##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q  [X]      Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2004 OR [  ]      Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number: 0-9463 AMERICAN BUILDING CONTROL, INC.  DELAWARE
    
    75-2626358(State or other jurisdiction
    
    (I.R.S. EmployerOf incorporation or organization)
    
    IdentificationNo.)1301 WATERS RIDGE DRIVELEWISVILLE, TEXAS
    
    75057(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (972) 353-6458 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [  ] Indicate by check mark whether the registrant is an accelerated filer as
defined in Rule 12b-2 of the Securities Exchange Act of 1934. Yes [  ] No [X] The aggregate market value of the voting stock held by non-affiliates
of the registrant, as of March 31, 2004 was $19,269,008. As of that date
14,168,388 shares of the Registrants Common Stock were outstanding.




---



AMERICAN BUILDING CONTROL, INC.
FORM 10-Q
TABLE OF CONTENTS FORWARD LOOKING STATEMENTSPART IITEM 1: FINANCIAL STATEMENTSITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4: CONTROLS AND PROCEDURESPART IIITEM 1: LEGAL PROCEEDINGSITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDSITEM 3: DEFAULTS UPON SENIOR SECURITIESITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSITEM 5: OTHER INFORMATIONITEM 6: EXHIBITS AND REPORTS ON FORM 8-KSIGNATURESCERTIFICATIONSCertification of Chief Executive OfficerCertification of Chief Financial OfficerJoint Certification of CEO and CFO
  
 Forward Looking Statements Certain statements contained or incorporated in this report on Form
10-Q, which are not statements of historical fact, constitute forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995 (the Reform Act). Forward looking statements are made
in good faith by American Building Control, Inc. (the Company or ABC)
pursuant to the safe harbor provisions of the Reform Act. These
statements may involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements to
differ materially from any future results, performance or achievements,
whether expressed or implied. These risks, uncertainties and factors
include the timely development and acceptance of new products and services,
the impact of competitive pricing, fluctuations in operating results, the
ability to introduce new products and services, technological changes,
reliance on intellectual property and other risks. The objectives set forth
in this Form 10-Q are subject to change due to global market and economic
conditions beyond the control of the Company. 2




---



##### Table of Contents








PART I




ITEM 1. FINANCIAL STATEMENTS

AMERICAN BUILDING CONTROL, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

March 31,
    
    December 31,2004
    
    2003ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    4,632
    
    
    $
    6,307Marketable securities
    
    
    1,299
    
    
    
    1,499Trade accounts receivable, net
    
    
    3,626
    
    
    
    3,484Inventories
    
    
    5,271
    
    
    
    4,832Receivable from Honeywell International, Inc.
    
    
    1,800
    
    
    
    1,800Prepaid expenses and other current assets
    
    
    387
    
    
    
    697Assets of discontinued operations
    
    
    83
    
    
    
    81Total current assets
    
    
    17,098
    
    
    
    18,700Property and Equipment, net
    
    
    2,471
    
    
    
    2,810Other Assets:Goodwill
    
    
    3,521
    
    
    
    3,521Other intangible assets
    
    
    46
    
    
    
    49Other assets
    
    
    755
    
    
    
    756Total assets
    
    $
    23,891
    
    
    $
    25,836LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Trade accounts payable
    
    $
    3,490
    
    
    $
    2,898Accrued expenses
    
    
    982
    
    
    
    1,779Accrued compensation
    
    
    2,161
    
    
    
    2,171Accrued royalties
    
    
    255
    
    
    
    255Customer deposits
    
    
    1,869
    
    
    
    Other current liabilities
    
    
    251
    
    
    
    53Deferred income
    
    
    488
    
    
    
    494Liabilities of discontinued operations
    
    
    857
    
    
    
    1,764Total current liabilities
    
    
    10,353
    
    
    
    9,414Long-Term LiabilitiesAccrued royalties
    
    
    32
    
    
    
    93Severance obligations
    
    
    
    
    
    
    29Total long-term liabilities
    
    
    32
    
    
    
    122Commitments and Contingencies
    
    
    
    
    
    
    Stockholders Equity:Preferred stock, $5 par value, issuable in series;
2,000,000 shares authorized; Series A, LIBOR + 200 basis
points cumulative convertible; 195,351 shares authorized,
issued and outstanding
    
    
    977
    
    
    
    977Common stock, $.01 par value; 50,000,000 shares
authorized; 17,656,738 and 17,656,738 shares issued at
March 31, 2004 and December 31, 2003, respectively
    
    
    176
    
    
    
    176Additional paid-in-capital
    
    
    162,618
    
    
    
    162,618Deferred stock compensation
    
    
    
    
    
    
    Accumulated deficit
    
    
    (111,650
    )
    
    
    (108,858
    )Accumulated other comprehensive income
    
    
    86
    
    
    
    88Treasury stock, at cost (3,488,350 and 3,488,350 common
shares at March 31, 2004 and December 31, 2003,
respectively)
    
    
    (38,701
    )
    
    
    (38,701
    )Total stockholders equity
    
    
    13,506
    
    
    
    16,300Total liabilities and stockholders equity
    
    $
    23,891
    
    
    $
    25,836


The accompanying notes are an integral part of the consolidated financial statements.

