**SECURITIESAND EXCHANGE COMMISSION**

 

**Washington,DC 20549**

 

**FORM 10-Q**

 
| **ý** |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**                                                                                    |
|------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                  |
|       |   | **For the quarterly period ended March 31, 2004**                                                                                                                                |
|       |   |                                                                                                                                                                                  |
| **OR**     |
|       |   |                                                                                                                                                                                  |
| **o**      |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**                                                                                   |
|       |   |                                                                                                                                                                                  |
|       |   | **For the transition period  from            to            ** |

 

**CommissionFile Number 1-14227**

 

**AMERICANBANK NOTE HOLOGRAPHICS, INC.**

 

(Exact name of Registrant asspecified in its charter)

 

| **Delaware**                                                     |   | **13-3317668**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation  or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |   |                                  |
| **399 Executive Boulevard  Elmsford, New York, 10523**           |
| (Address of principal executive offices,  including zip code)    |
|                                                             |   |                                  |
| **(914) 592-2355**                                               |
| (Registrant’s telephone number, including  area code)       |

 

**Not applicable**

(Former name, former address and formerfiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports) and (2) has been subject to suchfiling for the past 90 days.

 

ý Yes oNo

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

 

o Yes ýNo

 

The aggregate number of shares of common stock, $.01 par value,outstanding on May 5, 2004 was 18,483,720.

 

 

----

 

**AMERICANBANK NOTE HOLOGRAPHICS, INC.**

 

**FORM10-Q**

 

## **INDEX**

 
|                                                                                                 | Page No.                                                                                               |
|------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------|
| PART I - FINANCIAL INFORMATION                                                                       |                                                                                                   |
|                                                                                                 |                                                                                                   |
| Item 1. Financial Statements                                                                         |                                                                                                   |
|                                                                                                 |                                                                                                   |
|                                                                                                 | Condensed Balance Sheets as of  March 31, 2004 (Unaudited) and December 31, 2003             | 3 |
|                                                                                                 |                                                                                                   |
|                                                                                                 | Unaudited Condensed Statements of  Operations  For the Three Months Ended March 31, 2004 and 2003 | 4 |
|                                                                                                 |                                                                                                   |
|                                                                                                 | Unaudited Condensed Statements of Cash  Flows  For the Three Months Ended March 31, 2004 and 2003 | 5 |
|                                                                                                 |                                                                                                   |
|                                                                                                 | Notes to Unaudited Condensed Financial  Statements                                                     | 6 |
|                                                                                                 |                                                                                                   |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations | 9                                                                                                      |
|                                                                                                 |                                                                                                   |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                  | 11                                                                                                     |
|                                                                                                 |                                                                                                   |
| Item 4.  Controls and Procedures                                                                     | 11                                                                                                     |
|                                                                                                 |                                                                                                   |
| PART II - OTHER INFORMATION                                                                          |                                                                                                   |
|                                                                                                 |                                                                                                   |
| Item 1.  Legal Proceedings                                                                           | 12                                                                                                     |
|                                                                                                 | 12                                                                                                     |
| Item 6.  Exhibits and Reports on Form 8-K                                                            |                                                                                                   |

 

2

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PART I -FINANCIAL INFORMATION

 

ITEM I.FINANCIAL STATEMENTS

 

AMERICAN BANK NOTE HOLOGRAPHICS, INC.

CONDENSEDBALANCE SHEETS

(In thousands, except share data)

