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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended March 31, 2003

OR

Commission file number: 0-9463

AMERICAN BUILDING CONTROL, INC.

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 [   ]

As of April 30, 2003, 14,204,071 shares of the Registrant’s Common Stock were outstanding.

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AMERICAN BUILDING CONTROL, INC.
FORM 10-Q
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Forward Looking Statements

Certain statements contained or incorporated in this quarterly 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”) 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.

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PART I

ITEM 1. FINANCIAL STATEMENTS

AMERICAN BUILDING CONTROL, INC. and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

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

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AMERICAN BUILDING CONTROL, INC. and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

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

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AMERICAN BUILDING CONTROL, INC. and SUBSIDIARIES

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

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AMERICAN BUILDING CONTROL, INC. and SUBSIDIARIES

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

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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, 2002 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 financial statements have been restated to reflect the CCTV business as discontinued operations for all periods presented.

	Nature of Operations

	Following the Honeywell Asset Sale, the Company, which is headquartered in Lewisville, Texas, is focused on designing, marketing, selling and servicing specialty security products in industrial, governmental and consumer surveillance markets worldwide. The Company also has a small operation based in Switzerland.

The Company has two operating segments: the Professional Security Group (“PSG”), whose primary focus is access control products, and the Diversified Sales Group (“DSG”) which markets products to the consumer/ do-it-yourself business as well as its industrial video and alarm management businesses. A third segment, Corporate, provides human resources, legal, financial, information technologies, accounting and reporting functions.

	Principles of Consolidation

	The consolidated financial statements include the accounts of American Building Control, Inc. (formerly known as Ultrak, Inc.), a Delaware corporation, and its wholly-owned subsidiaries. These companies are collectively referred to as the “Company”.

	Local currencies are considered the functional currencies for the Company’s operations outside the United States. 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.

	All significant inter-company balances and transactions have been eliminated in consolidation.

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	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.

	Compensation Expense

Option prices are equal to the market price at the date of grant. Shares under grant generally become exercisable in three equal annual installments beginning one year after the date of grant and expire after ten years. 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 is reflected in 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):

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	The fair value of these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: expected volatility of a range of 55 to 80 percent; risk-free interest rates of ranging from 4.5 to 6.5 percent; no dividend yield; and expected lives of one to seven years.

	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 rollforward of warranty accrual for the three months ended March 31, 2003 and 2002 (in thousands):

	Reclassifications

	Certain amounts have been reclassified in the prior period financial statements to conform to the current period presentation.

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Note 2: Receivable from Honeywell International, Inc.

On December 20, 2002, the Company consummated the sale of assets and liabilities related to the closed-circuit television (“CCTV”) business (the “CCTV Business”) to Honeywell International, Inc. (“Honeywell”) for $36.0 million (the “Honeywell Asset Sale” or “Asset Purchase Agreement”). At December 31, 2002, the Company had a receivable of $5.4 million from Honeywell resulting from the Honeywell Asset Sale.

The $5.4 million receivable will be paid to the Company in three equal installments, every six months beginning in May 2003, less any claims or purchase price adjustments resulting from changes to the proposed closing balance sheet provided to Honeywell in March 2003. Adjustments to the purchase price are based on the difference between the final closing balance sheet and $28,389,000. On March 10, the Company submitted a proposed closing balance sheet that increased the purchase price by about $3.8 million. On April 9, Honeywell has challenged the proposed closing balance sheet and proposed a reduction in the purchase price of about $2.6 million.

	As of April 24, the Company and Honeywell did not resolve their differences. Pursuant to the terms of the Asset Purchase Agreement, the Company and Honeywell have begun the process of selecting a nationally recognized accounting firm to render a binding decision on the dispute. A final resolution is not expected until the third quarter of 2003.

Note 3: Trade Accounts Receivable

	Supplemental information on net trade accounts receivable (in thousands):

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, 2003 and 2002, no stock options, preferred shares or warrants were included in the computation of diluted earnings (loss) per share because the effect would have been anti-dilutive.

Note 5: Income Taxes

	The Company’s effective income tax rate for the quarters ended March 31, 2003 and 2002 differed from the federal statutory rate due to losses for which no benefit was taken.