3



---



##### Table of Contents



AMERICAN BUILDING CONTROL, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data) Three months ended March 31,2004
    
    2003(In thousands, except share and per share data)Net sales
    
    $
    8,778
    
    
    $
    11,395Cost of sales (exclusive of depreciation shown separately below)
    
    
    6,158
    
    
    
    7,772Gross profit
    
    
    2,620
    
    
    
    3,623Other operating costs:Selling, general and administrative
    
    
    5,028
    
    
    
    4,874Depreciation and amortization
    
    
    355
    
    
    
    5045,383
    
    
    
    5,378Operating loss
    
    
    (2,763
    )
    
    
    (1,755
    )Other income (expense):Interest expense
    
    
    
    
    
    
    (299
    )Interest income
    
    
    22
    
    
    
    19Other, net
    
    
    30
    
    
    
    3852
    
    
    
    (242
    )Loss before income taxes and discontinued operations
    
    
    (2,711
    )
    
    
    (1,997
    )Income tax benefit
    
    
    
    
    
    
    Loss from continuing operations
    
    
    (2,711
    )
    
    
    (1,997
    )Loss from discontinued operations
    
    
    (73
    )
    
    
    (664
    )Net loss
    
    
    (2,784
    )
    
    
    (2,661
    )Dividend requirements on preferred stock
    
    
    (8
    )
    
    
    (29
    )Net loss allocable to common stockholders
    
    $
    (2,792
    )
    
    $
    (2,690
    )Basic and diluted earnings (loss) per share from:Continuing operations
    
    $
    (0.19
    )
    
    $
    (0.14
    )Discontinued operations
    
    
    (0.01
    )
    
    
    (0.05
    )Basic and diluted loss per share
    
    $
    (0.20
    )
    
    $
    (0.19
    )Number of common shares used in computations:Basic
    
    
    14,168,388
    
    
    
    14,040,488Diluted
    
    
    14,168,388
    
    
    
    14,040,488
 The accompanying notes are an integral part of the consolidated financial statements. 4




---



##### Table of Contents



AMERICAN BUILDING CONTROL, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Three months ended March 31,2004
    
    2003Operating Activities:Net loss
    
    $
    (2,783
    )
    
    $
    (2,661
    )Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:Loss on disposal of fixed assets
    
    
    
    
    
    
    154Loss on sale of investments
    
    
    7
    
    
    
    Writedown
of non-compete deferred income
    
    
    (25
    )
    
    
    Realized foreign currency translation losses
    
    
    
    
    
    
    Depreciation and amortization
    
    
    355
    
    
    
    569Provision for losses on accounts receivable
    
    
    (308
    )
    
    
    96Mark-to-market interest rate swap
    
    
    52
    
    
    
    39Changes in operating assets and liabilities, net of dispositions:Trade accounts receivable
    
    
    166
    
    
    
    (602
    )Writedown of
supply agreement deferred income
    
    
    (75
    )Inventories
    
    
    (439
    )
    
    
    (1,072
    )Prepaid and other current assets
    
    
    309
    
    
    
    131Other assets
    
    
    4
    
    
    
    71Trade accounts payable
    
    
    592
    
    
    
    1,511Accrued and other current liabilities
    
    
    303
    
    
    
    (2,109
    )Net cash used in operating activities
    
    
    (1,842
    )
    
    
    (3,873
    )Investing Activities:Purchases of property and equipment
    
    
    166
    
    
    
    (258
    )Software development costs
    
    
    (182
    )
    
    
    Proceeds from the sale of property and equipment
    
    
    
    
    
    
    103Proceeds from redemption of marketable securities
    
    
    191
    
    
    
    Net cash provided by (used in) investing activities
    
    
    175
    
    
    
    (155
    )Financing Activities:Purchase of treasury stock
    
    
    
    
    
    
    (6
    )Payment of preferred stock dividends
    
    
    (8
    )
    
    
    (29
    )Net cash used in financing activities
    
    
    (8
    )
    
    
    (35
    )Net decrease in cash and cash equivalents
    
    
    (1,675
    )
    
    
    (4,063
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    6Cash and cash equivalents, beginning of period
    
    $
    6,307
    
    
    $
    16,436Cash and cash equivalents, end of period
    
    $
    4,632
    
    
    $
    12,379Supplemental cash flow information:Cash paid during the year for:Interest
    