 
|                                                                                                                     |   | **March 31,  2004** |       | **December 31,  2003** |       |
|--------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|------------|-----------------------------|------------|
|                                                                                                                     |   | **(Unaudited)**          |       | **(Note A)**                |       |
| ASSETS                                                                                                                   |   |                     | ** ** |                        | ** ** |
| Current Assets:                                                                                                          |   |                     |       |                        |       |
| Cash and cash equivalents                                                                                                |   | $                        | 11,843     |                        | $          | 11,341 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $180                                                     |   | 3,292                    |       | 3,174                       |       |
| Inventories                                                                                                              |   | 2,342                    |       | 2,386                       |       |
| Deferred income taxes                                                                                                    |   | 961                      |       | 981                         |       |
| Prepaid expenses                                                                                                         |   | 285                      |       | 385                         |       |
| Other                                                                                                                    |   | 75                       |       | 150                         |       |
| Total  current assets                                                                                                    |   | 18,798                   |       | 18,417                      |       |
| Machinery, equipment and leasehold  improvements, net of accumulated depreciation and amortization of $9,397 and  $9,238 |   | 2,499                    |       | 2,490                       |       |
| Other assets                                                                                                             |   | 100                      |       | 113                         |       |
|                                                                                                                     |   |                     |       |                        |       |
| Total Assets                                                                                                             |   | $                        | 21,397     |                        | $          | 21,020 |   |
|                                                                                                                     |   |                     |       |                        |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                |   |                     |       |                        |       |
| Current Liabilities:                                                                                                     |   |                     |       |                        |       |
| Accounts payable                                                                                                         |   | $                        | 581        |                        | $          | 687 |   |
| Accrued expenses                                                                                                         |   | 1,488                    |       | 1,627                       |       |
| Customer advances                                                                                                        |   | 52                       |       | 49                          |       |
| Income taxes payable                                                                                                     |   | 185                      |       | —                      |       |
| Total current liabilities                                                                                                |   | 2,306                    |       | 2,363                       |       |
| Deferred income taxes                                                                                                    |   | 1,240                    |       | 1,208                       |       |
|                                                                                                                     |   |                     |       |                        |       |
| Total liabilities                                                                                                        |   | 3,546                    |       | 3,571                       |       |
|                                                                                                                     |   |                     |       |                        |       |
| Commitments and contingencies                                                                                            |   |                     |       |                        |       |
|                                                                                                                     |   |                     |       |                        |       |
| Stockholders’ Equity:                                                                                               |   |                     |       |                        |       |
| Preferred stock, authorized 5,000,000  shares; no shares issued or outstanding                                           |   | —                   |       | —                      |       |
| Common stock, par value $.01 per share,  authorized 40,000,000 shares; issued and outstanding 18,483,720 shares          |   | 185                      |       | 185                         |       |
| Additional paid-in capital                                                                                               |   | 23,994                   |       | 23,994                      |       |
| Accumulated deficit                                                                                                      |   | (6,328                   | )          | (6,730                      | )          |
| Total Stockholders’ Equity                                                                                          |   | 17,851                   |       | 17,449                      |       |
|                                                                                                                     |   |                     |       |                        |       |
| Total Liabilities and Stockholders’ Equity                                                                          |   | $                        | 21,397     |                        | $          | 21,020 |   |

 

See Notes to Unaudited Condensed FinancialStatements.

 

3

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AMERICAN BANK NOTE HOLOGRAPHICS, INC.

CONDENSEDSTATEMENTS OF OPERATIONS - UNAUDITED

(In thousands, except per share data)

 
|                                     |   | **Three  Months Ended  March 31,** |       |
|------------------------------------------|--------|-----------------------------------------|------------|
|                                     |   | **2004**                                |       | **2003** |   |
| Revenue:                                 |   |                                    | ** ** |   | ** ** |
| Sales                                    |   | $                                       | 5,034      |   | $ | 4,538 |   |
| Royalty income                           |   | 10                                      |       | 44 |   |
|                                     |   | 5,044                                   |       | 4,582 |   |
| Costs and expenses:                      |   |                                    |       |   |   |
| Cost of goods sold                       |   | 2,270                                   |       | 2,016 |   |
| Selling and administrative               |   | 1,683                                   |       | 1,763 |   |
| Research and development                 |   | 283                                     |       | 268 |   |
| Depreciation and amortization            |   | 160                                     |       | 179 |   |
|                                     |   | 4,396                                   |       | 4,226 |   |
|                                     |   |                                    |       |   |   |
| Operating income                         |   | 648                                     |       | 356 |   |
|                                     |   |                                    |       |   |   |
| Interest income                          |   | 23                                      |       | 25 |   |
|                                     |   |                                    |       |   |   |
| Income before provision for income taxes |   | 671                                     |       | 381 |   |
| Provision for income taxes               |   | 269                                     |       | 162 |   |
|                                     |   |                                    |       |   |   |
| Net income                               |   | $                                       | 402        |   | $ | 219 |   |
|                                     |   |                                    |       |   |   |
| Net income per share:                    |   |                                    |       |   |   |
| Basic and diluted                        |   | $                                       | 0.02       |   | $ | 0.01 |   |

 

See Notes to Unaudited Condensed FinancialStatements.