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Note 6: Comprehensive Loss

	Supplemental information on comprehensive loss is as follows (in thousands):

Note 7: Goodwill and Other Intangible Assets

Under SFAS No. 142, Goodwill and Intangible Assets, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. A reporting unit is an operating segment or one level below an operating segment referred to as a component. The Professional Security Group (“PSG”) segment has two reporting units: U.S. Monitor Dynamics, Inc. (“MDI”) and International MDI; the Diversified Sales Group (“DSG”) segment has four reporting units: the consumer/do-it-yourself business (“SecurityandMore™”), ABM Data Systems (“ABM”), Industrial Vision Source (“IVS”) and Mobile Video Products (“MVP”). There is also a reporting unit for the Corporate segment.

In performing its impairment analysis under SFAS 142, the Company completes a two step process to determine the amount of the impairment. The first step involves comparison of the fair value of the reporting unit to the carrying value to determine if any impairment exists. The second step involves comparison of the implied fair value of the goodwill to the carrying value of the goodwill. The implied fair value of the goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. In calculating an impairment charge, the fair value of the impaired reporting units underlying the segments are estimated using discounted cash flow methodology or recent comparable transactions.

	The Company completed its transitional impairment analysis as required by SFAS No. 142

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as of January 1, 2002. As a result, the Company recorded a non-cash charge of approximately $14.8 million in the U.S. MDI reporting unit to reduce the carrying value of its goodwill. Such charge is reflected as a cumulative effect of an accounting change in the accompanying statement of operations. Additionally, the Company’s transitional impairment resulted in a non-cash charge of approximately $11.3 million related to the CCTV business. In calculating the impairment charge, the Company used the two-step process in SFAS No. 142 and determined the fair value of the CCTV reporting unit using recent comparable transactions. Such charge is reflected in the statement of operations as a cumulative effect of an accounting change from discontinued operations.

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	As of March 31, 2003, the net carrying value of the Company’s goodwill, by segment, is as follows (in thousands):

On April 25, 2003, the Company negotiated a full and final release of claims to fulfill its obligation to the former owners of Monitor Dynamics International, S.A., formerly known as Multi Concepts Systemes S.A., (“MCS”), pursuant to the purchase agreement executed in April 1999. This claim of $221,000 will be paid in three equal installments during the second, third and fourth quarters of 2003. As a result of this settlement, the Company reduced its related liability of $325,000 and goodwill by $104,000.

	Intangible assets consist of the following (in thousands):

	Amortization expense related to intangible assets subject to amortization was $72,000 and $136,000 for the three months ended March 31, 2003 and 2002, respectively.

	The aggregate estimated future amortization expense for intangible assets for each of the five succeeding years as of March 31, 2003 is as follows (in thousands):

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Note 8: Severance and Other Accrued Expenses

	Ohio Severance

	During 2002, the Company paid approximately $395,000 in severance costs in connection with the closure of the Ohio facility. The Company paid approximately $82,000 in severance costs during the first quarter of 2003. The remaining accrued severance ($27,000) will be paid by the end of the second quarter.

	Executive and Management Severance

The Company decided to sever a number of its executives including the past two CEOs, the Chief Operating Officer, the Senior Vice-President of the domestic sales group and the Vice-President of Marketing. At December 31, 2002, unpaid obligations related to executive and management severance was approximately $1.7 million. During the first quarter of 2003, the Company paid approximately $287,000 related to these obligations.

In April 2003, the Board of Directors authorized management to accelerate the last 18 months of severance due to the former Chief Executive Officer (“CEO”), George Broady, in a lump sum, discounted at 6%, for approximately $512,000. The 6% discount allowed the Company to reduce its severance obligation to Mr. Broady by about $65,000. Mr. Broady continues to receive his remaining severance payments on a bi-weekly basis through the end of June 2004. Also in April 2003, Mr. Broady’s employment was re-instated, as an assistant to the current CEO, Mr. Bryan C.W. Tate, for a 12-month period, at a salary of $2,500 a month plus a grant of 300,000 stock options.

In addition, Mr. Broady’s severance agreement, dated December 4, 2001, obligated the Company to extend a loan to him to cover the funds needed for the exercise of any stock options which remained outstanding to him upon the occurrence of a triggering event. On January 30, 2003 Mr. Broady gave notice of the intent to exercise options for 475,000 shares, at $1.42 (total of $674,500) under the terms of his severance agreement. Mr. Broady did not execute the loan documents forwarded to him by the Company, and therefore the 475,000 stock options expired.