    $
    
    
    
    $
    231Income taxes
    
    $
    
    
    
    $
    17
 The accompanying notes are an integral part of the consolidated financial statements. 5




---



##### Table of Contents



American Building Control, Inc. Notes to Consolidated Financial Statements Note 1: Nature of Operations Basis of Presentation The accompanying financial statements have been derived from the accounts of
American Building Control, Inc. and its subsidiaries (the Company). The interim financial statements are prepared on an unaudited basis in
accordance with accounting principles for interim reporting and do not include
all of the information and disclosures required by accounting principles
generally accepted in the United States of America for complete financial
statements. All adjustments which are, in the opinion of management, necessary
for a fair presentation of the results of operations for the interim periods
have been made and are of a recurring nature unless otherwise disclosed herein.
The results of operations for such interim periods are not necessarily
indicative of results of operations for a full year. For further information,
refer to the consolidated financial statements and notes to the consolidated
financial statements for the year ended December 31, 2003 included in the
Companys Annual Report on Form 10-K. On December 20, 2002, the Company sold its closed-circuit television (CCTV)
business to Honeywell International, Inc. (Honeywell) for $36 million,
subject to post-closing adjustments, plus the transfer of certain liabilities
(Honeywell Asset Sale). The CCTV business is presented as discontinued
operations. Nature of Operations In 2003, following the Honeywell Asset Sale, the Company reorganized
its business activities of designing, marketing, selling and servicing
niche security products for use in industrial, governmental and consumer
surveillance markets into two separate operating segments: Professional
Security Group (PSG) and Diversified Sales Group (DSG). During the first quarter of 2004, the Company developed a new
strategy that focuses on providing centralized security risk management
solutions that gather, analyze, correlate and report real-time event data
to enable rapid investigation and response to physical, cyber and
information security incidents within an organizations global
infrastructure. The Company aims to be the most trusted security solutions
provider to its government and corporate clients. In this new strategy, PSG
is identified as the core business that will be the Companys foundation
for the future. PSG is comprised of MDITM Security Systems, Inc. (MDI) and ABMTM Data
Systems, Inc. (ABM). MDI is a leader in the access control business and already an
important participant of many Homeland Security projects. MDIs new
Security SuiteTM of products has been launched successfully, and management
believes it is the first fully integrated system to incorporate access
control, video, audio alarm monitoring, and audit functions. The new
Security SuiteTM of products is at the forefront of the digital revolution
now unfolding in the security industry. The Company distributes its PointGuardTM access control product
primarily to the small to mid market commercial customer through a dealer
network. With over 2,000 worldwide installations, PointGuardTM represents a
significant opportunity for the Company to expand further into the
commercial markets. ABM provides alarm management software to central monitoring stations
that are owned by either organizations for their own use, such as large
universities, or commercial operators such as surveillance companies. ABM
has a substantial customer list that includes large blue-chip organizations
purchasing or licensing ABMs software products. DSG is comprised of the Securityandmore, the Industrial Vision Source
(IVSTM) and Mobile Video Products (MVPTM) operating units. As part of
its new business direction, the Company is currently in an ongoing process
of evaluating the possible divestiture of the DSG business segment.
However, at this time, no interested party has made a firm decision to
acquire the segment. 6




---



##### Table of Contents



SecurityandMore sells easy-to-install surveillance monitoring kits and
accessories through its call center, the www.SecurityandMore.com web-site
and national retail customers. IVSTM distributes video products to
manufacturing and research facilities. MVPTM sells monitoring and recording
devices to operators of public transit vehicles. Both IVSTM and MVPTM sell
third-party products as well as the Companys own branded products. Principles of Consolidation The consolidated financial statements include the accounts of American
Building Control, Inc., a Delaware corporation, and its wholly owned
subsidiaries. These companies are collectively referred to as the Company.
All significant inter-company balances and transactions have been eliminated in
consolidation. The local currency is considered the functional currency for the Companys
Swiss operations. Assets and liabilities are translated into U.S. Dollars at
the rate of exchange in effect at the balance sheet date. Revenues and expenses
are translated into U.S. Dollars at the average monthly exchange rates
prevailing during the year. Stock-Based Compensation In December 2002, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 148, Accounting for Stock-Based CompensationTransition
and Disclosurean amendment of FASB Statement No. 123.This statement amends
SFAS No. 123, Accounting for Stock-Based Compensation,to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company accounts for stock-based compensation to employees using the
intrinsic value method. Compensation costs for stock options is measured as the
excess, if any, of the quoted market price of the Companys stock at the date
of grant over the amount an employee must pay to acquire the stock. The Company
has adopted the disclosure-only provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. Based on the 2002 Stock Option Incentive Plan, the vesting period varies
based on individual grants and is determined by the Compensation Committee of
the Board of Directors. The Honeywell Asset Sale triggered the change of
control provisions in the Companys stock option plans that provided for the
immediate vesting of all outstanding stock options as of December 20, 2002. No compensation cost related to stock options is reflected in the
statements of operations as all options granted under the Companys option
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect on
operations and per share data as if the Company had applied the fair value
recognition provisions of SFAS No. 123 to employee stock-based compensation (in
thousands): Three months endedMarch 31,2004
    
