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

FORM 10-K

Commission File No. 1-14227

AMERICAN BANK NOTE HOLOGRAPHICS, INC.
(Exact Name of Registrant as Specified in Its Charter)

(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 ý    No o

        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. Yes o    No ý

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o    No ý

        The aggregate market value of the common stock, $0.01 par value, held by non-affiliates of the registrant, based upon the closing sale price of the common stock on June 30, 2003, was approximately $15,818,400. Shares of common stock held by each officer and director and by each person who controls 10% or more of the outstanding voting power of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

        The aggregate number of shares of common stock, $.01 par value, outstanding on March 12, 2004 was 18,483,720.

DOCUMENTS INCORPORATED BY REFERENCE

NONE

AMERICAN BANK NOTE HOLOGRAPHICS, INC.

2003 Form 10-K

Table of Contents

Part I.

Item 1. BUSINESS.

        American Bank Note Holographics, Inc. ("ABNH" or the "Company") originates, produces and markets holograms. Our holograms are used primarily for security applications such as counterfeiting protection and authentication of transaction cards, identification cards, documents of value and consumer products. Our ability to create distinctive, secure optically variable devices, to reproduce them with high quality and to distribute them securely has enabled us to become a market leader in security holography. Our products are used by over 150 companies worldwide, including MasterCard, VISA, American Express, Discover, Diners Club, Quaker State and Eli Lilly, as well as agencies of the United States government and certain foreign governments. We also produce non-secure holograms for design 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:

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our reputation as a quality supplier of secure holograms with over 20 years of experience in the industry,



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our expertise in holographic technology and production techniques,



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



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our ISO 9001:2000 certified manufacturing facilities, which allow us to mass produce high-quality holograms in a secure environment.

The Holography Industry

        A hologram is a unique type of image that is created through the diffraction of light at pre-determined angles to create various visual effects. Holograms are created with special laser configurations and do not use ink, so that a holographic image is readily distinguishable from a traditionally printed or copied image. When a hologram is viewed from different angles, the viewer is able to see features such as depth and movement, which is not typically possible in normal two-dimensional photographs. Holograms can also include information that is detectable only with the aid of special devices.

        The holography industry is divided into two main sectors: security and non-security.

Security

        The security sector of the holographic industry includes products that protect and authenticate transaction cards, documents of value, consumer and industrial products and identification cards. Using holography, each customer can develop its own unique hologram with which to identify and protect its product. Holograms provide the following major benefits as security devices:

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difficult to copy—holograms cannot be copied with conventional copying equipment such as color copiers or scanners. The unique properties and high resolution of a security hologram make it extremely difficult to replicate even with specialized equipment and expertise.

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•

overt features—the unique visual aspects of a hologram are easily recognizable, making authentication of products and documents practical for the general public without special machinery, equipment or training. Overt features that we offer include:



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3-D Imagery—an image that has three dimensions and gives the illusion of depth or varying distances.



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TrueColor- a holographic image that gives the illusion of color.



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Parallax—images created on different planes that move in relation to one another when viewed from different angles.



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Secondary Flip Image—an image that appears and disappears when viewed at certain angles.



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Diffractive Mercurial—a bright, sharp, color shifting two-dimensional image.



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Animation—a two or three-dimensional image that gives the illusion of motion.



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covert features—hidden features that can only be detected with high-powered microscopes or specialized readers can be incorporated into a hologram to make it more difficult to counterfeit and support forensic investigation. Covert features that we offer include:



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Hidden Latent Image—a hidden element within a holographic image that is machine-readable only with a proprietary reader.



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HoloScan™—a hidden machine readable code within a holographic image that can only be viewed with a proprietary reader.



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Micro Imagery—text or a logo within a holographic image that is visible only under magnification.



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Nano Imagery—microscopic text or a logo within a holographic image that is visible only with high-powered magnification.



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physical features—features that can be combined with holographic materials to increase the security of the holographic product. Physical features that we offer include:



•

Micro-demetallization—a feature whereby a designed portion of the vacuum deposited aluminum materials are removed from the holographic film to create additional unique aesthetic features that can be used to differentiate and authenticate the materials. This can be used to create see through screens, additional micro text in the metallization layer, and images that are only visible under magnification.



