's leader in suspended-
particle-device development and research, and licenses its light-
control technology to other companies. Currently, our 34
licensees are categorized into three main areas: materials for
making films (emulsions); film; and end-products. Our emulsion
makers produce and combine the necessary materials (i.e. SPD
particles and various liquids and special polymers) from which
SPD films are made. The film makers use a thin layer of
emulsion, which is coated between two sheets of plastic film
coated with a transparent conductive coating, which emulsion is
then partly solidified to form an SPD film that allows users to
control the amount of light passing through such film. The end-
product licensees then incorporate such SPD light-control film
into a variety of SPD-Smart products or make electronic systems
to control such SPD-Smart products.
The past several years have been important for Research
Frontiers as we moved from being a company with a technology
under development to a company with products using our
technology being sold by our licensees. The technology has also
received some prestigious awards, including the Best of What's
New Award for home technology products for 2002 from
Popular Science. It was also named one of the top new
technologies for 2002 by the Society of Automotive Engineers.
SPD-Smart windows have been installed in business and
commercial aircraft, as well as in architectural, automotive and
appliance glass projects. SPD technology is an "enabling"
technology cutting across many industries which has wide
commercial applications in many types of products where
variable light transmission is desired, such as:
- - "smart" windows, skylights partitions, doors, and
- - sunshades for the architectural, aircraft, marine,
automotive and appliance industries;
- - variable light transmission sunglasses, goggles, visors and other eyewear;
- - self-dimmable automotive sunroofs, sunvisors and rear-view mirrors; and
- - flat panel information displays for use in billboards,
scoreboards, point-of-purchase advertising displays, traffic signs,
computers, televisions, telephones, PDAs and other electronic instruments.
Various licensees of Research Frontiers have developed
SPD-Smart windows and other products. Several of our
licensees have already sold aircraft, architectural, marine and
automotive windows, skylights and doors, as well as glass doors
for appliances using SPD technology. Also, prototypes of flat
panel displays, eyewear, and self-dimming automotive rear-view
mirrors have been developed. These prototypes demonstrate the
feasibility and operation of the products they relate to, but need
additional product design, engineering or testing before
commercial products are introduced. Some of our licensees
consider the exact stage of development, product introduction
strategies and timetables, and other plans to be proprietary or
secret, and as such cannot be disclosed by the Company until
such licensees make their own public announcements or product
launches. Since 2002, marketing campaigns and product
launches by our licensees have been announced under the
indicated trademarks for their SPD-Smart products:
Licensee Trademark
Cricursa Cristales Curvados, SA Cri-Regulite(TM)
Innovative Glass Corporation E-Glass(TM)
InspecTech Aero Service, Inc. SPD-Equipped(TM), I-Shade(TM),
SPD-Shade(TM), e-Shade(TM)
Isoclima S.p.A. ChromaLite(TM)
Kerros Limited IntelliTint(TM)
SPD Control Systems Corp. The Systems Behind the Glass(TM),
Changing the Way You View Windows(TM)
SPD Technologies, Inc. InfiniTint(TM), New-View(TM),Smart-Shade(TM)
SPD Systems Inc. Health Smart(TM),VectorLux(TM),
InstaTint(TM), PowerTint(TM)
ThermoView Industries Alter-Lite(TM)
In addition, Research Frontiers introduced various marketing
programs under the following trademarks: SPD-Smart(TM),
VaryFast(TM), SPD SmartGlass(TM), The View of the Future -
Everywhere you Look(TM), Powered by SPD(TM), and Visit
SmartGlass.com - to change your view of the World(TM).
Our licensee InspecTech Aero Service Inc. reported that it
has received FAA certification for, and has already installed
SPD-Smart windows on, various aircraft. InspecTech reports
having installed or currently engineered SPD-Smart windows
for the following aircraft:
- - Airbus A319, A320 and other aircraft
- - Boeing 737,747, 757, 7E7 BBJ and other aircraft
- - Bombardier Challenger 601, 604
- - Bombardier Global Ex
- - Bombardier Learjet 24, 25, 31, 35, 36, 45, 55,60
- - Cessna Citation I, II, III
- - Cessna Conquest I, II
- - Cessna Citations 525,525A, 550, Excel, 5 and CX
- - Dassault Falcon 10, 50
- - EADS Eurocopter EC 155
- - Gulfstream (all models)
- - Piaggio P180 Avanti, and Pilatus PC-12
- - Raytheon Beechjet
- - Raytheon Hawker 700, 800
- - Raytheon King Air 90, 100, 200, 350
- - Sikorsky S-92 Helicopter
- - Bell 430 Helicopter
Starting in 2003, the number of aircraft incorporating
window shades using SPD-Smart technology increased, and the
number of additional aircraft for which SPD-Smart electronic
window shades have been designed and engineered also
increased. In addition, several of the world's largest jet
manufacturers have announced their interest to include
electronic smart window shades in their aircraft. These
electronic window shades may use SPD technology, or may use
other technologies such as electrochromic technology or electro-
mechanical window shades. Project architects and developers
have begun to specify more SPD-Smart glass in their projects,
and both the number and size of these projects is increasing.
Also, starting in late 2003, certain automakers have begun to
incorporate SPD-Smart glass in production and concept
vehicles, with some of these concept vehicles being exhibited at
major auto shows. There is a growing trend towards using more
glass in architectural and automotive applications, including the
introduction of panoramic roof systems and larger sunroofs for
transportation vehicles. SPD-Smart technology can provide
effective shading, glare control and heat management solutions
for these larger glass areas. SPD-Smart windows have also
begun to be used in yachts as well. The Company has also seen
the adoption rate in terms of number of licensees, as well as the
size of the organizations becoming licensees, increase. Also,
products using SPD-Smart technology continue to be exhibited
at trade shows, conferences, and industry events, with such
products not only being exhibited by our licensees, but also by
their customers and by original equipment manufacturers. While
there can be no assurance that these trends will continue, to the
extent that they do continue, they each should have a beneficial
effect on future fee income for the Company. In April 2004,
SPD Inc., which was at that time, the sole manufacturer of SPD-
Smart light control film and a subsidiary of Hankuk Glass
Industries, a former licensee of the Company, announced that it
was ceasing its business activities. Therefore, sales of SPD-
Smart products by licensees of the Company during most of
2004 and 2005 were curtailed as these licensees filled customer
orders out of existing inventory of SPD-Smart light control film
made by SPD Inc. while awaiting production of the next-
generation emulsion-based SPD-Smart light control film with
improved performance characteristics. Based upon the reports
by our licensees of their activities, shipments of next-generation
SPD-Smart film in limited quantity from licensee production
lines first occurred in March 2006, with larger capacity from
multiple sources of supply expected to become available later on
in 2006.
The following table summarizes Research Frontiers'
existing license agreements and lists the year these agreements
were entered into:
Licensee Products Covered Territory
Air Products and SPD emulsions and films for other licensees (2003) Worldwide
Chemicals, Inc.
American Glass Products Architectural and automotive windows (2002) Worldwide
(except Korea)
Asahi Glass Company Sunroof glass for other licensees (2001) Worldwide
(a sublicensee of its
subsidiary
AGC Automotive Americas
(f/k/a AP Technoglass Co.))
Avery Dennison Corp. SPD displays (2001) Worldwide
BOS GmbH Variable light transmission SPD sunshades Worldwide
and sunvisors. (2002)
BRG Group, Ltd. Architectural and automotive windows (2002) Worldwide
(except Korea)
Cricursa Cristales Curvados Architectural and automotive windows(2002) Worldwide
(except Korea)
Custom Glass Corporation Windows and sunroofs for mass Worldwide
transit trains/busses; SPD film (except Korea)
lamination for other licensees (2003)
Dainippon Ink and SPD emulsions for other licensees (1999) Worldwide
Chemicals Incorporated
E.I. DuPont de Nemours Architectural and automotive windows;SPD Worldwide
emulsions and films for other licensees (2004)
Film Technologies Int'l SPD film for other licensees and Worldwide
prospective licensees (2001)
General Electric Company SPD film for other licensees and Worldwide
prospective licensees (1995)
Glaverbel, S.A. Automotive vehicle rear-view mirrors, Worldwide
transportation vehicle sunvisors, and (except Korea
architectural and automotive windows(1996) for windows)
Global Mirror GmbH Rear-view mirrors and sunvisors (1999) Worldwide
Hitachi Chemical Co.,Ltd SPD emulsions and films for other Worldwide
licensees (1999)
Innovative Glass Corp. Architectural windows (2003) US,Canada,
and Mexico
InspecTech Aero Service Aircraft and marine windows and cabin Worldwide
dividers (2001) (except Korea)
Isoclima S.p.A. Architectural and automotive windows; SPD Worldwide
emulsion and film for other (except Korea)
licensees (2002)
Kerros Limited Automotive windows and sunroofs (2003) Worldwide
(except Korea)
for aftermarket
and UK only
for OEMs
Laminated Technologies Inc. SPD film lamination for
other licensees (2002) Worldwide
Leminur Limited Architectural windows (2003) Russia and
Countries of
former Soviet
Union
N.V. Bekaert S.A (acquired Architectural and automotive windows, Worldwide
from Material Sciences Corp.)SPD film for other licensees, prospective
licensees and architectural and automotive
window companies (1997)
Nippon Sheet Glass Co., Ltd SPD film for other licensee (2004) Worldwide
Pilkington plc SPD film lamination for other licensee (2004)Worldwide
Polaroid Corporation SPD emulsions and films for other Worldwide
licensees (2000)
Prelco Inc. Architectural windows,train and bus windows US,Canada,
(2004) and Mexico
Saint-Gobain Glass France Architectural windows, automotive and other Worldwide
transportation vehicle windows (other than (except
aircraft and spacecraft), kitchen and laundry Korea)
home appliance windows, and automotive sunvisors
and rear-view mirrors for cars, SUVs, light
trucks and other transportation vehicles (other
than as original equipment mirrors on heavy trucks,
busses, construction vehicles, firetrucks and other
vehicles in Class 5-8 or weighing over 16,000
pounds) (2003)
SmartGlass Ireland Ltd Architectural windows (2004) Ireland
SPD Control Systems Corp Electronics and building control systems(2005)Worldwide
SPD Technologies, Inc. Architectural windows (2002) Worldwide
(f/k/a Razor's Edge (except Korea)
Technologies, Inc.)
SPD Systems, Inc. Architectural, appliance and marine windows (2002)Worldwide
(except Korea)
ThermoView Industries, Inc. Architectural windows (2000) Worldwide
(except Korea)
Traco, Inc. Architectural windows (2003) Worldwide
(except Korea)
Vision (Environmental Architectural windows (2003) United Kingdom
Innovation) Limited
Licensees of Research Frontiers who incorporate SPD
technology into end-products will pay Research Frontiers a
royalty of 5-15% of net sales of licensed products under license
agreements currently in effect, and may also be required to pay
Research Frontiers fees and minimum annual royalties.