    2003Net loss from continuing operations allocable to common
stockholders:As reported
    
    $
    (2,719
    )
    
    $
    (2,026
    )Deduct: Total stock-based compensation under fair value
based method for all awards
    
    
    (426
    )
    
    
    Pro forma
    
    $
    (3,145
    )
    
    $
    (2,026
    )Basic and diluted loss per share from continuing operationsAs reported
    
    $
    (0.19
    )
    
    $
    (0.14
    )Pro forma
    
    $
    (0.22
    )
    
    $
    (0.14
    )
 The fair value of these options was estimated at the date of grant using
the Black-Scholes option pricing model with the following assumptions: expected
volatility of a range of 88 to 90 percent; risk-free interest rates ranging
from 3.3 to 3.9 percent; no dividend yield; and expected lives of one to seven
years. 7




---



##### Table of Contents



Warranty Reserves Reserves are provided for the estimated warranty costs when revenue is
recognized. The costs of warranty obligations are estimated based on warranty
policy or applicable contractual warranty, historical experience of known
product failure rates and use of materials and service delivery charges
incurred in correcting product failures. Specific warranty accruals may be made
if unforeseen technical problems arise. If actual experience, relative to these
factors, adversely differs from these estimates, additional warranty expense
may be required. The table below shows the roll-forward of warranty accrual for the three
months ended March 31, 2004 and 2003 (in thousands): Three months endedMarch 31,2004
    
    2003Beginning balance
    
    $
    184
    
    
    $
    128Charged to expense
    
    
    8
    
    
    
    16Usage
    
    
    (8
    )
    
    
    (1
    )Closing balance
    
    $
    184
    
    
    $
    143
 Marketable Securities The Company accounts for its marketable securities, all of which are
designated as available for sale, using SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities.Securities available for sale are
reported at fair value, with unrealized gains and losses, net of tax, excluded
from earnings and reported as a separate component of stockholders equity.
Realized gains and losses on securities available for sale are reported as
income in the period of sale. Reclassifications Certain amounts have been reclassified in the prior period financial
statements to conform to the current period presentation. Note 2: Receivable from International, Inc. The CCTV Business sold by the Company in the Honeywell Asset Sale
consisted of assets in the United States, Germany, Italy, Poland, South
Africa, Australia, Singapore and the United Kingdom. The sale price of $36
million, included a $2.2 million holdback for anticipated royalties for a
license agreement as well as a $5.4 million purchase price hold back. The
latter was subject to change in the net value of CCTV assets between March
31, 2002 and December 20, 2002 as well as general representations and
warranties made by the Company to Honeywell. The $5.4 million purchase price
holdback was to be paid to the Company, with accrued interest, over three
installments every six months after the close of the sale. In April 2003, Honeywell disputed the change in net asset value and,
after failing to resolve the differences by August 2003, Honeywell and the
Company entered into arbitration. In December 2003, the final resolution
rendered by the arbitrator increased the purchase price by approximately
$888 thousand. Honeywell made payments for the increase of the purchase
price, the first two of the three holdback installments and the accrued
interest in December 2003. The final $1.8 million installment is due in
June 2004. Note 3: Trade Accounts Receivable Supplemental information on net trade accounts receivable (in thousands): March 31,
    
    December 31,2004
    
    2003Gross trade accounts receivable
    
    $
    3,939
    
    
    $
    4,205Less: allowance for doubtful accounts
    
    $
    (413
    )
    
    
    (721
    )$
    3,526
    
    
    $
    3,484
 8




---



##### Table of Contents



Note 4: Earnings Per Share The Company computes basic earnings (loss) per share based on the
weighted-average number of common shares outstanding. Diluted earnings per
share is computed based on the weighted average number of shares outstanding,
plus the number of additional common shares that would have been outstanding if
dilutive potential common shares had been issued. For the three months ended March 31, 2004 and 2003, 3,133,015 and 454,635
stock options were outstanding, respectively, but were not included in the
computation of diluted earnings (loss) per share because the effect would have
been anti-dilutive. For the three months ended March 31, 2004 and 2003, 195,351
shares of preferred stock, which convert to 406,981 shares of common stock,
were excluded from the computation of diluted loss per share because the effect
was anti-dilutive. Note 5: Comprehensive Loss Supplemental information on comprehensive loss is as follows (in
thousands): Three months endedMarch 31,2004
    
    2003Net loss
    
    $
    (2,784
    )
    
    $
    (2,661
    )Other comprehensive income (loss):Currency translation adjustment.
    