•

Tamper Apparent—an invisible feature which when combined with the holographic image will act as a self destructive layer and produce a predictable release pattern. This release pattern can be custom or generic.



•

Taggants—unique features which are added during the manufacturing process to the holographic films or coatings that are verifiable by specialized equipment.

        The security sector of the holographic industry addresses concerns about counterfeiting, diversion, tampering and fraud. The cost of the hologram is generally relatively small compared to the value of the item being protected and the risk of loss. Consequently, customers typically select suppliers primarily based on the effectiveness of their security solutions, quality, reliability and price.

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        Our primary emphasis for our research, product development, marketing and sales activities is focused on the security sector of the holographic industry. We offer a diverse set of security, authentication and design features. Based on customer specific needs and applications, we can combine these techniques creating a unique set of effects in a well-constructed and effective holographic security product.

Non-Security

        The non-security sector of the holographic industry includes design, packaging and other decorative applications.

        The unique visual appeal of holograms makes them attractive for use on consumer products. Holograms are used to enhance the design of a wide variety of products including greeting cards, decorative clothing, point-of-purchase displays, and for other promotional uses. Holograms are also used for packaging of food and other products. These holograms are generally used on consumer product packaging for their eye-catching appeal, including packaging for candy, beer, toothpaste, soft drinks and other consumer products. Non-secure holograms are generally not as complex, secure or proprietary as security holograms. Since there are more companies capable of producing non-secure holograms than there are qualified to produce security holograms, the competition is more intense in the non-security sector, and the margins are typically lower than in the security market. Customers in the non-security sector of the holographic industry typically distinguish between suppliers primarily based upon price, quality and production capacity.

Markets and Products

        We have five target markets, and we market various products to meet the needs of these markets:

        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, holograms have been established as an important fraud prevention device on credit cards and other transaction cards. They are also commonly used to enhance the brand image of a transaction card issuer. Our products include:

        Holographic Hot-Stamp Foil.    Our largest source of revenue since our inception has been security holograms embossed into hot-stamp foil, for credit card authentication. Holographic hot-stamp foil can also enhance the design and branding of a card. Our customers in this market include the issuers or printers of MasterCard, Visa, American Express, Discover and Diners Club cards.

        HoloCard™.    HoloCard incorporates a hologram on a card's entire face, creating a customized marketing tool and a counterfeit deterrent. A full-faced hologram can support brand recognition, product enhancement campaigns, customer retention and overall product differentiation efforts.

        HoloMag™.    ABNH's patented technology for combining a hologram with the magnetic stripe on a card. HoloMag not only enables efficient utilization of real estate on the card with attractive imagery on the magnetic stripe, but it significantly enhances card security. Multiple levels of security plus distinct visual recognition make this device a very effective tool against card skimming and counterfeiting.

        Documents of Value.    Concerns over counterfeiting and copying have led to an increased use of holograms on documents of value, including currency, checks, gift certificates, stamps, tickets and other financial instruments. Holographic products for paper documents of value include:

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        Holographic Thread.    A holographic thread is a security device made up of a narrow-strip hologram, approximately 2-5 millimeters wide, and is typically incorporated into the paper substrate at the security paper mill. The hologram is often partially embedded into the paper creating a window or serpentine-thread. This holographic product offers both visual and covert security features and helps raise the recognition and perceived value of the document it is embedded into. We produce holographic material for security threads with our proprietary process, which we believe provides significant advantages for brighter and more durable holographic threads compared to other methods of holographic replication.

        Holographic Ribbons.    A holographic ribbon is an anti-counterfeiting device that can be used on documents of value such as checks and currency. The system is comprised of a narrow strip hologram made of hot-stamp foil and slit into ribbons that are applied on security paper by either the paper maker or the printer.

        Holographic Patch.    A holographic patch is created by embossing a hologram into hot-stamp foil, and is used for authenticating currency and other secure documents. It is machine applied for registered placement and quality. Depending on the design of the document, patches can be created to meet specific size, shape, creative and security requirements. A holographic patch is applied with heat and pressure forming a distinctly recognizable, security component of the document.