Licensees who sell products or components to other licensees of
Research Frontiers do not pay a royalty on such sale and
Research Frontiers will collect such royalty from the licensee
incorporating such products or components into their own end-
products. Research Frontiers' license agreements typically allow
the licensee to terminate the license after some period of time,
and give Research Frontiers only limited rights to terminate
before the license expires. Most licenses are non-exclusive and
generally last as long as our patents remain in effect. The license
granted to Hankuk Glass Industries was exclusive within Korea
for certain applications through December 2004 and expired at
the end of 2005. Due to their bankruptcy filings or other
termination of their general business activities, the Company
does not believe that Polaroid, Kerros, ThermoView and SPD
Technologies are pursuing any business activities with respect to
SPD technology. Global Mirror's license restricts new licenses
from being granted in the truck mirror original equipment
market for a period of time if certain sales milestones are met
with respect to commercial vehicles in Classes 5 through 8 with
gross vehicle weights in excess of 16,000 pounds. To date, the
Company has not generated sufficient revenue from its licensees
to fund its operations.
Although the Company believes based upon the status of
current negotiations that additional license agreements with third
parties will be entered into, there can be no assurance that any
such additional license agreements will be consummated, or the
extent that any current or future licensee of the Company will
produce or sell commercial products using the Company's
technology or generate meaningful revenue from sales of such
licensed products.
The Company plans to continue to exploit its SPD light
valve technology by entering into additional license and other
agreements with end-product manufacturers such as
manufacturers of flat glass, flat panel displays, automotive
products, and with other interested companies who may wish to
acquire rights to manufacture and sell the Company's
proprietary emulsions and films. The Company's plans also call
for further development of its SPD light valve technology and
the provision of additional technological and marketing
assistance to its licensees to develop commercially viable
products using SPD technology and expand the markets for such
products. The Company cannot predict when or if new license
agreements will be entered into or the extent to which
commercial products will result from its existing or future
licensees because of the risks inherent in the developmental
process and because commercialization is dependent upon the
efforts of its licensees as well as on the continuing research and
development efforts of the Company.
On March 29, 2006 the Company had eleven full-time
employees, four of whom are technical personnel, and the rest of
whom perform legal, marketing, investor relations, and
administrative functions. Of these employees, one has obtained a
doctorate in chemistry, one has a masters in chemistry, one has
extensive industrial experience in electronics and electrical
engineering, and one has majored in physics. Three employees
also have additional postgraduate degrees in business
administration, including one doctorate in organization and
management. Also the Company's suppliers and licensees have
people on their teams with advanced degrees in a number of
areas relevant to the commercial development of products using
the Company's technology. The success of the Company is
dependent on, among other things, the services of its senior
management, the loss of whose services could have a material
adverse effect upon the prospects of the Company.
The Company believes that its SPD light valve technology
has certain performance advantages over other technologies for
so-called "smart windows," windows which electrically vary the
amount of light passing through them, and automatically self-
dimmable automotive rear-view mirrors.
Variable light transmission technologies can be classified
into two basic types: "active" technologies that can be controlled
electrically by the user either automatically or manually, and
"passive" technologies that can only react to ambient
environmental conditions such as changes in lighting or
temperature. One type of passive variable light transmission
technology is photochromic technology; such devices change
their level of transparency in reaction to external ultra-violet
radiation. As compared to photochromic technology, the
Company's technology permits the user to adjust the amount of
light passing through the viewing area of the device rather than
merely reacting to external radiation. In addition, the reaction
time necessary to change from light to dark with SPDs can be
almost instantaneous, as compared to the much slower reaction
time for photochromic devices. Unlike SPD technology,
photochromic technology switches very slowly and does not
function well at the high and low ends of the temperature range
in which smart windows and other devices are normally
expected to operate.
The active, user-controllable technologies are sometimes
referred to as "smart" technologies. These active technologies
are far more useful because they can be controlled electrically
by a user with a manual adjustment or automatically when
coupled with a timer or sensing device such as a photocell,
motion detector or thermostat. There are three main types of
active devices which are compared below:
- - Electrochromic devices (EC)
- - Liquid crystal devices (LC)
- - Suspended-particle devices (SPD)
Electrochromic Technology: When compared to electrochromic
windows and rear-view mirrors, which use a direct current
voltage to alter the molecular structure of electrochromic
materials (which can be in the form of either a liquid, gel or
solid film) causing the material to darken, SPDs have numerous
potential performance, manufacturing and cost advantages. In
comparing the Company's SPD light valves to electrochromic
technologies, SPDs are expected to have some or all of the
following advantages:
- - faster response time
- - consistent switching speed regardless of size of viewing area
- - lower estimated costs
- - more reliable performance over a wider temperature range
- - capability of achieving darker off-states
- - default state (state requiring no power) is dark, maximizing
- - solar heat gain benefits
- - lower current drain
- - higher estimated battery life in applications where batteries are used
- - no "iris effect" (where light transmission changes first
occur at the outer edges of a window or mirror and then
work their way toward the center) when changing from
clear to dark and back again
- - SPD technology is a film-based technology that can be
applied to plastic as well as glass, and which can be applied
to curved as well as flat surfaces.
Many companies with substantially greater resources than
Research Frontiers such as 3M, Asahi Glass, Gentex Corp.,
Pilkington, PPG Industries, Saint-Gobain Glass and other large
corporations have pursued or are pursuing projects in the
electrochromic area. Some of these companies have reportedly
discontinued or substantially curtailed their work on
electrochromics due to technical problems and issues relating to
the expense of these technologies. At least four companies,
Saint-Gobain Glass, Sage Electrochromics, Inc., Gentex Corp.
and PPG Industies are currently actively working to
commercialize electrochromic window products.
Liquid Crystal Technology: To date, the main types of liquid
crystal smart windows have been produced by Taliq Corp. (a
subsidiary of Raychem Corp. which has since discontinued its
liquid crystal operations and licensed its technology to others),
Nippon Sheet Glass, Saint-Gobain Glass, Polytronix, Inc. and
3M (which has also reportedly discontinued its liquid crystal
film making operations). These windows are expensive and only
change from a cloudy, opaque milky-white to a clear state, are
hazy when viewed at an angle and have no useful intermediate
states. As compared to liquid crystal windows, SPD smart
windows should:
- - be less expensive to produce
- - have less haze
- - operate over a wider temperature range
- - use less power
- - absorb and shade light, rather than simply scattering it
- - permit an infinite number of intermediate states between a
transparent state and a dark blue state, rather than being just
"on" or "off" like LC windows.
In the flat panel display market, the Company also expects
to compete against various display technologies that are
currently being used commercially. In particular, the Company
expects its SPD technology to compete on the basis of the
performance characteristics with liquid crystal displays
("LCDs") and organic light emitting diodes ("OLEDs"). An
LCD is generally similar in construction to an SPD display, but
instead of a liquid or film suspension, it utilizes an organic
material called a liquid crystal which, although comprised of
molecules that flow like a liquid, has some of the characteristics
of solid crystals. Like SPD displays, LCDs are "passive" devices
which do not generate light, but merely reflect or modulate
existing light. OLEDs emit light rather than transmit it, and
unlike LCDs but similar to SPD displays, OLEDs promise to
have wide viewing angles and low power consumption.
However, several technological and manufacturing hurdles
remain in the production of OLEDs including limited life
expectancy, sensitivity to degradation from exposure to air and
water, and cost. The market for flat panel displays was estimated
by others to have been approximately $74 billion for 2005.
Because of further development work to be done in this area, the
Company cannot estimate when its licensees may begin to
penetrate the flat panel display market.
The Company believes that its SPD light valves and related
technology have significant advantages over existing display
devices and related technology. In comparison to existing
twisted nematic type LCDs, the Company's SPD displays are
believed to have:
- -higher contrast and brightness
- -a wider angle of view
- -lower estimated production costs
- -a less complex fabrication procedure
- -the ability to function over a wider temperature range
- -the ability to make displays without using sheet polarizers or alignment layers
- -lower light loss and a corresponding reduction in backlighting requirements.
With respect to other types of displays which emit their own
light, such as light-emitting diodes (LEDs) and cathode ray
tubes (CRTs), the Company's SPD light valves should have the
advantages of lower power consumption and make possible
larger displays that are easier to read in bright light.
LCDs and other types of displays, liquid crystal windows,
as well as electrochromic self-dimmable rear-view mirrors, are
already on the market, whereas products incorporating SPD
technology (as well as electrochromic windows) have only
begun to appear in the marketplace, so long-term durability and
performance of SPD light valves have not yet been fully
ascertained. The companies manufacturing LCD and other
display devices, liquid crystal windows, and electrochromic self-
dimmable rear-view mirrors and windows, have substantially
greater financial resources and manufacturing experience than
the Company. There is no assurance that comparable systems
having the same advantages of the Company's SPD light valves
could not be developed by competitors at a lower cost or that
other products could not be developed which would render the
Company's products difficult to market or technologically or
otherwise obsolete.
In each of the last three fiscal years the Company has
devoted substantially all of its time to the development of one
class of products, namely SPD light control technology, and
therefore revenue analysis by class is not provided herein.
The Company does not believe that future sales will be
seasonal in any material respect. Due to the nature of the
Company's business operations and the fact that the Company is
not presently a manufacturer, there is no backlog of orders for
the Company's products.
The Company believes that compliance with federal, state
and local provisions which have been enacted or adopted
regulating the discharge of materials into the environment, or
otherwise relating to the protection of the environment, will not
have a material effect upon the capital expenditures, earnings
and competitive position of the Company. The Company has no
material capital expenditures for environmental control facilities
planned for the remainder of its current fiscal year or its next
succeeding fiscal year.
Research and Development
As a result of the Company's research and development
efforts, the Company believes that its SPD light valves will be
usable in a number of commercial products. Such products may
include one or more of the following fields: "smart" windows,
variable light transmission eyewear such as sunglasses and
goggles, self-dimmable automotive sunroofs, sunvisors and
mirrors, and instruments and other information displays that use
digits, letters, graphic images, or other symbols to supply
information, including scientific instruments, aviation instruments,
automobile dashboard displays and, if certain improvements can
be made in various features of the Company's SPD light valves,
portable computer displays and flat panel television displays. The
Company believes that most of its research and development
efforts have applicability to products that may incorporate the
Company's technology. Based upon the current SPD-Smart
products being prepared for sale by various of its licensees, the
Company believes that the state of development of its technology
is sufficiently advanced, but that further improvements will result
in accelerated market penetration. The Company intends to
continue its research and development efforts for the foreseeable
future to improve its SPD light valve technology and thereby
assist our licensees in the product development, sales and
marketing of various existing and new SPD-Smart products.