    
    (2
    )
    
    
    (7
    )$
    (2,786
    )
    
    $
    (2,668
    )
 Note 6: Severance and Other Accrued Expenses As of March 31, 2004, the Company had accruals for severance,
restructuring and settlement expenses. A detail of these charges is as follows
(in thousands): Accrued at December 31,
    
    2004 Charges
    
    Amount paid in
    
    Accrued at March 31,2003
    
    (credits)
    
    cash
    
    2004Royalty Claims
    
    $
    329
    
    
    $
    
    
    
    $
    (61
    )
    
    $
    268United Kingdom Lease
    
    
    330
    
    
    
    
    
    
    
    (262
    )
    
    
    682003 Severance
    
    
    670
    
    
    
    
    
    
    
    (532
    )
    
    
    1382004 Severance
    
    
    
    
    
    
    300
    
    
    
    
    
    
    
    300$
    1,329
    
    
    $
    300
    
    
    $
    (855
    )
    
    $
    774
 Royalty Claim On April 21, 2003, the Company reached a settlement in the amount of
approximately $625,000 related to a patent infringement claim. An initial
payment of $156,000, representing 25% of the settlement was paid by the
Company during April 2003. The remaining amount, plus interest, is being paid
in monthly installments of approximately $21,000 over the ensuing 24 months. United Kingdom Lease In the Honeywell Asset Sale, Honeywell did not assume the lease for
the Companys Warrington (Manchester) facility in the United Kingdom.
During the first quarter of 2004, the Company reached a final settlement
with the landlord. The final settlement was for $330,000. The Company has
paid $262,000 during the first quarter and the remaining $68 is due to be
paid by June 30, 2004. 9




---



##### Table of Contents



2003 Corporate and Executive Headcount Reduction At December 31, 2003, unpaid obligations related to executive and
management severance was approximately $0.7 million. As of March 31, 2004,
the Company had one outstanding agreement. 2004 Executive Severance Mr. Tate separated as an employee of the Company on December 31, 2003 and
as its Chief Executive Officer and as the Chairman of the Board in November
2003. Mr. Tate resigned his position on the Companys Board of Directors
effective March 31, 2004. Pursuant to an agreement entered into between Mr.
Tate and the Company dated April 15, 2004, all employment-related issues
between Mr. Tate and the Company have been concluded. Mr. Tate was paid
$300,000 for severance. Note 7: Segment Disclosures and Foreign Operations The Companys underlying accounting records are maintained on a legal
entity basis for government and public reporting requirements. Segment
disclosures are consistent with internal management reporting, and the
segment disclosures for prior years have been reclassified to be consistent
with the current year presentation. The Company evaluates performance based
operating profit (loss). The accounting policies of these segments are the
same as those described in the summary of significant accounting policies
(included in the Companys 10-K for the year ended December 31, 2003). The Company has two operating segments: the Professional Security
Group (PSG) and the Diversified Sales Group (DSG). In addition to PSG
and DSG, the corporate functions of human resources, legal, financial,
information technologies, accounting, reporting and executive are located
in Lewisville, Texas. Also included is a service center that repairs DSG
and PSG products, as well as other manufactured products. PSG is comprised of MDI, MDI Switzerland and ABM. MDI is a leader in
the access control business. ABM sells alarm management software to central
monitoring stations that are owned by either organizations for their own
use, such as large universities, or commercial operators such as
surveillance companies. MDI Switzerland is being reorganized as part of an
overall shift in the Companys international strategy. DSG
is comprised of the Securityandmore, IVSTM and MVPTM.
SecurityandMore sells easy-to-install surveillance monitoring kits through
its call center, the www.SecurityandMore.com web-site and national retail
customers. IVSTM distributes video products to manufacturing and research
facilities. MVPTM sells monitoring and recording devices to public transit
vehicles. Both IVSTM and MVPTM sell third-party products as well as the
Companys own branded products. PSG
    
    DSG
    
    Corporate
    
    TotalThree months ended March 31, 2004Total revenue
    
    $
    3,592
    
    
    $
    5,194
    
    
    $
    
    
    
    $
    8,786Intersegment revenue
    
    
    (4
    )
    
    
    (5
    )
    
    
    
    
    
    
    (9
    )Revenue from external customers
    
    $
    3,588
    
    
    $
    5,189
    
    
    $
    
    
    
    $
    8,778Gross profit
    
    $
    1,504
    
    
    $
    1,117
    
    
    $
    (1
    )
    
    $
    2,620Selling, general and administrative
expenses
    
    
    2,504
    
    
    
    1,086
    
    
    
    1,438
    
    
    
