**SECURITIES AND 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 September 30, 2005** |
|                                                        |       |                                                                                                     |
| **OR**                                                      |
|                                                        |       |                                                                                                     |
| **o**                                                       | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For thetransition period from               to**

 

**CommissionFile Number 1-14227**

 

**AMERICAN BANK NOTE HOLOGRAPHICS, INC.**

**(Exactname of Registrant as specified in its charter)**

** **
| **Delaware**                                                     | ** ** | **13-3317668**                         |
|------------------------------------------------------------------|------------|----------------------------------------|
| (State or  other jurisdiction of incorporation  or organization) |       | (I.R.S.  Employer  Identification No.) |

 

**2Applegate Drive**

**Robbinsville,New Jersey 08691**

(Address of principal executiveoffices, including zip code)

 

**(609) 632-0800**

(Registrant’s telephone number,including area code)

 

**Notapplicable**

(Former name, former addressand former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports) and (2) has beensubject to such filing for the past 90 days.

 

ý  Yes  o  No

 

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

 

o  Yes  ý  No

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

 

o  Yes  ý  No

 

The aggregate number of sharesof common stock, $.01 par value, outstanding on November 11, 2005 was18,647,469.

 

 

----

 

**AMERICAN BANK NOTE HOLOGRAPHICS, INC.**

 

**FORM 10-Q**

 

## **INDEX**

 
| PART I - FINANCIAL INFORMATION                                                                             |   |
|-----------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                            |   |
| Item 1. Financial Statements                                                                                    |   |
|                                                                                                            |   |
| Balance Sheets as of  September 30, 2005 (Unaudited) and December 31, 2004                            |   |
|                                                                                                            |   |
| Statements of Operations – Unaudited  For the Three and Nine Months Ended September 30, 2005 and 2004 |   |
|                                                                                                            |   |
| Statements of Cash Flows – Unaudited  For the Nine Months Ended September 30, 2005 and 2004           |   |
|                                                                                                            |   |
| Condensed Notes to Unaudited Financial  Statements                                                              |   |
|                                                                                                            |   |
| Item 2. Management’s Discussion and Analysis of Financial Condition  and Results of Operations             |   |
|                                                                                                            |   |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk                                              |   |
|                                                                                                            |   |
| Item 4. Controls and Procedures                                                                                 |   |
|                                                                                                            |   |
| PART II  - OTHER INFORMATION                                                                               |   |
|                                                                                                            |   |
| Item 4. Submission of Matters to a Vote of Security Holders                                                     |   |
|                                                                                                            |   |
| Item 6.  Exhibits                                                                                               |   |

 

2

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PART I - FINANCIAL INFORMATION

 

ITEM I. FINANCIAL STATEMENTS

 

AMERICAN BANK NOTE HOLOGRAPHICS, INC.

BALANCE SHEETS

(In thousands, except share data)

 
| ** **                                                                                                                             | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                             | ** ** | **(Unaudited)**              | ** ** | **(Note A)**                | ** ** |
| ASSETS                                                                                                                                 | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current Assets:                                                                                                                        |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                              |       | $                            | 9,457      |                        | $          | 11,357 |   |
| Short-term investments                                                                                                                 |       | —                       |       | 1,989                       |       |
| Accounts receivable, net of allowance for  doubtful accounts of $250 and $180                                                          |       | 6,092                        |       | 3,889                       |       |
| Inventories, net                                                                                                                       |       | 6,018                        |       | 3,394                       |       |
| Deferred income taxes, net                                                                                                             |       | 1,120                        |       | 983                         |       |
| Prepaid expenses                                                                                                                       |       | 478                          |       | 317                         |       |
| Total current  assets                                                                                                                  |       | 23,165                       |       | 21,929                      |       |
| Machinery, equipment and leasehold  improvements, net of accumulated depreciation and amortization of $10,585 and  $10,062             |       | 6,994                        |       | 3,172                       |       |
| Other assets                                                                                                                           |       | 89                           |       | 110                         |       |
|                                                                                                                                   |       |                         |       |                        |       |
| Total Assets                                                                                                                           |       | $                            | 30,248     |                        | $          | 25,211 |   |
|                                                                                                                                   |       |                         |       |                        |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                             |       |                         |       |                        |       |
| Current Liabilities:                                                                                                                   |       |                         |       |                        |       |
| Accounts payable                                                                                                                       |       | $                            | 3,784      |                        | $          | 1,519 |   |
| Accrued expenses                                                                                                                       |       | 2,233                        |       | 2,040                       |       |
| Customer advances                                                                                                                      |       | 68                           |       | 69                          |       |
| Income taxes payable                                                                                                                   |       | 915                          |       | 1,058                       |       |
| Total current liabilities                                                                                                              |       | 7,000                        |       | 4,686                       |       |
| Other long-term liabilities                                                                                                            |       | 1,370                        |       | 1,211                       |       |
|                                                                                                                                   |       |                         |       |                        |       |
| Total liabilities                                                                                                                      |       | 8,370                        |       | 5,897                       |       |
|                                                                                                                                   |       |                         |       |                        |       |
| 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 18,647,469 shares and  18,515,907 shares |       | 187                          |       | 185                         |       |
| Additional paid-in capital                                                                                                             |       | 24,444                       |       | 24,058                      |       |
| Accumulated deficit                                                                                                                    |       | (2,753                       | )          | (4,929                      | )          |
| Total Stockholders’ Equity                                                                                                        |       | 21,878                       |       | 19,314                      |       |
|                                                                                                                                   |       |                         |       |                        |       |
| Total Liabilities and Stockholders’ Equity                                                                                        |       | $                            | 30,248     |                        | $          | 25,211 |   |

 

See Condensed Notes toUnaudited Financial Statements.

