In December 2000, the Company's Board of Directors approved a performance bonus plan which provided for a bonus to be paid on or after July 2, 2001 and on or after January 2, 2002 equal to 1% of the increase, if any, in the Company's market value during the first and second halves of 2001. Bonuses were capped at a recipient's salary in the case of employees of the Company, and were capped at $57,222 in the case of non-employee directors of the Company. During 2000, the Company had a similar performance plan in place. The Company recorded $785,500 and $755,000 of expenses in connection with these plans for the six months ended June 30, 2001 and 2000, respectively. The non-employee director cap was $56,100 for 2000.

The bonuses under this plan were earned in the first half of each year.

I need to underscore the fact that even non-employee directors of the company (Bernard Gold and Robert Budin) were eligible to participate and receive compensation under the plan! Robert Budin is still on the board. Mr. Gold passed away. Victor Keen was not a board member at the time, although he was the Corporate Secretary. The company had no nomination committee or compensation committee at the time and according to their proxy for 2002 they still did not have these committees as of April 30, 2003. The compensation committee was probably formed between April 30 and June 12, 2003 given Dr. Malvino's work performed for the board meeting on June 12. There is no indication a nomination committee has been formed. I digress. Back to the details of the company activities regarding the bonus plan.

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From the March 31, 2001 Form 10-Q:

"For the three months ended March 31, 2001, the Company received $1,235,972 of net cash proceeds from (i) the issuance of 7,100 shares of common stock issued upon the exercise of options resulting in net proceeds of $64,525 and (ii) 84,000 shares of common stock issued upon the exercise of warrants resulting in net proceeds of $1,171,447."

"For the three months ended March 31, 2001, the Company purchased in the open market and subsequently retired 177,700 shares of treasury stock with an aggregate cost of $2,948,487."

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From the June 30, 2001 Form 10-Q:

"For the six months ended June 30, 2001, the Company received $4,602,079 of net cash proceeds from (i) the issuance of 28,175 shares of common stock issued upon the exercise of options resulting in net proceeds of $224,347 and (ii) 247,000 shares of common stock issued upon the exercise of warrants resulting in net proceeds of $4,377,732."

"For the six months ended June 30, 2001, the Company purchased in the open market and subsequently retired 299,693 shares of treasury stock with an aggregate cost of $5,945,938."

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So, in Q1 and Q2 of 2001, the Company was an active purchaser in its stock, despite being profitless and despite the possibility such activity could affect the price of the stock at the time the bonus was determined. They reported acquiring 121,993 shares for approximately $3 million (you can do the math if you like), within 1% of the weighted average dollar trade completed during the quarter (feel free to check this also). In other words, they didn't buy the top, but they sure didn't buy the bottom either.

During Q2 of 2001, the total shares traded exceeded 5.5 million.

What did this stock churning accomplish? What the company did in effect was to retire shares from the open market at the same time management at lower prices exercised shares under option. The result was book value dilution of outside shareholders interests. At the same time, the company was supporting the price of the stock through their open market stock purchasing activity, thereby artificially increasing the price used to compute the June 30, 2001 management performance bonus!

Another nice touch was Bob Saxe acquiring 1,000 shares on the open market on June 19, ten days before the bonus was determined and the same day the Company turned out to open NASDAQ stock market! He already controlled over 500,000 shares, and if you counted all the shares he controlled directly, indirectly, or through warrants and options, the number swelled to over 1.4 MILLION! So, what was the point of buying 1,000 shares ten days before his bonus was measured? It appears this was his first open market purchase of stock dating back to at least 1995. Bob Saxe did not purchase shares on the open market again until March 2003 when he reported by 1,000 shares purchased at $5.35 and again in November 2003 when he acquired another 600 shares at $9.48 per share. On June 19, 2001 he was willing to pay $24.07!

How does a company arrange to open the NASDAQ and can they select the date they do so? How about the date they collect a bonus based on the closing price of the stock that particular day?

You can read all about it here.

I wonder how many other companies who celebrate an exchange opening also paid bonuses to their management based on the closing price?

If you want to look at the surrounding dates summary of stock activity, you will find it here.

Whether the management had the chutzpah to engage in stock purchasing activity that very day the bonus compensation was determined will go undetermined by me. I'll have to leave that to the legal beagles and any regulatory authority that might also wonder about this. The Corporate Secretary should have records regarding this activity.

It is a joke that a majority of the so-called independent directors were eligible to participate in the bonus program. Their potential compensation was capped at less than the reporting threshold of $60,000, so absent a straight answer or a discovery process the outside shareholder will have to live without an answer from people who are supposed to represent their interests, but in this case fell well short of doing so.

As bad as all that is, their transgressions were worse in 2000. From the Research Frontiers Form 10-K for the year 2000:

"In December 1999, the Company's Board of Directors approved a performance bonus plan which provides for a bonus to be paid on July 1, 2000 and January 1, 2001 equal to 1% of the increase, if any, in the Company's market value during the first and second halves of 2000. Bonuses are capped at a recipient's salary in the case of employees of the Company, and are currently capped at $55,000 in the case of non-employee directors of the Company. The expense recorded in connection with this bonus plan was $755,000 during 2000."

What was worse about it was that while they engaged in the same activities as seen in 2001, they had the unfortunate task of RESTATING the Form 10-Q's filed for 2000 because they failed to account for the expense of contingent performance stock options in excess of $3,000,000. Ironically, it appears the booked expense rose as a result of the higher closing price of the stock at the end of the second quarter of 2000!

Perhaps the auditor, KPMG, caught it? Better late than never I suppose. The 25,000 shares under option at issue dated back to 1994.

I won't bore my readers with the details of the transactions in 2000. I simply want to make you aware they exist. You can detail them out for your own edification. The June 30, 2000 stock activity was 236,300 shares and the stock "closed" at $30.00. At December 29, 2000, the stock closed at $17.50, which set the stock up nicely for that July 1, 2001 bonus payday.