    5,028Depreciation and amortization expense
    
    
    213
    
    
    
    33
    
    
    
    109
    
    
    
    355Operating loss
    
    $
    (1,206
    )
    
    $
    (13
    )
    
    $
    (1,544
    )
    
    $
    (2,763
    )Three months ended March 31, 2003Total revenue
    
    $
    5,175
    
    
    $
    6,264
    
    
    $
    
    
    
    $
    11,439Intersegment revenue
    
    
    (42
    )
    
    
    (2
    )
    
    
    
    
    
    
    (44
    )
 10




---



##### Table of Contents



PSG
    
    DSG
    
    Corporate
    
    TotalRevenue from external customers
    
    $
    5,133
    
    
    $
    6,262
    
    
    $
    
    
    
    $
    11,395Gross profit
    
    $
    2,050
    
    
    $
    1,573
    
    
    $
    
    
    
    $
    3,623Selling, general and administrative
expenses
    
    
    2,586
    
    
    
    812
    
    
    
    1,476
    
    
    
    4,874Depreciation and amortization expense
    
    
    219
    
    
    
    9
    
    
    
    275
    
    
    
    503Operating loss
    
    $
    (755
    )
    
    $
    752
    
    
    $
    (1,751
    )
    
    $
    (1,754
    )
 Geographic Information (in thousands): Three months endedMarch 31,2004
    
    2003Sales:United States
    
    $
    8,550
    
    
    $
    9,885Switzerland
    
    
    228
    
    
    
    1,510$
    8,778
    
    
    $
    11,395
 Note 8: Stock Repurchase On March 12, 2003, the Board of Directors approved a plan to repurchase up
to 200,000 shares of the Companys Common Stock through April 12, 2003. The
Company purchased 18,200 shares for approximately $18,000 under this plan.
There is no immediate plan to purchase additional shares. Note 9: Liquidation of International Entities As a result of the sale of the CCTV business to Honeywell, most of the
Companys international entities no longer have any business activities.
Excluding the access control business in Switzerland, the Company has begun the
process to liquidate most of its international entities. During the liquidation
process, certain claims have been made against the Companys French, Belgian
and German entities. Based on an estimation of settlement, the Company recorded
an accrual for these claims and related legal fees of approximately $0.6
million in discontinued operations during 2003. At the end of March 2004 an
accrual of $0.4 million, included in discontinued operations, remained for the
unsettled claims. The remaining $0.5 million in liabilities of discontinued
operations consists of costs associated with the liquidation of foreign
operations associated with the Honeywell asset sale and legal and professional
fees required to accomplish the closures. Note 10: Marketable Securities During the first three months of 2004, the Company owned $1.3 million in
callable government securities from the Federal Home Loan Bank (FHLB), the
Federal National Mortgage Association (FNMA) and the Federal Home Loan
Mortgage Corporation (FRMC). The Company has classified these investments as
available for sale (see note 1 to the Companys Consolidated Financial
Statements for additional detail). The following table summarizes these
securities (dollars in thousands): Security
    
    Coupon
    
    Callable
    
    Maturity
    
    Amortized
    
    Unrealized
    
    MarketType
    
    Rate
    
    Date
    
    Date
    
    Cost
    
    Loss
    
    ValueFHLB
    
    
    6.50
    %
    
    
    3/15/2004
    
    
    
    3/15/2017
    
    
    
    571
    
    
    
    21
    
    
    
    550FHLB
    
    
    6.59
    %
    
    
    8/6/2004
    
    
    
    8/6/2014
    
    
    
    126
    
    
    
    4
    
    
    
    122FNMA
    
    
    5.50
    %
    
    
    4/16/2004
    
    
    
    4/16/2018
    
    
    
    511
    
    
    
    10
    
    
    
    501FRMC
    
    
    6.35
    %
    
    
    5/15/2004
    
    
    
    5/15/2016
    
    
    
    129
    
    
    
    3
    
    
    
    126$
    1,337
    
    
    $
    38
    
    
    $
    1,299
 11




---



##### Table of Contents



The security above that was callable on March 15, 2004 was actually called on
April 1, 2004 and will be reflected in the next quarter report. 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Financial statements for the three months ended March 31, 2004 and 2003
report the Companys CCTV Business as discontinued operations. The results of
operations are discussed as a whole, and where appropriate, by segment. The
following table contains information regarding the percentage of net sales of
certain income and expense items for the three months ended March 31, 2004 and
2003 and the percentage changes in these income and expense items from year to
year: PercentagePercentage of Net Sales
    
    Increase (Decrease)Three Months ended March 31,
    
    Between Periods2004 vs.2004
    
    2003
    
    2003Net Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    -23.0
    %Cost of sales
    