 

3

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AMERICAN BANK NOTE HOLOGRAPHICS, INC.

STATEMENTS OF OPERATIONS - UNAUDITED

(In thousands, except per share data)

 
| ** **                                                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenue:                                                                  | ** ** | ** **                                 | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales                                                                     |       | $                                          | 8,959      |                                      | $          | 5,808 |   | $ | 22,216 |   | $ | 15,749 |   |
| Royalty income                                                            |       | —                                     |       | —                                    |       | 10 |   | 13 |   |
|                                                                      |       | 8,959                                      |       | 5,808                                     |       | 22,226 |   | 15,762 |   |
| Costs and expenses:                                                       |       |                                       |       |                                      |       |   |   |   |   |
| Cost of goods sold (excluding depreciation  and amortization shown below) |       | 4,227                                      |       | 2,413                                     |       | 10,187 |   | 6,943 |   |
| Selling and administrative                                                |       | 2,239                                      |       | 1,846                                     |       | 6,370 |   | 5,280 |   |
| Research and development                                                  |       | 291                                        |       | 319                                       |       | 872 |   | 967 |   |
| Depreciation and amortization                                             |       | 127                                        |       | 171                                       |       | 755 |   | 495 |   |
| Facility consolidation                                                    |       | 278                                        |       | 93                                        |       | 600 |   | 93 |   |
|                                                                      |       | 7,162                                      |       | 4,842                                     |       | 18,784 |   | 13,778 |   |
|                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Operating income                                                          |       | 1,797                                      |       | 966                                       |       | 3,442 |   | 1,984 |   |
|                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Other income:                                                             |       |                                       |       |                                      |       |   |   |   |   |
| Interest income                                                           |       | 61                                         |       | 29                                        |       | 183 |   | 77 |   |
| Patent agreement                                                          |       | —                                     |       | —                                    |       | — |   | 178 |   |
|                                                                      |       | 61                                         |       | 29                                        |       | 183 |   | 255 |   |
|                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Income before provision for income taxes                                  |       | 1,858                                      |       | 995                                       |       | 3,625 |   | 2,239 |   |
| Provision for income taxes                                                |       | 742                                        |       | 397                                       |       | 1,449 |   | 895 |   |
|                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Net income                                                                |       | $                                          | 1,116      |                                      | $          | 598 |   | $ | 2,176 |   | $ | 1,344 |   |
|                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Net income per share:                                                     |       |                                       |       |                                      |       |   |   |   |   |
| Basic                                                                     |       | $                                          | 0.06       |                                      | $          | 0.03 |   | $ | 0.12 |   | $ | 0.07 |   |
| Diluted                                                                   |       | $                                          | 0.06       |                                      | $          | 0.03 |   | $ | 0.11 |   | $ | 0.07 |   |
|                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Weighted average number of shares:                                        |       |                                       |       |                                      |       |   |   |   |   |
| Basic                                                                     |       | 18,618                                     |       | 18,484                                    |       | 18,562 |   | 18,484 |   |
| Diluted                                                                   |       | 19,576                                     |       | 18,808                                    |       | 19,363 |   | 18,823 |   |

 

See Condensed Notes toUnaudited Financial Statements.

 

4

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AMERICAN BANK NOTE HOLOGRAPHICS, INC.

STATEMENTS OF CASH FLOWS - UNAUDITED

(In thousands)

 
| ** **                                                                         | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Cash flows from operating activities:                                              | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                         | 2,176      |   | $ | 1,344 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                      |       |   |   |
| Depreciation and amortization                                                      |       | 755                                       |       | 495 |   |
| Deferred income taxes, net                                                         |       | 22                                        |       | (52 | ) |
| Provision for doubtful accounts                                                    |       | 70                                        |       | — |   |
| Provision for inventory reserves                                                   |       | 321                                       |       | 320 |   |
| Changes in operating assets and  liabilities:                                      |       |                                      |       |   |   |
| Accounts receivable                                                                |       | (2,273                                    | )          | (1,040 | ) |
| Inventories                                                                        |       | (2,945                                    | )          | (699 | ) |
| Prepaid expenses and other                                                         |       | (144                                      | )          | 145 |   |
| Accounts payable and accrued expenses                                              |       | 2,078                                     |       | 834 |   |
| Customer advances                                                                  |       | (1                                        | )          | 22 |   |
| Income taxes payable                                                               |       | (143                                      | )          | 745 |   |
|                                                                               |       |                                      |       |   |   |
| Net cash (used) provided by operating  activities                                  |       | (84                                       | )          | 2,114 |   |
|                                                                               |       |                                      |       |   |   |
| Cash flows from investing activities:                                              |       |                                      |       |   |   |
| Decrease (increase) in short-term  investments                                     |       | 1,989                                     |       | (2,016 | ) |
| Capital expenditures                                                               |       | (4,193                                    | )          | (652 | ) |
|                                                                               |       |                                      |       |   |   |
| Net cash used in investing activities                                              |       | (2,204                                    | )          | (2,668 | ) |
|                                                                               |       |                                      |       |   |   |
| Cash flows from financing activities:                                              |       |                                      |       |   |   |
| Proceeds from exercise of stock options                                            |       | 388                                       |       | — |   |
|                                                                               |       |                                      |       |   |   |
| Net cash provided by financing activities                                          |       | 388                                       |       | — |   |
|                                                                               |       |                                      |       |   |   |
| (Decrease) in cash and cash equivalents                                            |       | (1,900                                    | )          | (554 | ) |
| Cash and cash equivalents, beginning of  period                                    |       | 11,357                                    |       | 7,340 |   |
|                                                                               |       |                                      |       |   |   |
| Cash and cash equivalents, end of period                                           |       | $                                         | 9,457      |   | $ | 6,786 |   |
|                                                                               |       |                                      |       |   |   |
| Supplemental cash flow information:                                                |       |                                      |       |   |   |
| Taxes paid                                                                         |       | $                                         | 1,785      |   | $ | 181 |   |
| Capital expenditures included in accounts  payable                                 |       | $                                         | 380        |   | $ | 32 |   |