During the past year, the Company has made significant
advances relating to materials to enable (1) improved stability of
SPD emulsions, (2) a wide range of light transmission, and (3)
improved film adhesion.
The Company has devoted most of the resources it has
heretofore expended to research and development activities with
the goal of producing commercially viable light valves and already
has developed working prototypes of its SPD light valves for
several different applications, with primary emphasis on smart
windows for various applications.
Research Frontiers' main goals in its research and development are:
- - developing wider ranges of light transmission and quicker switching speeds;
- - developing different colored particles;
- - reducing the voltage required to operate SPDs; and
- - obtaining data and developing improved materials regarding
environmental stability and longevity.
Research Frontiers incurred approximately $1,392,000,
$1,683,000, and $1,909,000 during the years ended December 31,
2005, 2004, and 2003, respectively, for research and development.
Research Frontiers plans to engage in substantial continuing
research and development activities.
Patents and Proprietary Information
The Company has 34 United States patents in force, and five
United States patent applications are pending. The Company's
United States patents expire at various dates from 2006 through
2023. The Company has approximately 220 issued foreign patents
and 198 foreign and international patent applications pending. The
Company's foreign patents expire at various dates from 2006
through 2022. The Company believes that its SPD light valve
technology is adequately protected by its patent position and by its
proprietary technological know-how. However, the validity of the
Company's patents has never been contested in any litigation. To a
lesser extent, the Company relies on trade secrets and
nondisclosure agreements to protect its technology. The Company
generally requires any employee, consultant, or licensee having
access to its confidential information to execute an agreement
whereby such person agrees to keep such information confidential.
Rights Plan
In February 2003, the Company's Board of Directors adopted
a Stockholders' Rights Plan and declared a dividend distribution
of one Right for each outstanding share of Company common
stock to stockholders of record at the close of business on March
3, 2003. Subject to certain exceptions listed in the Rights Plan, if a
person or group has acquired beneficial ownership of, or
commences a tender or exchange offer for, 15% or more of the
Company's common stock, unless redeemed by the Company's
Board of Directors, each Right entitles the holder (other than the
acquiring person) to purchase from the Company $120 worth of
common stock for $60. If the Company is merged into, or 50% or
more of its assets or earning power is sold to, the acquiring
company, the Rights will also enable the holder (other than the
acquiring person) to purchase $120 worth of common stock of the
acquiring company for $60. The Rights will expire at the close of
business on February 18, 2013, unless the Rights Plan is extended
by the Company's Board of Directors or unless the Rights are
earlier redeemed by the Company at a price of $.0001 per Right.
The Rights are not exercisable during the time when they are
redeemable by the Company. The above description highlights
some of the features of the Company's Rights Plan and is not a
complete description of the Rights Plan. A more detailed
description and a copy of the Rights Plan is available from the
Company upon request.
ITEM 1A. RISK FACTORS
In addition to the other information in this Annual Report on Form
10-K, you should carefully consider the following factors in
evaluating us and our business. This Annual Report contains, in
addition to historical information, forward-looking statements that
involve risks and uncertainties. Our actual results could differ
materially. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below,
as well as those discussed elsewhere in this Annual Report,
including the documents incorporated by reference.
There are risks associated with investing in companies such as
ours who are engaged in research and development. In addition to
risks which could apply to any company or business, you should
also consider the business we are in and the following:
Research Frontiers has a history of operating losses, expects to
incur additional losses in the future, and consequently will need
additional funds in the future to continue its operations. To date,
Research Frontiers has lost money, and we expect to lose money
in the foreseeable future. Because we expect that our future
revenues will consist primarily of license fees (which have not
been significant to date), unless our licensees produce and sell
products using our technology, Research Frontiers will not be
profitable. There is no guarantee that we will ever be profitable.
Since Research Frontiers was started in 1965 through December
31, 2005, its total net loss was $58,932,898. In 2005 our net loss
was $3,747,532 and was $4,262,741 in 2004.
We have funded our operations by selling our common stock to
investors. If we need additional money, there is no guarantee that
it will be available when we need it, or on favorable terms.
Without giving effect to the raising of additional capital in the
future, the Company would have to raise additional capital no later
than the first quarter of 2007 if operations, including research and
development and marketing, are to be maintained at current levels.
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.
Research Frontiers depends upon the activities of its licensees in
order to be profitable. We do not directly manufacture or market
products using SPD technology. Although a variety of products
have been sold by our licensees, and since it is up to our licensees
to decide when and if they will introduce products using SPD
technology, we cannot predict when and if our licensees will
generate substantial sales of such products. Research Frontiers'
SPD technology is currently licensed to 34 companies. Other
companies are also evaluating the technology for use in various
products. In the past, some companies have evaluated our
technology without proceeding further. Also, we do not intend to
manufacture products using SPD technology. Instead we intend to
continue to license our technology to manufacturers of end
products, films and emulsion. We expect that our licensees would
be primarily responsible for marketing and manufacturing, but we
are also engaging in market development activities.
Products using SPD technology have only recently been
introduced into the marketplace. Developing products using new
technologies can be risky because problems, expenses and delays
frequently occur. Research Frontiers cannot control whether or not
its licensees will develop SPD products. Some of our licensees
appear to be more active than others, some appear to be better
capitalized than others, and some licensees appear to be inactive.
There is no guarantee when or if our licensees will successfully
produce any commercial product using SPD technology.
SPD technology is the only technology Research Frontiers works
with, so that our success depends upon the viability of SPD
technology which has yet to be proven. We have not fully
ascertained the performance and long-term reliability of our
technology, and therefore there is no guarantee that our
technology will successfully be incorporated into all of the
products which we are targeting for use of SPD technology. We
expect that different product applications for SPD technology will
have different performance and reliability specifications. For
example, SPD eyewear requiring batteries may need to use lower
voltages than SPD windows used in homes or offices, yet may not
need to last as long or be exposed to as harsh an environment. We
expect that our licensees will primarily be responsible for
reliability testing, but that we may also continue to do reliability
testing so that we can more effectively focus our research and
development efforts towards constantly improving the
performance characteristics and reliability of products using SPD
technology.
ITEM 2. PROPERTIES
The Company currently occupies approximately 9,500 square
feet of space at an annual rental which in 2005 was approximately
$175,000 for its executive office and research facility at 240
Crossways Park Drive, Woodbury, New York 11797 under a lease
expiring January 31, 2014. The Company believes that its space,
including its laboratory facilities, is adequate for its present needs.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings pending by or against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY,RELATED STOCK HOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
(a) Market Information
(1) The Company's common stock is traded on the
NASDAQ Capital Market. As of March 29, 2006, there were
13,812,559 shares of common stock outstanding.
(2) The following table sets forth the range of the high and
low selling prices (as provided by the National Association of
Securities Dealers) of the Company's common stock for each
quarterly period within the past two fiscal years:
Quarter Ended Low High
March 31, 2004 8.28 13.98
June 30, 2004 6.94 11.55
September 30, 2004 5.13 7.60
December 31, 2004 5.65 7.96
March 31, 2005 5.00 6.59
June 30, 2005 2.76 5.75
September 30, 2005 2.55 3.50
December 31, 2005 3.18 7.00
These quotations may reflect inter-dealer prices, without retail
mark-up, mark-down, or commission, and may not necessarily
represent actual transactions.
(b) Approximate Number of Security Holders
As of March 29, 2006, there were 610 holders of record of
the Company's common stock. The Company estimates that there
are approximately 8,200 beneficial holders of the Company's
common stock.
(c) Dividends
The Company did not pay dividends on its common stock in
2005 and does not expect to pay any cash dividends in the
foreseeable future. There are no restrictions on the payment of
dividends.
(d) Issuer Purchases of Equity Securities
None.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected data regarding the
Company's operating results and financial position. The data
should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations and the
consolidated financial statements and notes thereto, all of which
are contained in this Annual Report on Form 10-K.
Year ended December 31,
2005 2004 2003 2002 2001
Statement of Operations Data:
Fee income $138,742 $201,321 $258,187 $217,519 $ 142,002
Operating expenses (1) 2,624,379 2,633,534 2,537,317 2,631,139 3,155,305
Research and development(1)1,391,657 1,682,624 1,908,753 1,859,030 2,223,425
Charge for reduction in value
of investment in SPD Inc.(2) -- 165,501 615,200 -- --
4,016,036 4,481,659 5,061,270 4,490,169 5,378,730
Operating loss (3,877,294)(4,280,338)(4,803,083)(4,272,650)(5,236,728)
Net investment income (3) 129,762 17,597 30,775 321,534 696,058
Net loss (3,747,532)(4,262,741)(4,772,308)(3,951,116)(4,540,670)
Basic and diluted net loss
per common share (.27) (.33) (.38) (.33) (.38)
Dividends per share -- -- -- -- --
As of December 31,
2005 2004 2003 2002 2001
Balance Sheet Data:
Total current assets $3,823,093 $2,716,964 $5,322,083 $5,293,629 $8,272,677
Total assets 3,957,205 2,860,673 5,690,270 6,267,051 9,324,902
Long-term debt, including
accrued interest -- -- -- -- --
Total shareholders'equity 3,646,254 2,392,303 5,469,427 5,974,466 9,049,920
_________________________________
(1) During 2002, the Company reclassified costs associated with
patents and patent applications from research and development
expenses to operating expenses. The amount of patent costs
reclassified from research and development expense to operating
expense for the year ended December 31, 2001 was approximately $411,000.
(2) Reflects a non-cash charge against income of $615,200 recorded
by the Company in the first quarter of 2003 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 $209,704 during the
first quarter of 2004. During the fourth quarter of 2004, the
Company received a payment of $44,203 as part of a liquidation
distribution made by SPD Inc. to its shareholders, resulting in a
total net non-cash charge against income of $165,501 in 2004.
(3) Net investment income for 2002 includes $64,608 of interest
income received from officers of the Company upon payment of
notes receivable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical 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."
The Company has entered into a number of license
agreements covering potential products using the Company's
SPD technology. The Company receives fees and 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 applied the cost method of accounting for its
minority equity interest in SPD Inc., a subsidiary of Hankuk
Glass Industries, Inc. Because no public market existed for the
common stock of SPD Inc., the Company reviewed 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 was 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. During the fourth quarter of 2004, the
Company received a payment of $44,203 as part of a liquidation
distribution made by SPD Inc. to its shareholders, resulting in a
total net non-cash charge against income of $165,501 in 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.
Results of Operations
Year ended December 31, 2005 Compared to the Year ended December 31, 2004
The Company's fee income from licensing activities for
2005 was $138,742, as compared to $201,321 for 2004. 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 $9,155 for 2005 to
$2,624,379 from $2,633,534 for 2004. This decrease was
primarily the result of lower marketing, accounting, depreciation
and isnurance expenses, partially offset by higher payroll,
consulting, and patent expenses, and higher stock listing fees
and reserves for bad debts.
Research and development expenditures decreased by
$290,967 to $1,391,657 for 2005 from $1,682,624 for 2004.
This decrease was primarily the result of decreased payroll,
depreciation, and other allocated office expenses partially offset
by higher materials expense.
Investment income for 2005 was $129,762 as compared to
a net gain from its investing activities of $17,597 for 2004. This
difference was primarily due to higher interest rates during 2005
and higher cash balances due to the receipt of proceeds from the
sale of common stock and warrants in February 2005.
Investment income for 2004 was $30,097 prior to a write-down
of $12,500 in the Company's investment in common stock of ThermoView Industries.
During 2004, the Company recorded total non-cash
accounting charges of $165,501 against income to reflect a
reduction in the value of its investment in SPD Inc.
As a consequence of the factors discussed above, the
Company's net loss was $3,747,532 ($0.27 per share) for 2005
as compared to $4,262,741 ($0.33 per share) for 2004.
Year ended December 31, 2004 Compared to the Year ended December 31, 2003
The Company's fee income from licensing activities for
2004 was $201,321, as compared to $258,187 for 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 increased by $96,217 for 2004 to
$2,633,534 from $2,537,317 for 2003. This increase was
primarily the result of higher accounting fees (representing a
$201,050 increase), insurance, partially offset by lower payroll,
marketing, legal, patent, depreciation, consulting and directors expenses.
Research and development expenditures decreased by
$226,129 to $1,682,624 for 2004 from $1,908,753 for 2003.
This decrease was primarily the result of decreased payroll and
depreciation expenses, partially offset by higher insurance
expenses, and rent.
Investment income for 2004 was $17,597 as compared to a
net gain from its investing activities of $30,775 for 2003.
Investment income for 2004 was $30,097 prior to a write-down
of $12,500 in the Company's investment in common stock of ThermoView Industries.
During 2004, the Company recorded total non-cash
accounting charges of $165,501 against income to reflect a
reduction in the value of its investment in SPD Inc. Of this, the
Company recorded a non-cash charge against income of
$209,704 during the first quarter of 2004. During the fourth
quarter of 2004, the Company received a payment of $44,203 as
part of a liquidation distribution made by SPD Inc. to its
shareholders, resulting in a total net non-cash charge against
income of $165,501 in 2004. 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.
As a consequence of the factors discussed above, the
Company's net loss was $4,262,741 ($0.33 per share) for 2004
as compared to $4,772,308 ($0.38 per share) for 2003.
Financial Condition, Liquidity and Capital Resources
During 2005, the Company's cash and cash equivalent balance
increased by $1,042,622 principally as a result of $5,000,000 of
net proceeds received from the issuance of common stock and
warrants, offset by cash used to fund the Company's operating
activities of $3,920,835. At December 31, 2005, the Company
had working capital of $3,512,142 and its shareholders' equity
was $3,646,254.
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 $176,669, plus tenant's share of applicable taxes.
These lease obligations are summarized over time as of
December 31, 2005:
Payments due by period
<1 year 1-3 years 4-5 years >5 years Total
Operating lease obligations 159,000 493,000 340,000 365,000 1,357,000
In February 2005, the Company raised $5 million in net
proceeds in connection with the registered sale to institutional
investors of one million shares of its common stock and the
issuance of five-year warrants to purchase 200,000 shares of
common stock at an exercise price of $7.50 per share.
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, existing cash reserves and budgeted
revenues, the Company believes that it would not require
additional funding until the first quarter of 2007. 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. 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.
Inflation
The Company does not believe that inflation has a
significant impact on its business.
New Accounting Standards
In December 2004, the Financial Accounting Standards
Board, or FASB, issued SFAS No. 123R "Share Based
Payment," which replaces SFAS No. 123 and supersedes APB
No. 25. SFAS No. 123R requires that the cost resulting from all
share-based payment transactions be recognized in the
consolidated financial statements. This statement applies to all
share-based payment transactions in which an entity acquires
goods or services by issuing its shares, options or other equity
instruments. This statement establishes fair value as the
measurement objective in accounting for share-based payment
arrangements and requires all entities to apply a fair-value-based
measurement method in accounting for share-based payment
transactions with employees, except for equity instruments held
by employee share ownership plans. This statement is effective
as of the beginning of the first annual reporting period that
begins after June 15, 2005, which will be the Company's next
fiscal year beginning January 1, 2006. The Company expects
that the adoption of SFAS No. 123R 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, since all options granted prior to January
1, 2006 are fully vested.
Related Party Transactions
None.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
At times, the Company invests available cash and cash
equivalents in money market funds or in short-term U.S. treasury
securities with maturities that are generally two years or less.
Although the rate of interest paid on such investments may
fluctuate over time, each of the Company's investments, other
than in money market funds whose interest yield varies, is made
at a fixed interest rate over the duration of the investment.
Accordingly, the Company does not believe it is materially
exposed to changes in interest rates as it generally holds these
treasury securities until maturity.
The Company does not have any sales, purchases, assets or
liabilities determined in currencies other than the U.S. dollar, and
as such, is not subject to foreign currency exchange risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements listed in Item 15(a)(1)
and (2) are included in this Report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on
Form 10-K, the Company carried out an evaluation, under the
supervision and with the participation of the Company's
management, including the CEO and CFO, of the effectiveness
of the design and operation of the Company's disclosure controls
and procedures pursuant to Exchange Act Rule 13a-15. Based
upon that evaluation, the Company's CEO and CFO concluded
that the Company's disclosure controls and procedures are
effective in timely alerting them to material information relating
to the Company (including its consolidated subsidiary) required
to be included in the Company's periodic SEC filings. There
were no changes in the Company's internal control over financial
reporting during the quarterly period ended December 31, 2005
that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company has adopted a code of ethics applicable to its Chief
Executive Officer, Chief Operating Officer, Treasurer and Chief
Financial Officer, any Vice President and other employees of the
Company with important roles in the financial reporting process.
This Code of Ethics was adopted by the entire Board of Directors
of the Company, including all of its Audit Committee members,
in March 2004 in accordance with the requirements of the
Sarbanes Oxley Act. The code of ethics is available on the
Company's website at www.SmartGlass.com and was also filed
as an exhibit to the Company's Annual Report on Form 10-K for
the year ended December 31, 2003. The Company intends to
satisfy the disclosure requirement under Item 10 of Form 8-K
regarding any amendment to, or waiver from, a provision of this
code of ethics by posting such information on the website specified above.
The other information required by this Item 10 is incorporated by
reference to the Company's definitive Proxy Statement to be
filed with the Commission on or before April 30, 2006, in
connection with the Company's Annual Meeting of Stockholders
scheduled to be held on June 8, 2006.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by
reference to the Company's definitive Proxy Statement to be
filed with the Commission on or before April 30, 2006, in
connection with the Company's Annual Meeting of Stockholders
scheduled to be held on June 8, 2006. Notwithstanding anything
to the contrary set forth herein or in any of the Company's past
or future filings with the Securities and Exchange Commission
that might incorporate by reference the Company's definitive
Proxy Statement, in whole or in part, the report of the
compensation committee and the stock price performance graph
contained in such definitive Proxy Statement shall not be
incorporated by reference into this Annual Report on Form 10-K
or in any other such filings.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required by this Item 12 is incorporated by
reference to the Company's definitive Proxy Statement to be
filed with the Commission on or before April 30, 2006, in
connection with the Company's Annual Meeting of Stockholders
scheduled to be held on June 8, 2006.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated by
reference to the Company's definitive Proxy Statement to be
filed with the Commission on or before April 30, 2006, in
connection with the Company's Annual Meeting of Stockholders
scheduled to be held on June 8, 2006.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 is incorporated by
reference to the Company's definitive Proxy Statement to be
filed with the Commission on or before April 30, 2006, in
connection with the Company's Annual Meeting of Stockholders
scheduled to be held on June 8, 2006.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements and Financial Statement Schedules
The following consolidated financial statements of Research
Frontiers Incorporated are filed under Item 8 of this Report.
Page
Report of Independent Registered Public Accounting Firm. . . . . . . F-1
Report of Independent Registered Public Accounting Firm. . . . . . . F-2
Consolidated Financial Statements:
Consolidated Balance Sheets,
December 31, 2005 and 2004. . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations,
Years ended December 31, 2005, 2004 and 2003. . . . . . . . F-4
Consolidated Statements of Shareholders' Equity,
Years ended December 31, 2005, 2004 and 2003. . . . . . . . F-5
Consolidated Statements of Cash Flows,
Years ended December 31, 2005, 2004 and 2003. . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . F-7
Schedule II - Valuation and Qualifying Accounts . . . . . . . . . . F-19
All other schedules have been omitted because they are not
applicable, or not required, or the required information is
disclosed elsewhere in this Annual Report.
(a)(3) Exhibits
3.1 Restated Certificate of Incorporation of the Company.
Previously filed as Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1994, and incorporated herein by
reference.
3.2 Amended and Restated Bylaws of the Company.
Previously filed as an Exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1993 and incorporated herein by
reference.
4.1 Form of Common Stock Certificate. Previously filed as
an Exhibit to the Company's Registration Statement on
Form S-18 (Reg. No. 33-5573NY), declared effective
by the Commission on July 8, 1986, and incorporated
herein by reference.
4.2.1 Rights Agreement dated as of February 16, 1993
between Research Frontiers Incorporated and
Continental Stock Transfer & Trust Company, as Rights
Agent, which includes as Exhibit A thereto the Form of
Rights Certificate. Previously filed as an Exhibit to the
Company's Registration Statement on Form 8-A dated
February 16, 1993, and incorporated herein by reference.
4.2.2 Rights Agreement dated as of February 18, 2003
between Research Frontiers Incorporated and
Continental Stock Transfer & Trust Company, as Rights
Agent, which includes as Exhibit A thereto the Form of
Rights Certificate. Previously filed as an Exhibit to the
Company's Registration Statement on Form 8-A dated
February 24, 2003, and incorporated herein by reference.
4.3 Subscription Agreement between Research Frontiers
and Ailouros Ltd. dated as of October 1, 1998, and
related Class A Warrant and Class B Warrant between
Research Frontiers and Ailouros Ltd. dated as of
October 1, 1998. Previously filed as an Exhibit to the
Company's Registration Statement on Form S-3 (No.
333-65219) dated October 1, 1998, and incorporated
herein by reference.
10.1* Amended and Restated Employment Contract effective
January 1, 1989 between the Company and Robert L.