        Product Authentication and Security Packaging.    The use of holograms for product authentication and security packaging 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 are used as authentication devices in, among others, pharmaceuticals, licensed consumer products and high value consumer and industrial products. 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. Our products for this market segment include:

        Holographic Labels.    Our pressure-sensitive label is available with a broad array of authenticating features such as demetallizing, latent imagery, machine readability and other overt and covert features. By combining multiple security techniques, we achieve higher levels of security and make the entire product or package easier to authenticate and difficult to simulate.

        HoloSeal™.    HoloSeal integrates several key security features into one innovative device. A high security hologram, customized tamper-apparent break pattern, black light verification system and machine-readable embedded code are all features of this security label. In addition, HoloSeal can be manufactured to be transparent or semi-transparent so that printed regulatory or marketing copy can be seen through the hologram.

        HoloGard™.    HoloGard is ABNH's innovative approach to sealing bottles or containers with a higher level of security. Utilizing an induction seal process, this application provides for authentication, tamper-resistance and branding. A holographic layer becomes part of the seal itself. HoloGard can be combined with other security features to create an effective approach for the security needs of a wide range of sealed products.

        HoloSleeve™.    HoloSleeve is a heat-shrink seal with an integrated holographic stripe that can be applied to the lids of bottles to deter product fraud and tampering. By including overt and covert security features within the hologram, a customized tamper-apparent break pattern and an embedded black light verification system, HoloSleeve provides manufacturers of bottled goods with a tool to combat criminals that, at the same time, can be easily integrated into a customer's existing manufacturing operations.

        Transparent Laminates for Identification Documents.    We provide secure holographic laminates for applications such as ID cards, passports, military ID's and drivers' licenses. We have patents on demetallized holograms which are transparent and used to see printed information under the holograms.

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        We believe there are significant security advantages for demetallized holograms used on ID cards and passports. We currently supply transparent laminates for certain U.S. government ID cards as well as national IDs for certain foreign countries. We believe there is a need to improve the security of certain ID cards and passports and we are proposing security holograms as a component of the security enhancements that are being considered by major issuers of identification documents.

        Commercial.    We also produce holographic imagery for decorative and promotional purposes. Our products for this market include pressure sensitive labels with a rich array of designs and wide web holographic patterns for flexible packaging applications.

Strategy

        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, Diners Club, Discover, American Express and many of the major security card manufacturers. We intend to maintain our leadership position in the card industry and grow through excellent customer service and the distribution of new products that address the security needs and design objectives of this market.

        Focus Sales and Marketing.    We have narrowed the focus of our sales and marketing efforts to those specific applications within our target markets in which we can establish and sustain competitive advantages through a combination of product differentiation, intellectual property and market position.

        Protect and Leverage Our Intellectual Property Position.    We intend to continue to protect our intellectual property and leverage our intellectual property rights.

        Broaden and Enhance Our Security Offerings.    We are developing better security solutions for our target markets which incorporate innovative applications of holography and other complimentary technologies.

        Control Costs.    We intend to prudently manage our expenses to strengthen our competitive position and enhance margins.

        Strengthen Operational Capabilities.    We intend to invest in enhancing our production and operational capabilities to improve the products and services we provide to our customers and gain operational efficiencies.

        Grow through Strategic Partnerships.    We have a strategic partnership with Crane & Co. and we intend to continue pursuing strategic partnerships or acquisitions that could provide operating synergies or access to new customers or technologies.

Production Process

        We are one of the most experienced security production companies in the holographic industry. We have ISO certified security production facilities containing a total of nine origination laboratories and twenty 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 or customer orders to third parties. The production process consists of the following steps:

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Design

        The first step of the production process is the design of the hologram. In our 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 disc, three-dimensional sculpture, flat art, etc., referred to as "information") are delivered to one of our 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.

        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 effects. 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 believe that our largest competitors in the security sector may use similar processes among others.