 

See Condensed Notes toUnaudited Financial Statements.

 

5

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AMERICAN BANK NOTE HOLOGRAPHICS, INC.

CONDENSED NOTES TO UNAUDITED FINANCIAL STATEMENTS

 

NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES

 

American Bank Note Holographics, Inc. (the “Company”) originates,produces, markets and sells secure holograms and products incorporating secureholograms. The Company’s products are used primarily in security applicationsincluding authentication of transaction cards, identity documents, valuedocuments and various consumer products. Holograms are also used for packaging,design and promotional applications.  TheCompany operates in one reportable industry segment.

 

The accompanying unaudited financial statements have been prepared inaccordance with U.S. generally accepted accounting principles for interimfinancial information and with the instructions to Form 10-Q and Article 10of Regulation S-X.  Accordingly, they donot include all of the information and footnotes required by U.S. generallyaccepted accounting principles for complete financial statements. In theopinion of management, all adjustments (consisting of normal recurringadjustments) considered necessary for a fair statement have been included.Operating results for the three and nine months ended September 30, 2005are not necessarily indicative of the results that may be expected for the yearending December 31, 2005.

 

The balance sheet at December 31, 2004 has been derived from theaudited financial statements at that date but does not include all of theinformation and footnotes required by U.S. generally accepted accountingprinciples 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 forthe year ended December 31, 2004, as filed with the United StatesSecurities and Exchange Commission (“SEC”).

 

REVENUE RECOGNITION

 

The Company recognizes revenue in accordance with the provisions of theSEC’s Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition (anamendment of SAB 101, “Revenue Recognition in Financial Statements”).”  Specifically, sales and the related cost ofgoods sold are generally recognized at the latter of the time of shipment orwhen title passes to customers. In some situations, the Company has shippedproduct where the sale is contingent upon the customers’ use of the product. Inthese situations, the Company does not recognize sales upon product shipment,but rather when the buyer of the product informs the Company that the producthas been used.  Additionally, pursuant tothe request of and agreement with a certain customer, completed items arestored on behalf of the customer at the Company’s on-site secured facility and,in that instance, sales are recognized when all of the following have occurred:the customer has ordered the goods pursuant to a fixed price purchase order,the manufacturing process is complete, the goods have been transferred to theon-site secured facility and are ready for shipment, the risk of ownership haspassed to the customer, the customer has been billed for the order andcollection of the invoice is considered probable.

 

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 $283,000 and $546,000 for the three and nine months ended September 30,2005, respectively, and $92,000 and $316,000 for the three and nine monthsended September 30, 2004, respectively. Shipping and handling costs are included in selling and administrativeexpenses.

 

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 18,617,681 and 18,562,215 for the three and ninemonths ended September 30, 2005, respectively, and 18,483,720 for each ofthe three and nine months ended September 30, 2004. Diluted net income pershare is computed by dividing net income by the weighted average number ofshares of common stock outstanding and dilutive potential shares of commonstock. For the three and

 

6

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nine months ended September 30, 2005, the diluted number ofweighted average shares outstanding was 19,576,229 and 19,362,973,respectively, which includes dilutive stock options of 958,548 shares and800,758 shares, respectively. For the three and nine months ended September 30,2004, the diluted number of weighted average shares outstanding was 18,808,489and 18,823,452, respectively, which includes dilutive stock options of 324,769shares and 339,732 shares, respectively. Options to purchase 179,000 and829,000 shares of common stock at September 30, 2005 and 2004,respectively, were not included in the computation of diluted earnings pershare because the options’ exercise prices were greater than the average marketprice of the common shares, and therefore, the effect on earnings per sharewould be anti-dilutive.

 

BUSINESS INFORMATION

 

Sales toMasterCard were approximately 30% and 37% of sales for the three months ended September 30,2005 and 2004, respectively, and 33% and 36% of sales for the nine months endedSeptember 30, 2005 and 2004, respectively. The Company has an agreementwith MasterCard, as amended, in which MasterCard has retained the Company asits exclusive supplier of MasterCard holograms as well as holographic magneticstripe (HoloMagTM) through February 28, 2013, subject to automatic renewalif not terminated by either party.  Theloss of all or a substantial portion of the sales to MasterCard would have amaterial adverse effect on the financial position, results of operations andcash flows of the Company. At September 30, 2005 and December 31,2004, accounts receivable from this customer totaled $1.8 million and $1.1million, respectively.

 

Sales of VISA holograms (which includes HoloMagTM starting in the threemonth period ended September 30, 2005) to manufacturers of VISA creditcards were approximately 42% and 28% of sales for the three months ended September 30,2005 and 2004, respectively, and 31% of sales for each of the nine months endedSeptember 30, 2005 and 2004. The loss of a substantial portion of thesales to manufacturers of VISA credit cards would have a material adverseeffect on the financial position, results of operations and cash flows of theCompany. Accounts receivable from these customers approximated $2.9 million and$1.2 million at September 30, 2005 and December 31, 2004,respectively.

