Kenneth Traub left Voxware in 1998 vowing to look for a less stressful

job. A co-founder of Voxware in 1994, he had helped it grow from a

four-person firm to a public company with 18,000 square feet on

College Road, and he had watched it flounder, mostly because the

technology, Voice over Internet Protocol (VoIP), was ahead of its

time. "Co-founding and building Voxware was one of the most exciting

experiences of my life," said Traub then.

At the time Traub landed in the job market, the dotcoms had not yet

suffered their decline, and Traub looked at, but turned down, some

promising Internet jobs. "After Voxware – which was exciting but

turned out to be somewhat of a disappointment – I wanted something

more stable and less stressful," he says now.

He was introduced to American Bank Note Holographics (ABNH) by his

investment bankers from Voxware, and he took the job of chief

financial officer for that company, which designs, mass-produces, and

markets secure holograms, for uses ranging from credit cards to seals

on drug packages. As an established company, ABNH was likely to set a

relatively relaxed pace, or so Traub thought.

In fact, ABNH seemed perfect to Traub because it was the polar

opposite of Voxware. Voxware had been a start-up in Traub’s living

room, whereas ABNH’s parent had been founded in 1795 by colonial

leaders such as Paul Revere. Voxware had a brand-new, not-ready-to-be

accepted idea, and ABNH’s technology was in every wallet in the

Western hemisphere. Voxware developed software, and ABNH manufactured

a product.

But ABNH resembled Voxware in one very unfortunate way – it was ahead

of its time. Whereas Voxware’s voice over IP had prefigured what would

eventually happen in Internet technology, ABNH, as it turns out, had

precociously pushed the envelope of securities fraud when it went

public as a separate entity from its parent, American Bank Note.

"In 1998 ABNH had been a very successful IPO at $7.50, and when I met

the management, stock was trading at about $18," says Traub in a

telephone interview. "It looked to me like a perfect opportunity. They

hired me as executive vice president and CFO. On my first day of work,

January 12, 1999, together with Deloitte & Touche, I discovered there

had been a fraud."

Since then the chairman of the board, the president, and the CFO have

all been found guilty of violations of securities laws, including

publishing false financial statements. The stock fell from $15 to

under $1. "It was an Enron-like scandal. We were proactively dealing

with many of the issues of Sarbanes-Oxley ahead of our time," says

Traub. Traub, who has an MBA from Harvard, was asked to take over the

company and is now the CEO. His turnaround efforts were so successful

that they were the subject of a case study at Columbia Business

School.

"Today we have no debt, $13 million in cash, no legal problems of any

kind pending or anticipated, and have successfully repositioned the

company as the world leader in product and document security and

authentication," says Traub. "We have been leading in the development

of more sophisticated security solutions, both for authentication and

in addressing homeland security." New products have been developed in

these target markets: transaction cards, identity documents, value

documents (currency), and consumer products, most notably

pharmaceutical.

Last month Traub announced he is moving his company from two locations

(58,000 square feet in Elmsford, New York, and 30,000 feet in

Huntingdon Valley, Pennsylvania) to 134,000 square feet at 2 Applegate

Drive in Robbinsville, taking over the building constructed for the

now-departed McLean Engineering. Traub expects to move in in May, and

he is hiring administrative positions (including a quality manager,

marketing, sales, payables and receivables clerks, and administrative

assistants) plus production positions (embossing operators,

metalizers, and printing press operators). The state has promised

Business Incentive Employment Grants.

Traub looked for a building that was conducive to high quality

manufacturing, had space for clean rooms as well as offices, and had

high security; ABNH had to be the sole occupants. He found it at the

Applegate Drive building constructed by Matrix Development.

John Schulze of Woodbridge-based Schulze Organization located the

space for Traub and negotiated the unusual lease – a sublease for 14

years with options to renew or purchase. "We were able to get an

outstanding deal," says Traub. "Compared to my two other buildings I

am getting 50 percent more space and the total rent is decreasing by

40 percent." The base rent is $555,000 for the first year, increasing

by 1.9 percent each year, but the first seven months are rent free.

Grubb & Ellis represented the landlord, WP Carey.

Traub was represented in the negotiations for real estate and with the

NJEDA by Windells Marx as well as by New York-based Fulbright and

Jaworski. Art Blick from Northwestern Mutual has the firm’s insurance

and benefits business, and Jeff Perlman of Borden Perlman is the agent

for the property and casualty insurance. Creative Marketing Alliance

is handling Traub’s marketing, in part because it also manages the

industry association for transaction cards.

Counting the upgraded equipment, Traub is putting $7 million into his

building and spending $5 million in relocation and severance expenses.

The new location (50 miles from Huntington and 60 miles from

Westchester) enables the company to retain virtually all the employees

from the Pennsylvania facility, and many of those who worked near

Westchester, the administrative headquarters, will move or commute.