Plate Making

        Once the origination process is completed, a plate is created in order to permit mass production. The "one-up" 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 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 typically enter into production planning with the customer where drawings and overall specifications are written and distributed to the various production and quality control departments.

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        We employ three 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. Soft or compliant embossing permits embossing into pre-metallized films, as well as, certain metallized films and also allows for embossing on wider-web materials.

        The other method of production is casting. We developed a proprietary casting method, which we refer to as In-Situ Polymeric Replication. 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 each of these methods may include some combination of metallization, demetallization, application of adhesive, slitting, die-cutting, lamination and custom numbering. The completed holographic material may then be applied to the customer's product.

        We perform the above processes through a combination of our internal production resources and outside subcontractors.

Quality

        Through the ISO 9001:2000 certification program, we continually make improvements to our processes through the use of an effective and efficient business management system.

        Our manufacturing facilities located in Elmsford, New York and Huntingdon Valley, Pennsylvania are ISO certified.

        Our manufacturing facility located in Elmsford, New York includes our art department, origination labs, plate making and replication and maintains the ISO 9001:2000 standard covering quality assurance for design, development and production.

        Our manufacturing facility located in Huntingdon Valley, Pennsylvania maintains ISO 9001:2000 certification covering quality assurance for production.

Information Technology

        We implemented an integrated enterprise resource planning system starting in 2000 that provides more comprehensive information for management decision making. We made improvements to this system in 2003 and we intend to make further improvements in 2004.

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 research and development has enabled us to create new technologies and proprietary production processes and to deliver innovative products to the marketplace. We intend to continue to make on-going investments in research and development in order to:

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Develop better solutions for our customers' problems.



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Create features which differentiate our products from those of our competitors.



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Develop and improve processing techniques to improve the quality and reduce the costs of our products.

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Manufacturing Facilities

        See "Item 2. Properties."

Sales and Marketing

        In 2003, we provided holographic products to over 150 customers worldwide. We are the exclusive supplier of holograms to MasterCard and we are one of 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, Eli Lilly, Quaker State, agencies of the United States government, foreign governments and numerous other companies.

        In the sales department we currently employ a Vice President of Sales, a Vice President of Corporate Development, four full-time, incentive-compensated salespeople and two customer sales service personnel. We also utilize incentive-based international sales agents around the world.

        Our sales process generally involves identifying a customer problem, designing a solution for the customer problem, creating samples for customer evaluation and testing. Most of our target customers are credit card issuers, government agencies and large corporations that are experiencing counterfeiting or other security problems. The sales process is generally at least three months, and in some cases, the sales process can last several years.

        Pricing decisions are generally made centrally by our operating executives. We focus some of our marketing efforts on trade shows such as the International Card Manufacturers Association trade show, the Card Tech/SecureTech trade show, Intergraph, Cartes and Interphex.

Competition

        The holographic industry is highly competitive and highly fragmented. A number of our competitors are larger, and have greater financial resources, than us. The industry has become increasingly competitive over the past several years as low cost foreign producers have entered our target markets, and low cost holographic producers that previously focused on non-security applications are increasingly competing in security applications. The holographic industry has also experienced consolidation, which has increased the breadth and scale of some of our competitors. In the holographic industry, competition is generally based on technology, price, product quality and customer service. We also compete with other non-holographic methods or devices.

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 30 U.S. patents and numerous foreign patents, as well as patents pending and service marks that are used in our business.

        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 U.S. 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.

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Employees

        As of March 12, 2004, we employed approximately 100 persons of which 55 are covered by collective bargaining agreements. We consider our relations with our employees to be good. We are party to collective bargaining agreements with Paper, Allied-Industrial, Chemical & Energy Workers International Union Local 1-0318 ("Local 1-0318") and PACE International Union Local 286 ("Local 286"). The agreement with Local 1-0318 has a three-year term, will expire on December 31, 2006 and covers 22 employees. The agreement with Local 286 has a five-year term, will expire on January 28, 2005, and covers 33 employees.

Available Information

        Our investor relations website is accessable through www.abnh.com. We make available on this website under the caption "Investor Relations (SEC Filings)" free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file or submit such materials to the Securities and Exchange Commission.