	Royalty Claim

In 2002, the Company was notified it was subject to a royalty claim on an Assignment Agreement in connection with a patent on electronic monitoring and surveillance devices for the purposes of security and behavior modification in public transportation vehicles (the “Patent”). The Company acquired the ownership of the Patent in 1995 by entering into the Assignment Agreement. The Patent was challenged in 1997 and the re-examination was not completed until 2002. The re-examination upheld the Patent. The Company recorded a charge of approximately $865,000 related to the dispute and paid $150,000 during 2002. At December 31, 2002, the Company has $715,000 accrued related to the dispute.

On April 21, 2003, the Company reached a settlement in the amount of $625,536 for all past claims as of December 31, 2002. A down payment of $156,384, representing 25% of the settlement, was paid during April 2003. The remaining amount will be paid in monthly installments of $20,582 over the ensuing 24 months. A credit to earnings of approximately $90,000 will be recorded in the second quarter of 2003 as a result of the settlement.

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Note 9: 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 on a performance basis consistent with internal management reporting. The Company evaluates performance based on operating profit (loss). The Company has two operating segments: the Professional Security Group (“PSG”) and the Diversified Sales Group (“DSG”).

	PSG

The PSG segment consists primarily of the access control sales in the United States to professional security dealers, installers and certain large-end users of professional security products, including the U.S. Government. The domestic access control business is supplemented by a growing international integration and distribution business based in Switzerland. The product range for the international unit is the same as the one for the U.S.

	DSG

	DSG includes four components; the consumer/do-it-yourself business, the industrial video business, the alarm management business and the mobile video product business.

	The consumer do-it-yourself business, “SecurityandMore™”, based in Lewisville, Texas, and includes a call center and Internet site, SecurityandMore.com, which focus on consumer oriented security products.

	The Industrial Visual Source (“IVS”) and Mobile Video Products (“MVP”) cater to the video and security needs of manufacturing facilities, scientific labs, research organizations and mass transit vehicles.

	The alarm management business, ABM Data Systems, Inc. (“ABM”), sells software products to central monitoring stations that are owned by either proprietary organizations such as large university campuses or commercial operators such as surveillance companies.

	Corporate

	The corporate functions of legal, financial, information technologies, internal audit, accounting and reporting are located in Lewisville, Texas.

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	Geographic Information (in thousands):

Note 10: 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 has repurchased 18,200 shares for approximately $18,048 under the repurchase plan.

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Note 11: Subsequent Events

	CEO Compensation Package

In April 2003, a compensation package for the Company’s Chief Executive Officer (“CEO”), Mr. Bryan C.W. Tate, was approved by the Compensation Committee of the Board of Directors. The package included a base salary of $250,000 and a grant of 280,000 stock options - half of which vested immediately and the other half vested one year from grant. The CEO was also granted 140,000 restricted shares of common stock, one-half vesting on January 1, 2004 and one-half vesting on January 1, 2005. In addition, the compensation package includes regular benefits, $750 per month car allowance and reimbursed relocation expenses.

	Sale of Ohio Land and Building

	On April 7, 2003, the Company completed the sale of its land and building in Carroll, Ohio for net cash proceeds of approximately $1,419,000. This transaction will result in a net gain from discontinued operations of approximately $165,000 during the second quarter of 2003.

	Corporate Headcount Reduction

After the Honeywell Asset Sale, the Company’s management determined that the ongoing operations could not support the current corporate overhead structure. On April 30, 2003, the decision was made to terminate certain corporate personnel, including Company’s Senior Vice-President and General Counsel. The Company will recognize approximately $335,000 in expense related to these severance obligations during the second quarter of 2003.

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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, 2003 and 2002 have been restated to report the Company’s CCTV Business as discontinued operations (see note 1 to the Company’s Consolidated Financial Statements for additional detail).

     The results of operations are discussed as a whole, and where appropriate, by segment (see note 9 to the Company’s Consolidated Financial Statements for additional detail).

     The following table contains information regarding the percentage of net sales of certain income and expense items for the three months ended March 31, 2003 and 2002 and the percentage changes in these income and expense items from year to year: