AMERICAN BANK NOTE HOLOGRAPHICS INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD OF TO

COMMISSION FILE NO. 1-3410

AMERICAN BANK NOTE HOLOGRAPHICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 13-3317668
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)

399 EXECUTIVE BOULEVARD
ELMSFORD, NY 10523
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(914) 592-2355
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

COMMON STOCK, $.01 PAR VALUE PER SHARE

(TITLE OF CLASS)

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 __ No X

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. [ ]

The aggregate market value of the common stock, $.01 par value, held by
non-affiliates of the registrant on December 15, 1999 was $20,454,000.

The aggregate number of shares of common stock, $.01 par value, outstanding
on December 15, 1999 was 13,636,000.

DOCUMENTS INCORPORATED BY REFERENCE:

NONE

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AMERICAN BANK NOTE HOLOGRAPHICS, INC.

1998 FORM 10-K

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TABLE OF CONTENTS

PART I
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Item 1. Business.................................................... 1
Item 2. Properties.................................................. 12
Item 3. Legal Proceedings........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders......... 14

PART II
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Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 15
Item 6. Selected Financial Data..................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 25
Item 8. Financial Statements and Supplementary Data................. 25
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 25

PART III
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Item 10. Directors, Executive Officers and Key Employees of
Registrant................................................ 26
Item 11. Executive Compensation...................................... 28
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 32
Item 13. Certain Relationships and Related Transactions.............. 33

PART IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 35

Index to Financial Statements......................................... 36

Financial Statements.................................................. F-1

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PART I

ITEM 1. BUSINESS.

American Bank Note Holographics, Inc. ("ABNH") originates, mass-produces
and markets holograms. Our holograms are used primarily for security
applications such as counterfeiting protection for credit and other transaction
cards, identification cards and documents of value, as well as for tamper
resistance and authentication of high-value consumer and industrial products.
Our ability to control the diffraction of light ("origination") using
proprietary processes in a secure, controlled manufacturing environment has
enabled us to become a market leader in security holography. Our products are
used by over 200 companies worldwide, including MasterCard, VISA, American
Express, Discover, Diners Club, Europay, Merck and Eli Lilly, as well as
agencies of the United States government and certain foreign governments. We
also produce non-secure holograms for packaging and promotional applications.

We believe we have a number of strengths that provide us with a competitive
advantage in the security sector of the holography industry, including:

- our reputation as a quality supplier of secure holograms with 18 years of
experience in the industry,

- our expertise in holographic technology and production and our extensive
patent portfolio,

- our origination laboratories, which enable us to produce distinctive
holograms with a variety of security features that make them difficult to
counterfeit, and

- our two efficient, ISO 9000 certified manufacturing facilities, which
allow us to mass produce high-quality holograms at a low cost in a secure
environment.

In January 1999, ABNH disclosed that its previously issued financial
statements for 1996, 1997 and the first three quarters of 1998 all required
restatement. This gave rise either directly or indirectly to several other
issues that were significant to ABNH. We have restated those financial
statements which are included in this Form 10-K, and we have devoted substantial
resources to address the various issues that arose from the need to restate
these financial statements.

THE HOLOGRAPHY INDUSTRY

A hologram is a laser-generated, three-dimensional reproduction of an
object, produced on a two-dimensional surface. A hologram controls the
diffraction of light at pre-determined angles to create specific visual imagery.
When a hologram is viewed from different angles, features such as depth and
movement, unseen in normal two-dimensional photographs, are seen by the viewer.
Holograms can also include information that is visible only with the aid of
special devices.

The holography market is divided into three main sectors: security,
promotion and packaging.

SECURITY

The security sector of the holography market includes credit and other
transaction cards, product authentication and documents of value. Holography,
combining art and science, allows each customer to develop its own unique
hologram with which to identify and protect its product. The secure hologram can
also incorporate certain covert data, which are only machine readable, about the
particular products shipped or purchased. Holograms provide the following major
benefits as security devices:

- the three-dimensional imagery, combined with the high degree of skill and
capital investment required to replicate holograms and various
proprietary hidden and visible security features, makes exact duplication
and replication of holograms on a mass-production basis extremely
difficult and presents obstacles to counterfeiting,

- the unique visual aspects of a hologram are easily recognizable, making
authentication of products and documents possible by both experts and
laymen without special machinery, equipment or training, and
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- the adhesives used to affix the hologram permanently to a product or a
document may be specially designed to make it readily apparent if there
is any attempt to remove or tamper with the hologram.

The security sector of the holography market includes:

Transaction Cards. In the early 1980's, we began marketing our secure
holograms for use on credit cards and, as a result, helped to create and expand
the security sector of the holography market. Since that time, the use of
holograms on credit cards and other transaction cards has continued to grow. The
most common examples of secure holograms are the distinctive MasterCard globes
and VISA dove found on their various credit and transaction cards. In recent
years, consumers demanding fast, convenient and secure methods of payment have
increasingly supplemented traditional payment systems such as checks and cash
with card-based payments, such as debit, credit and charge cards.

Product Authentication. The use of product authentication holograms is
driven by concerns regarding counterfeiting, piracy, pilfering, diversion and
other infractions that can result in lost sales, lost goodwill and product
liability claims. Holograms have gained increasing acceptance as authentication
devices in, among others, the electronics, pharmaceutical, licensed consumer
products (e.g., clothing, sporting goods and software) and entertainment event
marketing industries and in high value consumer and industrial products (e.g.,
laser printers, electronic components, computer hardware and software,
videocassettes and compact discs). Product authentication holograms are either
machine or hand-applied to individual products. A holographic label that is
tampered with can become permanently damaged, leaving a visible footprint on the
product. Customers distinguish hologram providers in the product authentication
sector of the holography market on the basis of security features offered,
secure production control capabilities and price.

Documents of Value. Concerns over counterfeiting and copying have led to
an increased use of holograms on documents of value, including currency,
passports, business cheques, gift certificates, vouchers, certificates of
deposit, stamps (postage and revenue), tickets and other financial instruments.
We believe that an increasing number of countries are using holograms in their
currencies and we expect the market for holograms on currency to continue to
grow.

PROMOTION

The unique visual appeal of holograms makes them attractive for use on
consumer products and for retail advertising. Promotional holography is used for
"short run," low-end products, including greeting cards, decorative clothing,
point-of-purchase displays, and for certain advertising. The manufacturing
processes utilized for the creation of promotional holograms are not as complex,
secure or proprietary as those used in creating security holograms. Competition
is based primarily on price, turn-around time, design and reliability.

PACKAGING

Holograms can also be used as ribbons and papers for gift-packaging and
paper and plastic wrapping for packaging of food and other products. These
lower-margin, commodity-type holograms are generally used on consumer product
packaging solely for their eye-catching appeal, including packaging for candy,
beer, toothpaste, soft-drinks and other consumer products. The manufacturing
processes utilized for the creation of packaging holograms are not as complex,
secure or proprietary as those used in creating security holograms. Customers
distinguish between suppliers primarily based upon quality, price and production
capacity.

STRATEGY

In 1999, we started to implement a strategy that included the following
components:

Build a New, Strong Management Team and Workforce. In 1999, ABNH's
Chairman and Chief Executive Officer, President and Chief Operating Officer, VP
Finance, Controller, and VP Operations all resigned from their positions with
ABNH. As a result, ABNH recruited the following persons to its management team:
Kenneth Traub, President; Salvatore D'Amato, Chairman; Russell LaCoste,
Executive Vice President of Corporate Development and Marketing; Alan Goldstein,
Chief Financial Officer; George Condos, Controller; and Peter Sorbo, Director of
Research and Development and Engineering. We also
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restructured operations to improve accountability and reduce expenses. We
believe that we have been successful in retaining our most important employees
and we have created a much stronger management team and organization. We intend
to continue to strengthen our organization.

Improve Capital Structure and Reduce Debt. At the time of its initial
public offering, ABNH had approximately $5.2 million of secured bank debt and
nominal cash. Following the disclosure of the need to restate its prior period
financial statements, ABNH was notified by its commercial bankers, led by The
Chase Manhattan Bank, that it was in default on its bank debt. In early 1999, we
implemented improved cost control and balance sheet management initiatives in
order to improve cash flow and reduce debt. We also negotiated an amendment to
the loan agreement with Chase which waived the existing defaults, and then
closed a refinancing with Foothill Capital Corporation, which enabled us to
repay the Chase facility and improve our capital structure. We believe that this
improvement to our capital structure gives us additional flexibility to invest
in the business for the long term.

Improve Operating Controls. We are in the process of implementing new
financial and manufacturing software to comply with Year 2000 issues and to
improve our management reporting capabilities. We believe these systems will
significantly improve the information available to management to manage the
business. We have also put in place new policies and procedures and changed
reporting relationships and responsibilities.

Reestablish Credibility Among Our Constituents and Within Our
Industry. This year, ABNH was under a great deal of scrutiny by concerned
customers, suppliers, employees, lenders, stockholders, lawyers, regulators and
others. We hope to reestablish our credibility through the continued execution
of the strategy described herein. We also hope to continue to enhance our
reputation in our industry through increased attention to product quality,
innovation and customer service.

Protect and Enhance Our Position in Our Core Transaction Card Business. We
hold a leadership position in the market for holograms on transaction cards as a
result of our relationships with companies such as MasterCard, VISA, Europay,
Diners Club and Discover. We have managed these relationships very closely in
1999, and hope to continue to strengthen them. This year we extended our
position in this market with a new relationship with American Express. We hope
to leverage our strong position and expertise in producing holograms for
transaction cards into other growth opportunities including identification
cards, product authentication and documents of value.

Develop New Products and Innovations. We have been a leading innovator in
the origination and mass production of secure holograms and we expect to
continue to emphasize the development of new technologies and products for our
target markets. Currently, we are seeking to develop higher resolution
holograms, new ways to increase the information stored on a hologram and
improvements to machine-readable features on our holograms. We are also
developing improvements to our products that have applications for tamper
apparent seals, bank notes (currency), personal identification documents and
other markets.

Develop New Market Opportunities. We have started to pursue new
applications and markets for our products. For instance, we believe there is an
increasing demand for holograms on bank notes, and we have started to develop
improved solutions that better meet the needs and requirements of this market.

Protect and Leverage Our Intellectual Property Position. We believe our
patent portfolio is very valuable and we intend to leverage our intellectual
property and patent rights. This year, we succeeded in persuading a competitor
to pay past due royalties in connection with a patent license agreement that we
had entered into previously. We intend to continue to protect our intellectual
property and enforce our patent rights.

Grow through Strategic Acquisitions. While much of our time during 1999
was spent on the issues described above, in 2000 we intend to pursue strategic
acquisitions that provide operating synergies or access to new customers or
technologies.

PRODUCTS

Our secure holography products can be grouped into three categories:
embossed holograms on hot stamp foils, pressure-sensitive labels and laminates.

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Embossed Holograms on Hot Stamp Foils. These holograms are designed for
permanent application to plastic (e.g., transaction cards), paper (e.g.,
currency) and other substrates through the application of heat and pressure to
the hologram. We use specific heat activated adhesives to ensure even bonding of
the hologram to the substrate, and the exposed side of the hologram is treated
with protective coatings to ensure durability and wear resistance. Our embossed
holograms on hot stamp foils also possess a degree of flexibility that helps
them to avoid problems such as cracking or flaking. Our customers for embossed
holograms on hot stamp foils include MasterCard, approved manufacturers of VISA
cards, American Express, Discover, Diners Club and Europay.

Pressure Sensitive Labels. These labels are designed to be applied using
pressure by hand or by machine to create a permanent bond to the intended
substrate. We have developed proprietary and patent pending features that make
tampering apparent. If removed, the label leaves a distinctive mark or pattern
and the removed material is unusable. The labels can be laser numbered or
ink-jet numbered for security, control and traceability. These labels are
designed primarily as a security device for branded merchandise, luxury goods
and pharmaceuticals. Our customers for pressure sensitive labels include 3M,
Merck, Eli Lilly, Playboy and Sony.

Laminates. Laminates are used primarily in identification products. We
have patented our method of making the hologram visible at specific angles and
invisible at other pre-determined angles. Our patented see-through, demetallized
product also protects the information on the identification document (card,
passport or paper credential) from alteration and provides additional security.
Fully metallized laminates are used on products such as hang tags for apparel,
"full face" transaction cards and magazine covers. Adhesives for laminates can
be formulated for application through both heat and pressure as well as pressure
only, depending upon the customer's specific requirements. Our customers for
laminates include the U.S. government, China and Colombia.

PRODUCTION PROCESS

We are one of the most experienced security production companies in the
holographic industry. We have two ISO certified security production facilities
containing a total of nine origination laboratories and 17 mass replication
lines as well as extensive security and quality control procedures. We also have
a large and sophisticated distribution network for secure holographic products.

Our production process is integrated to handle most aspects of production,
including raw materials sourcing, processing, finishing, packaging, storage and
logistics. From time to time, we subcontract certain production functions to
third parties. The production process consists of the following four steps:

DESIGN

The first step of the production process is the design of the hologram. In
the art department, our experienced personnel work with the customer to develop
a conceptual design that incorporates the necessary features, both security and
non-security, to satisfy the customer's requirements.

ORIGINATION

After the design has been completed, various laser-ready components
(magnetic floppy disc, three dimensional sculpture, flat art, etc., referred to
as "information") are delivered to one of our nine origination studios.

The conversion from information to hologram is based on our ability to
record light in an organized format. Coherent light, which is delivered by a
laser, is best understood as light which has one wavelength of the visible
spectrum and possesses a high degree of organization. The coherent light is
split into two beams (the object beam and the reference beam) directed toward
photo-resist treated glass. The object beam is interfered with by the
information before continuing its travel toward the photo-resist treated glass.
The reference beam is not interfered with and travels directly toward the
photo-resist treated glass.

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The object beam then interferes with the reference beam, creating an
interference pattern which is recorded on the light sensitive photo-resist
glass. After developing the photo-resist glass, the film is re-illuminated
approximating the original angle(s) of the reference beam. The resulting
interference pattern within the film reflects some of the light, striking it
into a re-creation of the pattern of light that originally came from the object
beam, due to a property of light called diffraction. The reflected light, now
organized and containing all information that the object beam once carried,
allows the viewer to see all of the information in three dimensions, true color
or with other desired effect.

There are less complex methods of creating a hologram origination than the
process described above. However, in our opinion, the above process produces the
clarity, depth perception, movement and mass replication properties that are
essential components of our secure holograms. We further believe that our
largest competitors in the security sector may use similar processes.

PLATE MAKING

Once the origination process is completed, a plate is created in order to
permit mass production. The "one-on" image is "step and repeated" to a
pre-determined size with multiple identical images recorded on a photo-resist
glass. The glass is then converted to a production plate in an electrolytic
process where nickel is grown on the surface of the glass. Nickel is used
because its molecular nature allows for an exact transfer of the origination to
the production plate. We believe that our proprietary plate making process is an
important component of our ability to mass produce our secure holograms.

The electrolytic process creates different "generations" of plates prior to
the production phase. Each generation, identical to the last, creates a more
wear resistant plate for use in a mass production environment, thereby extending
the useful life of the plate. The production plate will have varying degrees of
hardness, depending upon the processes used in production.

MASS PRODUCTION

Manufacturing specifications are determined in collaboration with the
customer. We and the customer typically enter into production planning where
drawings and overall specifications are written and distributed to the various
production and quality control departments.

We employ two methods of mass-production of holograms. Hard embossing
transfers images to an aluminum foil/polyester substrate through heat and
pressure. Heat and pressure on the holographic plate force the holographic image
into the foil, which is then converted into the final product.

The other method of production is In-Situ Polymeric Replication, which was
developed by us. Using this method, a polymer is transferred to a substrate
(polyester, polypropylene, etc.) which is then put in contact with the
holographic plate so that holographic imagery is replicated. The material is
then metallized using a vacuum deposition process.

Finishing for both methods may include some combination of demetallization,
application of adhesive, slitting, die-cutting and custom numbering. The
completed holographic material may then be applied to the customer's product.

RESEARCH AND PRODUCT DEVELOPMENT

We have devoted significant attention to research and product development
to continue to enhance our origination, replication and mass production
capabilities. Our R&D has enabled us to create new technologies and proprietary
production processes and to deliver innovative products to the marketplace.

Over the past several years, members of our staff have developed a number
of new products, including a tamper-apparent label and a tamper-apparent heat
seal laminate for use in identification card and passport products. We are
seeking to develop new ways to deliver higher resolution beyond what is
currently available in the security sector of the holography market.
Additionally, the development of machine-readable holograms has been a priority
for the research and product development department. Machine-readable technology
may

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enable holographic products to be compatible with optical bar code technology
for a variety of applications, including both simple product validation or
authentication and more sophisticated uses.

MANUFACTURING SUPPORT

The research and product development department assists the manufacturing
department in addressing various process and quality issues. Our research and
product development staff has also been involved in several manufacturing
process improvements, including the discovery of a means to increase
significantly the lifetime of nickel plate shims and the development of an
automated plate layout program that has reduced layout time from two weeks to
less than one day.

MANUFACTURING FACILITIES

See "Item 2. -- Properties."

SALES AND MARKETING

In 1998, we provided holographic products to over 200 customers worldwide.
We are the exclusive supplier of holograms to MasterCard and we believe we are
one of only two authorized manufacturers of VISA holograms for sale to approved
manufacturers of VISA cards. In addition, we supply holograms to American
Express, Diners Club, Discover, Europay and numerous other companies.

We currently employ an Executive Vice President of Corporate Development
and Marketing, a Vice President of Sales and Marketing, three full-time,
incentive-compensated salespeople and three sales service personnel. We also
utilize incentive-based international sales agents around the world.

All pricing decisions are made centrally by our operating executives. We
focus some of our marketing efforts on trade shows such as Expopak, the
International Holographics Manufacturers Association trade show, the
International Card Manufacturers Association trade show and the Card
Tech/SecurTech trade show. In the future, we intend to participate in security,
transaction card, brand protection, packaging, pharmaceutical, labeling and
document trade shows, both domestically and internationally.

COMPETITION

The holography industry is highly competitive and highly fragmented. A
number of our competitors are larger or are divisions of larger companies, and
have greater financial resources, than us. In the holography industry,
competition is generally based on technology, price, product quality and
customer service. We also compete with other non-holographic methods or devices.
We believe our position in the security sector of the holography market is
attributable to our technical expertise, years of experience and reputation in
the mass production of secure holograms.

TRADEMARKS AND PATENTS

We utilize a combination of patents, trade secrets and confidentiality
agreements, as well as restricted access and other forms of intellectual
property protection, to safeguard certain of our proprietary technology and
processes. We also hold certain trademarks with respect to certain products and
services. We currently hold approximately 35 U.S. patents and numerous foreign
patents, as well as patents pending and service marks that are used in our
business. We believe our patent portfolio is valuable and we intend to continue
to leverage the value of our intellectual property and patent rights.

There can be no assurance as to the degree of protection offered by our
patents, the success of any of our enforcement actions or the likelihood that
patents will be issued for pending applications. Competitors in the United
States and foreign countries may have applied for or obtained, or may in the
future apply for and obtain, patents that will prevent, limit or interfere with
our ability to make and sell some of our products.

In 1997, our United States patent numbers 4,728,377 and 4,913,504 (the
"Gallagher Patents"), which relate to a certain process for applying a hologram,
were invalidated by a U.S. federal court. While the

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invalidation of these U.S. patents does not prevent us from producing and
marketing any of our holograms, it does prevent us from asserting these patents
against parties that are making, selling and using the claimed inventions of
these patents solely in the United States. However, the corresponding foreign
patents remain valid and outstanding, and we believe they are important patents
in the international holographic industry. This year, we succeeded in persuading
a foreign competitor to pay us past due royalties in excess of $800,000 and to
resume paying royalties under a license agreement that we had entered into
previously relating to certain foreign counterparts of the Gallagher patents.

EMPLOYEES

As of December 15, 1999, we employed 94 persons, of which 57 are covered by
collective bargaining agreements. We consider our relations with our employees
to be good.

RISK FACTORS

IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS

In addition to other information in this Annual Report on Form 10-K, the
following risk factors should be carefully considered in evaluating us and our
business because such factors currently have a significant impact or may have a
significant impact on our business, operating results or financial condition.
This Form 10-K contains forward-looking statements that have been made pursuant
to the provisions of the Private Securities Litigation Reform Act of 1995.
Actual results could differ materially from those projected in the forward-
looking statements as a result of the risk factors set forth below and elsewhere
in this form.

WE ARE DEFENDING A CLASS ACTION LAWSUIT INITIATED BY SOME OF OUR
STOCKHOLDERS.

A consolidated class action complaint against ABNH, certain of its former
officers and directors, its former parent (American Banknote Corporation), the
four co-lead underwriters of our initial public offering and our auditors, has
been filed in the United States District Court for the Southern District of New
York. The complaint alleges violations of the federal securities laws and seeks
to recover damages on behalf of all purchasers of our common stock during the
class period (July 15, 1998 through February 1, 1999). The complaint seeks
recission of the purchase of shares of our common stock or alternatively,
unspecified compensatory damages, along with costs and expenses including
attorneys' fees. We and certain other defendants have separately moved to
dismiss the complaint. The plaintiffs' discovery requests as well as their
motion for class certification have been stayed pending resolution of the
respective motions to dismiss. We have commenced settlement discussions with
plaintiffs' counsel. We do not believe it is feasible to predict or determine
the outcome or resolution of these proceedings, or to estimate the amounts of,
or potential range of loss with respect thereto. In addition, the timing of the
resolution of these proceedings is uncertain. The range of possible resolutions
could include judgements against us or settlements that could require
substantial payments by us, including costs of defending such suits, which could
have a material adverse effect on our financial position, results of operations
and cash flows.

WE ARE BEING INVESTIGATED BY THE U.S. ATTORNEY'S OFFICE AND THE SECURITIES
AND EXCHANGE COMMISSION.

On February 9, 1999, the Division of Enforcement of the SEC issued a Formal
Order Directing Private Investigation, designating officers to take testimony
and requiring the production of certain documents, in connection with matters
giving rise to the need to restate our previously issued financial statements.
We have provided numerous documents to and continue to cooperate fully with the
SEC staff. We cannot predict the duration of such investigation or its potential
outcome.

The U.S. Attorney's Office for the Southern District of New York has
commenced an investigation in connection with matters giving rise to the need to
restate our previously issued financial statements, as well as a possible
violation in 1998 of the Foreign Corrupt Practices Act. We have not been advised
that we are a target of such investigation. We have provided numerous documents
to and continue to cooperate fully with the U.S. Attorney's Office. We cannot
predict the duration of such investigation or its potential outcome.

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OUR COMMON STOCK IS SUSPENDED FROM TRADING ON THE NEW YORK STOCK EXCHANGE
AND WILL NOT RESUME TRADING ON THE NYSE.

Our common stock was suspended from trading on the New York Stock Exchange
in August 1999. Following such suspension, the NYSE indicated that it will apply
to delist our common stock. Our common stock will not resume trading on the
NYSE, but we intend to seek to have our common stock traded on another stock
exchange or quoted on Nasdaq. Current pricing information on our common stock
has been available in the "pink sheets" published by National Quotation Bureau,
LLC. The "pink sheets" is an unorganized over-the-counter market which generally
provides significantly less liquidity than established stock exchanges or the
Nasdaq National Market, and quotes for stocks included in the "pink sheets" are
not listed in the financial sections of newspapers as are those for established
stock exchanges and the Nasdaq National Market. Therefore, prices for securities
traded solely in the "pink sheets" may be difficult to obtain, and our
stockholders may find it difficult to resell their shares. Until we are current
with our SEC filings, we are effectively unable to apply to list our common
stock or other securities with a national securities exchange or Nasdaq.

WE DEPEND ON CREDIT CARD MANUFACTURERS FOR A SUBSTANTIAL PORTION OF OUR
BUSINESS.

During 1998 and 1997, sales to credit card companies accounted for
approximately 70% and 75%, respectively, of our total sales, including
MasterCard and approved manufacturers of VISA brand credit cards, which together
accounted for approximately 56% and 62% of our total sales in 1998 and 1997,
respectively. If either MasterCard or VISA were to terminate its respective
relationship with us, or if we were to lose a substantial portion of our
business with either of these entities, there would be a material adverse effect
on our business, financial condition and results of operations. See
"Business -- Sales and Marketing." We provide holograms to MasterCard pursuant
to an agreement which expires in February 2003, subject to automatic renewal if
not terminated by either party. During 1999, MasterCard informed us that it
believes that ABNH breached certain terms of the agreement in 1997 and 1998. We
have been working closely with MasterCard to address issues raised by
MasterCard, and we believe our relationship with MasterCard is good.

Currently, we are one of two companies authorized to manufacture and sell
VISA brand holograms to manufacturers of VISA brand credit cards. There can be
no assurance that we can continue to successfully meet the needs of our
customers. In addition, failure to obtain anticipated orders or delays or
cancellations of orders or significant pressure to reduce prices from key
customers could have a material adverse effect on our future financial
performance.

WE DEPEND ON SINGLE SUPPLIERS FOR SOME KEY PRODUCT COMPONENTS.

We have historically purchased certain key materials used in the
manufacture of our holograms from single suppliers with which we do not have
supply contracts. Any problems that occur with respect to the delivery, quality
or cost of any such materials could have a material adverse effect on our
financial condition, results of operations and cash flows.

OUR MANAGEMENT TEAM IS NEW TO OUR COMPANY.

During 1999 we experienced substantial and significant turnover in our
senior management and our board of directors. Consequently, we have only
recently assembled our management team. The transition in management could have
an impact on our relationship with our employees, suppliers, customers and other
constituents.

RECENT EVENTS MAY CAUSE US TO LOSE EXISTING AND POTENTIAL CUSTOMERS AND
SUPPLIERS.

We have received inquiries from some of our customers and suppliers
relating to the previously disclosed adverse events affecting ABNH. Our
reputation has been adversely impacted and may continue to be affected by these
events. As a consequence, our relationships with existing customers and
suppliers may be strained. In addition, our ability to develop potential
customers or suppliers to maintain and grow our business may be adversely
affected.
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OUR QUARTERLY OPERATING RESULTS CAN FLUCTUATE.

Our future operating results are likely to fluctuate substantially from
quarter to quarter. Since a significant portion of our business is derived from
orders placed by a limited number of large customers, variations in the timing
of such orders could cause significant fluctuations in our operating results.
Other factors that may result in fluctuations in operating results include:

- customers' promotions,

- inventory replenishment,

- card expiration patterns,

- delivery schedules,

- changes in the cost of materials or labor,

- increased R&D expenses,

- competitive pricing pressures,

- legal and accounting fees associated with stockholder litigation,
government investigations and the restatement of our financial
statements, and

- financing costs.

WE ARE IN A COMPETITIVE, HIGHLY-FRAGMENTED INDUSTRY WITH MANY COMPANIES
COMPETING TO DELIVER A HIGHLY-SPECIALIZED PRODUCT.

The holography industry is highly competitive. Our competitors, which are
numerous and may have more resources than us, may take away market share or
compete with us on the basis of price, which may erode our prices and margins.
Increasing competition in the market for our security holograms has resulted in
declining sales prices for these products over the past few years.

Competition is based on a number of factors, such as:

- technology,

- price,

- product quality, and

- customer service.

In addition, an increased use of non-holographic methods or devices in place of
our products could reduce demand for our products. A number of competitors are
larger or are divisions of larger companies, and have greater financial
resources, than us.

WE HAVE RECENTLY IMPLEMENTED NEW INFORMATION AND ACCOUNTING SYSTEMS, AND WE
ARE STILL IMPLEMENTING ADDITIONAL IMPROVEMENTS TO OUR SYSTEMS.

We are in the process of implementing new financial and manufacturing
software to comply with Year 2000 issues and to improve our management reporting
capabilities. We believe these systems will significantly improve the
information available to management to manage the business. The implementation
of these new systems is time-consuming and expensive. Any problems that we have
in running these systems or that our employees have in adapting to these new
systems could materially and adversely affect our business, financial condition
and results of operations.

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OUR BUSINESS DEPENDS UPON OUR INTELLECTUAL PROPERTY WHICH MAY NOT BE
SUFFICIENTLY PROTECTED FROM INFRINGERS.

We utilize a combination of patents, trade secrets and confidentiality
agreements, as well as restricted access and other forms of intellectual
property protection, to safeguard certain of our proprietary technology and
processes. We also hold certain trademarks with respect to certain products and
services. We cannot be certain as to the degree of protection offered by any of
our patents or as to the likelihood that patents will be issued for any of our
pending applications. There can be no assurance that we will be able to maintain
the confidentiality of our trade secrets or that our confidentiality agreements
will provide meaningful protection of our trade secrets or other proprietary
information. See "Business -- Trademarks and Patents."

In addition, litigation may be necessary in the future to enforce our
intellectual property rights or to determine the validity and scope of our
patents or of the proprietary rights of others. Such litigation might result in
substantial costs and diversion of resources and management attention.
Furthermore, our business activities may infringe upon the proprietary rights of
others, and in the past third parties have claimed, and may in the future claim,
infringement by our products. Any such claims, with or without merit, could
result in significant litigation costs and diversion of management attention,
and could require us to enter into royalty and license agreements that may be
disadvantageous to us or suffer other harm to our business. If litigation is
successful against us, it could result in invalidation of our proprietary rights
and liability for damages, which could have a harmful effect on our business.

WE MAY BE SUBJECT TO SIGNIFICANT PRODUCT LIABILITY IN CONNECTION WITH THE
PRODUCTS WHICH WE PROVIDE TO OUR CUSTOMERS.

We provide holograms in connection with a wide range of our customers'
products, in which case it is possible that we are subjecting ourselves to
product liabilities in association with those products or in connection with the
holograms used with those products. Although we maintain product liability
insurance, there can be no assurance that such insurance would be available to
cover any such claim or available in amounts sufficient to cover all potential
liabilities. As a result, product liability claims could have a material adverse
effect on our business, financial condition and results of operations.

SINCE A SIGNIFICANT PERCENTAGE OF OUR SALES ARE DERIVED FROM OVERSEAS
CUSTOMERS, OUR EXPORTS AND BUSINESS MAY BE SUBJECT TO SOME RISKS RELATED TO
DOING BUSINESS INTERNATIONALLY.

In 1998 and 1997, 28% and 25%, respectively, of our sales were derived from
customers outside the United States. All export sales are denominated in U.S.
dollars. International sales are subject to risks, including:

- United States and international regulatory requirements and policy
changes,

- political and economic instability,

- difficulties in accounts receivable collection,

- tariffs and other barriers, and

- difficulty in attracting, retaining and managing international
representatives.

We cannot be certain that any of these factors will not have a material adverse
effect on our business, financial condition or results of operations. See "Item
7. -- Management's Discussion and Analysis of Financial Condition and Results of
Operations."

OUR BUSINESS IS SUBJECT TO ENVIRONMENTAL REGULATION AND IS ALWAYS SUBJECT
TO ENVIRONMENTAL LIABILITY.

Our operations are subject to federal, state and local environmental laws
and regulations. If we fail to comply with applicable rules and regulations, we
could be subject to monetary damages and injunctive action, which could
materially and adversely affect our business, financial condition or results of
operations. We believe that we are currently in material compliance with
applicable laws and regulations. However, to the

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extent future laws and regulations are adopted or interpretations of existing
laws and regulations change, new requirements may be imposed on our future
activities or may create liability retroactively.

OUR FORMER PARENT COMPANY, ABN, HAS EXPERIENCED FINANCIAL DIFFICULTY DURING
1999, AND WE MAY HAVE RISKS ASSOCIATED WITH ABN'S POTENTIAL INABILITY TO
PAY ITS OBLIGATIONS TO US AND TO THIRD PARTIES.

Our former parent company, ABN, has experienced financial difficulty during
1999. On December 8, 1999, ABN filed a petition and plan of reorganization in
federal bankruptcy court pursuant to Chapter 11 of the U.S. Bankruptcy Code. The
petition seeks approval for a financial restructuring resulting in the
cancellation of certain of ABN's outstanding indebtedness in exchange for equity
in ABN as well as the amendment of the repayment terms of certain other
outstanding indebtedness of ABN. The petition does not seek to affect ABN's
trade obligations or payables in the ordinary course.

In connection with our IPO, we entered into a number of agreements with ABN
that require ABN to indemnify us under certain circumstances. However, ABN's
financial difficulty may result in its inability to indemnify us. In addition,
we are co-defendants with ABN in some ongoing litigation in which we could be
held jointly and severally liable along with ABN. In such an event the
plaintiffs may be unable to collect any money from ABN and may instead attempt
to pursue collection from us. For more details on this litigation, see "Item
3. -- Legal Proceedings." Any inability of ABN to indemnify us or to pay any
liabilities for which we are jointly and severally liable could have a material
adverse effect on our financial position, results of operations and cash flows.

WE CURRENTLY HAVE NO INTENTION OF PAYING DIVIDENDS AND ANY DIVIDENDS WE MAY
PAY WILL DEPEND ON CERTAIN FACTORS.

We intend to retain all earnings, if any, for use in our business. We do
not anticipate paying cash dividends in the foreseeable future.

SHARES CURRENTLY HELD BY STOCKHOLDERS MAY BE SUBJECT TO DILUTION DUE TO THE
POTENTIAL ISSUANCE OF PREFERRED STOCK.

Our certificate of incorporation permits the issuance of up to 5,000,000
shares of preferred stock and permits the board of directors to fix the rights,
preferences, privileges and restrictions of such shares without any further vote
or action by our stockholders. Although we have no current plans to issue shares
of preferred stock, the potential issuance of preferred stock may have the
effect of:

- delaying, deferring or preventing a change in control of our company,

- may discourage bids for the common stock at a premium over the market
price of the common stock, and

- may adversely affect the market price of, and the voting and other rights
of the holders of the common stock.

WE REMAIN VULNERABLE TO YEAR 2000 COMPLIANCE PROBLEMS IN OUR SYSTEMS AND
THOSE OF OUR SUPPLIERS AND CUSTOMERS, WHICH COULD POTENTIALLY DISRUPT OUR
OPERATIONS AND MAY REQUIRE GREATER THAN ANTICIPATED REMEDIAL EXPENSES.

We are preparing for the impact of the Year 2000 on our operations. Year
2000 issues could include potential problems in our information technology and
other systems that we use in our operations. Year 2000 system failures could
affect routine but critical operations such as forecasting, purchasing,
production, order processing, inventory control, shipping and billing and
collections. In addition, system failures could affect security, payroll
operations and employee safety. Third parties who fail to adequately address
their own Year 2000 issues could also expose us to potential risks.

Systems and applications that we have identified to date as not currently
being Year 2000 compliant include financial software systems (which process
order entry, purchasing, production management, general

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ledger, accounts receivable, accounts payable functions, and payroll
applications) and critical applications in our manufacturing facilities. We have
completed the inventory and verification of the Year 2000 readiness of
computer-controlled manufacturing equipment and computer controls for our
manufacturing and office facilities, and we have completed our assessment of the
Year 2000 remediation efforts of our suppliers and customers where there is a
significant business relationship. We expect to complete the conversion or
replacement of the computer information systems for our entire business
operations by December 31, 1999. Our failure to complete our Year 2000
compliance work in a timely manner and the failure of our third-party suppliers
and customers to become Year 2000 compliant could have a material adverse impact
on our business, financial condition and results of operations.

At this time, we believe that the most likely "worst case" scenario
relating to Year 2000 involves the loss of utility service, rendering us unable
to manufacture and distribute. We have developed a contingency plan that
includes such precautionary measures as managing inventory levels, the
deployment of manual systems, the use of alternate computer software that we
currently own and using outside contractors. At this time, however, we cannot
currently estimate either the likelihood or potential adverse impact of such
failures.

We currently estimate that the total cost of addressing and remedying Year
2000 issues and enhancing our operating systems will be approximately $425,000,
which does not include internal costs associated with our Year 2000 remediation.
Our internal costs associated with our Year 2000 remediation are being expensed
as incurred, and have not been material to our past performance and are not
expected to be material relative to our future performance. No funds were
expended related to our Year 2000 remediation during 1998. Through October 31,
1999, approximately $380,000 was expended and approximately $45,000 will be
expended during the period November 1, 1999 through December 31, 1999 in
connection with the remediation and testing of our computer systems. Our current
estimates of the amount of costs and time necessary to remediate and test our
computer systems are based on the facts and circumstances existing and known at
this time. These estimates were made using assumptions of future events
including the continued availability of certain resources, implementation
success by key third parties and other factors.

See "Item 7. -- Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Year 2000 Readiness Disclosure" for more details of
our Year 2000 assessment and compliance efforts.

ITEM 2. PROPERTIES.

We maintain secure hologram manufacturing facilities in Elmsford, New York
and Huntingdon Valley, Pennsylvania. We believe that our existing facilities are
adequate to meet our current requirements and that additional suitable space
will be available as needed.

Our 57,200 square foot facility at Elmsford, New York serves as our
headquarters and includes our art department, origination facilities, plate
making facilities and the manufacturing site for the mass production of numerous
holographic products. Our origination facilities include nine laser
laboratories.

Our 30,000 square foot facility at Huntingdon Valley, Pennsylvania is
dedicated to the mass production of security holograms primarily for transaction
cards.

Both facilities are constantly monitored for security, and have uniformed
security personnel on site, 24 hours a day, seven days a week. The Director of
Security is responsible for the physical security of both facilities, access and
egress, monitoring employee integrity, and safeguarding of machinery, materials,
work-in-process and finished product until shipping. The security department
witnesses material destruction and supervises the transfer of security
shipments. Each facility is equipped with full perimeter alarms enhanced by
window glass break sensors, internal motion detectors and closed circuit video
monitoring of security sensitive areas.

ITEM 3. LEGAL PROCEEDINGS.

On February 9, 1999, the Division of Enforcement of the SEC issued a Formal
Order Directing Private Investigation, designating officers to take testimony
and requiring the production of certain documents, in
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connection with matters giving rise to the need to restate ABNH's previously
issued financial statements. We have provided numerous documents to and continue
to cooperate fully with the SEC staff. We cannot predict the duration of such
investigation or its potential outcome.

The U.S. Attorney's Office for the Southern District of New York has
commenced an investigation in connection with matters giving rise to the need to
restate our previously issued financial statements, as well as a possible
violation in 1998 of the Foreign Corrupt Practices Act. We have not been advised
that ABNH is a target of such investigation. We have provided numerous documents
to and continue to cooperate fully with the U.S. Attorney's Office. We cannot
predict the duration of such investigation or its potential outcome.

A consolidated class action complaint against ABNH, certain of its former
officers and directors, ABN, the four co-lead underwriters of our IPO and our
auditors, has been filed in the United States District Court for the Southern
District of New York. The complaint alleges violations of the federal securities
laws and seeks to recover damages on behalf of all purchasers of our common
stock during the class period (July 15, 1998 through February 1, 1999). The
complaint seeks rescission of the purchase of shares of our common stock or
alternatively, unspecified compensatory damages, along with costs and expenses
including attorneys' fees. We and certain other defendants have separately moved
to dismiss the complaint. The plaintiffs' discovery requests as well as their
motion for class certification have been stayed pending resolution of the
respective motions to dismiss. We have commenced settlement discussions with
plaintiffs' counsel. We do not believe it is feasible to predict or determine
the outcome or resolution of these proceedings, or to estimate the amounts of,
or potential range of loss with respect thereto. In addition, the timing of the
resolution of these proceedings is uncertain. The range of possible resolutions
could include judgements against us or settlements that could require
substantial payments by us, including costs of defending such suits, which could
have a material adverse effect on our financial position, results of operations
and cash flows.

On February 14, 1997, James Rigby, Trustee in Bankruptcy for Holosonics,
Inc., Holotron Corp., Meadows Games, Inc. and Fire Diamond, Inc. commenced an
adversary proceeding in the United States Bankruptcy Court for the Western
District of Washington at Seattle against International Banknote Company, Inc.,
ABN and us. The complaint alleged that the defendants were indebted to the
bankruptcy estate for royalty payments under a 1981 license and that we were
liable for unpaid royalties for 1990 in the amount of $226,322, for 1991 in the
amount of $853,582 and through July 1992 in the amount of $568,762, plus
attorney's fees and interest on unpaid amounts. The defendants and Trustee
entered into a settlement agreement which was approved by an order of the
bankruptcy court on September 10, 1999, whereby the defendants agreed to pay the
Trustee $150,000, of which $135,000 has been paid with the balance of $15,000
payable one-hundred twenty days following entry of the order. The full amount of
the settlement has been accrued at December 31, 1998.

In 1994, plaintiffs, K.A.H. Company, Inc. and Kenneth A. Haines, filed suit
against us, ABN and ABNH Research Co., Inc. in the Supreme Court of the State of
New York, County of New York. A judgment was entered on March 19, 1999 for
$175,639, with attorneys' fees still to be assessed. Plaintiffs' counsel has
stated that he would seek in excess of $300,000 in attorneys' fees. Such
judgment was entered only against ABN, which contends that we should contribute
to the payment of the judgment. The defendants have appealed and the plaintiffs
have filed a cross-appeal, both of which are still pending. The plaintiffs and
defendants are currently engaged in settlement discussions.

On August 17, 1999, we commenced an action in the Supreme Court of the
State of New York, County of Westchester, seeking recovery of approximately
$350,000 on a claim arising from amounts owed to us for holographic materials
sold and delivered in July 1999. The defendant removed the action to the United
States District Court for the Southern District of New York, where it is
currently pending. On December 1, 1999, we received the defendant's answer to
our complaint and counterclaims alleging millions of dollars in damages arising
from ABNH's alleged breach of a 1993 agreement pursuant to which ABNH sold
holographic material to the defendant and alleged failure to fulfill a May 1998
purchase order. We do not believe that the outcome or resolution of these
proceedings will have a material adverse effect on our financial position,
results of operations or cash flows.

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In 1998, ABNH fulfilled an order for holograms for approximately $600,000.
In 1999, the customer alleged that ABNH breached its contract with such customer
based on problems that the ultimate user was experiencing with the holograms,
and claimed potential damages in excess of $6 million. We do not believe that
the agreement was breached, and we are in discussions with this customer in an
attempt to resolve this dispute amicably. There can be no assurance, however,
that this matter will be resolved amicably, or that this dispute will not lead
to litigation with the customer.

We currently and from time to time are involved in litigation (as both
plaintiff and defendant) incidental to the conduct of our business; however,
other than the shareholder litigation described above, we are not a party to any
lawsuit or proceeding which, in our opinion, is likely to have a material impact
on our financial position, results of operations or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.

Our common stock was traded on the New York Stock Exchange under the symbol
"ABH" from the time of our initial public offering on July 15, 1998 to August 3,
1999, when trading in our common stock was suspended. The following table sets
forth the high and low closing prices of our common stock for each quarter of
1998 and 1999 during which it traded on the NYSE.

HIGH LOW
------ -----

1998
Third Quarter (from July 15, 1998).......................... $ 8.56 $4.88
Fourth Quarter.............................................. 18.00 5.81
1999
First Quarter............................................... $17.00 $1.63
Second Quarter.............................................. 3.88 2.06
Third Quarter (through August 2, 1999)...................... 3.06 1.63

Our common stock was suspended from trading on the NYSE on August 3, 1999
because we had not filed our annual report for the year ended December 31, 1998
or our quarterly report for the quarter ended March 31, 1999 within the SEC's
prescribed time period. Following such suspension, the NYSE indicated that it
would apply to delist our common stock. In the interim, our common stock has
been traded in the over-the-counter market.

The following table sets forth the high and low closing prices of our
common stock for each quarter of 1999 during which it has traded on the
over-the-counter market.

HIGH LOW
----- -----

1999
Third Quarter (from August 3, 1999)......................... $3.06 $1.25
Fourth Quarter (through December 15, 1999).................. $3.05 $1.50

The price of our common stock has been quoted on the "pink sheets"
published by the National Quotation Bureau, LLC (ticker symbol: "ABHH"). The
"pink sheets" is an unorganized over-the-counter market which provides
significantly less liquidity than established stock exchanges or the Nasdaq
National Market, and quotes for stocks included in the "pink sheets" are not
listed in the financial sections of newspapers as are those for established
stock exchanges and the Nasdaq National Market.

As of December 15, 1999, there were approximately 60 holders of record of
our common stock. Because many of our shares of common stock are held of record
by brokers and other institutions on behalf of stockholders, we are unable to
estimate the total number of beneficial stockholders represented by these record
holders.

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ITEM 6. SELECTED FINANCIAL DATA.

YEAR ENDED DECEMBER 31,
---------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(AS RESTATED -- SEE NOTE 1)

STATEMENT OF INCOME DATA:
Sales.................................... $21,900 $27,865 $27,516 $23,085 $28,669
Costs and expenses:
Cost of goods sold.................. 14,141 13,787 14,710 12,153 19,064
Selling and administrative.......... 4,673 4,576 4,711 5,813 6,291
Depreciation and amortization....... 1,066 1,203 1,141 1,136 1,080
------- ------- ------- ------- -------
19,880 19,566 20,562 19,102 26,435
------- ------- ------- ------- -------
Operating income....................... 2,020 8,299 6,954 3,983 2,234
Other income........................... 244 113 196 821 554
Interest, net.......................... 305 305 305 146 (400)
------- ------- ------- ------- -------
Income before taxes on income.......... 2,569 8,717 7,455 4,950 2,388
Taxes on income........................ 1,198 3,663 3,117 2,130 1,269
------- ------- ------- ------- -------
Net income............................. $ 1,371 $ 5,054 $ 4,338 $ 2,820 $ 1,119
======= ======= ======= ======= =======
Net income per share:
Basic and diluted...................... $ 0.10 $ 0.37 $ 0.32 $ 0.21 $ 0.08
Weighted average shares outstanding:
Basic.................................. 13,636 13,636 13,636 13,636 13,636
Diluted................................ 13,636 13,636 13,636 13,636 13,701

DECEMBER 31,
---------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(IN THOUSANDS)
(AS RESTATED -- SEE NOTE 1)

BALANCE SHEET DATA:
Working capital.......................... $10,426 $11,208 $ 9,431 $ 8,684 $ 2,023
Total assets........................... 30,329 29,366 27,742 27,515 30,820
Total debt............................. -- -- -- 674 5,968
Total stockholders' equity............. 26,513 25,452 22,434 21,165 14,530

- ---------------
(1) The financial data as of and for the years ended December 31, 1997 and 1996
have been restated as described in Note 11 to the Financial Statements. As
of December 31, 1994, retained earnings have been reduced by approximately
$278,000, net of applicable income taxes, for the effects of certain
overbillings during 1991 through 1994. Additionally, during the year ended
December 31, 1994, sales and net income have been reduced by approximately
$60,000 and $35,000, respectively, for the effects of this overbilling.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

The following discussion and analysis should be read in conjunction with
"Item 6. -- Selected Financial Data" and our financial statements, including the
notes thereto, appearing elsewhere in this report.

On January 19, 1999, ABNH announced that the audit committee of its board
of directors initiated an investigation into circumstances that gave rise to the
need to restate prior period financial statements. The audit committee's
investigation has since been completed, and, as a result of its findings, ABNH
has restated its previously issued financial statements for 1996, 1997 (see Note
11 to the financial statements) and the first three quarters of 1998. The
effects of the restatement are presented in Note 11 to the financial statements
and have been reflected herein.

OVERVIEW

ABNH was, until July 20, 1998, a wholly-owned subsidiary of ABN. On that
date, ABN completed the sale of 13,636,000 shares of our common stock in a
public offering, representing ABN's entire investment in ABNH. We did not
receive any proceeds from the IPO. Additionally, in connection with the IPO, the
amounts due from ABN and affiliates of approximately $33.9 million were
cancelled and deemed to be a dividend. Immediately following our IPO, we had
approximately $5.2 million of secured bank debt and nominal cash. As a
wholly-owned subsidiary, we were provided certain corporate and administrative
services by ABN, including financial reporting, treasury functions, tax planning
and compliance, risk management, human resources and legal services.
Additionally, because ABN managed cash and financing requirements centrally,
interest expense and financing requirements prior to the IPO were based on the
existing capital structure. Our results prior to the IPO might have differed
from the results that might have been achieved had we operated as an independent
entity.

ABNH originates, mass-produces and markets holograms. Our holograms are
used primarily for security applications such as counterfeiting protection for
credit and other transaction cards, identification cards and documents of value,
as well as for tamper resistance and authentication of high-value consumer and
industrial products. Our ability to control the diffraction of light
("origination") using proprietary processes in a secure, controlled
manufacturing environment has enabled us to become a market leader in security
holography. Our products are used by over 200 companies worldwide. We also
produce non-secure holograms for packaging and promotional applications. Our
sales of holograms for credit card security applications generally carry higher
gross margins than sales for other applications.

Concerns regarding counterfeiting, piracy and other infractions that can
result in lost sales, lost goodwill and product liability claims drive the use
of product authentication holograms. Companies in various industries have
utilized holograms as authentication devices to reduce potential losses. Also,
concerns over counterfeiting and copying have led to an increased use of
holograms on documents of value, including currency, passports, business
cheques, gift certificates, vouchers, certificates of deposit, stamps (postage
and revenue), tickets and other financial instruments.

Our sales are derived from the sale of our security and commercial
holograms. In 1998, we derived approximately 95% of our sales from security
applications and approximately 5% from commercial applications. A significant
portion of our business was derived from orders placed by a limited number of
large customers, and variations in the timing of such orders can cause
significant fluctuations in our sales.

We are currently dependent on certain credit card companies for a
substantial portion of our business, including MasterCard and manufacturers of
VISA brand credit cards. Sales to MasterCard were approximately 30%, 35%, and
23%, respectively, and sales to Visa card manufacturers were approximately 26%,
27%, and 31%, respectively, of sales for the years ended December 31, 1998, 1997
and 1996. We are the exclusive supplier of holograms to MasterCard pursuant to
an agreement, as amended, that extends until February 2003. The agreement
provides for automatic two-year renewal periods if not terminated by either
party. During 1999, we were informed by MasterCard that it believes that we
breached certain terms of the agreement in 1998 and 1997. We have been working
closely with MasterCard to address issues raised by MasterCard, and

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believe our relationship with MasterCard is good. We do not have long-term
purchase contracts with VISA and we supply holograms to approximately 50 VISA
authorized card manufacturers pursuant to purchase orders. Currently we are one
of two companies authorized to manufacture and sell VISA brand holograms to
manufacturers of VISA brand credit cards. If either MasterCard or VISA were to
terminate its respective relationship with us or substantially reduce their
orders, there would be a material adverse effect on our business, financial
condition, results of operations and cash flows.

Holograms are sold under purchase orders and contracts with customers.
Sales and the related cost of goods sold are generally recognized at the latter
of the time of shipment or when title passes to customers. In some situations,
we have shipped product with the right of return where we are unable to
reasonably estimate the level of returns and/or the sale is contingent upon the
customers' use of the product. In these situations, we do not recognize sales
upon product shipment, but rather when the buyer of the product informs us that
the product has been used. Additionally, pursuant to terms with a certain
customer, completed items are stored on behalf of the customer at our on-site
secured facility and, in that instance, sales are recognized when all of the
following have occurred: the customer has ordered the goods, the manufacturing
process is complete, the goods have been transferred to the on-site secured
facility and are ready for shipment, the risk of ownership has passed to the
customer and the customer has been billed for the order. During the first
quarter of 1998, we recorded sales of approximately $6.5 million under this
arrangement.

We have historically purchased certain key materials used in the
manufacture of our holograms from single suppliers, with which we do not have
supply contracts. Any problems that occur with respect to the delivery, quality
or cost of any such materials could have a material adverse effect on our
financial position, results of operations and cash flows.

During 1998, 1997 and 1996, export sales accounted for approximately 28%,
25% and 32%, respectively, of total sales. All of our export sales are presently
denominated in U.S. dollars.

Cost of goods sold includes raw materials such as nickel, foils, films and
adhesives; labor costs; manufacturing overhead; and hologram origination costs
(which represent costs of a unique master hologram that is made to customer
specifications and is an integral part of the production process). As a result,
costs of goods sold are affected by product mix, manufacturing yields, costs of
hologram originations and changes in the cost of raw materials and labor.

Selling and administrative expenses primarily consist of salaries, benefits
and commissions for our corporate, sales, marketing and administrative personnel
and marketing and advertising expenses for our services and products.

Sales may fluctuate from quarter to quarter due to changes in customers'
ordering patterns. Customers do not typically provide us with precise forecasts
of future order quantities. Quarterly demand for holograms may be materially
influenced by customers' promotions, inventory replenishment, card expiration
patterns, delivery schedules and other factors which may be difficult for us to
anticipate.

In accordance with a tax allocation agreement in effect through the date of
our IPO, we were included in the consolidated U.S. Federal income tax return
and, in certain instances, consolidated or combined state and local income tax
returns of ABN and made payments to ABN based on the amounts which would be
payable as Federal, state and local income taxes as if consolidated or combined
returns were not filed. We computed our Federal, state and local income tax
provision as if we were filing separate income tax returns, without regard to
the tax allocation agreement. In October 1999, an affiliate of ABN received an
assessment for approximately $0.9 million of taxes and interest from the City of
New York relating to the years ended December 31, 1990, 1991 and 1992. We were
included in the combined City of New York income tax returns of ABN for the
periods covered by the assessment and had previously made payments to ABN based
on amounts which would have been payable if the combined income tax returns were
not filed. We are contingently liable, jointly and severally, for U.S. Federal,
state and local income taxes for periods in which we are included in the
consolidated or combined income tax returns of ABN. Amounts paid to ABN in
excess of amounts which would have been payable had we filed separate tax
returns have been charged to Due from

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Former Parent and affiliates. For periods subsequent to our IPO, we will file
our own U.S. Federal and state income tax returns.

COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998 TO THE YEAR ENDED DECEMBER 31,
1997

Sales. Sales increased by $5.6 million, or 24.2%, from $23.1 million in
1997 to $28.7 million in 1998. The increase in sales was due primarily to an
increase in sales of security holograms for credit cards of $2.9 million and
other security holograms of $2.7 million. Sales in the fourth quarter of 1998
were impacted by approximately $3.0 million in sales (including the sale of
goods originally shipped on consignment) at discounts from normal selling prices
in exchange for immediate payment. We believe that, in the absence of such
discounts, a portion of these sales would have occurred in 1999; therefore, it
is anticipated that sales, related gross margins and net income will be
adversely affected in the first quarter of 1999. The contractual net unit sales
price applicable to MasterCard was reduced in September 1998 by approximately
5%. At December 31, 1998, we had customer advances approximating $1.5 million
which represented payments received from customers for products, at a discount
from the normal sales price in exchange for immediate payment, which have not
yet been shipped ($1.2 million) and for products shipped with the right of
return ($0.3 million) where we are unable to reasonably estimate the level of
returns. We anticipate that sales will be recognized in 1999 from these
transactions.

Cost of Goods Sold. Cost of goods sold increased by $6.9 million, or
56.6%, from $12.2 million in 1997 to $19.1 million in 1998. As a percentage of
sales, cost of goods sold increased from 52.8% in 1997 to 66.6% in 1998. This
increase reflects increases in the amortization of origination costs (which are
charged to costs of goods sold based on the total number of holographic images
estimated to be produced) due to lower volumes of sales than had been originally
estimated (5%), increases in origination costs which were incurred in
anticipation of orders which did not materialize (5%), increased provisions for
obsolete and excess inventory due primarily to quality considerations and lower
of cost or market adjustments (7%), the effects on gross margin of the sales
discounts referred to above (1%), an increase in warranty expense (1%), and
increases in royalty expenses (2%), offset by an increase in the gross margins
on our sales mix (7%).

Selling and Administrative Expenses. Selling and administrative expenses
increased by $0.5 million, from $5.8 million in 1997 to $6.3 million in 1998. As
a percentage of sales, selling and administrative expenses decreased from 25.1%
in 1997 to 22.0% in 1998. The increase in expenses is primarily attributable to
increased sales commissions of $0.4 million relating to the increase in sales,
increased administrative salaries of $0.2 million relating to new hires and
salary increases, and increased costs relating to shareholder communications and
other costs associated with public ownership of $0.4 million, offset by a
decrease in provisions for bad debts of $0.4 million.

Depreciation and Amortization. Depreciation and amortization remained
relatively unchanged in 1998 compared to 1997. As a percentage of sales,
depreciation and amortization decreased from 4.9% in 1997 to 3.8% in 1998.

Other Income. Other income decreased by $0.2 million from $0.8 million in
1997 to $0.6 million in 1998. This decrease in other income was primarily due to
a change in 1997 in the estimate of 1996 royalties resulting from information
not reported by a licensee until 1997.

Interest, net. Interest, net decreased by $0.5 million from $0.1 million
in net income in 1997 to $0.4 million net expense in 1998. This decrease was due
to increased interest expense under the revolving credit facility of $0.4
million and a reduction in interest income from ABN of $0.1 million as a result
of the cancellation of the $5.3 million note receivable from ABN that bore
interest at 5.75% per annum, which was included in the deemed dividend discussed
above.

Income Taxes. Income taxes for periods prior to the IPO are based on taxes
that would have been paid had we operated on a stand-alone basis. Income taxes
decreased by $0.8 million, from $2.1 million in 1997 to $1.3 million in 1998, as
a result of lower taxable income due to the factors described above. For a
reconciliation of income taxes from the federal statutory rate to our effective
rate, see Note 5 to our financial statements.

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Net Income. As a result of the foregoing, net income decreased by $1.7
million, or 60.7%, from $2.8 million in 1997 to $1.1 million in 1998.

COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 TO THE YEAR ENDED DECEMBER 31,
1996

Sales. Sales decreased by $4.4 million, or 16.0%, from $27.5 million in
1996 to $23.1 million in 1997. The decrease in sales was due primarily to a
decrease in commercial hologram sales of $2.2 million and a decrease of $2.2
million in sales of security holograms for credit cards.

Cost of Goods Sold. Cost of goods sold decreased by $2.5 million, or
17.0%, from $14.7 million in 1996 to $12.2 million in 1997. As a percentage of
sales, cost of goods sold decreased from 53.5% in 1996 to 52.8% in 1997.

Selling and Administrative Expenses. Selling and administrative expenses
increased by $1.1 million, or 23.4%, from $4.7 million in 1996 to $5.8 million
in 1997. As a percentage of sales, selling and administrative expenses increased
from 17.1% in 1996 to 25.1% in 1997. This increase in selling and administrative
expenses was due primarily to a bad debt charge of $800,000 associated with a
product development project. In addition, approximately $300,000 of expenses
were incurred in 1997 in connection with our ISO 9000 certification.

Depreciation and Amortization. Depreciation and amortization remained
relatively unchanged from 1996 to 1997. As a percentage of sales, depreciation
and amortization increased from 4.1% in 1996 to 4.9% in 1997.

Other Income. Other income increased by $0.6 million from $0.2 million in
1996 to $0.8 million in 1997. This increase was primarily due to a change in
1997 in the estimate of 1996 royalties resulting from information not reported
by a licensee until 1997.

Interest, net. Interest, net, decreased by $0.2 million from $0.3 million
in 1996 to $0.1 million in 1997 as a result of interest on the revolving credit
facility. Interest income in both years represents interest on a note due from
ABN.

Income Taxes. Income taxes for periods prior to the IPO are based on taxes
that would have been paid had we operated on a stand-alone basis. Income taxes
decreased by $1.0 million from $3.1 million in 1996 to $2.1 million in 1997, as
a result of lower taxable income due to the factors described above. For a
reconciliation of income taxes from the federal statutory rate to our effective
rate, see Note 5 to our financial statements.

Net Income. As a result of the foregoing, net income decreased by $1.5
million, or 34.9%, from $4.3 million in 1996 to $2.8 million in 1997.

SEASONALITY

Our sales have not generally exhibited substantial seasonality. However,
our sales and operating results to date have, and future sales and therefore
operating results may, continue to fluctuate from quarter to quarter. The degree
of fluctuation will depend on a number of factors, including the timing and
level of sales, any change in the pricing of our products and the mix of
products sold. Because a significant portion of our business is expected to be
derived from orders placed by a limited number of large customers, variations in
the timing of such orders could cause significant fluctuations in our operating
results. Customers do not typically provide us with precise forecasts of future
order quantities. Quarterly demand for holograms may be materially influenced by
customers' promotions, inventory replenishment, card expiration patterns,
delivery schedules and other factors which may be difficult for us to
anticipate. Other factors that may result in fluctuations in operating results
include the timing of new product announcements and the introduction of new
products and new technologies by us or our competitors, delays in research and
development of new products, increased R&D expenses, availability and cost of
materials from our suppliers, competitive pricing pressures and financing costs.

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LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1998, we had $4.3 million in cash and cash equivalents and
working capital of $2.0 million. This cash balance included cash generated from
sales in the fourth quarter of 1998 at a discount from the normal sales price in
exchange for immediate payment and from customer advances, as well as the
effects of an increase in accounts payable. A substantial portion of this cash
was subsequently utilized for repayments under our revolving credit agreement,
the payment of trade payables, and for costs relating to the audit committee
investigation discussed above. We estimate that the total amount to be expended
in connection with the audit committee investigation and related restatement
efforts will approximate $4.0 million. These costs will be charged to operations
as incurred and will adversely impact 1999 operating results and cash flows. At
September 30, 1999, we had $1.0 million of cash and cash equivalents, $2.3
million payable under our revolving credit agreement with Foothill Capital
Corporation and no further availability under the borrowing base formula of our
revolving credit agreement.

On July 20, 1998, contemporaneously with our IPO, we entered into a $30.0
million credit facility agreement, consisting of a $20.0 million acquisition
facility and a $10.0 million working capital facility, maturing on July 20,
2004, which replaced a facility we had entered into with an affiliate of ABN.
Substantially all of our assets were secured under the terms of the credit
agreement. At the time of the IPO, approximately $5.2 million was due and owing
under the credit agreement. At December 31, 1998, the $5.6 million outstanding
under the credit agreement exceeded the maximum permitted borrowings, as
defined, pursuant to the borrowing base formula, as defined, under the credit
agreement. In February 1999, the lenders notified us that we were in default
under the credit agreement. On March 31, 1999, the credit agreement was amended,
whereby the maximum permitted borrowings was reduced to the lesser of $4.5
million or the maximum permitted borrowings under a borrowing base formula, as
defined. Borrowings under the amended credit agreement bore interest at the
lender's alternate base rate, as defined, plus 0.5%. On July 20, 1999, the
amended credit agreement was further amended, whereby (1) all existing events of
default were waived, (2) the latest maturity date of all loans outstanding was
changed to January 20, 2000 and (3) the maximum permitted borrowings was reduced
to $4.0 million, which was to decline monthly until December 31, 1999 when the
maximum permitted borrowings was to be $2.6 million. The second amended credit
agreement provided for borrowings under a revolving credit line bearing interest
at the lender's alternate base rate, as defined, plus 2% (8.0% at December 31,
1998), subject to a borrowing base formula, as defined. As consideration for the
second amended credit agreement, we paid a fee of $40,000 and issued warrants to
purchase up to 781,645 shares of our common stock, subject to anti-dilution
rights, at $4.50 per share. Such warrants were terminated on September 29, 1999
pursuant to the second amended credit agreement when amounts outstanding under
the second amended credit agreement were repaid, as described below.