    
    70.2
    %
    
    
    68.2
    %
    
    
    -20.8
    %Gross profit
    
    
    29.8
    %
    
    
    31.8
    %
    
    
    -27.7
    %Operating expenses:Selling, general and administrative
    
    
    57.3
    %
    
    
    42.8
    %
    
    
    3.2
    %Depreciation and amortization
    
    
    4.0
    %
    
    
    4.4
    %
    
    
    -29.7
    %Operating loss
    
    
    -31.5
    %
    
    
    -15.4
    %
    
    
    -57.4
    %Other income (expense)
    
    
    0.6
    %
    
    
    -2.1
    %
    
    
    121.5
    %Loss before taxes and discontinued operations
    
    
    -30.9
    %
    
    
    -17.5
    %
    
    
    -35.8
    %Income taxes
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Loss from continuing operations
    
    
    -30.9
    %
    
    
    -17.5
    %
    
    
    -35.8
    %Loss from discontinued operations
    
    
    -1.6
    %
    
    
    -5.8
    %
    
    
    79.4
    %Net loss
    
    
    -32.4
    %
    
    
    -23.4
    %
    
    
    -7.0
    %
 Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003 For the three months ended March 31, 2004, net sales were $8.8 million, a
decrease of $2.6 million (23%) over the same period in 2003. Sales in the PSG
segment decreased $1.5 million (30%), to $3.6 million during the first quarter
of 2004 compared to $5.1 million during the same period in 2003. The decrease
is primarily related to a $1.1 million sale of video products to a French
casino in 2002 that were delivered in the first quarter of 2003. Video product
sales in the United States accounted for a additional decrease of $0.4 million
compared to the first quarter of 2003. Sales of Access Control and Alarm
Monitoring core products remained consistent. Sales in the DSG segment
decreased $1.1 million (17%), to $5.2 million during the first quarter of 2004,
compared to $6.3 million during the same period in 2003. The decrease is mainly
due to a $600 thousand decline in the industrial video business, a decrease of
$300 thousand in consumer products and lesser decreases in mobile video
products compared to the first quarter of 2003. The $600 thousand sales
reduction in the IVS group was mainly caused by continuing reduced capital
spending in the Semiconductor Inspection and Video Teleconferencing markets.
The decrease in the consumer sales group primarily resulted from a large
national retailer purchase of consumer security products in the first quarter
of 2003 as it began marketing DSGs product line. For the first quarter of
2004, the same national retailer placed reduced orders to a normal sales level
mode versus its startup mode. 12




---



##### Table of Contents



Gross profit margins decreased from 31.8% during the three months ended
March 31, 2003 to 29.8%, or a 27.7% decrease. The margin decrease is attributed
to the DSG segment. The DSG segment gross profit was 21.5% for the first
quarter of 2004 compared to 25.1% during the same period of 2003, primarily due
to strong price erosion within the industrial video business. The PSG segment
gross profit was 41.9% for the first quarter of 2004 compared to 39.9% during
the same period of 2003. The increase of gross profit margins within the PSG
segment is related to fewer video product sales as the segment focuses on the
higher margin SAFEnet access control products. Selling, general and administrative expenses (SG&A) were $5.0 million
for the three months ended March 31, 2004, an increase of $0.2 million (3%)
over the same period in 2003. The increase was related primarily to the former
CEOs $300 thousand severance expense in the first quarter of 2004 versus
senior management severance of $170 thousand for the first quarter of 2003.
Depreciation and amortization expenses were $0.4 million for the three months
ended March 31, 2004, a decrease of $0.1 million (30%) over the same period in
2003. This decrease resulted primarily from less building depreciation and the
write-off of Companys SAP system in 2003. Other income and expenses during the three months ended March 31, 2004
were $0.1 million of income, compared to a net $(0.2) million of income and
expenses during the same period in 2003. The improvement resulted primarily
from $0.3 million of interest and loan amortization costs incurred due to the
Companys sale/leaseback of its Lewisville Headquarters facility
during the first quarter of 2003. Net losses from discontinued operations in the first quarters March 31,
2004 and 2003 were $(73,000) and $(664,000), respectively. The losses were
primarily due to costs incurred while liquidating the Companys international
legal entities following the Honeywell asset sale. Financial Condition, Liquidity and Capital Resources In the first three months of 2004, the Companys cash and cash
equivalents, including its marketable securities held for sale, decreased from
$7.8 million at December 31, 2003 to $5.9 million at March 31, 2004. The
largest components of the net cash used in operations of $1.8 million were $2.8
million net loss and the decrease of $0.9 million accrued expenses related to
discontinued operations. These uses of cash were offset by a customer deposit
of $1.9 million related to a Homeland Security contract due to ship during the
second and third quarters of 2004. The callable securities held by the Company have coupon rates ranging from
5.5 to 6.6 percent and mature from April 2014 to April 2018 (see note 11 to the
Companys Consolidated Financial Statements for additional detail). The
government may choose to call any security at a date later than the listed call
date. However, the Company believes that based on current interest rate
projections given to the Company by our investment advisor, the government will
choose to call these securities on or near the pertinent call date. During the next twelve months, the Companys primary source of liquidity
will be its cash and cash equivalents. Although cash requirements will
fluctuate depending on the timing and extent of many factors, the Company
believes that it should have enough liquidity to satisfy its liquidity
requirements for at least the next 12 months. The Company plans to generate
cash by divesting its non-core DSG business units and collecting the final
purchase price holdback payment from Honeywell. The Company also plans to
continue consolidation and the rationalization of operating expenses in its
continued efforts to positively impact operational and financial performance. Contractual Obligations and Commitments The following table summarizes the Companys contractual obligations and
commitments with definitive payment terms that will require cash outlays in the
future. These amounts are as of March 31, 2004 (in thousands): Total
    