The case study of the turn-around, presented by Columbia professor

Laura B. Resnikoff, depicted Traub at the moment when he decided to

turn a corporate crisis into a personal opportunity. Three weeks after

he came on board as CFO, the ABNH board asked him to take the post of

president.

In considering his options, he realized that, though his path to the

corner office would be littered with obstacles, he could stake out the

traditional position of the turnaround king: He could honestly say he

had not caused the company’s problems. "He figured that if things did

not go well, he knew that he was not responsible for the problems.

However, if he could successfully turn the company around, he would

get the credit for its survival," says the case study. Most important,

Traub knew how to fight in the trenches.

Traub grew up on Long Island, where his parents owned a furniture

store. He graduated from Emory University in 1983, then went to

Harvard for his MBA. Before founding Voxware he had been vice

president of finance for Trans-Resources Inc., a diversified

multinational holding company which provided some of the seed

investment for Voxware.

At Voxware Traub developed the business plan that positioned Voxware

as a pioneer in the Internet audio, telephony and multimedia markets.

Before the IPO he landed four private equity financings from such

investors as Intel and Netscape. Just before it went public, raising

$20 million in 1996, Voxware changed its business plan from focusing

on consumer CD-ROM products to concentrating on Internet telephones.

Traub negotiated and signed more than 100 license agreements with such

clients as Netscape, Microsoft, AOL, IBM, Oracle, Apple, Walt Disney,

Worldcom, Nokia, and Lucent.

To the company’s chagrin it found that, though other concepts on the

Internet had prospered, the growth of Internet telephony lagged far

behind expectations. Meanwhile Voxware had expanded to 58,000 square

feet and was burning money at $1 million per quarter.

Late in 1997 Bathsheba Malsheen replaced the co-founding CEO and

changed the business plan yet again. The following spring, Voxware had

dropped from 92 people to under 50 people, and stock had dropped to

from $7.50 to just under $3.

Traub left Voxware then, but he retained the confidence of the

financial community. "Kenny has been a competent CFO in so far as any

CFO could have an influence on Voxware’s position," said analyst Bruce

Carlsmith of Montgomery Securities (U.S. 1, May 6, 1998). "People

cognizant of the story know that the issues the company faces are more

endemic to the industry and what they are trying to do than issues of

leadership. The IP telephony market has not yet taken off, and where

it has, they haven’t yet used Voxware’s technology."

One of Voxware’s investment bankers (which included Montgomery

Securities, Alex Brown, and Oppenheimer) recommended him for the job

of CFO at ABNH. Traub lives in the Princeton area, is married to an

attorney, and has two daughters, and though the commute to Elmsford

might have seemed daunting, at least the job would not require the

killer hours that Voxware had needed. Or so he must have thought.

The market opportunities for ABNH looked good. ABNH had helped create

the market for secure holograms when, in the 1980s, credit cards began

using them to fend off counterfeits made on the new color copiers. A

hologram is a laser-generated, three-dimensional reproductions of an

image produced on a two-dimensional surface. By controlling the

diffraction of light, they can add depth, color, and movement to

two-dimensional photographs. The tiny hologram – 40,000 of them would

fit in a shoebox – is used for secure products, such as credit cards

and drivers’ licenses, but can also be used for non-secure products,

such as greeting cards and advertising.

ABNH has done non-secure holograms for magazines such as the National

Geographic and Sports Illustrated, but when Traub took over, the major

card manufacturers (Visa and MasterCard) represented most of its

revenues. ABNH has virtually all of the MasterCard business and the

majority of the Visa business; it can produce more than 20 million

holograms per week or close to 1 billion per year.

The parent company, American Bank Notes (ABN), had been the original

engraver and printer of U.S. currency, but when the U.S. Bureau of

Engraving and Printing took over that function, it turned to printing

bank notes and security certificates. With its secure manufacturing

protocols in place, it was natural for ABN to go into the burgeoning

hologram business, and it established ABNH in 1981 as a wholly-owned

subsidiary. Though security printing grew less and less profitable,

the parent company continued to expand, depending on ABNH for cash

flow. When ABN needed to refinance its debt, it took ABNH public and

kept the cash that the IPO produced. The Columbia case study points

out that this spin-off "was greeted by the market with skepticism,"

and that the price was lowered twice.

Priced at $8.50 per share, the 1998 IPO netted nearly $108 million,

but none of this went to ABNH, so ABNH had to get bank loans to keep

operating. The company was advised to hire a credible CFO if the stock

were to continue to climb.

Traub, the new CFO, was hired to separate out the internal systems –

accounting, purchasing, and human resources – from the parent company.

He also hoped to float a secondary stock offering that could fund

expansion.