Saxe. Previously filed as an Exhibit to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1993 and incorporated herein by reference.
10.2* Amended and Restated 1992 Stock Option Plan.
Previously filed as Exhibit 4 to the Company's
Registration Statement on Form S-8 (Reg. No. 33-
86910) filed with the Commission on November 30,
1994, and incorporated herein by reference.
10.3* 1998 Stock Option Plan, as amended. Previously filed
as an Exhibit to the Company's Definitive Proxy
Statement dated April 30, 1998 filed with the
Commission on April 29, 1998, 1994, and incorporated
herein by reference.
10.4* Form of Stock Option Agreement between the Company
and recipients of stock options issued pursuant to the
Company's Stock Option Plans. Previously filed as part
of Exhibits 4.1, 4.2, and 4.3 to the Company's
Registration Statement on Form S-8 (Reg. No. 33-
53030) filed with the Commission on October 6, 1992,
and incorporated herein by reference.
10.5 Lease Agreement dated November 7, 1986, between the
Company and Industrial & Research Associates Co.
Previously filed as an exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1986 and incorporated herein by reference.
10.5.1 First Amendment to Lease dated November 26, 1991
between the Company and Industrial and Research
Associates Co. Previously filed as an Exhibit to
Amendment No. 1 to the Company's Registration
Statement on Form S-1 (Reg. No. 33-43768) declared
effective by the Commission on December 17, 1991,
and incorporated herein by reference.
10.5.2 Second Amendment to Lease dated March 11, 1994
between the Company and Industrial and Research
Associates Co. Previously filed as an exhibit to the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993 and incorporated herein
by reference.
10.5.3 Third Amendment to Lease dated July 14, 1998 between
the Company and Industrial and Research Associates
Co. Previously filed as an exhibit to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 and incorporated herein by reference.
10.5.4 Fourth Amendment to Lease dated January 13, 2004
between the Company and Industrial and Research
Associates Co. Previously filed as an exhibit to the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2003 and incorporated herein
by reference.
10.6 License Agreement effective as of August 2, 1995
between the Company and General Electric Company.
Previously filed as an Exhibit to the Company's Current
Report on Form 8-K dated August 2, 1995 with portions
omitted pursuant to the Registrant's request for
confidential treatment and filed separately with the
Securities and Exchange Commission, and incorporated
herein by reference.
10.7 License Agreement effective as of April 29, 1996
between the Company and Glaverbel, S.A. Previously
filed as an Exhibit to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 31,
1996 with portions omitted pursuant to the Registrant's
request for confidential treatment and filed separately
with the Securities and Exchange Commission, and
incorporated herein by reference.
10.8 License Agreement effective as of January 18, 1997
between the Company and Material Sciences
Corporation. Previously filed as an Exhibit to the
Company's Current Report on Form 8-K dated March 3,
1997 with portions omitted pursuant to the Registrant's
request for confidential treatment and filed separately
with the Securities and Exchange Commission, and
incorporated herein by reference.
10.9 License Agreement effective as of March 31, 1997
between the Company and Hankuk Glass Industries,
Inc. Previously filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1997 with portions omitted
pursuant to the Registrant's request for confidential
treatment and filed separately with the Securities and
Exchange Commission, and incorporated herein by reference.
10.10 License Agreement effective as of August 8, 1997
between the Company and Orcolite, a Unit of Monsanto
Company. Previously filed as an Exhibit to the
Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 1997 with portions
omitted pursuant to the Registrant's request for
confidential treatment and filed separately with the
Securities and Exchange Commission, and incorporated
herein by reference.
10.11 License Agreement effective as of June 25, 1999
between the Company and Dainippon Ink and
Chemicals, Incorporated. Previously filed as an Exhibit
to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 1999 with portions
omitted pursuant to the Registrant's request for
confidential treatment and filed separately with the
Securities and Exchange Commission, and incorporated
herein by reference.
10.12 License Agreement effective as of August 9, 1999
between the Company and Hitachi Chemical Co., Ltd.
Previously filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1999 with portions omitted
pursuant to the Registrant's request for confidential
treatment and filed separately with the Securities and
Exchange Commission, and incorporated herein by reference.
10.13 License Agreement effective as of December 3, 1999
between the Company and Global Mirror GmbH & Co.
KG. Previously filed as an Exhibit to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 with portions omitted pursuant to
the Registrant's request for confidential treatment and
filed separately with the Securities and Exchange
Commission, and incorporated herein by reference.
10.14 License Agreement effective as of December 13, 1999
between the Company and Global Mirror GmbH & Co.
KG. Previously filed as an Exhibit to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 with portions omitted pursuant to
the Registrant's request for confidential treatment and
filed separately with the Securities and Exchange
Commission, and incorporated herein by reference.
10.15 License Agreement effective as of March 21, 2000
between the Company and ThermoView Industries, Inc.
Previously filed as an Exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1999 with portions omitted pursuant to
the Registrant's request for confidential treatment and
filed separately with the Securities and Exchange
Commission, and incorporated herein by reference.
10.16 License Agreement effective as of May 23, 2000
between the Company and Polaroid Corporation.
Previously filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 2000 with portions omitted pursuant to
the Registrant's request for confidential treatment and
filed separately with the Securities and Exchange
Commission, and incorporated herein by reference.
10.17 License Agreement effective as of February 16, 2001
between the Company and AP Technoglass Co.
Previously filed as an Exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended
December 31, 2001 with portions omitted pursuant to
the Registrant's request for confidential treatment and
filed separately with the Securities and Exchange
Commission, and incorporated herein by reference.
10.18 License Agreement effective as of March 21, 2001
between the Company and InspecTech Aero Service,
Inc. Previously filed as an Exhibit to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2001 with portions omitted pursuant to
the Registrant's request for confidential treatment and
filed separately with the Securities and Exchange
Commission, and incorporated herein by reference.
10.19 License Agreement effective as of March 28, 2001
between the Company and Film Technologies
International, Inc. Previously filed as an Exhibit to the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2001 with portions omitted
pursuant to the Registrant's request for confidential
treatment and filed separately with the Securities and
Exchange Commission, and incorporated herein by reference.
10.20 License Agreement effective as of November 29, 2001
between the Company and Avery Dennison
Corporation. Previously filed as an Exhibit to the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2001 with portions omitted
pursuant to the Registrant's request for confidential
treatment and filed separately with the Securities and
Exchange Commission, and incorporated herein by reference.
10.21 License Agreement effective as of February 4, 2002
between the Company and BOS GmbH & Co. KG.
Previously filed as an Exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended
December 31, 2001 with portions omitted pursuant to
the Registrant's request for confidential treatment and
filed separately with the Securities and Exchange
Commission, and incorporated herein by reference.
10.22 License Agreement effective as of March 11, 2002
between the Company and Isoclima S.p.A. Previously
filed as an Exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001
with portions omitted pursuant to the Registrant's
request for confidential treatment and filed separately
with the Securities and Exchange Commission, and
incorporated herein by reference.
10.23 License Agreement effective as of July 2, 2002 between
the Company and Isoclima S.p.A. Previously filed as an
Exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2002 with
portions omitted pursuant to the Registrant's request for
confidential treatment and filed separately with the
Securities and Exchange Commission, and incorporated
herein by reference.
10.24 License Agreement effective as of August 19, 2002
between the Company and Razor's Edge Technologies,
Inc. Previously filed as an Exhibit to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2002 with portions omitted pursuant to
the Registrant's request for confidential treatment and
filed separately with the Securities and Exchange
Commission, and incorporated herein by reference.
10.25 License Agreement effective as of October 7, 2002
between the Company and American Glass Products
(Glass Technology Investment Ltd.). Previously filed as
an Exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2002 with
portions omitted pursuant to the Registrant's request for
confidential treatment and filed separately with the
Securities and Exchange Commission, and incorporated
herein by reference.
10.26 License Agreement effective as of October 7, 2002
between the Company and SPD Systems, Inc.
Previously filed as an Exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended
December 31, 2002 with portions omitted pursuant to
the Registrant's request for confidential treatment and
filed separately with the Securities and Exchange
Commission, and incorporated herein by reference.
10.27 License Agreement effective as of October 24, 2002
between the Company and Cricursa Cristales Curvados
S.A. Previously filed as an Exhibit to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2002 with portions omitted pursuant to
the Registrant's request for confidential treatment and
filed separately with the Securities and Exchange
Commission, and incorporated herein by reference.
10.28 License Agreement effective as of December 9, 2002
between the Company and BRG Group, Ltd. Previously
filed as an Exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2002
with portions omitted pursuant to the Registrant's
request for confidential treatment and filed separately
with the Securities and Exchange Commission, and
incorporated herein by reference.
10.29 License Agreement effective as of December 13, 2002
between the Company and Laminated Technologies Inc.
Previously filed as an Exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended
December 31, 2002 with portions omitted pursuant to
the Registrant's request for confidential treatment and
filed separately with the Securities and Exchange
Commission, and incorporated herein by reference.
10.30 License Agreement effective as of April 17, 2003
between the Company and Custom Glass Corporation.
Previously filed as an Exhibit to the Company's Annual
Report on Form 10-K/A for the fiscal year ended
December 31, 2003 with portions omitted pursuant to
the Registrant's request for confidential treatment and
filed separately with the Securities and Exchange
Commission, and incorporated herein by reference.
10.31 License Agreement effective as of May 2, 2003 between
the Company and Air Products and Chemicals, Inc.
Previously filed as an Exhibit to the Company's Annual
Report on Form 10-K/A for the fiscal year ended
December 31, 2003 with portions omitted pursuant to
the Registrant's request for confidential treatment and
filed separately with the Securities and Exchange
Commission, and incorporated herein by reference.
10.32 License Agreement effective as of May 30, 2003
between the Company and Kerros Limited. Previously
filed as an Exhibit to the Company's Annual Report on
Form 10-K/A for the fiscal year ended December 31,
2003 with portions omitted pursuant to the Registrant's
request for confidential treatment and filed separately
with the Securities and Exchange Commission, and
incorporated herein by reference.
10.33 License Agreement effective as of June 6, 2003 between
the Company and Traco, Inc. Previously filed as an
Exhibit to the Company's Annual Report on Form 10-
K/A for the fiscal year ended December 31, 2003 with
portions omitted pursuant to the Registrant's request for
confidential treatment and filed separately with the
Securities and Exchange Commission, and incorporated
herein by reference.
10.34 License Agreement effective as of June 16, 2003
between the Company and Saint-Gobain Glass France
S.A. Previously filed as an Exhibit to the Company's
Annual Report on Form 10-K/A for the fiscal year
ended December 31, 2003 with portions omitted
pursuant to the Registrant's request for confidential
treatment and filed separately with the Securities and
Exchange Commission, and incorporated herein by reference.