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 our business and us because these 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 10-K.

        Our quarterly and annual operating results may fluctuate and the price of our common stock may change in response to those fluctuations.

        Our quarterly and annual operating results have varied in the past and may vary significantly in the future depending on factors such as:

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timing of customer orders,



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customer business cycles,



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card expiration patterns,



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inventory replenishment,



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increased competition,



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changes in our and our competitors' pricing policies,



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patent expiration and fluctuating amounts of royalty income,



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changes in the cost of materials or labor,



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cost and availability of the services of subcontractors,



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costs of recruiting or relocating personnel,



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increased research and development expenses,



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expenses associated with litigation,



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financing costs,



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market acceptance of our products,



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the time required for customer testing and evaluation,

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•

costs associated with implementing changes in operations,



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investments in new technology and equipment,



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changes in facility requirements,



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changes in our business strategy, and



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general economic factors.

        Because our revenues and operating results may fluctuate, it is possible that in some future quarter, our revenues or operating results will be below the expectations of public market analysts and investors, which could cause our stock price to decrease.

        We depend on sales to credit card manufacturers for a substantial portion of our business, the loss of which would significantly reduce our revenues.

        Sales to credit card companies accounted for approximately 77% of our total sales in 2003 and 82% of our total sales in 2002. Sales to MasterCard and approved manufacturers of VISA brand credit cards together accounted for approximately 63% of our total sales in 2003 and 67% of our total sales in 2002. We entered into an agreement with MasterCard dated February 28, 2003, which replaced the agreement dated February 1, 1996, as amended. We entered into an amendment to this agreement on September 29, 2003, in which MasterCard retained us to produce a new hologram for the Debit MasterCard and extended the agreement to February 2011, subject to automatic renewal if not terminated by either party.    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 if we were to lose a substantial portion of our business with either of these entities our business, operating results and financial condition would be materially and adversely affected. In addition, if we fail to obtain anticipated orders from these customers or if we experience delays or cancellations of orders from these customers, our business and financial performance will be materially and adversely affected.

        We are in a competitive, highly-fragmented industry with many companies competing to deliver a highly-specialized product, which may lead to declining sales or reduced prices for our products.

        The holography industry is highly competitive. A number of our competitors are larger than us or are divisions of larger companies, and have greater financial resources, than us. 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. The industry has become increasingly competitive over the past several years as low cost foreign producers have entered our target markets, and low cost holographic producers that previously focused on non-security applications are increasingly competing in security applications. Increasing competition in the market for our security holograms has resulted in declining sales prices for these products over the past several years and sales prices are continuing to decline. Competitive pressures may force us to reduce prices, which can adversely affect our results of operations.

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

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price,



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technology,



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product quality, and



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customer service.

        In addition, an increased use of non-holographic methods or devices in place of our products could reduce demand for our products. We cannot assure you that we will have sufficient resources to make the technological advances necessary to maintain any competitive advantages. We also cannot assure you that the bases of competition in the industries in which we compete will not shift.

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        If we are not able to successfully protect our intellectual property our business could be materially and adversely affected.

        Our business is dependent upon our proprietary technology. 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. Certain of our patents have expired and others have been declared invalid in the past. Other patents will expire over the next several years. The expiration of patents has resulted in our royalty income decreasing materially in 2003. We can not assure you 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. 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.

        If our products infringe on the intellectual property rights of third-parties, our business may suffer if we are sued for infringement or cannot obtain licenses to these rights on commercially acceptable terms.

        We are subject to the risk of adverse claims and litigation alleging infringement by us of the intellectual property rights of others. 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 cause 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 material adverse effect on our business and financial condition.

        We depend on third-party suppliers and subcontractors for some key product components and processes, and we may not be able to find alternative sources in a timely manner if those suppliers or subcontractors fail to supply us.