On September 29, 1999, amounts then outstanding under the second amended
credit agreement were repaid when we entered into a loan and security agreement
with Foothill Capital Corporation, a subsidiary of Wells Fargo Bank, maturing on
September 29, 2004. The loan and security agreement, which is secured by
substantially all of our assets, provides for borrowings in an aggregate amount
up to $10.0 million (which may be increased to $15.0 million with the consent of
the parties), subject to a borrowing base formula, under a revolving credit
facility, term loan and capital expenditure loan. Borrowings under the loan and
security agreement bear interest at the lender's reference rate, as defined,
plus 1.5%, which may decrease to 1.25%, 1.00%, or 0.5% under certain
circumstances. Under the terms of the loan and security agreement, the maximum
amounts of the term and capital expenditure loans are approximately $1.0 million
and $2.0 million, respectively, and are repayable in sixty equal monthly
installments.

The loan and security agreement contains covenants customary for credit
facilities of a similar nature, including limitations on our ability to, among
other things, (1) declare dividends or repurchase or redeem stock, (2) prepay,
redeem or repurchase debt, incur liens and engage in sale-leaseback
transactions, (3) make loans and investments, (4) incur additional debt, (5)
amend or otherwise alter material agreements or enter into restrictive
agreements, (6) make capital expenditures in any fiscal year in excess of $2.5
million, (7) engage in mergers, acquisitions and asset sales, (8) engage in
certain transactions with affiliates and (9) materially alter the nature of our
business. Additionally, under the terms of the loan and security agreement, we
are required to achieve Year 2000 compliance by December 31, 1999. We are also
required to
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comply with specified financial covenants and ratios and must provide to the
lender our March 31 and June 30, 1999 unaudited financial statements by December
15, 1999 and our September 30, 1999 unaudited financial statements by December
31, 1999. The loan and security agreement provides for events of default
customary for transactions of this type, including nonpayment,
misrepresentation, breach of covenant, cross-defaults, bankruptcy, adverse
judgments in excess of $0.2 million, and change of ownership and control.

As a result of the amended credit agreement, in the first quarter of 1999
we will write off unamortized deferred financing costs of approximately $0.4
million relating to the credit agreement. As a result of the second amended
credit agreement, in the third quarter of 1999 we will write off unamortized
deferred financing costs of approximately $59,000 relating to the amended credit
agreement. As a result of the loan and security agreement, in the third quarter
of 1999 we will write off the remaining unamortized deferred financing costs
(approximately $31,000) relating to the second amended credit agreement.

During 1998 and 1997, the weighted average interest rate of outstanding
borrowings was approximately 8.4% and 9.0%, respectively. The average aggregate
borrowings during 1998 and 1997 was approximately $5.2 million and $0.9 million,
respectively.

Prior to our IPO, our cash accounts had been controlled on a centralized
basis by ABN and, accordingly, cash receipts and disbursements had been received
or made through ABN and were recorded as due from ABN and affiliates. Subsequent
to our IPO, we maintain our own centralized cash management system. Prior to our
IPO, cash had been provided to ABN in the ordinary course of business by way of
intercompany advances to service its debt obligations and for general corporate
purposes. Upon consummation of our IPO, these intercompany advances were
cancelled and included in the deemed dividend to ABN of $33.9 million.
Immediately following our IPO, we had approximately $5.2 million of secured bank
debt and nominal cash.

For the year ended December 31, 1998, our operating activities provided
cash flow of $7.4 million compared to $4.0 million and $4.6 million of cash flow
provided by operating activities in 1997 and 1996, respectively. The increase in
cash flows was primarily due to sales in the fourth quarter of 1998, at a
discount from the normal sales price in exchange for immediate payment, and
customer advances, as discussed above, as well as an increase in amounts owed to
vendors.

Investing activities for the years ended December 31, 1998, 1997 and 1996
used cash flows of approximately $0.4 million, $0.5 million, and $0.4 million,
respectively. These activities primarily reflected capital expenditures for the
respective years. We anticipate that capital expenditures in 1999 and 2000 will
be approximately $0.6 million and $0.7 million, respectively. These amounts
include approximately $0.4 million in 1999 for new systems which will be year
2000 compliant, with the balance relating to capital expenditures required to
improve production capabilities.

Financing activities for the years ended December 31, 1998, 1997 and 1996
used cash flows of $3.0 million, $3.4 million and $7.4 million, respectively.
The activity in 1998 was comprised of advances to ABN and affiliates ($7.8
million) and deferred financing costs ($0.5 million), offset by borrowings under
the revolving credit agreement and other borrowings ($5.3 million). The activity
in 1997 and 1996 was comprised principally of advances to ABN and affiliates
($4.1 million and $7.4 million, respectively) and, in 1997, was offset by $0.7
million of borrowings under the then existing revolving credit facility.

We believe that cash flows from operations, together with cash balances and
availability of funds under the loan and security agreement, will be sufficient
to meet working capital needs, service debt and fund capital expenditures for
the next twelve months.

We are a party to certain legal proceedings that may affect our financial
position. For a description of these proceedings, see "Item 3. -- Legal
Proceedings."

On August 3, 1999, the New York Stock Exchange suspended trading in our
common stock for failure to deliver its Annual Report on Form 10-K for the year
ended December 31, 1998 and its Quarterly Report on Form 10-Q for the three
months ended March 31, 1999 on a timely basis. Following the suspension, the
NYSE notified us of its intent to apply for delisting of our common stock. Our
common stock will not resume

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trading on the NYSE, but we intend to seek to have our common stock traded on
another stock exchange or quoted on Nasdaq.

NEW ACCOUNTING STANDARDS

In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1
requires computer software costs associated with internal use software to be
expensed as incurred until certain capitalization criteria are met. We adopted
SOP 98-1 on January 1, 1999. Adoption of this statement did not have a material
impact on our financial position, results of operations, or cash flows.

In April 1998, the AICPA issued Statement of Position 98-5, Reporting on
the Cost of Start-Up Activities ("SOP 98-5"). SOP 98-5 requires all costs
associated with pre-opening, pre-operating and organization activities to be
expensed as incurred. We adopted SOP 98-5 on January 1, 1999. Adoption of this
statement did not have a material impact on our financial position, results of
operations, or cash flows.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which, as amended,
is effective for fiscal years beginning after June 15, 2000. SFAS No. 133
requires the recognition of all derivatives in the balance sheets as either
assets or liabilities measured at fair value. We will adopt SFAS No. 133 for the
2001 fiscal year. We are currently evaluating the impact SFAS No. 133 will have
on our financial position, results of operations and cash flows.

YEAR 2000 READINESS DISCLOSURE

The Year 2000 issue is the result of computer programs using only the last
two digits to refer to a year. Therefore, these computer programs do not
properly recognize a year that begins with "20" instead of the familiar "19." If
not corrected, these computer applications could fail or create erroneous
results. The global extent of the potential impact of the Year 2000 problem is
not yet known, and if not timely corrected, it could adversely affect the
economy and us. We use computer information systems and manufacturing equipment,
which may be affected. We also rely on suppliers and customers who are also
dependent on systems and equipment, which use date sensitive software. We
recognize the importance of the Year 2000 issue and it has been given high
priority.

Late in 1997 we began to review the production equipment used in the
manufacture of our products as well as the systems related to the infrastructure
of our manufacturing and office facilities. We inventoried and verified Year
2000 readiness of computer controlled manufacturing equipment and computer
controls for our manufacturing and office facilities. This equipment included
the air conditioning and heating systems, the elevator and all manufacturing
equipment. This process was validated by equipment manufacturers and was
completed in December 1998.

In December 1998, we began evaluating and testing our internal computer
information systems. This effort involved plans for creating or purchasing
replacement systems for those computer information systems which were developed
internally as well as obtaining versions of software purchased from third
parties which are Year 2000 compliant. We expect to have converted or replaced
computer information systems for our entire business operations by the end of
the fourth quarter of 1999 with an estimated total cost of approximately
$425,000, which does not include internal costs associated with our Year 2000
remediation. Our internal costs associated with our Year 2000 remediation are
being expensed as incurred, and have not been material to our past performance
and are not expected to be material relative to our future performance. No funds
were expended relating to our Year 2000 remediation during 1998. Through October
31, 1999, approximately $380,000 was expended and approximately $45,000 will be
expended in November and December 1999. Our current estimates of the amount of
costs and time necessary to remediate and test our computer systems are based on
the facts and circumstances existing and known at this time. These estimates
were made using assumptions of future events including the continued
availability of certain resources, implementation success by key third parties
and other factors.

We are in the process of implementing new financial and manufacturing
software to comply with the Year 2000 issues and to improve our management
reporting capabilities. All mission critical portions of the

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software have been pilot tested to insure the correct operation of the hardware
and software. We have begun testing in parallel the new financial and
manufacturing software, and expect that such testing will include data through
November 30, 1999 with an expected completion date of December 15, 1999. Once
such parallel testing is completed, we will consider our mission critical
hardware and software to be Year 2000 compliant. As the new financial and
manufacturing software is implemented and tested, our Year 2000 contingency plan
has also been modified to include the Year 2000 compliant capabilities of the
new portions of the software.

Also, in late 1998 we began to assess the Year 2000 remediation efforts of
our suppliers, including providers of services such as utilities, and customers
where there is a significant business relationship. These efforts however
provide no assurances that we will not be affected by the Year 2000 problems of
other organizations. This process was completed in March 1999. To date, however,
the information received from our suppliers and customers indicate that their
respective Year 2000 remediation efforts are on target to achieve Year 2000
compliance by December 31, 1999.

If we are unsuccessful or if the remediation efforts of our key suppliers
or customers are unsuccessful with regard to Year 2000 remediation, there may be
a material adverse impact on our results and financial condition. A worst case
scenario would include the loss of utility service, rendering us unable to
manufacture and distribute. Our contingency plan includes such precautionary
measures as managing inventory levels, the deployment of manual systems, the use
of alternate computer software that we currently own and the use of outside
contractors. At this time, however, we are unable to quantify any potential
adverse impact but will continue to monitor and evaluate the situation.

IMPACT OF INFLATION

In recent years, inflation has not had a significant impact on our
historical operations. There can be no assurance that inflation will not
adversely affect our operations in the future, particularly in emerging markets
where inflationary conditions tend to be more prevalent.