10.35 License Agreement effective as of August 1, 2003
between the Company and Vision (Environmental
Innovation) Limited. Previously filed as an Exhibit to
the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 2003 with portions
omitted pursuant to the Registrant's request for
confidential treatment and filed separately with the
Securities and Exchange Commission, and incorporated
herein by reference.
10.36 License Agreement effective as of November 13, 2003
between the Company and Innovative Glass
Corporation. Previously filed as an Exhibit to the
Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 2003 with portions
omitted pursuant to the Registrant's request for
confidential treatment and filed separately with the
Securities and Exchange Commission, and incorporated
herein by reference.
10.37 License Agreement effective as of December 11, 2003
between the Company and Leminur Limited. Previously
filed as an Exhibit to the Company's Annual Report on
Form 10-K/A for the fiscal year ended December 31,
2003 with portions omitted pursuant to the Registrant's
request for confidential treatment and filed separately
with the Securities and Exchange Commission, and
incorporated herein by reference.
10.38 License Agreement effective as of March 25, 2004
between the Company and Pilkington plc. Previously
filed as an Exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2004
with portions omitted pursuant to the Registrant's
request for confidential treatment and filed separately
with the Securities and Exchange Commission, and
incorporated herein by reference.
10.39 License Agreement effective as of April 5, 2004
between the Company and SmartGlass Ireland Ltd.
Previously filed as an Exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended
December 31, 2004 with portions omitted pursuant to
the Registrant's request for confidential treatment and
filed separately with the Securities and Exchange
Commission, and incorporated herein by reference.
10.40 License Agreement effective as of April 8, 2004
between the Company and Prelco Inc. Previously filed
as an Exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2004 with
portions omitted pursuant to the Registrant's request for
confidential treatment and filed separately with the
Securities and Exchange Commission, and incorporated
herein by reference.
10.41 License Agreement effective as of April 13, 2004
between the Company and E. I. Dupont De Nemours
and Company. Previously filed as an Exhibit to the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2004 with portions omitted
pursuant to the Registrant's request for confidential
treatment and filed separately with the Securities and
Exchange Commission, and incorporated herein by
reference.
10.42 License Agreement effective as of September 3, 2004
between the Company and Nippon Sheet Glass Co., Ltd.
Previously filed as an Exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended
December 31, 2004 with portions omitted pursuant to
the Registrant's request for confidential treatment and
filed separately with the Securities and Exchange
Commission, and incorporated herein by reference.
10.43 License Agreement effective as of October 25, 2005
between the Company and SPD Control Systems
Corporation. Previously filed as an Exhibit to the
Company's Current Report on Form 8-K dated October
31, 2005 with portions omitted pursuant to the
Registrant's request for confidential treatment and filed
separately with the Securities and Exchange
Commission, and incorporated herein by reference.
14 Code of Ethics of Research Frontiers Incorporated.
Previously filed as an Exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended
December 31, 2003, and incorporated herein by reference.
21 Subsidiaries of the Registrant - SPD Enterprises, Inc.
23.1 Consent of BDO Seidman, LLP - Filed herewith.
23.2 Consent of KPMG LLP - Filed herewith.
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.
* Executive Compensation Plan or Arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto 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)
Dated: March 29, 2006
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated:
Signature Position Date
/s/Robert M. Budin Director March 29, 2006
Robert M. Budin
/s/Joseph M. Harary Director, President, March 29, 2006
Joseph M. Harary Treasurer
/s/Victor F. Keen Director March 29, 2006
Victor F. Keen
/s/Albert P. Malvino Director March 29, 2006
Albert P. Malvino
/s/Robert L. Saxe Director, Chairman March 29, 2006
Robert L. Saxe
Report of Independent Registered Public Accounting Firm
The Shareholders and Board of Directors
Research Frontiers Incorporated:
We have audited the accompanying consolidated balance sheet of
Research Frontiers Incorporated as of December 31, 2005 and
the related consolidated statements of operations shareholders'
equity, and cash flows for the year then ended. Our audit also
included the financial statement schedule for year ended
December 31, 2005, as listed in Item 15(a). These financial
statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements and financial statement schedule are free of
material misstatement. The Company is not required to have,
nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company's internal control over
financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements and financial statement schedule, assessing the
accounting principles used and significant estimates made
by management, as well as evaluating the overall financial
statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Research Frontiers Incorporated at December 31,
2005, and the results of its operations and its cash flows for the
year then ended, in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, the financial statement schedule presents fairly, in all
material respects, the information set forth therein.
/s/ BDO Seidman, LLP
Melville, New York
March 3, 2006
Report of Independent Registered Public Accounting Firm
The Shareholders and Board of Directors
Research Frontiers Incorporated:
We have audited the accompanying consolidated balance sheet
of Research Frontiers Incorporated and subsidiary as of
December 31, 2004, and the related consolidated statements
of operations, shareholders' equity and cash flows for each
of the years in the two-year period ended December 31, 2004.
In connection with our audits of the consolidated financial
statements, we also have audited the information included
in the financial statement schedule as listed in Item 15(a)
for each of the years in the two-year period ended
December 31, 2004. These consolidated financial statements
and the financial statement schedule are the responsibility
of the Company's management. Our responsibility is to
express an opinion on these consolidated financial
statements and the financial statement schedule based
on our audits.
We conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the
accounting principles used and significant estimates made
by management, as well as evaluating the overall financial
statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material
respects, the financial position of Research Frontiers
Incorporated and subsidiary as of December 31, 2004,
and the results of their operations and their cash flows
for each of the years in the two-year period ended
December 31, 2004, in conformity with U.S. generally
accepted accounting principles. Also in our opinion,
the related financial statement schedule, when
considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly,
in all material respects, the information set forth
therein for each of the years in the two-year period
ended December 31, 2004.
/s/ KPMG LLP
Melville, New York
March 15, 2005
RESEARCH FRONTIERS INCORPORATED
Consolidated Balance Sheets
December 31, 2005 and 2004
Assets 2005 2004
Current assets:
Cash and cash equivalents $ 3,644,685 2,602,063
Royalty receivables, net of reserves of
$78,674 in 2005 and $82,522 in 2004 40,000 54,544
Prepaid expenses and other current assets 138,408 60,357
Total current assets 3,823,093 2,716,964
Fixed assets, net 111,507 121,104
Deposits 22,605 22,605
Total assets $ 3,957,205 2,860,673
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 132,584 116,440
Deferred revenue 5,000 10,000
Accrued expenses and other 173,367 341,930
Total current liabilities 310,951 468,370
Shareholders' equity:
Common stock, par value $0.0001 per share;
authorized 100,000,000 shares, issued and
outstanding 13,812,559 and 12,812,559
shares for 2005 and 2004 1,381 1,281
Additional paid-in capital 62,577,771 57,576,388
Accumulated deficit (58,932,898) (55,185,366)
Total shareholders' equity 3,646,254 2,392,303
Commitments (note 10)
Total liabilities and shareholders' equity $ 3,957,205 2,860,673
See accompanying notes to consolidated financial statements.
RESEARCH FRONTIERS INCORPORATED
Consolidated Statements of Operations
Years ended December 31, 2005, 2004 and 2003
2005 2004 2003
Fee income $ 138,742 201,321 258,187
Operating expenses 2,624,379 2,633,534 2,537,317
Research and development 1,391,657 1,682,624 1,908,753
Charge for reduction in value
of investment in SPD Inc. -- 165,501 615,200
4,016,036 4,481,659 5,061,270
Operating loss (3,877,294) (4,280,338) (4,803,083)
Net investment income 129,762 17,597 30,775
Net loss (3,747,532) (4,262,741) (4,772,308)
Basic and diluted net loss
per common share $ (0.27) (0.33) (0.38)
Weighted average number of
common shares outstanding 13,692,011 12,792,091 12,436,879
See accompanying notes to consolidated financial statements.
RESEARCH FRONTIERS INCORPORATED
Statements of Shareholders' Equity
Years ended December 31, 2005, 2004 and 2003
Additional Accumulated
Common Stock Paid Accumulated Comprehensive
Shares Amount in Capital Deficit Income(Loss) Total
Balance,Dec.31,2002 12,215,879 $1,222 52,124,811 (46,150,317) (1,250)5,974,466
Issuance of
common stock 460,025 46 4,201,711 -- -- 4,201,757
Comprehensive loss:
Net loss -- -- -- (4,772,308) --(4,772,308)
Unrealized loss on available-
for-sale securities -- -- -- -- (3,375) (3,375)
Total Comprehensive Loss (4,775,683)
Issuance of stock,
options and warrants
for services performed 7,509 -- 68,887 -- -- 68,887
Balance,Dec.31,2003 12,683,413 $1,268 56,395,409 (50,922,625) (4,675)5,469,427
Issuance of
common stock 127,417 13 1,162,589 -- -- 1,162,602
Comprehensive loss:
Net loss -- -- -- (4,262,741) --(4,262,741)
Unrealized loss on available-
for-sale securities -- -- -- -- 4,625 4,625
Total Comprehensive Loss (4,258,116)
Issuance of stock,
options and warrants
for services performed 1,729 -- 18,390 -- -- 18,390
Balance,Dec.31,2004 12,812,559 $1,281 57,576,388 (55,185,366) -- 2,392,303
Issuance of
common stock 1,000,000 100 4,999,900 -- -- 5,000,000
Net loss -- -- -- (3,747,532) --(3,747,532)
Issuance of options
for services performed -- -- 1,483 -- -- 1,483
Balance,Dec.31,2005 13,812,559 1,381 62,577,771 (58,932,898) -- 3,646,254
See accompanying notes to consolidated financial statements.
RESEARCH FRONTIERS INCORPORATED
Consolidated Statements of Cash Flows
Years ended December 31, 2005, 2004 and 2003
2005 2004 2003
Cash flows from operating activities:
Net loss $(3,747,532)(4,262,741)(4,772,308)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 46,140 82,736 112,092
Provision for uncollectible royalty receivables (3,848) 32,522 50,000
Charge for reduction in value of
investment in SPD Inc. -- 165,501 615,200
Expense relating to cashless
exercise of stock options -- 15,707 40,987
Expense relating to issuance of stock, options
and warrants for services performed 1,483 2,683 27,900
Impairment loss on marketable securities -- 12,500 --
Changes in assets and liabilities:
Royalty receivables 18,392 72,825 (71,744)
Prepaid expenses and other current assets (78,051) 21,670 (55,366)
Deferred revenue (5,000) (13,683) 11,683
Accounts payable and accrued expenses (152,419) 261,210 (83,425)
Net cash used in operating activities (3,920,835)(3,609,070)(4,124,981)
Cash flows from investing activities:
Purchases of fixed assets (36,543) (67,962) (47,155)
Proceeds from liquidation of SPD Inc. -- 44,203 --
Investment in SPD, Inc., at cost -- -- (74,902)
Net cash used in investing activities (36,543) (23,759) (122,057)
Cash flows from financing activities:
Proceeds from issuances of
common stock and warrants 5,000,000 1,162,602 4,201,757
Net cash provided by financing activities 5,000,000 1,162,602 4,201,757
Net increase (decrease) in cash
and cash equivalents 1,042,622 (2,470,227) (45,281)
Cash and cash equivalents at beginning of year 2,602,063 5,072,290 5,117,571
Cash and cash equivalents at end of year $ 3,644,685 2,602,063 5,072,290
See accompanying notes to consolidated financial statements.