    2004
    
    2005
    
    2006
    
    2007Contractual
obligations and
commitments:Operating leases
    
    $
    1,374
    
    
    $
    614
    
    
    $
    369
    
    
    $
    301
    
    
    $
    90Royalty obligation
    
    
    362
    
    
    
    266
    
    
    
    46
    
    
    
    25
    
    
    
    25Severance obligations
    
    
    452
    
    
    
    452
    
    
    
    
    
    
    
    
    
    
    
    $
    2,188
    
    
    $
    1,332
    
    
    $
    415
    
    
    $
    326
    
    
    $
    115
 13




---



##### Table of Contents



On April 16, 2004, the Company announced that it will consolidate its MDI
Security Systems (MDI) and ABM Data Systems (ABM) operations in San Antonio,
Texas. This transition has begun and, when completed, the facility will house
all executive, sales, marketing, technical support, assembly, integration and
sustaining research and development activities. The royalty obligation includes $268,000 in future payments for all past
and a minimum annual payment of $25,000 per year for future obligations. The accrued severance at March 31, 2004, includes severance obligations
related to Mr. Tate and another executive management position terminated during
the Companys restructuring and cost cutting initiatives that took place in
2003 and 2004. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Exchange Since the access control office in Switzerland is the Companys only
significant foreign-based operation, accounting for approximately 3% of the
total consolidated sales during the first quarter of 2004, the Company does not
expect currency fluctuation to have a material adverse effect on its future
consolidated financial position or results of operation. Interest Rates An interest rate swap agreement with Bank One remained in effect through
February 15, 2004. This agreement expired and terminated in February, and the
company paid $52,000 for final settlement of the obligation. 
 ITEM 4. CONTROLS AND PROCEDURES The Companys management, with the participation of the Companys
principal executive officer and principal financial officer, evaluated the
effectiveness of the Companys disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act
of 1934, as amended) within 90 days before the filing of this quarterly report.
Based on this evaluation, the Companys principal executive officer and
principal financial officer have concluded that the Companys disclosure
controls and procedures were effective as of the end of the reported period to
ensure that information that is required to be disclosed by the Company in the
reports if files or submits under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms. During the quarter ended March
31, 2004, the Company added personnel in its accounting and finance group to
address various control matters identified in the financial reporting process.
These changes have allowed the Company to prepare its financial information and
related disclosures in a more timely manner. 14




---



##### Table of Contents



PART II 
 ITEM 1. LEGAL PROCEEDINGS The Company is subject to various legal proceedings and claims, either
asserted or unasserted, that arise in the ordinary course of business. Although
the outcomes of these legal proceedings cannot be predicted with certainty,
management does not believe that any of these existing legal matters will have
a material adverse effect on the Companys financial condition or results of
operations. 
 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 
 ITEM 5. OTHER INFORMATION None. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K  a)
    
    Exhibits. The following is a list of the Exhibits filed with this Form 10-Q. 31.1  Certification of Chief Executive Officer required by Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended (the
Exchange Act). 31.2  Certification of Chief Financial Officer required by Rule 13a-14(a) or
Rule 15d-14(a) of the Exchange Act. 32.1  Joint Certification of Chief Executive Officer and Chief Financial
Officer required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and
Section 1350 of Chapter 63 of Title 18 of the United States Code. (*)  b)
    
    Reports on Form 8-K. The following reports on Form 8-K were filed
during the three months ended March 31, 2003 1. On March 9, 2004, a report was filed which furnished a press release
reporting the Companys preliminary earnings for the quarter and year ending
December 31, 2003 15




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on behalf by the undersigned, thereunto duly authorized. AMERICAN BUILDING CONTROL, INC.Dated: May 17, 2004
    
    
    By:
    /s/ Jon D. GreenwoodJon D. GreenwoodSenior Vice President and Interim Chief Financial Officer
 16