 

The Company purchases certain key materials used in the manufacture ofits products and outsources certain key processes and products from third partysuppliers, some of whom are sole source relationships, and some of whom theCompany does not have supply contracts with. Any problems that occur withrespect to the delivery, quality or cost of any such materials or processes couldhave a material adverse effect on the financial position, results of operationsand cash flows of 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 costs 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 anddiluted net income per share would have differed as reflected by the pro formaamounts indicated below:

 
| ** **                                                                                                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                               | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                               | ** ** | **(In thousands, except per share data)**  | ** ** |
| Net income, as reported                                                                                                  |       | $                                          | 1,116      |                                      | $          | 598 |   | $ | 2,176 |   | $ | 1,344 |   |
| Deduct: Stock-based employee compensation  expense determined under fair value based method for all awards, net of taxes |       | 62                                         |       | 30                                        |       | 165 |   | 90 |   |
| Pro forma, net income                                                                                                    |       | $                                          | 1,054      |                                      | $          | 568 |   | $ | 2,011 |   | $ | 1,254 |   |
|                                                                                                                     |       |                                       |       |                                      |       |   |   |   |   |
| Basic net income per share, as reported                                                                                  |       | $                                          | 0.06       |                                      | $          | 0.03 |   | $ | 0.12 |   | $ | 0.07 |   |
| Basic net income per share, pro forma                                                                                    |       | $                                          | 0.06       |                                      | $          | 0.03 |   | $ | 0.11 |   | $ | 0.07 |   |
| Diluted net income per share, as reported                                                                                |       | $                                          | 0.06       |                                      | $          | 0.03 |   | $ | 0.11 |   | $ | 0.07 |   |
| Diluted net income per share, pro forma                                                                                  |       | $                                          | 0.05       |                                      | $          | 0.03 |   | $ | 0.10 |   | $ | 0.07 |   |

 

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 isincluded in accrued expenses in the accompanying balance sheets. Changes in theCompany’s warranty provision are as follows:

 
| ** **                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                     | ** ** | **(In thousands)**                         | ** ** | **(In thousands)**                        | ** ** |
| ** **                     | ** ** | ** **                                 | ** ** | ** **                                | ** ** |
| Balance at beginning of period |       | $                                          | 548        |                                      | $          | 486 |   | $ | 510 |   | $ | 510 |   |
| Warranties issued              |       | 110                                        |       | 40                                        |       | 230 |   | 120 |   |
| Settlements made               |       | (20                                        | )          | (56                                       | )          | (102 | ) | (160 | ) |
| Balance at September 30   |       | $                                          | 638        |                                      | $          | 470 |   | $ | 638 |   | $ | 470 |   |

 

RECLASSIFICATIONS – Certain prior year amounts have been reclassifiedto conform with the current year’s presentation.

 

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS — In December 2004,the Financial Accounting Standards Board issued Statement No. 123(R) (FAS123R), Share-Based Payment, revising FAS 123 and requiring that all share-basedpayments to employees be recognized in the financial statements. Generally, theapproach to accounting for share-based payments in FAS 123R is similar to theapproach described in FAS 123, however, pro forma footnote disclosure will nolonger be an alternative to financial statement recognition. This statement, asamended, becomes effective in the first annual period beginning after June 15,2005. The Company expects to adopt the new statement effective January 1,2006, using the modified-prospective transition method described in thestatement. Under this method, the Company will be required to recognizecompensation expense over the remaining vesting period for all awards thatremain unvested as of January 1, 2006. As permitted by FAS 123, theCompany currently accounts for share-based payments to employees using APB 25’sintrinsic value method and, as such, generally recognized no compensation costfor employee stock options. The Company is still assessing the impact that theadoption of FAS 123R will have on its financial position, results of operationsand cash flows.

 

In November 2004, the Financial Accounting Standards Board issuedStatement No. 151 (FAS 151), Inventory costs, an amendment of ARB No. 43,Chapter 4. FAS 151 clarifies that abnormal amounts of idle facility expense,freight, handling costs and wasted materials should be recognized as currentperiod charges. In addition, FAS 151 requires that allocation of fixedproduction overhead to inventory be based on the normal capacity of theproduction facilities. FAS 151 is effective for inventory costs incurred duringfiscal years beginning after June 15, 2005. The Company currently believesthat the adoption of FAS 151 will not have a material impact on its financialstatements.

 

In March 2005, the Financial Accounting Standards Board (“FASB”)issued interpretation No. 47, *Accounting for ConditionalAsset Retirement Obligations*, an interpretation of SFAS No. 143.This interpretation clarifies that the term of *conditionalasset retirement obligation* refers to a legal obligation to performan asset retirement activity in which the timing and/or method of settlementare conditional on a future event that may or may not be within the control ofthe entity. The obligation to perform the asset retirement activity isunconditional even though uncertainty exists about the timing and/or method ofsettlement. Accordingly, an entity is required to recognize a liability for thefair value of a conditional asset retirement obligation if the fair value ofthe liability can be reasonably estimated. The provisions of Interpretation 47are effective for fiscal years ending after December 15, 2005. Theadoption of this statement will not have an impact to the Company’s financialstatement presentation since there have been no conditional asset retirementobligations.