RESEARCH FRONTIERS INCORPORATED
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
(1) Business
Research Frontiers Incorporated ("Research Frontiers" or 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 Research Frontiers, 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.
The Company has historically utilized its cash and the proceeds
from maturities of its investments 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, and 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. 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. Eventual success of the
Company and generation of positive cash flow will be dependent
upon the commercialization of products using the Company's
technology by the Company's licensees and payments of
continuing royalties on account thereof. To date, the Company has
not generated sufficient revenue from its licensees to fund its operations.
(2) Summary of Significant Accounting Policies
(a) Cash and Cash Equivalents
The Company considers securities purchased with original
maturities of three months or less to be cash equivalents. Cash
equivalents consist of short-term investments in money market
accounts at December 31, 2005 and 2004.
(b) Marketable Investment Securities
The Company classifies its securities (equity security) into
available-for-sale which are recorded at fair value with unrealized
holding gains and losses excluded from earnings and are reported
as a separate component of shareholders' equity until realized.
Dividend and interest income are recognized when earned. Cost is
maintained on a specific identification basis for purposes of
determining realized gains and losses on sales of investments. A
decline in the market value of any available-for-sale security below
cost that is deemed to be other than temporary results in a reduction
in carrying amount to fair market value. The impairment is charged
to earnings and a new cost basis for this security is established.
During the fourth quarter of 2004, the Company reduced the
investment balance to $0 based upon a continued reduction in the
market price of this equity security, and recorded a charge to net
investment income of $12,500.
(c) Royalties Receivable
Royalties receivable are recorded at the amounts specified within
the license agreements when the collectibility of the receivable is
reasonably assured. The receivables do not bear interest. The
allowance for doubtful accounts is the Company's best estimate of
the amount of probable credit losses in the Company's existing
royalties receivable. The Company determines the allowance based
on historical write off experience. The Company reviews its
allowance for doubtful accounts periodically. Past due accounts are
reviewed individually for collectibility. Account balances are
charged off against the allowance after all means of collection have
been exhausted and the potential for recovery is considered remote.
(d) Fixed Assets
Fixed assets are carried at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful
lives of the assets.
(e) Fee Income
Fee income represents amounts earned by the Company under
various license and other agreements (note 9) relating to
technology developed by the Company. During fiscal 2005, four
licensees of the Company accounted for 36%, 14%, 13% and 11%,
respectively of fee income recognized during the year. During
fiscal 2004, four licensees of the Company accounted for 25%,
19%, 13% and 12%, respectively of fee income recognized during
the year. During fiscal 2003, four licensees of the Company
accounted for 19%, 19%, 19% and 15%, respectively of fee income
recognized during the year.
(f) Basic and Diluted Loss Per Common Share
Basic earnings (loss) per share excludes any dilution. It is based
upon the weighted average number of common shares outstanding
during the period. Dilutive earnings (loss) per share reflects the
potential dilution that would occur if securities or other contracts to
issue common stock were exercised or converted into common
stock. The Company's dilutive earnings (loss) per share equals
basic earnings (loss) per share for each of the years in the three-
year period ended December 31, 2005 because all common stock
equivalents (i.e., options and warrants) were antidilutive in those
periods. The number of options and warrants that were not included
because their effect is antidilutive was 3,075,593, 2,628,400, and
2,686,975, for 2005, 2004, and 2003, respectively.
(g) Research and Development Costs
Research and development costs are charged to expense as
incurred.
(h) Patent Costs
The Company expenses costs relating to the development or
acquisition of patents due to the uncertainty of the recoverability of
these items.
(i) Use of Estimates
The preparation of the Company's consolidated financial
statements requires management of the Company to make a number
of estimates and assumptions relating to the reported amount of
assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during this period.
Significant items subject to such estimates and assumptions include
the valuation of deferred income tax assets. Actual results could
differ from those estimates.
(j) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(k) Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between
willing parties. The carrying amounts of all financial instruments
classified as a current asset or current liability are deemed to
approximate fair value because of the short maturity of those
instruments.
(l) 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 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 earnings
per share as if the fair value method had been applied:
2005 2004 2003
Net loss, as reported $(3,747,532) $(4,262,741) $(4,772,308)
Add: Stock-based employee compensation
expense included in reported net loss 1,483 18,390 40,987
Deduct: Total stock-based employee
compensation determined under fair-
value based method for all awards (955,584) (693,943) (873,262)
Pro forma $(4,701,633) $(4,938,294) $(5,604,583)
Basic and diluted net loss
per common share As reported $ (0.27) $ (0.33) $ (0.38)
Pro forma $ (0.34) $ (0.38) $ (0.45)
The per share weighted average fair value of stock options granted
during 2005, 2004, and 2003, was approximately $2.22, $4.37, and
$7.45, respectively, on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:
Expected Risk-Free Expected Stock Expected Life
Grant Date Dividend Yield Interest Rate Volatility in Years
December 2005 0% 4.251% 68.910% 5.00
July 2005 0% 3.788% 70.800% 5.00
January 2004 0 % 3.225% 79.580% 4.53
December 2004 0 % 3.521% 70.650% 4.53
June 2003 0 % 1.750% 82.050% 3.77
(l) Accumulated Other Comprehensive Income (loss)
The change in accumulated other comprehensive income (loss) was
a reclassification adjustment of $4,625 for the year-ended
December 31, 2004 reflecting the write off of an equity investment
for an other than temporary impairment (see note 2(b)).
The change in accumulated other comprehensive income (loss) was
$3,375 for the year-ended December 31, 2003 for the unrealized
holding losses on available-for-sale securities for the period.
(m) 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.
(n) Impairment of Long-Lived Assets
In accordance with SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," the Company reviews long-
lived assets to determine whether an event or change in
circumstances indicates the carrying value of the asset may not be
recoverable. The Company bases its evaluation on such impairment
indicators as the nature of the assets, the future economic benefit of
the assets and any historical or future profitability measurements, as
well as other external market conditions or factors that may be
present. If such impairment indicators are present or other factors
exist that indicate that the carrying amount of the asset may not be
recoverable, the Company determines whether an impairment has
occurred through the use of an undiscounted cash flows analysis at
the lowest level for which identifiable cash flows exist. If
impairment has occurred, the Company recognizes a loss for the
difference between the carrying amount and the fair value of the
asset. Fair value is the amount at which the asset could be bought or
sold in a current transaction between a willing buyer and seller
other than in a forced or liquidation sale and can be measured as the
asset's quoted market price in an active market or, where an active
market for the asset does not exist, the Company's best estimate of
fair value based on discounted cash flow analysis. Assets to be
disposed of by sale are measured at the lower of carrying amount or
fair value less estimated costs to sell. The implementation of SFAS
No. 144 had no impact on the Company's financial position or
results of operations.
(3) 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 the April 2003
financing, and the Company 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
was 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. During the fourth quarter of 2004, the Company received a
payment of $44,203 as part of a liquidation distribution made by
SPD Inc. to its shareholders, resulting in a total net non-cash charge
against income of $165,501 in 2004. The Company's license
agreement with Hankuk Glass Industries provided for the payment
of minimum annual royalties to the Company in 2002 and 2003.
These amounts were all paid in full in 2004.
(4) Marketable Investment Securities
The fair value of marketable investment securities is based upon
quoted market prices. The amortized cost, gross unrealized holding
gains and fair value for the Company's investment security at
December 31, 2003 were as follows:
Amortized Cost Gross Unrealized Holding Fair Value
Gains (Losses)
Available-for-sale securities:
Equity security available-for-sale $12,500 -- ($4,625) $7,875
During the fourth quarter of 2004, the Company charged the
remaining value ($7,875) of this security to net investment income
as the result of an impairment that was deemed other than temporary.
(5) Fixed Assets
Fixed assets and their estimated useful lives, are as follows:
2005 2004 Estimated useful life
Equipment and furniture $ 1,181,824 1,167,771 5 years
Leasehold improvements 331,689 309,199 Life of lease or esti-
1,513,513 1,476,970 mated Life if shorter
Less accumulated depreciation
and amortization 1,402,006 1,355,866
$ 111,507 121,104
(6) Accrued Expenses and Other
Accrued expenses consist of the following at December 31, 2005 and 2004:
2005 2004
Payroll, bonuses and related benefits $ 83,253 103,406
Professional services 47,777 206,674
Deferred rent 19,006 10,691
Other 23,331 21,159
$173,367 341,930
(7) Income Taxes
There was no income tax expense in 2005, 2004 and 2003 due to
losses incurred by the Company.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 2005 and 2004
are presented below.
2005 2004
Deferred tax assets:
Depreciation $ 93,000 $ 100,000
Capital loss carryforward 66,000 312,000
Allowance for bad debts 32,000 33,000
Net operating loss carryforwards 18,307,000 17,118,000
Research and other credits 979,000 951,000
Other temporary differences 15,000 15,000
Total gross deferred tax assets 19,492,000 18,529,000
Less valuation allowance 19,492,000 18,529,000
$ -- $ --
In assessing the realizability of deferred tax assets, the Company
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon future taxable
income during the period in which those temporary differences
become deductible. The Company considers the scheduled reversal
of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. Based upon its
historical operating losses, the Company believes that it is more
likely than not that deferred tax assets will not be realized.
Accordingly, the Company has recorded a full valuation allowance
against the deferred tax assets, as they will not be realized unless
the Company achieves profitable operations in the future.
At December 31, 2005, the Company had a net operating loss
carryforward for federal income tax purposes of $45,800,000,
varying amounts of which will expire in each year from 2006
through 2025. Research and other credit carryforwards of $979,000
are available to the Company to reduce income taxes payable in
future years principally through 2025. Net operating loss
carryforwards of $956,000 and research and other credit
carryforwards of $40,000 are scheduled to expire during fiscal
2006, if not utilized.
(8) Shareholders' Equity
During 2003, the Company received $4,201,757 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) 364,300
shares of common stock issued upon the exercise of warrants
resulting in net proceeds of $3,527,148; and (iii) the issuance of
69,475 shares of common stock issued upon the exercise of options
resulting in net proceeds of $509,590. 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.