 

4

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AMERICAN BANK NOTE HOLOGRAPHICS, INC.

CONDENSEDSTATEMENTS OF CASH FLOWS - UNAUDITED

(In thousands)

 
|                                                                               |   | **Three  Months Ended  March 31,** |       |
|------------------------------------------------------------------------------------|--------|-----------------------------------------|------------|
|                                                                               |   | **2004**                                |       | **2003** |   |
|                                                                               |   |                                    | ** ** |   | ** ** |
| Cash flows from operating activities:                                              |   |                                    | ** ** |   | ** ** |
| Net income                                                                         |   | $                                       | 402        |   | $ | 219 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                                    |       |   |   |
| Depreciation and amortization                                                      |   | 160                                     |       | 179 |   |
| Deferred income taxes                                                              |   | 52                                      |       | 162 |   |
| Changes in operating assets and liabilities:                                       |   |                                    |       |   |   |
| Accounts receivable                                                                |   | (118                                    | )          | 769 |   |
| Inventories                                                                        |   | 44                                      |       | (29 | ) |
| Prepaid expenses and other                                                         |   | 187                                     |       | 298 |   |
| Accounts payable and accrued expenses                                              |   | (245                                    | )          | (616 | ) |
| Customer advances                                                                  |   | 3                                       |       | (16 | ) |
| Income taxes payable                                                               |   | 185                                     |       | — |   |
|                                                                               |   |                                    |       |   |   |
| Net cash provided by operating activities                                          |   | 670                                     |       | 966 |   |
|                                                                               |   |                                    |       |   |   |
| Cash flows from investing activities:                                              |   |                                    |       |   |   |
| Capital expenditures                                                               |   | (168                                    | )          | (128 | ) |
|                                                                               |   |                                    |       |   |   |
| Net cash used in investing activities                                              |   | (168                                    | )          | (128 | ) |
|                                                                               |   |                                    |       |   |   |
| Increase in cash and cash equivalents                                              |   | 502                                     |       | 838 |   |
| Cash and cash equivalents, beginning of  period                                    |   | 11,341                                  |       | 8,659 |   |
|                                                                               |   |                                    |       |   |   |
| Cash and cash equivalents, end of period                                           |   | $                                       | 11,843     |   | $ | 9,497 |   |
|                                                                               |   |                                    |       |   |   |
| Supplemental cash payments:                                                        |   |                                    |       |   |   |
| Taxes                                                                              |   | $                                       | 11         |   | $ | 5 |   |

 

See Notes to Unaudited Condensed Financial Statements.

 

5

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AMERICAN BANK NOTE HOLOGRAPHICS, INC.

NOTES TOUNAUDITED CONDENSED FINANCIAL STATEMENTS

 

NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES

 

American Bank Note Holographics, Inc. (the “Company”) originates,mass-produces, and markets secure holograms. Holograms are used for security,packaging and promotional applications. The Company operates in one reportableindustry segment.

 

The accompanying unaudited condensed financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States for interim financial information and with the instructions toForm 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates for complete financial statements. In the opinion of management, alladjustments (consisting of normal recurring accruals) considered necessary fora fair presentation have been included. Operating results for the three monthsended March 31, 2004 are not necessarily indicative of the results thatmay be expected for the year ending December 31, 2004.

 

The balance sheet at December 31, 2003 has been derived from theaudited financial statements at that date but does not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.

 

For further information, refer to the financial statements andfootnotes thereto included in the Company’s annual report on Form 10-K for theyear ended December 31, 2003, as filed with the United States Securitiesand Exchange Commission.

 

REVENUE RECOGNITION

 

The Company recognizes revenue in accordance with the provisions of theSecurities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin (“SAB”)No. 104, “Revenue Recognition (an amendment of SAB 101, “RevenueRecognition”).”  Specifically, sales andthe related cost of goods sold are generally recognized at the latter of thetime of shipment or when title passes to customers. In some situations, theCompany has shipped product where the sale is contingent upon the customers’use of the product. In these situations, the Company does not recognize salesupon product shipment, but rather when the buyer of the product informs theCompany that the product has been used. Additionally, pursuant to terms with a certain customer, completed itemsare stored on behalf of the customer at the Company’s on-site secured facilityand, in that instance, sales are recognized when all of the following haveoccurred: the customer has ordered the goods, the manufacturing process iscomplete, the goods have been transferred to the on-site secured facility andare ready for shipment, the risk of ownership has passed to the customer andthe customer has been billed for the order.