        We purchase certain key materials used in the manufacture of our holograms and outsource certain key processes from third-party suppliers, some of which are sole source relationships, with whom we do not have supply contracts. We may not be able to find alternative sources in a timely manner if our suppliers or subcontractors become unwilling or unable to supply us, or if they increase their prices. Our inability to obtain key product components or to have certain processes performed on our behalf could cause delays or reduce product shipments, which could cause our relationship with customers to suffer and materially and adversely affect our financial condition, results of operations and cash flows.

        Our common stock trades on the OTC Bulletin Board, which may adversely affect the price of our common stock.

        Our common stock trades on the over-the-counter bulletin board (OTCBB), an electronic quotation service. Our current stock price does not meet the minimum stock price requirement of any major stock exchange or NASDAQ. The OTCBB does not impose listing standards or requirements, does not provide automatic trade executions and does not maintain relationships with quoted issuers. Stocks traded on the OTCBB may experience:

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a loss of market makers,



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a lack of readily available bid and ask prices,



•

a greater spread between the bid and ask prices of its stock, and



•

a general loss of liquidity compared to established stock exchanges or the NASDAQ National Market.

        In addition, many investors have policies against purchasing or holding OTCBB securities. Both trading volume and the market value of our stock have been, and will continue to be, affected by trading on the OTCBB, which may adversely affect the price of our stock and make it difficult for our stockholders to resell their shares.

        If we were unable to continue to attract and retain qualified employees, our business, operating results and financial condition could be materially and adversely affected.

        Our future success depends on our ability to attract and retain qualified:

•

management,



•

engineering,



•

manufacturing,



•

research and development,



•

sales and marketing, and



•

support personnel.

        Competition for these individuals is intense, and we cannot assure you that we will be able to retain our existing personnel or attract and retain additional personnel.

        Our former parent company, American Banknote Corporation ("ABN" or the "Former Parent"), has experienced financial difficulty and we may have risks associated with ABN's inability to perform under the terms of its agreement with us.

        During 2000, we reached an agreement with ABN which provided, among other things, for ABN to be responsible for and pay all asserted and unasserted income, franchise or similar tax liabilities of ours for the period January 1, 1990 through July 20, 1998 and indemnify us with respect to any such liabilities. ABN has experienced financial difficulty in the past and if ABN continues to experience financial difficulty, it may result in its inability to perform under the terms of the agreement with us which could have a material adverse effect on our financial position, results of operations and cash flows.

        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.

        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.

        Sales derived from customers outside the United States were 28% of our total sales in 2003 and 27% of our total sales in 2002. Our international sales are subject to risks, including:

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•

U.S. and international regulatory requirements and policy changes,



•

exchange rate fluctuations,



•

political and economic instability,



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difficulties in accounts receivable collection,



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tariffs and other barriers, and



•

difficulty in attracting, retaining and managing international representatives.

        These factors may have a material adverse effect on our future international sales and, consequently our business, financial condition or 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. To the 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.

        The issuance of shares of our common stock upon exercise of outstanding options, together with the potential sales of such shares in the public market, could result in substantial dilution of your investment, a detrimental effect on our liquidity and ability to raise additional capital, and a significant decline in the market value of our common stock.

        As of March 12, 2004, we had approximately 18,483,720 shares of our common stock issued and outstanding and 2,838,500 additional shares of common stock reserved for issuance upon exercise of outstanding stock options. If the holders of shares of common stock acquired upon the exercise of outstanding options were to sell a significant amount of their shares into the open market, the market price of our common stock could be adversely affected. The sales might also make it more difficult for us to sell equity or equity-related securities in the future at a price we deem appropriate.

        Crane & Co. Inc. has certain rights which could adversely affect the market price of our common stock.

        On June 30, 2000, we entered into a stock purchase agreement with Crane & Co., Inc. ("Crane") under which Crane purchased 3,387,720 shares of our common stock. In connection with the transaction, Crane received the right to cause us to register its shares for public resale and to include its shares in any future registration of our securities, subject to certain exceptions. Any sales of such shares by Crane could have a negative effect on the market price of our common stock.

        Our principal stockholders, executive officers and directors have substantial influence over all matters requiring stockholder approval, including a change of control that you might otherwise approve.