 

In December 2004, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”) No. 154, *Accounting Changes and Error Corrections*, a replacement ofAPB Opinion No. 20

 

8

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and SFAS No. 3. This statement changes the requirements for theaccounting for and the reporting of a change in accounting principle. Thisstatement requires retrospective application to prior period financialstatements of changes in accounting principle, unless it is impracticable todetermine either the period-specific effects of the cumulative effect of thechange. Indirect effects of a change in accounting principle should berecognized in the period of the accounting change. The provisions of SFAS No. 154are effective for fiscal years beginning after December 15, 2005. TheCompany will adopt this Statement beginning January 1, 2006.

 

NOTE B – INVENTORIES, NET

 

Inventories consist of the following:

 
| ** **                                    | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **(Unaudited)**              | ** ** | **(Note A)**                | ** ** |
| ** **                                    | ** ** | **(In thousands)**           | ** ** |
|                                          |       |                         |       |                        |       |
| Finished goods                                |       | $                            | 5,092      |                        | $          | 2,049 |   |
| Finished goods on consignment with  customers |       | 175                          |       | 231                         |       |
| Work in process                               |       | 1,149                        |       | 1,192                       |       |
| Raw materials                                 |       | 474                          |       | 473                         |       |
| Subtotal                                      |       | 6,890                        |       | 3,945                       |       |
| Less: Inventory reserves                      |       | 872                          |       | 551                         |       |
| Net inventory                                 |       | $                            | 6,018      |                        | $          | 3,394 |   |

 

NOTE C – OTHER LONG-TERM LIABILITIES

 

Otherlong-term liabilities at both September 30, 2005 and December 31,2004 include an $800,000 reserve for potential tax liabilities and a $132,000long-term deferred tax asset.  Alsoincluded in other long-term liabilities at September 30, 2005 and December 31,2004 are $348,000 and $386,000, respectively, of long-term deferred incometaxes and $354,000 and $25,000, respectively, of deferred rent.

 

NOTE D - FACILITY CONSOLIDATION

 

On December 14, 2004, the Company entered into certain agreementsto lease a new 134,000 square foot facility located in Robbinsville, New Jerseywhich is now the site of the Company’s primary operations. The lease expires onMay 31, 2017. The Company has the right to renew the lease for threeconsecutive five year terms and also has an option to purchase the building.

 

The Company substantially completed the move and consolidation of itsoperations into the Robbinsville, New Jersey facility in the quarter ended September 30,2005. The facilities located in Elmsford, New York and Huntingdon Valley,Pennsylvania were not fully vacated and available for sublease by the end ofthe quarter ended September 30, 2005 and accordingly the costs relating tothe abandonment of those facilities will be recorded in the quarter ending December 31,2005.  The Company currently expects thetotal expenses associated with the Elmsford and Huntingdon Valley leases,vacating these facilities, relocating and terminating certain employees, movingequipment and other related expenses to be approximately $3.4 million of which$0.6 million and $0.2 million was incurred in 2005 and 2004, respectively. As ofSeptember 30, 2005, $0.2 million of facility consolidation costs were includedin accrued expenses.  Of the remainder ofapproximately $2.6 million, approximately $2.0 million is expected to becharged to facility consolidation expense on the statement of operations in thequarter ending December 31, 2005 and the balance will be expensed in 2006and 2007.

 

NOTE E - COMMITMENTS AND CONTINGENCIES

 

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

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS 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

 

American Bank Note Holographics, Inc. (the “Company”) originates,produces, markets and sells secure holograms and products incorporating secureholograms. The Company’s products are used primarily in security applicationsincluding authentication of transaction cards, identity documents, valuedocuments and various consumer products. Holograms are also used for packaging,design and promotional applications.

 

A significantportion of the Company’s business is derived from orders placed by certaintransaction card companies, including MasterCard and manufacturers of VISAbrand transaction cards, and variations in the timing of such orders can causesignificant fluctuations in the Company’s sales.  Several thousand banks worldwide issue VISAand MasterCard branded cards that incorporate the Company’s holograms.

 

Sales toMasterCard were approximately 30% and 37% of sales for the three months ended September 30,2005 and 2004, respectively, and 33% and 36% of sales for each of the ninemonths ended September 30, 2005 and 2004, respectively. The Company has anagreement with MasterCard, as amended, in which MasterCard retained the Companyas its exclusive supplier of MasterCard holograms.  In the quarter ended September 30, 2005,the Company entered into an amendment to its agreement with MasterCard in whichMasterCard named the Company as its exclusive supplier of holographic magneticstripes (“HoloMagTM”) and extended the agreement through February 28, 2013,subject to automatic renewal.

 

Sales of VISAholograms (which includes HoloMagTM starting in the three month period ended September 30,2005) to manufacturers of VISA credit cards were approximately 42% and 28% ofsales for the three months ended September 30, 2005 and 2004,respectively, and 31% of sales for the nine months ended September 30,2005 and 2004. Currently we are one of two companies authorized to manufactureand sell the VISA Dove holograms to manufacturers of VISA brand credit cards.****On March 15, 2005, VISA announced its intention tophase out the Dove hologram that we supply for the front of the VISA card, andto replace it with an integrated holographic magnetic stripe on all VISAbranded cards.  On April 8, 2005, weentered into an Agreement with VISA, pursuant to which we are authorized tosupply HoloMagTM to VISA-approved card manufacturers. We are currently the onlysupplier of holographic magnetic stripes to VISA’s authorized cardmanufacturers. No assurance can be given that we will remain the only supplierof this product to manufacturers of VISA brand credit cards in the future.  The transition to VISA’s new card designcommenced in July 2005, and we anticipate the Dove hologram design will bephased out on newly issued cards by the third quarter of 2006, and will bereplaced by the holographic magnetic stripe.