 

Customer advances represent payments received from customers forproducts which have not yet been shipped. These customer advances are classified as current liabilities on theaccompanying balance sheets.

 

Shipping and handling amounts billed to customers are included in salesand amounted to $108,000 and $75,000 for the three months ended March 31,2004 and 2003, respectively.  Shippingand handling costs are included in selling and administrative expenses.

 

BASIC AND DILUTED NET INCOME PER SHARE

 

Basic net income per share is computed based on the weighted averagenumber of outstanding shares of common stock. The basic weighted average numberof shares outstanding were 18,483,720 in each of the three months endedMarch 31, 2004 and 2003. Diluted net income per share is computed bydividing net income by the weighted average number of shares of common stock outstandingand dilutive potential shares of common stock. For the three months endedMarch 31, 2004 and 2003, the diluted number of weighted average sharesoutstanding was 18,871,948 and 18,484,071, respectively, which includesdilutive stock options of 388,228 shares and 351 shares, respectively.

 

6

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BUSINESS INFORMATION

 

Sales toMasterCard were approximately 35% and 12% of sales for the three months endedMarch 31, 2004 and 2003, respectively. The Company entered into anagreement with MasterCard dated February 28, 2003, which replaces theagreement dated February 1, 1996, as amended.  The Company and MasterCard entered into an amendment to thisagreement on September 29, 2003, in which MasterCard retained the Companyto produce a new hologram for the Debit MasterCard and extended the agreementto February 28, 2011, subject to automatic renewal if not terminated byeither party.  The loss of all or asubstantial portion of the sales to MasterCard, however, would have a materialadverse effect on the financial position, results of operations and cash flowsof the Company. At March 31, 2004 and December 31, 2003, accountsreceivable from this customer totaled $1.2 million and $1.0 million,respectively.

 

Sales of VISA holograms to manufacturers of VISA credit cards wereapproximately 34% and 31% of sales for the three months ended March 31,2004 and 2003, respectively. The loss of a substantial portion of the sales tomanufacturers of VISA credit cards would have a material adverse effect on thefinancial position, results of operations and cash flows of the Company.Accounts receivable from these customers approximated $1.5 million and $1.3million at March 31, 2004 and December 31, 2003, respectively.

 

The Company purchases certain key materials used in the manufacture ofits holograms and outsources certain key processes from third party suppliers,some of which are sole source relationships, with whom the Company does nothave supply contracts. Any problems that occur with respect to the delivery,quality or cost of any such materials or processes could have a materialadverse effect on the financial position, results of operations and cash flowsof the Company.

 

STOCK-BASED COMPENSATION PLANS

 

As allowed by SFAS No. 123,the Company has elected to continue to apply the intrinsic value-based methodof accounting prescribed in APB Opinion No. 25 and, accordingly, does notrecognize compensation expense for stock option grants made at an exerciseprice equal to or in excess of the fair market value of the stock at the dateof grant.

 

Had compensation cost for the Company’s outstanding stock options beendetermined based on the fair value at the grant dates for those optionsconsistent with SFAS No. 123, the Company’s net income and basic and dilutednet income per share would have differed as reflected by the pro forma amountsindicated below:

 
|                                                    |                                                                                                             | **Three  Months Ended  March 31,**    |       |
|---------------------------------------------------------|------------------------------------------------------------------------------------------------------------------|--------------------------------------------|------------|
|                                                    |                                                                                                             | **2004**                                   |       | **2003** |   |
|                                                    |                                                                                                             | **(In thousands, except per  share data)** |       |
|                                                    |                                                                                                             |                                       | ** ** |   | ** ** |
| Net income, as reported                                 |                                                                                                             | $                                          | 402        |   | $ | 219 |   |
| Add:   Non-cash employee compensation, as reported |                                                                                                             | —                                     |       | — |   |
| Deduct:                                                 | Stock-based employee compensation expense determined under fair value  based method for all awards, net of taxes |                                       | 18         |   | 7 |   |
| Pro forma, net income (loss)                            |                                                                                                             | $                                          | 384        |   | $ | 212 |   |
|                                                    |                                                                                                             |                                       |       |   |   |
| Basic and diluted net income per share, as  reported    |                                                                                                             | $                                          | 0.02       |   | $ | 0.01 |   |
|                                                    |                                                                                                             |                                       |       |   |   |
| Basic and diluted net income per share, pro  forma      |                                                                                                             | $                                          | 0.02       |   | $ | 0.01 |   |
|                                                         |                                                                                                                  |                                            |            |  |  |  |  |  |