        Our executive officers and directors and entities related to them, in the aggregate, beneficially own approximately 24.0% of our common stock as of March 12, 2004, which includes 18.4% owned by Crane & Co., Inc., an investor related to Douglas A. Crane, one of our directors. These stockholders acting together have the ability to exert substantial influence over all matters requiring approval by our stockholders. These matters include the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. Such a concentration of ownership could have the effect of delaying, deferring or preventing a change in control, or impeding a merger or consolidation, takeover or other business combination.

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Effects of anti-takeover provisions could inhibit the acquisition of ABNH.

        Our certificate of incorporation permits our board of directors to issue up to 5,000,000 shares of preferred stock and 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:

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discouraging potential acquisitions proposals,



•

delaying or preventing a change in control, and



•

limiting the price that investors might be willing to pay in the future for shares of our common stock.

        We are also subject to Section 203 of the Delaware General Corporation Law which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder.

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Item 2. PROPERTIES.

        We maintain secure hologram manufacturing facilities in Elmsford, New York, Huntingdon Valley, Pennsylvania and Dalton, Massachusetts. 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 leased 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 production of numerous holographic products. Our origination facilities include nine laser laboratories. This lease expires in December 2007.

        Our 30,000 square foot leased facility at Huntingdon Valley, Pennsylvania is dedicated to the production of security holograms. This lease expires in July 2007.

        Our 2,400 square foot leased facility at Dalton, Massachusetts was opened in 2000 and is also dedicated to the production of security holograms. The lease, which is for successive one year periods ending on October 31, automatically renews unless 120 days advance notice is given by either party not to renew.

        Each facility is constantly monitored for security, and has uniformed security personnel on site, 24 hours a day, seven days a week. Our Director of Security is responsible for the physical security of each facility, 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.

        During 1991, we entered into a Patent License Agreement (the "License Agreement"), which required us to pay royalties in connection with certain products that we produce. During 2002, the licensor under the License Agreement filed a lawsuit against us in the United States District Court for the Eastern District of Washington, alleging breach of the License Agreement. In December 2002, we entered into a settlement agreement whereby we paid $431,250 on December 31, 2002. The payment satisfied all obligations to pay royalties that may have been owed both for the past and the future under the License Agreement. In 2002, we recorded $231,250 as royalty expense in the accompanying statements of operations to cover all allegedly past due royalties and $200,000 will be amortized over the remaining life of the patents which expire in 2005 and 2007.

        We currently, and from time to time, are involved in litigation (as both plaintiff and defendant) incidental to the conduct of our business; however, 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, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

        Our common stock has been quoted on the NASD's Over-the-Counter Bulletin Board quotation service under the symbol "ABHH," since March 31, 2000. Our securities are not listed or quoted on any exchange or other quotation system.

        The following table sets forth the high and low closing prices of our common stock for each quarter of 2002, 2003 and the first two months of 2004.

        Warrants to purchase our common stock were quoted on the NASD's Over-the-Counter Bulletin Board quotation service from August 27, 2002 to June 18, 2003, the date the warrants expired. During 2002, the warrants had high and low closing prices of $0.05 and $0.01, respectively, during the third quarter and a high and low closing price of $0.01 during the fourth quarter. During 2003, the warrants had high and low closing prices of $0.03 and $0.01, respectively, during the first quarter and high and low closing prices of $0.01 and $0.001, respectively, during the period ended June 18, 2003.

        As of March 12, 2004, there were approximately 499 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.

        We have not paid cash dividends during the past two fiscal years. We have no plans or intentions of paying dividends in the foreseeable future.

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Item 6. SELECTED FINANCIAL DATA.

(a)

Sales have been adjusted from 1999 through 2000 to reflect the reclassification of shipping charges billed to customers, which were previously netted in selling and administrative expenses.

(b)

During the year ended December 31, 1999, we incurred costs of $3.5 million, net of $0.6 million of insurance reimbursements, in connection with the audit committee investigation and related restatement efforts and defense of litigation. Also, during 1999, we determined that we would not establish our own post-retirement health care plan and reversed a $404,000 accrued liability in this

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