 

If we were tolose a substantial portion of our business with either MasterCard or VISAwithout replacing it with new product sales, our business, operating resultsand financial condition would be materially and adversely affected. Inaddition, if we fail to obtain anticipated orders from these customers or if weexperience delays or cancellations of orders from these customers, our businessand financial performance will be materially and adversely affected.

 

Our products are sold on a fixed price basis under purchase orders andcontracts with customers. Sales and the related cost of goods sold aregenerally recognized at the latter of the time of shipment or when title passesto customers. In some situations, the Company has shipped product where thesale is contingent upon the customers’ use of the product. In these situations,the Company does not recognize sales upon product shipment, but rather when thebuyer of the product informs the Company that the product has been used.Additionally, pursuant to the request of and agreement with a certain customer,completed items are stored on behalf of the customer at the Company’s on-sitesecured facility and, in that instance, sales are recognized when all of thefollowing have occurred: the customer has ordered the goods pursuant to a fixedprice purchase order, the manufacturing process is complete, the goods havebeen transferred to the on-site secured facility and are ready for shipment,the risk of ownership has passed to the customer, the customer has been billedfor the order and collection of the invoice is considered probable.  In certain cases the Company has agreed tomaintain an inventory of products for a customer

 

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to ensure quick turn around of deliveries.  The Company provides replacement product forup to 180 days from original shipment as a warranty for defective product.

 

The Company purchases certain key materials used in the manufacture ofits products and outsources certain key processes and products from third partysuppliers, some of whom are sole source relationships, and some of whom it doesnot have supply contracts with. Any problems that occur with respect to thedelivery, quality or cost of any such materials or processes could have amaterial adverse effect on the Company’s financial position, results ofoperations and cash flows.

 

Sales may fluctuate from quarter to quarter due to changes in customers’ordering patterns. Customers do not typically provide the Company with preciseforecasts of future order quantities. Quarterly demand for holograms may bematerially influenced by customers’ promotions, inventory replenishment, cardexpiration patterns, delivery schedules and other factors which may bedifficult 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).Cost of goods sold also includes the cost of certain processes that the Companyoutsources to third parties. As a result, costs of goods sold are affected byproduct mix, manufacturing yields, supplier prices and changes in the cost ofraw materials and labor.

 

Selling and administrative expenses primarily consist of salaries,benefits and commissions for the Company’s corporate, sales, customer service,marketing and administrative personnel, marketing and promotion expenses, legaland accounting expenses and expenses associated with being a public company.  The Company also includes the cost of shippingand handling product deliveries that are billed to customers in selling andadministrative expenses. Shipping and handling costs included in selling andadministrative expenses amounted to $314,000 and $627,000 for the three andnine months ended September 30, 2005, respectively.

 

COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2005 TO THREEMONTHS ENDED SEPTEMBER 30, 2004

 

*Sales.*  Sales increased by $3.2 million, or 54.2%,from $5.8 million for the three months ended September 30, 2004 to $9.0million for the three months ended September 30, 2005.  The increase was primarily due to theimplementation of new programs in the transaction card market including ourHoloMagTM integrated holographic magnetic security stripe product as well as thecreation of new programs in the identity document market and the expansion ofexisting customer relationships in the transaction card, identity and productauthentication markets.  HoloMagTMproducts shipped to several customers in the quarter ended September 30,2005 with significant sales made to the manufacturers of VISA brand transactioncards. Sales growth in the quarter was also affected by the value of theHoloMagTM product which sells for substantially higher prices than aconventional hot stamp hologram due to its unique design and high securityfeatures.

 

*Cost of Goods Sold.*  Cost of goods sold increased by $1.8 million,from $2.4 million for the three months ended September 30, 2004 to $4.2million for the three months ended September 30, 2005 primarily as a resultof the volume increase.  As a percentageof sales, cost of goods sold increased from 41.5% for the three months ended September 30,2004 to 47.2% for the three months ended September 30, 2005.  The increase was primarily due to increasesin the warranty provision and in inventory reserves associated with volumeincreases and the launch of the HoloMagTM program. Cost of goods sold in thecurrent period included approximately $0.2 million of costs associated withoperating an additional facility including duplicative rent, utilities andsupplies.

 

*Selling and Administrative.*  Selling and administrative expenses increased$0.4 million from $1.8 million for the three months ended September 30,2004 to $2.2 million for the three months ended September 30, 2005. As apercentage of sales, selling and administrative expenses decreased from 31.8%for the three months ended September 30, 2004 to 25.0% for the same periodin 2005.  The increase in expenses wasprimarily due to higher professional fees, salaries and wages in support of thegrowth of the business and shipping charges which increased due to higherproduct shipments.  The decrease inpercentage of sales was primarily due to the volume increase in sales,partially offset by higher general and administrative costs.

 

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*Research and Development. *Research anddevelopment expenses decreased $28,000 from $319,000 for the three months endedSeptember 30, 2004 to $291,000 for the same period in 2005 primarily as aresult of lower testing expenses, partially offset by higher salaries and wagesdue to manpower additions.

 

*Depreciation and Amortization.*  Depreciation and amortization decreased $0.1million from $0.2 million for the three months ended September 30, 2004 to$0.1 million for the same period in 2005. The decrease was primarily due to theacceleration of depreciation on equipment and leasehold improvements in thefirst two quarters of 2005 in connection with the consolidation of the Company’soperations in its new facility in Robbinsville, New Jersey.