 

7

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WARRANTY COSTS

 

The Companyprovides for warranty costs in amounts it estimates will be needed to coverfuture warranty obligations for products sold. Estimates of warranty costs are based on historical experience and areperiodically reviewed and adjusted, when necessary.  The Company’s product warranty provision is included in accruedexpenses in the accompanying balance sheets. Changes in the Company’s warrantyprovision are as follows:

 
|                      |   | **Three  Months Ended  March 31,** |   |
|---------------------------|--------|-----------------------------------------|--------|
|                      |   | **2004**                                |   | **2003** |   |
|                      |   | **(In thousands)**                      |   |
|                      |   |                                    |   |   |   |
| Balance at January 1 |   | $                                       | 510    |   | $ | 605 |   |
| Warranties issued         |   | 40                                      |   | 40 |   |
| Settlements made          |   | (26                                     | )      | (66 | ) |
| Balance at March 31  |   | $                                       | 524    |   | $ | 579 |   |

 

NOTE B - INVENTORIES

 

Inventories consist of the following:

 
|                                          |   | **March 31,  2004** |   | **December 31,  2003** |   |
|-----------------------------------------------|--------|--------------------------|--------|-----------------------------|--------|
|                                          |   | **(Unaudited)**          |   | **(Note A)**                |   |
|                                          |   | **(In  thousands)**      |   |
|                                          |   |                     |   |                        |   |
| Finished goods                                |   | $                        | 848    |                        | $      | 800 |   |
| Finished goods on consignment with  customers |   | 304                      |   | 417                         |   |
| Work in process                               |   | 811                      |   | 764                         |   |
| Raw materials                                 |   | 379                      |   | 405                         |   |
|                                          |   | $                        | 2,342  |                        | $      | 2,386 |   |

 

NOTE C - COMMITMENTS AND CONTINGENCIES

 

The Company currently and from time to time is involved in litigation(as both plaintiff and defendant) incidental to the conduct of its business;however, the Company is not a party to any lawsuit or proceeding which, in theopinion of management of the Company, could have a material impact on the Company’sfinancial position, results of operations or cash flows.

 

8

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ITEM 2. MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunctionwith the Company’s unaudited financial statements, including the notes thereto,appearing elsewhere in this report.

 

OVERVIEW

 

The Company originates, mass-produces and markets holograms. TheCompany’s holograms are used primarily for security applications such ascounterfeiting protection for credit and other transaction cards,identification cards and documents of value, as well as for tamper resistanceand authentication of high-value consumer and industrial products.  The Company also produces non-secureholograms for packaging and promotional applications.  The Company’s sales of holograms for security applicationsgenerally carry higher gross margins than sales for non-security applications.

 

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

 