UNAUDITED QUARTERLY RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997

YEAR ENDED DECEMBER 31, 1998(A)
--------------------------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER
--------------------- --------------------- ---------------------
AS AS AS
PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED FOURTH QUARTER
---------- -------- ---------- -------- ---------- -------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Sales(b)................................ $7,035 $10,176 $9,581 $4,636 $10,524 $5,091 $ 8,766
Cost of goods sold...................... 2,438 4,609 4,007 2,100 3,781 1,930 10,425
Net income (loss)....................... 1,793 2,510 2,279 387 2,771 294 (2,072)
Net income (loss) per share -- basic and
diluted............................... $ 0.13 $ 0.18 $ 0.17 $ 0.03 $ 0.20 $ 0.02 $ (0.15)

YEAR ENDED DECEMBER 31, 1997(A)
---------------------------------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
--------------------- --------------------- --------------------- ---------------------
AS AS AS AS
PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- -------- ---------- -------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Sales......................... $5,241 $6,198 $6,296 $5,969 $8,104 $7,786 $11,274 $ 3,132
Cost of goods sold............ 2,629 3,556 2,591 3,189 2,617 2,348 4,075 3,060
Net income (loss)............. 657 633 1,422 909 2,275 2,245 3,185 (967)
Net income (loss) per share --
basic and diluted........... $ 0.05 $ 0.05 $ 0.10 $ 0.07 $ 0.17 $ 0.16 $ 0.23 $ (0.07)

- ---------------
(a) The financial statements each of the quarters in the period ended September
30, 1998 and the year ended December 31, 1997 have been restated. See Note
11 to the financial statements.

(b) In the first quarter of 1998, ABNH recorded sales of $6.5 million related to
a customer order which was transferred to ABNH's on-site secured facility
(See Note 1 to the financial statements).

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We do not engage in significant activity with respect to market risk
sensitive instruments. Accordingly, our risk with respect to market risk
sensitive instruments is immaterial.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The Financial Statements and Supplementary Data required by this item are
filed as part of this Form 10-K. See Index to Financial Statements on page F-1
of this Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

Not applicable.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF REGISTRANT

The following table sets forth certain information concerning our
directors, executive officers and key employees. All directors hold office until
the next annual meeting of stockholders or until their successors have been
elected and qualified. Officers are appointed by the board of directors and
serve at the discretion of the board.

NAME AGE POSITION(S)
- ---- --- -----------

DIRECTORS AND EXECUTIVE OFFICERS:
Salvatore F. D'Amato............................ 71 Chairman of the Board
Kenneth H. Traub................................ 38 President, Chief Operating Officer and Director
Stephen A. Benton*.............................. 58 Director
C. Gerald Goldsmith*............................ 71 Director
Russell LaCoste................................. 49 Executive Vice President, Corporate Development
and Marketing
Alan Goldstein.................................. 52 Vice President and Chief Financial Officer
KEY EMPLOYEES:
Michael T. Banahan.............................. 41 Vice President, Sales and Marketing
George Condos................................... 37 Controller

- ---------------
* Member of the audit committee.

Salvatore F. D'Amato has served as our Chairman of the Board since April
1999 and as a director since March 1999. He was also our Chairman of the Board
and President from 1983 to 1990. Mr. D'Amato was President and a director of
ABN, our former parent corporation, from 1977 to 1983. Prior thereto he served
as Vice President, Engineering and Senior Vice President, Operations with ABN.
Mr. D'Amato holds a masters degree in Engineering from Columbia University.

Kenneth H. Traub has served as our President and Chief Operating Officer
since February 1999, as our consultant since January 1999 and as a director
since April 1999. Previously, Mr. Traub co-founded Voxware, Inc., a developer of
digital speech processing technologies, and served on its board of directors
from February 1995 to January 1998 and as its Executive Vice President, Chief
Financial Officer and Secretary from February 1995 to April 1998. Prior thereto,
Mr. Traub was Vice President of Trans-Resources, Inc., a diversified
multinational holding company. Mr. Traub holds an M.B.A. from the Harvard
Graduate School of Business Administration and a B.A. from Emory University.

Stephen A. Benton has served as a director since July 1998. Dr. Benton is
the founding head of the Spatial Imaging Group at the Massachusetts Institute of
Technology, where he has been a faculty member since 1982. He is a fellow of the
Optical Society of America and the Society for Imaging Science and Technology.
Dr. Benton holds a Ph.D. in Applied Physics from Harvard University.

C. Gerald Goldsmith has served as a director since July 1998. Mr. Goldsmith
has been an independent investor and financial advisor for over 20 years. He is
a director of ABN, Innkeepers USA Trust, Plymouth Rubber Company, Inc., Palm
Beach National Bank & Trust Company and Intracoastal Health System. Mr.
Goldsmith holds an M.B.A. from the Harvard Graduate School of Business
Administration.

Russell LaCoste has served as our Executive Vice President, Corporate
Development and Marketing since October 1999. He also served as our Vice
President, Sales and Marketing from 1984 to 1992. Mr. LaCoste was Vice President
of Sales and Marketing of Kurz Transfer Products, a manufacturer of specialty
printing products, from September 1995 to October 1999. From 1992 to September
1995, he was President of Optigraphics Corporation, a specialty printer. Mr.
LaCoste holds a B.S. in Marketing from the University of Vermont and an M.B.A.
from the University of Bridgeport.

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Alan Goldstein has served as our Vice President and Chief Financial Officer
since April 1999 and as our consultant since February 1999. Mr. Goldstein was
Vice President and Chief Accounting Officer of Complete Management, Inc., a
physician management company, from June 1997 to July 1998, and Vice President
and Chief Financial Officer of RF International, Inc., a multinational
transportation services holding company, from July 1994 to December 1996. During
other periods Mr. Goldstein acted as an independent consultant. Mr. Goldstein
holds a B.S. in Business Administration from Boston University and a M.S. in
Accounting from Long Island University. Mr. Goldstein is a Certified Public
Accountant.

Michael T. Banahan has served as our Vice President, Sales and Marketing
since May 1999. He also served as a senior member of our sales department from
1989 to May 1999. Mr. Banahan holds a B.A. in Marketing Management from the
University of Rhode Island.

George Condos has served as our Controller since May 1999 and as our
consultant since February 1999. Mr. Condos was Controller of PSR Logistics, a
transportation company, from January 1997 to August 1998. From February 1995 to
January 1997, he was District Controller and Office Manager at Browning-Ferris
Industries, a waste management and recycling company. From 1991 to February
1995, he was Controller of United Carting Company, a waste services company. Mr.
Condos holds a B.S. in Accounting from Fairleigh Dickinson University.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) under the Securities Exchange Act of 1934 requires our
executive officers and directors, and persons who beneficially own more than ten
percent of our common stock, to file initial reports of ownership and reports of
changes in ownership with the SEC. Executive officers, directors and greater
than ten percent beneficial owners are required by the SEC to furnish us with
copies of all Section 16 forms they file.

Based upon a review of the copies of such forms furnished to us and written
representations from our executive officers and directors, we believe that the
reporting requirements of Section 16, as amended, applicable to our executive
officers, directors and greater than ten percent beneficial owners were complied
with on a timely basis for all transactions that occurred during 1998, except
that Stephen A. Benton and C. Gerald Goldsmith, each of whom became a director
of ABNH and received a grant of options to purchase ABNH common stock in July
1998, failed to timely report such events on Form 3. These events have been
subsequently reported.

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ITEM 11. EXECUTIVE COMPENSATION.

The following table provides information concerning compensation paid to or
earned during 1996, 1997 and 1998 by each individual who served as our CEO
during 1998 and the next three most highly compensated executive officers during
1998 (the "Named Executive Officers"). None of our other executive officers
earned salary and bonus in excess of $100,000 during 1998.

SUMMARY COMPENSATION TABLE

LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------- ----------------
SHARES OF COMMON
OTHER ANNUAL STOCK UNDERLYING
SALARY BONUS COMPENSATION(1) OPTIONS
NAME YEAR ($) ($) ($) (#)
- ---- ---- -------- ------- --------------- ----------------

Morris Weissman(2)............ 1996 -- -- -- --
1997 -- -- -- --
1998 -- -- -- 400,000
Joshua C. Cantor(3)........... 1996 250,000 -- 440 --
1997 250,000 25,000 31,908 --
1998 250,000 -- 8,924 200,000
Richard P. Macchiarulo(4)..... 1996 -- -- -- --
1997 87,847 28,280 -- --
1998 99,167 -- 1,670 40,000
Jeffrey N. Dugal (5).......... 1996 -- -- -- --
1997 51,897 12,500 1,925 --
1998 120,750 5,190 3,150 40,000

- ---------------
(1) Other Annual Compensation for Messrs. Cantor, Macchiarulo and Dugal consists
of the use of automobiles paid for by us.

(2) Mr. Weissman served as Chairman of the Board and Chief Executive Officer
from 1990 to April 1999.

(3) Mr. Cantor served as Executive Vice President and General Manager from
November 1995 to May 1997 and as President from May 1997 to February 1999.

(4) Mr. Macchiarulo served as Vice President -- Finance from June 1997 to
February 1999.

(5) Mr. Dugal served as Vice President -- Operations from June 1997 to February
1999.

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The following table provides information concerning option grants during
1998 to the Named Executive Officers. No options were exercised during 1998.

OPTION GRANTS IN 1998

POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
--------------------------------------------------- ---------------------
SHARES OF PERCENT OF
COMMON TOTAL
STOCK OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS(1) EMPLOYEES PRICE EXPIRATION 5% 10%
NAME (#) IN 1998 ($/SHARE) DATE ($) ($)
- ---- ---------- ---------- --------- ------------- --------- ---------

Morris Weissman(2)............ 400,000 40.6% 8.50 July 13, 2008 2,138,242 5,418,725
Joshua C. Cantor(3)........... 200,000 20.3% 8.50 July 13, 2008 1,069,121 2,709,362
Richard P. Macchiarulo(4)..... 40,000 4.1% 8.50 July 13, 2008 213,824 541,872
Jeffrey N. Dugal(5)........... 40,000 4.1% 8.50 July 13, 2008 213,824 541,872

- ---------------
(1) All of the options terminated unexercised upon the officers' resignations in
1999.

(2) Mr. Weissman served as Chairman of the Board and Chief Executive Officer
from 1990 to April 1999.

(3) Mr. Cantor served as Executive Vice President and General Manager from
November 1995 to May 1997 and as President from May 1997 to February 1999.

(4) Mr. Macchiarulo served as Vice President -- Finance from June 1997 to
February 1999.