 

*Facility Consolidation Expenses.*Facilityconsolidation expenses, in the three months ended September 30, 2005, of$0.3 million pertain to expenses incurred for the Company’s new facility inRobbinsville, New Jersey and consist primarily of moving expenses for machineryand equipment.

 

*Interest Income*.  Interest income increased $32,000 from$29,000 for the three months ended September 30, 2004 to $61,000 for thethree months ended September 30, 2005 due to higher interest rates ineffect during the current period.

 

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2005 TO NINE MONTHSENDED SEPTEMBER 30, 2004

 

*Sales*.  Sales increased by $6.5 million, or 41.1%,from $15.7 million for the nine months ended September 30, 2004 to $22.2million for the nine months ended September 30, 2005.  The increase was primarily due to theimplementation of new customer programs in the transaction card market and theexpansion of existing customer relationships in the transaction card, identityand product authentication markets. Additionally sales increased as a resultnew programs in the secure identification card market.  Sales growth in the period was also affectedby the value of the HoloMagTM product which sells for substantially higherprices than a conventional hot stamp hologram due to its unique design and highsecurity features.

 

*Cost of Goods Sold*.  Cost of goods sold increased by $3.3 million,from $6.9 million for the nine months ended September 30, 2004 to $10.2million for the nine months ended September 30, 2005.  As a percentage of sales, cost of goods soldincreased from 44.1% in the nine months ended September 30, 2004 to 45.9%for the same period in 2005.  Theincrease of 1.8 percentage points was primarily due to a change in product mixand increased warranty and inventory obsolescence reserves. Cost of goods soldin the period ended September 30, 2005 included approximately $0.6 millionof costs associated with operating an additional facility including duplicativerent, utilities and supplies.

 

*Selling and Administrative*.  Selling and administrative expenses increased$1.1 million from $5.3 million for the nine months ended September 30,2004 to $6.4 million for the nine months ended September 30, 2005. As apercentage of sales, selling and administrative expenses decreased from 33.5%for the nine months ended September 30, 2004 to 28.7% for the nine monthsended September 30, 2005. The increase in expenses was primarily due tohigher commissions, travel expenses, and shipping charges as well as costsassociated with operating an additional facility including duplicative rent,utilities, supplies and recruitment for the new facility.

 

*Research and Development*.* *Research anddevelopment expenses decreased $0.1 million from $1.0 million for the ninemonths ended September 30, 2004 to $0.9 million for the same period in2005. The decrease was primarily due to a decrease in testing expenses.

 

*Depreciation and Amortiza*tion.  Depreciation and amortization increased $0.3million from $0.5 million for the nine months ended September 30, 2004 to$0.8 million for the same period in 2005. The increase was primarily due to theacceleration of depreciation and amortization on equipment and leaseholdimprovements to be abandoned upon the consolidation of the Company’s operationsin its new facility in Robbinsville, New Jersey.

 

*Facility Consolidation Expenses.*Facilityconsolidation expenses of $0.6 million pertain to expenses incurred for theCompany’s new facility in Robbinsville, New Jersey and consist primarily ofexpenses for the moving of machinery and equipment, employee relocation andseverance.

 

*Interest Income*.  Interest income increased $106,000 from$77,000 for the nine months ended September 30, 2004

 

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to $183,000 for the nine months ended September 30, 2005 due tohigher interest rates in effect during the current period.

 

*Patent Agreement.*During the nine months ended September 30, 2004 the Company entered intoan agreement with a competitor in which the Company was paid $178,000, whichdid not recur in the current year.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At September 30, 2005, the Company had $9.5 million in cash andcash equivalents and working capital of $16.2 million.

 

The Company’soperating activities used cash of $84,000 for the nine months ended September 30,2005, compared to $2.1 million of cash provided for the nine months ended September 30,2004. The decrease was primarily due to an increase in accounts receivableconsistent with the increase in sales and increased inventory in anticipationof future sales of HoloMagTM, partially offset by an increase in accountspayable for the facility consolidation and inventory build. Investingactivities for the nine months ended September 30, 2005 used cash of $2.2million as a result of capital expenditures, primarily associated with the newfacility, of $4.2 million partially offset by sales of short-term investmentsof $2.0 million. Financing activities for the nine months ended September 30,2005 provided cash of $0.4 million due to the exercise of stock options. Therewere no financing activities for the nine-month period ended September 30,2004.

 

On December 14,2004, the Company entered into agreements to lease a 134,000 square foot modernmanufacturing and office building in Robbinsville, New Jersey, which is thesite of its primary operations following the closure, relocation andconsolidation of its operations in Elmsford, New York and Huntingdon Valley,Pennsylvania into the Robbinsville site. The Company substantially completedthe relocation and consolidation of its operations within the quarter ended September 30,2005. The Robbinsville facility provides substantial room for expansion as theCompany consolidated its operations that were being conducted within a 58,000square foot facility in Elmsford, New York and a 30,000 square foot facility inHuntingdon Valley, Pennsylvania into the new facility. The Company has alsobegun acquiring and installing additional equipment and technology in the newfacility in order to broaden its capabilities to serve its target customers,expand capacity and improve efficiency.