A significant portion of the Company’s business is derived from ordersplaced by certain credit card companies, including MasterCard and manufacturersof VISA brand credit cards, and variations in the timing of such orders cancause significant fluctuations in the Company’s sales. Sales to MasterCard wereapproximately 35% and 12% of sales for the three months ended March 31,2004 and 2003, respectively. The Company entered into an agreement withMasterCard dated February 28, 2003, which replaces the agreement datedFebruary 1, 1996, as amended. The Company and MasterCard entered into anamendment to this agreement on September 29, 2003, in which MasterCardretained the Company to produce a new hologram for the Debit MasterCard andextended the agreement to February 28, 2011, subject to automatic renewalif not terminated by either party. Sales of VISA holograms to manufacturers of VISA credit cards wereapproximately 34% and 31% of sales for the three months ended March 31,2004 and 2003, respectively. The Company does not have long-term purchasecontracts with VISA and supplies holograms to approximately 50 VISA authorizedcard manufacturers pursuant to purchase orders. Currently the Company is one oftwo companies authorized to manufacture and sell VISA brand holograms tomanufacturers of VISA brand credit cards. If either MasterCard or VISA were toterminate its respective relationship with the Company or substantially reducetheir orders, there would be a material adverse effect on the Company’sbusiness, 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 latterof the time of shipment or when title passes to customers. In some situations,the Company has shipped product where the sale is contingent upon thecustomers’ use of the product. In these situations, the Company does notrecognize sales upon product shipment, but rather when the buyer of the productinforms the Company that the product has been used. Additionally, pursuant toterms with a certain customer, completed items are stored on behalf of thecustomer at the Company’s on-site secured facility and, in that instance, salesare recognized when all of the following have occurred: the customer hasordered the goods, the manufacturing process is complete, the goods have beentransferred to the on-site secured facility and are ready for shipment, therisk of ownership has passed to the customer and the customer has been billedfor the order. At March 31, 2004 and December 31, 2003, accountsreceivable from this customer totaled $1.2 million and $1.0 million,respectively.

 

The Company purchases certain key materials used in the manufacture ofits holograms and outsources certain key processes from third party suppliers,some of whom are sole source relationships, with which it does not have supplycontracts. Any problems that occur with respect to the delivery, quality orcost of any such materials or processes could have a material adverse effect onthe Company’s financial position, results of operations and cash flows.

 

Sales may fluctuate from quarter to quarter due to changes incustomers’ ordering patterns. Customers do not typically provide the Companywith precise forecasts of future order quantities. Quarterly demand forholograms

 

9

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may be materially influenced by customers’ promotions, inventoryreplenishment, card expiration patterns, delivery schedules and other factorswhich may be difficult for the Company to anticipate.

 

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

 

Selling and administrative expenses primarily consist of salaries,benefits and commissions for the Company’s corporate, sales, marketing andadministrative personnel, marketing and promotion expenses, legal andaccounting expenses and expenses associated with being a public company.

 

COMPARISON OF THREE MONTHS ENDED MARCH 31, 2004 TO THREE MONTHSENDED MARCH 31, 2003

 

*Sales.*  Sales increased by $0.5 million, or 10.9%,from $4.5 million for the three months ended March 31, 2003 to $5.0million for the three months ended March 31, 2004.  The increase was due to an increase in salesof holograms for credit cards of $1.5 million primarily resulting from anincrease in sales to MasterCard, which was the result of a temporary reductionin purchases by MasterCard in the first half of 2003 as well as expansion ofother credit card programs, partially offset by a decrease of $1.0 million forsales of non credit card security holograms, which was primarily due to certainidentification products shipped in the 2003 period that were not shipped in thecurrent period but are expected to be shipped in varying quantities in futureperiods.

 

*Royalty Income.*  Royalty income decreased $34,000 from$44,000 for the three months ended March 31, 2003 to $10,000 for the sameperiod in 2004. The decrease was due to the expiration of a patent licenseagreement during the 2003 period.

 

*Cost of Goods Sold.*  Cost of goods sold increased by $0.3million, from $2.0 million for the three months ended March 31, 2003 to$2.3 million for the three months ended March 31, 2004.  As a percentage of sales, cost of goods soldincreased from 44.4% in the three months ended March 31, 2003 to 45.1% forthe same period in 2004.  The increaseof 0.7% was primarily due to a change in product mix.

 

*Selling andAdministrative.* Selling and administrative expenses decreased $0.1 million from $1.8million for the three months ended March 31, 2003 to $1.7 million for thethree months ended March 31, 2004. As a percentage of sales, selling andadministrative expenses decreased from 38.9% for the three months endedMarch 31, 2003 to 33.4% for the current period.  The decrease was primarily due to a decrease in selling salaries,commissions and benefits of $0.1 million.

 

*Research and Development. *Research anddevelopment expenses remained relatively unchanged.

 

*Depreciation andAmortization.* Depreciation and amortization remained relatively unchanged.

 

*Interest Income*.  Interest income remained relativelyunchanged.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At March 31, 2004, the Company had $11.8 million in cash and cashequivalents and working capital of $16.5 million.

