Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended September 30, 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 [  ]

     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]

     As of November 1, 2003, 14,016,517 shares of the Registrant’s Common Stock were outstanding.

Table of Contents

AMERICAN BUILDING CONTROL, INC.
FORM 10-Q
TABLE OF CONTENTS

i

Table of Contents

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.

ii

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)

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

1

Table of Contents

AMERICAN BUILDING CONTROL, INC. and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

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

2

Table of Contents

AMERICAN BUILDING CONTROL, INC. and SUBSIDIARIES

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

3

Table of Contents

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

4

Table of Contents

AMERICAN BUILDING CONTROL, INC. and SUBSIDIARIES

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

5

Table of Contents

AMERICAN BUILDING CONTROL, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

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

6

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, 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 to its industrial video and alarm management businesses. A third segment, Corporate, provides human resources, legal, financial, information technologies, accounting, reporting functions and internal audit.

          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”. 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.

7

Table of Contents

     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.

     With the exception of the options issued as compensation expense to the Company’s former CEO, Mr. George Broady, (see note 7 to the Company’s Consolidated Financial Statements–2002 Executive and Management Severance), 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):

8

Table of Contents

     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 55 to 80 percent; risk-free interest rates ranging from 4.0 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 roll-forward of warranty accrual for the three and nine months ended September 30, 2003 and 2002 (in thousands):

9

Table of Contents

     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.

10

Table of Contents

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.

     According to the Asset Purchase Agreement, the $5.4 million receivable was to 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, 2003, the Company submitted a proposed closing balance sheet that increased the purchase price by approximately $3.8 million. On April 9, 2003, Honeywell disputed the proposed closing balance sheet and, through several subsequent amendments, ultimately proposed a reduction in the $36 million purchase price of approximately $5.9 million.

     As of November 6, 2003, the Company and Honeywell have not resolved their differences. Pursuant to the terms of the Asset Purchase Agreement, the Company and Honeywell have engaged an independent accounting firm to render a binding decision on the dispute. A final resolution is not expected until the fourth quarter of 2003. Accordingly, payments due under the holdback provision have not been made according to the payment schedule.

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 and nine months ended September 30, 2003 and 2002, 1,247,935 and 1,435,581 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 and nine months ended September 30, 2003 and 2002, 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.

11

Table of Contents

Note 5: Comprehensive Loss

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

Note 6: Goodwill and Other Intangible Assets

     Under SFAS No. 142, Goodwill and Intangible Assets, goodwill impairment may 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: MDI Security Systems U.S. (“MDI”) and MDI Security Systems International; 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”). 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 an impairment may exist. If the carrying value of the reporting unit exceeds the fair value, 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.

12

Table of Contents

     The Company completed its transitional impairment analysis as required by SFAS No. 142 as of January 1, 2002. As a result, the Company recorded a non-cash charge of approximately $14.8 million in the MDI Security Systems U.S. 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.

     As of September 30, 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 MDI-Switzerland, formerly known as Multi Concepts Systemes S.A., pursuant to the purchase agreement executed in April 1999. This claim of $221,000 was 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.

13

Table of Contents

     Intangible assets consist of the following (in thousands):

     Amortization expense related to intangible assets subject to amortization was $69,000 and $40,000 for the three months ended September 30, 2003 and 2002, respectively.

     Amortization expense related to intangible assets subject to amortization was $211,000 and $144,000 for the nine months ended September 30, 2003 and 2002, respectively.

     The aggregate estimated future amortization expense for intangible assets for each of the five succeeding years as of September 30, 2003 is as follows (in thousands):

Note 7: Severance and Other Accrued Expenses

     As of September 30, 2003, the Company had accruals for severance and other accrued expenses. A detail of these charges is as follows (in thousands):