During 2004, the Company received $1,162,602 of net cash
proceeds from the issuance of (i) 104,917 shares of common
stock issued upon the exercise of warrants resulting in net proceeds
of $987,037; and (ii) 22,500 shares of common stock issued upon
the exercise of options resulting in net proceeds of $175,565. In
addition, 1,729 shares were issued through the cashless exercise of
an option to purchase 17,500 shares. In connection therewith, the
Company recorded a non-cash compensation expense of $15,707 in 2004.
In February 2005, the Company raised $5 million in net proceeds
in connection with the registered sale to institutional investors of
one million shares of its common stock and the issuance of five-
year warrants to purchase 200,000 shares of common stock at an
exercise price of $7.50 per share.
(b) Options and Warrants
(i) Options
In 1992, the shareholders approved a stock option plan (1992
Stock Option Plan) which provides for the granting of both
incentive stock options at the fair market value at the date of grant
and nonqualified stock options at or below the fair market value at
the date of grant to employees or non-employees who, in the
determination of the Board of Directors, have made or may make
significant contributions to the Company in the future. The
Company initially reserved 468,750 shares of its common stock for
issuance under this plan. In 1994 and 1996, the Company's
shareholders approved an additional 300,000 shares and 450,000
shares, respectively, for issuance under this plan. As of December
31, 2001, no options were available for issuance under this Plan
and this Plan expired during 2002.
In 1998, the shareholders approved a stock option plan (1998
Stock Option Plan) which provides for the granting of both
incentive stock options at the fair market value at the date of grant
and nonqualified stock options at or below the fair market value at
the date of grant to employees or non-employees who, in the
determination of the Board of Directors, have made or may make
significant contributions to the Company in the future. The
Company may also award stock appreciation rights or restricted
stock under this plan. The Company initially reserved 540,000
shares of its common stock for issuance under this plan. In 1999,
the Company's shareholders approved an additional 545,000
shares for issuance under this Plan, and in each of 2000 and 2002,
the Company's shareholders approved an additional 600,000
shares for issuance under this Plan. As of December 31, 2005,
awards for 15,379 shares of common stock were available for
issuance under this Plan.
At the discretion of the Board of Directors, options expire in ten
years or less from the date of grant and are generally fully
exercisable upon grant but in some cases may be subject to vesting
in the future. Full payment of the exercise price may be made in
cash or in shares of common stock valued at the fair market value
thereof on the date of exercise, or by agreeing with the Company
to cancel a portion of the exercised options. When an employee
exercises a stock option through the surrender of options held,
rather than of cash for the option exercise price, compensation
expense is recorded in accordance with APB Opinion No. 25.
Accordingly, compensation expense is recorded for the difference
between the quoted market value of the Company's common stock
at the date of exchange and the exercise price of the option. During
2004 and 2003, the Company recorded non-cash expenses of
$15,707 and $40,987, respectively, related to cashless exercises of
options.
Activity in stock options is summarized below:
Number of Shares Weighted Average
Subject to Option Exercise Price
Balance at December 31, 2002 2,435,750 $ 12.04
Granted 86,500 $ 12.62
Cancelled (3,000) $ 15.41
Exercised (84,475) $ 7.32
Balance at December 31, 2003 2,434,775 $ 12.22
Granted 148,750 $ 7.34
Cancelled (134,325) $ 9.16
Exercised (40,000) $ 7.97
Balance at December 31, 2004 2,409,200 $ 12.16
Granted 430,193 $ 7.42
Cancelled (148,400) $ 11.27
Balance at December 31, 2005 2,690,993 $ 11.45
The following table summarizes information about stock options at
December 31, 2005:
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Options Contractual Exercise Shares Exercise
Exercise Price Outstanding Life (Years) Price Exercisable Price
$3.00 to $6.00 388,433 7.86 $ 5.86 388,433 $ 5.86
$6.01 to $7.50 650,250 3.44 $ 7.11 650,250 $ 7.11
$7.51 to $9.00 465,800 3.44 $ 8.38 465,800 $ 8.38
$9.01 to $12.00 413,960 5.98 $ 10.50 413,960 $ 10.50
$12.01 to $15.00 332,250 6.17 $ 13.29 332,250 $ 13.29
$15.01 to $19.00 109,000 4.91 $ 18.99 109,000 $ 19.00
$19.01 to $37.03 331,300 5.20 $ 27.75 325,300 $ 27.75
2,690,933 5.08 $ 11.46 2,685,993 $ 11.44
During 2005, 2004 and 2003, the Company issued options to a
consultant to purchase 500, 750 and 5,000 shares of common stock
at an exercise price of $5.60, $6.175 and $9.54 per share,
respectively. The Company recorded $1,483, $2,683, and $27,900
of non-cash expense in connection with the issuance of these options.
(ii) Warrants
Activity in warrants is summarized below, excluding the effect
of the warrants discussed in note 8(c)):
Number of Shares Exercise
Underlying Warrants Granted Price
Balance at December 31, 2002 227,200 $5.88-13.50
Exercised -- --
Terminated -- --
Issued 25,000 9.00
Balance at December 31, 2003 252,200 5.88-13.50
Exercised 5,500 5.88
Terminated (27,500) 5.88-9.35
Issued -- --
Balance at December 31, 2004 219,200 5.88-13.50
Exercised -- --
Terminated (34,600) 7.31-13.50
Issued 200,000 7.50
Balance at December 31, 2005 384,600 $ 5.88-9.63
Warrants generally expire from two to ten years from the date of
issuance. At December 31, 2005, the number of warrants exercisable was
379,600 at a weighted average exercise price of $7.64 per share.
During 2003, a warrant to purchase 25,000 shares of common stock
at an exercise price of $9.00 per share was issued to a director of the
Company in connection with a private placement.
(c) Class A and Class B Warrants
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 subsequently eliminated by mutual
agreement so that the Company could put stock to Ailouros at
selling prices in excess of $15 per share. 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 could
determine how much common stock, if any, was to 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
15, 2004, no shares remained registered for future issuance under
the Class A Warrant.
In connection with the financing, the Company also issued Ailouros
Ltd. a Class B Warrant which expires on September 30, 2008. The
Class B Warrant is exercisable into 65,500 shares at an exercise
price of $8.25 per share which represents 120% of average of the
closing bid and ask price of the Company's common stock on the
date of the Class B Warrant's issuance. The Class B Warrant has not
been exercised to date. Ailouros paid the Company $10,000 upon
issuance of the Class A Warrant and the Class B Warrant.
(9) License and Other Agreements
The Company has entered into a number of license agreements
covering various products using the Company's SPD technology.
Licensees of Research Frontiers who incorporate SPD technology
into end products will pay Research Frontiers an earned royalty of
5-15% of net sales of licensed products under license agreements
currently in effect, and may also be required to pay Research
Frontiers fees and minimum annual royalties. To the extent that
products have been sold resulting in earned royalties under these
license agreements in excess of these minimum advance royalty
payments, the Company has recorded additional royalty income.
Licensees who sell products or components to other licensees of
Research Frontiers do not pay a royalty on such sale and Research
Frontiers will collect such royalty from the licensee incorporating
such products or components into their own end-products. Research
Frontiers' license agreements typically allow the licensee to
terminate the license after some period of time, and give Research
Frontiers only limited rights to terminate before the license expires.
Most licenses are non-exclusive and generally last as long as our
patents remain in effect. To date, revenues from license agreements
have not been sufficient to fund the Company's costs of operation.
(10) Commitments
The Company has an employment agreement with one of its officers
which provides for an annual base salary of $379,798 through
December 31, 2006.
The Company has a defined contribution profit sharing (401K) plan
covering employees who have completed one year of service.
Contributions are made at the discretion of the Company. The
Company did not make any contributions to this plan for 2005, 2004 or 2003.
The Company occupies premises under an operating lease
agreement which expires on January 31, 2014. At December 31,
2005, the approximate minimum annual future rental commitment
under this lease for the next five years are as follows:
2006: $159,000
2007: $162,000
2008: $164,000
2009: $167,000
2010: $169,000
Thereafter: $536,000
Rent expense, including other occupancy related expenses,
amounted to approximately $175,000, $168,000, and $152,000, for
2005, 2004, and 2003, respectively.
(11) Rights Plan
In February 2003, the Company's Board of Directors adopted a
Stockholders' Rights Plan and declared a dividend distribution of
one Right for each outstanding share of Company common stock to
stockholders of record at the close of business on March 3, 2003.
Subject to certain exceptions listed in the Rights Plan, if a person or
group has acquired beneficial ownership of, or commences a tender
or exchange offer for, 15% or more of the Company's common
stock, unless redeemed by the Company's Board of Directors, each
Right entitles the holder (other than the acquiring person) to
purchase from the Company $120 worth of common stock for $60.
If the Company is merged into, or 50% or more of its assets or
earning power is sold to, the acquiring company, the Rights will
also enable the holder (other than the acquiring person) to purchase
$120 worth of common stock of the acquiring company for $60. The
Rights will expire at the close of business on February 18, 2013,
unless the Rights Plan is extended by the Company's Board of
Directors or unless the Rights are earlier redeemed by the Company
at a price of $.0001 per Right. The Rights are not exercisable during
the time when they are redeemable by the Company.
(12) Selected Quarterly Financial Data (Unaudited)
Quarter
2005 First Second Third Fourth
Fee income $41,250 $36,992 $26,750 $33,750
Operating loss (962,734) (999,180) (951,098) (964,282)
Net loss (940,498) (962,104) (914,867) (930,063)
Basic and diluted net loss
per common share (1) (.07) (.07) (.07) (.07)
2004 First Second Third Fourth
Fee income $ 37,319 $ 56,008 $41,648 $ 66,346
Operating loss (1,335,797) (1,013,267) (879,020) (1,052,254)
Net loss (1,328,814) (1,007,038) (870,809) (1,056,080)
Basic and diluted net loss
per common share (1) (.10) (.08) (.07) (.08)
(1) Since per share information is computed independently for each
quarter and the full year, based on the respective average number of
common shares outstanding, the sum of the quarterly per share amounts
does not necessarily equal the per share amounts for the year.
SCHEDULE II
RESEARCH FRONTIERS INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2005, 2004, and 2003
Balance at Charged to Balance
beginning costs and at end
Description of period expenses Deductions of period
Allowance for uncollectible
royalty receivables:
December 31, 2005 $ 82,522 $ 40,795 $44,643* $ 78,674
December 31, 2004 $ 50,000 $ 32,522 $ 0 $ 82,522
December 31, 2003 $ 0 $ 50,000 $ 0 $ 50,000
*Previously reserved receivables written off to the reserve.