Research Frontiers (Nasdaq: REFR)
trading at $11.01 as of 10/24/02

It's not just a trick; it's a 35-year-old trick. Research Frontiers(Nasdaq: REFR) has marketed its Suspended Particle Device (SPD) smart glass technology for more than three decades, and has yet to generate much in the way of revenues, much less earnings.

What the company does, and awfully well, is promote itself with press release after press release that speak of licensee after licensee, all of which are imminently going to sell products using Research Frontiers' technology. Except they don't.

This is a $119 million company with a price-to-sales ratio of more than 800. Even a cursory read of its 10-K gives me the impression the main product it sells is the company's stock.

The inside cover of Research Frontiers' 2001 Annual Report quotes a letter to shareholders: "Research Frontiers is no longer a 'concept company.'" The insinuation is that the company will finally make the transition from a research organization with a neato idea to one that generates revenues based upon the technology and service it offers. Well, we've come to the end of October, and nothing's happened.

But that's not new. A look at Research Frontiers' press releases offers a litany of past press releases about the availability and soon-to-be commercialization of its SPD technology. For example, in a press release from 1997, Research Frontiers hails Hankuk's announcement that it would begin commercial production in the following year.

Hankuk's President, Kim Sung Man, said that Hankuk forecasts rapid expansion of the demand for SPD smart windows because of their excellent protection from ultraviolet radiation in sunlight, as well as their ability to efficiently vary the amount of light transmission. Hankuk plans to commercialize a wide range of SPD products and to establish new production facilities next year.

Earlier this month, Research Frontiers and Hankuk Glass Industries entered into a new expanded license agreement, which permits Hankuk to produce and sell throughout the world a wide range of products using SPD technology, including architectural windows, skylights, transportation vehicle windows for cars, boats, trains, aircraft and spacecraft, and sunroofs, as well as information displays for all types of products such as computers, televisions, beepers, cellular and other telephones, scientific instruments, toys, and contrast enhancement/glare reduction filters. Hankuk's license also permits them to sell automotive sun visors and rear-view mirrors as original equipment for cars manufactured in Korea.

That production schedule would have called for the launch of commercial sales by Hankuk in 1998. It is now more than four years later. Nothing.

According to press releases, Research Frontiers signed a licensing deal with Glaverbel for automotive rear-view mirrors in 1994, and Glaverbel sent prototypes to the big three auto manufacturers, Ford(NYSE: F), General Motors(NYSE: GM), and Chrysler. CEO Robert Saxe said, "Glaverbel and Research Frontiers were proceeding rapidly with development of the SPD rear-view mirror product." To date, not a single one has been sold.

But perhaps the annual report was correct. In July, Research Frontiers announced "better-than-expected results" from recently launched marketing campaigns by its licensees," including ThermoView Industries(AMEX: THV). Regardless, Research Frontiers' $80,000 in revenues in the quarter that ended June 30 was comprised entirely of licensing payments. It'll be awfully interesting to see, in the next 10-Q in another three weeks, what those "better-than-expected results" mean in sales, but Research Frontiers has yet to announce numbers. Given the history of big promises and negligible follow-through, I'm not holding my breath.

You might wonder if Research Frontiers' shareholders and directors have lost their minds, having put up with so many years of failure by the company's management to generate revenue-bearing sales. Even if the product is good, a management is judged on its ability to turn that product into cash flows. Not at Research Frontiers. Executives receive performance bonuses based not on revenues, not on profits, not on cash flows, but on market cap. If they can talk the stock price up, they get bonuses. Period. By the way, the company's directors get a performance bonus based on stock price, as well. It's no wonder that they don't bark at years of futility. They're kept men.

As such, the top two executives, Robert Saxe and Joseph Harary, received $1.42 million in total compensation in 2001, 10 times the company's revenue for the same year. This compares with a top two executives compensation-to-sales ratio in 2000 of 4.9, and a TTEC/S ratio in 1999 of 5.1. That's absurd. It would only be possible if there were a long line of suckers willing to buy shares.

Apparently, there has been. Don't be one of them. Stay very far away.

Bill Mann holds Research Frontiers shares short. It was tough to get 'em. The Motley Fool is investors writing for investors.

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