His plans cratered on his first day on the job. When the scandal

broke, the board fired the president and made Traub president,

reporting to the CEO. "The company had no cash, was in default on its

$5.5 million in bank debt and was facing significant, complicated

securities litigation," says Traub. "We were both defendants and

adversaries with our former parent. The Securities and Exchange

Commission and the U.S. Attorney’s Office were conducting

investigations."

Companies dealing in security products have reputations to maintain,

and they are particularly vulnerable to scandal. "The reason why you

have a hologram on your credit card is to protect against fraud," says

Traub. "Our suppliers cut off credit, customers were canceling

contracts, and employees were quitting." Reorganizing, he laid off

40 of the company’s 130 employees. One by one, he succeeded in having

every member of the board resign, and he replaced them. Then he

prevailed on the CEO to resign and terminated every member of the

management team, filling two key positions with former "untainted"

employees. A former chairman and president of ABNH, Salvatore "Sal"

D’Amato, came out of retirement to add credibility to the executive

lineup. D’Amato, a mechanical engineer, had been with the company from

1983 to 1990; Traub named him chairman of the board and chief

technology officer. Similarly, Russell LaCoste, vice president of

sales in the 1980s, rejoined the team.

But banks still wanted their money, vendors wanted payment, and

customers didn’t want to place orders with a company that might file

for bankruptcy. So Traub persuaded the banks that it was in their best

interest to let him keep operating the company. He asked for working

capital to finish work-in-progress inventory, and he also aggressively

sought asset-based lenders. He and his team met with each of the major

customers to gain their confidence. He met obligations to the crucial

vendors. For the non-crucial vendors, he and the banks worked out

discount payments of cents on the dollar.

The key to survival, he says now, was keeping things in perspective

and managing one task at a time: "There were so many issues to deal

with that we needed to sequentially manage each challenge as it came

along."

Traub did the turnaround from 1999 to 2001, and after September 11,

his company’s growth was fueled, in part, by the growth in the

security market. For his products, Traub distinguishes between overt,

covert, and forensic security. "The overt security is what you

recognize, things you can see in the hologram image that are unique,

such as movement and depth. Covert images require additional special

equipment that incorporates what you can’t see. Deeper down, we

incorporate forensic information specific for law enforcement, to

catalog the counterfeits and facilitate the prosecution of criminals."

The biggest boost to ABNH’s recovery was a major investment, $9.3

million, from Crane & Co., the chief supplier of paper to the U.S.

Bureau of Engraving. Established in 1801 and run by a

seventh-generation family member, Crane owns 18 percent of ABNH and is

its partner on leading-edge products – making holograms for currency

in some foreign countries, including Bulgaria. The two companies hope

the United States will add holography to its currency – by adding

optically variable window threads – and they anticipate bidding for

that project.

Another reason why Crane’s investment was crucial to Traub is that he

set up a manufacturing facility inside Crane’s building in Dalton,

Massachusetts. Now that he is combining his production lines in New

York and Pennsylvania, the Crane site can function as a redundant

line.

Traub notes that he faced the crisis in 1999, managed the turnaround

through 2001, stabilized the business through 2003, and started to

rebuild it in 2004. "What we are doing now is addressing the legacy of

inefficiency, having two disjointed manufacturing facilities, where

the primary manufacturing facility in Pennsylvania was remote from

corporate marketing and design in New York. Under the past management

there had been very little investment in modernizing the

infrastructure."

When ABNH opened on the New York Stock Exchange in 1998 at $9, it had

gone as high as $18, and when the scandal broke it traded below $1.

For 1999 there were no financial statements, and it was relegated to

the Pink Sheets. It has been moved to the OTC Bulletin Board and

traded recently at just under $3. Traub plans to wait until the stock

reaches the Nasdaq minimum of $5 before trying to move to Nasdaq.

In contrast, the parent company, which had reaped all the proceeds of

the IPO, filed bankruptcy under the weight of the scandal. It has

reorganized and is substantially smaller.

"Now we are financially strong and have succeeded in penetrating

significant new markets. Now we can confidently invest and can build a

much stronger and more capable infrastructure to deliver next

generation security solutions at a time when the demand for security

solutions is escalating," says Traub. "This move is really the next

step in the turnaround and rebuilding of this company."

After all the problems with the turnaround, and all the prolonged real

estate negotiations, Traub was nearly stymied in his desire to move to

New Jersey because, it seems, the state has a law that no company with

the word "bank" in its name that is not a bank can operate here. "They

presented me with two choices, change your name or don’t move here. I

told them, ‘I have 200 years of good will in this name, and if that is

your position, I will move elsewhere.’" The governor’s office assisted

with the legislature that amended the law.

American Bank Note Holographics Inc. (ABHH.OB), 399

Executive

Boulevard, Elmsford NY 10523. Moving to 2 Applegate Drive,

Robbinsville 08691. Kenneth Traub, CEO. 914-593-0809. Www.abnh.com

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