 

The Company’soperating activities provided cash of $0.7 million for the three months endedMarch 31, 2004, compared to $1.0 million of cash provided for the threemonths ended March 31, 2003.  Cashflows provided by net income and adjustments to reconcile net income to netcash provided by operating activities were $0.6 million in the three monthsended March 31, 2004. Cash flows provided by changes in operating assetsand liabilities were $0.1 in the three months ended March 31, 2004primarily due to changes in inventory, prepaid expenses and other assets, andincome taxes payable being offset by changes in accounts receivable andaccounts payable and accrued

 

10

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expenses. For thethree months ended March 31, 2003, cash flows provided by net income andadjustments to reconcile net income to net cash used in operating activitiesprovided cash of $0.6 million and changes in operating assets and liabilitiesprovided cash of $0.4 million.

 

Investingactivities for the three months ended March 31, 2004 and 2003 used cash of$168,000 and $128,000, respectively, for capital expenditures.

 

There were no financing activities for the three-month periods endedMarch 31, 2004 and 2003.

 

The Company has long-term operating leases for offices, manufacturingfacilities and equipment, which expire through 2007.  The Company has renewal options on some locations, which providefor renewal rents based upon increases tied to the consumer price index.

 

SPECIAL NOTE REGARDING FORWARD - LOOKING STATEMENTS

 

Certain statements in this Form 10-Q constitute “forward-looking”statements within the meaning of the Private Securities Litigation Reform Actof 1995 (the “Reform Act”). Such “forward-looking” statements involve known andunknown risks, uncertainties and other factors which may cause the actualresults, performance or achievements of the Company, or industry results, to bematerially different from any future results, performance, or achievementsexpressed or implied by such “forward-looking” statements. Such factors aremore fully described under the caption “Business – Risk Factors” in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2003,which should be considered in connection with a review of this report.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

 

The Company does not engage in significant activity with respect tomarket risk sensitive instruments. Accordingly, our risk with respect to marketrisk sensitive instruments is immaterial.

 

ITEM 4. CONTROLS ANDPROCEDURES

 

**The Company carried out an evaluation, under thesupervision and with the participation of management, including the Company’sChief Executive Officer and Chief Financial Officer, of the effectiveness ofthe design and operation of the Company’s disclosure controls and procedures asof the end of the period covered by this report pursuant to Exchange Act Rule13a-15.  Based upon that evaluation, theChief Executive Officer and Chief Financial Officer concluded that theCompany’s disclosure controls and procedures were effective in timely alertingthem to material information relating to the Company required to be included inthe Company’s periodic Securities and Exchange Commission filings.  There were no changes in the Company’sinternal control over financial reporting that occurred during the Company’smost recent fiscal quarter that would have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.**

 

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PART II -OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

Not applicable.

 

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

 

(a)                        Exhibits

 

31.1             Certificationof Kenneth H. Traub pursuant to Exchange Act Rules 13a-14 and 15d-14, asadopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2             Certificationof Alan Goldstein pursuant to Exchange Act Rules 13a-14 and 15d-14, as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1             Certificationof Kenneth H. Traub pursuant to 18 U.S.C. Section 1350, as adopted pursuantto Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2             Certificationof Alan Goldstein pursuant to 18 U.S.C. Section 1350, as adopted pursuantto Section 906 of the Sarbanes-Oxley Act of 2002.

 

(b)                       Reports onForm 8-K

 

Current report onForm 8-K dated March 22, 2004, reporting the Company’s results ofoperations for the quarter and year ended December 31, 2003.

 

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#### **SIGNATURES**

#### ** **

Pursuant to therequirements of the Securities Exchange Act of 1934, the Company has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|   | AMERICAN BANK NOTE  HOLOGRAPHICS, INC. |
|--------|----------------------------------------|
|   |                                   |
|   | By:                                    | /s/ Kenneth H. Traub |   |
|   | Kenneth H. Traub                       |
|   | President and Chief Executive Officer  |
|   |                                   |
|   | By:                                    | /s/ Alan Goldstein |   |
|   | Alan Goldstein                         |
|   | Vice President,                        |
|   | Chief Financial Officer and            |
|   | Chief Accounting Officer               |
|        |                                        |  |  |  |

 

Date:  May 10, 2004

 

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