 

The base rent on the new lease for the Robbinsville, New Jerseyfacility is $555,000 per year, increasing by 1.9% per year, and the first sevenmonths of the lease are rent-free. Through September 30, 2005 the Companyhas recorded deferred rent of $0.4 million. The Company currently pays acombined base rent of $889,000 per year for its two existing smaller facilitiesin Elmsford, New York and Huntingdon Valley, Pennsylvania. The term of the newlease for the Robbinsville, New Jersey facility is through May 31, 2017,and at the expiration of the term, the Company has options to renew the leasefor three consecutive five year periods and an option to purchase the buildingafter the end of the original lease term for the adjusted fair market value asdefined in the lease agreement.

 

The Company currently anticipates investing approximately $7.0 millionthrough 2005, of which approximately $5.5 million has been expended through September 30,2005, including $.9 million expended in 2004. The estimated $7.0 millionincludes expenditures for facility upgrades to customize the Robbinsville, NewJersey facility for the Company’s operational and security requirements as wellas the acquisition of new equipment to upgrade and expand our productioncapabilities.

 

The Companybelieves that cash flows from operations and its cash balances will besufficient to meet working capital needs and fund capital expenditures,including expenditures relating to the Robbinsville facility, for theforeseeable future.

 

The Company substantially completed the move and consolidation of itsoperations into the Robbinsville, New Jersey facility in the quarter ended September 30,2005. The facilities located in Elmsford, New York and Huntingdon Valley,Pennsylvania were not fully vacated and available for sublease by the end ofthe quarter ended September 30, 2005, and accordingly, the costs relatingto the abandonment of those facilities will be recorded in the quarter ending December 31,2005.  The Company currently expects thetotal expenses associated with the Elmsford and Huntingdon Valley leases,vacating these facilities, relocating and terminating certain employees, movingequipment and other related expenses to be approximately $3.4 million. Of theapproximately $3.4 million the Company expects to incur, $0.6 million and $0.2million was incurred in 2005 and 2004, respectively, and are

 

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classified as facility consolidation expenses on the accompanyingstatement of operations.  Approximately$2.5 million of the total expenses are expected to be paid in cash ratably fromthe fourth quarter of 2005 through the fourth quarter of 2007.

 

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 the Company’sAnnual Report on Form 10-K for the year ended December 31, 2004,which should be considered in connection with a review of this report.

 

ITEM 3.  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT 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 AND PROCEDURES

 

**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 Rule 13a-15.  Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were effective in timely alerting them tomaterial information relating to the Company required to be included in theCompany’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.**

 

PART II - OTHER INFORMATION

 

ITEM 4.  SUBMISSION OF MATTERS TOA VOTE OF SECURITIES HOLDERS

 

On September 22,2005, the Company held its annual meeting of stockholders.  For more information on the followingproposals, refer to the Company’s proxy statement dated August 25, 2005,the relevant portions of which are incorporated herein by reference.

 

1.               The stockholderselected each of the five nominees to the Company’s Board of Directors who willserve until the 2006 annual meeting of stockholders or until their successorsare elected and qualified:

 
| **Director**               | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|----------------------------|------------|------------|------------|--------------|------------|
|                       |       |       |       |         |       |
| Kenneth H.  Traub          |       | 17,784,291 |       | 352,006      |       |
| Salvatore F.  D’Amato |       | 18,099,068 |       | 37,229       |       |
| Fred J.  Levin             |       | 18,129,087 |       | 7,210        |       |
| Douglas A.  Crane          |       | 18,110,851 |       | 25,446       |       |
| Jordan S.  Davis           |       | 18,128,787 |       | 7,510        |       |

 

2.               The stockholdersapproved the adoption of the Company’s 2005 Stock Incentive Plan:

 
| For             |   | 9,353,983  |   |
|-----------------|--------|------------|--------|
| Against         |   | 196,868    |   |
| Abstain         |   | 287,319    |   |
| Broker Non-vote |   | 8,298,127  |   |
|            |   |       |   |
| Total           |   | 18,136,297 |   |

 

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3.               The stockholdersratified the selection of PricewaterhouseCoopers LLP as the independentregistered public accounting firm of the Company:

 
| For             |   | 18,112,338 |   |
|-----------------|--------|------------|--------|
| Against         |   | 22,290     |   |
| Abstain         |   | 1,669      |   |
| Broker Non-vote |   | 0          |   |
|            |   |       |   |
| Total           |   | 18,136,297 |   |

 

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ITEM 6.  EXHIBITS

 

10.1         AmendmentNo. 2, dated March 25, 2005, to the Hologram Agreement dated as of February 28,2003 (as amended pursuant to Amendment No. 1 dated as of September 29,2003) by and between MasterCard International Incorporated and American BankNote Holographics, Inc. *

 

10.2         AmendmentNo. 3, dated August 24, 2005, to the Hologram Agreement dated as of February 28,2003 (as amended pursuant to Amendment No. 1 dated as of September 29,2003 and Amendment No. 2 dated as of March 25, 2005) by and betweenMasterCard International Incorporated and American Bank Note Holographics, Inc.*

 

10.3         VISAInternational Holographic Magnetic Stripe Tape Manufacturing ApprovalAgreement, dated April 8, 2005, by and between VISA International ServiceAssociation and American Bank Note Holographics, Inc. *

 

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 Mark J. Bonney pursuant to Exchange Act Rules 13a-14 and 15d-14, asadopted pursuant 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 adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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

 

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* Portions have been omitted pursuant to a request for confidentialtreatment.

 

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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/ Mark J. Bonney                |   |
|                         | Mark J. Bonney                        |
|                         | Executive Vice President,             |
|                         | Chief Financial Officer and           |
|                         | Chief Accounting Officer              |
|                         |                                  |
| Date: November 14, 2005 |                                  |
|                              |                                       |  |  |

 

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