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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number: 0-9463

American Building Control, Inc.

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

      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 þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in a definitive proxy to be filed or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes o          No þ

      The aggregate market value of the voting stock held by non-affiliates of the registrant, as of June 30, 2003 was $14,572,840. As of that date 14,148,388 shares of the Registrant’s Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

      The information required by Part III of this Form (Items 10, 11, 12, 13 and 14) is incorporated by reference from the registrant’s Proxy Statement to be filed on or before April 29, 2004.

AMERICAN BUILDING CONTROL, INC.

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Forward Looking Statements

      Certain statements contained or incorporated in this annual report on Form 10-K, 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-K are subject to change due to global market and economic conditions beyond the control of the Company.

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PART I

General

      American Building Control, Inc. is a leading electronic security technology company. The Company was reincorporated in Delaware in 1995 as Ultrak, Inc. On December 20, 2002, following stockholder approval, the Company sold its closed-circuit television (“CCTV”) business to Honeywell International, Inc. (“Honeywell”) and changed its name to American Building Control, Inc. in connection with the Honeywell Asset Sale. Additional information regarding the Honeywell Asset Sale is set forth at the end of this Item 1 under the heading “Honeywell Asset Sale”.

Businesses

      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”). The total 2003 revenues of the PSG business were approximately $17 million and represented about 43% of the Company’s total revenues. The DSG’s total 2003 revenues were approximately $23 million and represented about 57% of the Company’s total revenues.

      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 MDI^TM Security Systems, Inc. (“MDI”) and ABM^TM 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 Suite^TM 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 Suite^TM of products is at the forefront of the digital revolution now unfolding in the security industry.

      The Company distributes its PointGuard^TM access control product primarily to the small to mid market commercial customer through a dealer network. With over 2,000 worldwide installations, PointGuard^TM 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 (“IVS^TM”) and Mobile Video Products (“MVP^TM”) operating units.

      SecurityandMore sells easy-to-install surveillance monitoring kits and accessories through its call center, the www.SecurityandMore.com web-site and national retail customers. IVS^TM distributes video products to manufacturing and research facilities. MVP^TM sells monitoring and recording devices to public transit vehicles. Both IVS^TM and MVP^TM sell third-party products as well as the Company’s own branded products.

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Markets and Strategy

      ABC believes that many global organizations, governments and commercial businesses are beginning to recognize significant surveillance needs in its physical, network and information assets. Until recently, these different disciplines were managed and operated separately. In many large organizations, the Chief Security Officer (“CSO”) was typically in charge of the physical security, whereas the Chief Information Officer (“CIO”) or Chief Technology Officer (“CTO”) managed the network and information security. This separation of responsibility often causes gaps in an organization’s ability to protect its assets from physical or cyber intrusion.

      In today’s marketplace, it is increasingly clear that the security concerns for physical, network and information assets are converging. Organizations are combining their security needs into one functional unit that can manage security risks throughout their entire enterprise. ABC will support this new CSO/CIO decision-making unit by centralizing the control of disparate security environments in an organization. The Company plans to provide solutions that can bridge the gap between the true level of threat and the level of detection as well as merging multiple solutions available in the current infrastructure. The solutions provided by the Company entail products and services that will essentially create a centralized “nerve center” for all security management across an organization.

      The Company already has strong presence in the areas of access control and alarm monitoring, which is part of the physical security domain. The Company plans to acquire, through acquisitions or internal development, capabilities to deliver state of the art products and services covering information security. These markets include intellectual property protection, trademark search, forensic search, network intrusion and business threat analysis. Our products and services will result in seamless solutions to comprehensive organizational security environments, encompassing physical, network and information assets.

      The Company plans to leverage MDI’s quarter-century experience in physical security to develop a multiple discipline solution for the converging security market.

Products and Services

      Currently, in the PSG segment, MDI’s Security Suite^TM of products is the “flagship” product line for MDI’s access control business. The end users for these products tend to be government agencies or large corporations that have sophisticated and centralized security needs. The Company’s PointGuard^TM product is distributed to the small to mid market commercial customers who need basic access control applications. The Security Suite^TM of products and PointGuard^TM are sold to integrators, dealers and distributors who work with the end users for installation. In addition, MDI provides architectural and consultative advice to end users, dealers and consultants. ABM also develops and sells alarm management software under the brand name Phoenix to central monitoring stations and proprietary commercial accounts. The Company’s MDI office in Lausanne, Switzerland markets and installs access control products throughout Europe.

      In the DSG segment, SecurityandMore sells closed circuit television (CCTV) monitoring kits and accessories under the brand names Focus^TM, Exxis^TM and Smart Choice. MVP^TM and IVS^TM sell products under the brand name MVP^TM or IVS^TM as well as third party video products such as Sony and Mitsubishi.

      Products and services that cater to centralized security control, as mentioned above in “Markets and Strategy”, will be the focus of the Company’s long term investment plan. The Company is in the process of completing plans to divest the non-core businesses and assets of the DSG segment. The timing and pricing of such divestments can not be accurately determined at this time. The Company will focus on re-engineering its core MDI product suite and leverage new product technologies, and offer an upgrade path for the existing installed customer base. Additionally, the Company will target small, strategic acquisitions in the physical, network or information security space to enhance the development of the new strategy. The Company also intends to establish a solution-based recurring revenue model from maintenance contracts, system upgrades, services and training.

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Product Design and Development

      MDI currently develops its access control product lines at its Rancho Cucamonga, California facility. MDI has a professional engineering staff dedicated to software and hardware development. ABM has a technical staff in Austin, Texas that develops software for alarm management applications. SecurityandMore’s product development activities are conducted at the Lewisville, Texas facility. The Company is considering the consolidation of its product development and service capabilities.

Supplier Relationships

      The Company believes that its supplier relationships are good and stable. Ameritron Inc. and Dell, Inc. are the largest vendors for access control equipment. Hitron and Sony are the most significant suppliers for electronic video products. Sudden loss of any one of these vendors could result in material short-term supply problems. The Company continuously evaluates potential vendors to bridge any supply chain disruptions that may occur in its business operations.

Competition

      Substantial competition exists in all of the markets where the Company competes. Significant competitive factors include quality, product performance, customer service, price and ease of integration.

      PSG’s major competitors are Lenel Systems International, Inc., Softwarehouse (a division of Tyco), GE Interlogix and the Northern Computers division of Ademco, a subsidiary of Honeywell. Samsung, Strategic Vista International, Inc. and Philips are the major competition for the DSG segment.

      Certain current and potential competitors have substantially greater resources than the Company. In order to compete successfully, the Company must continue to invest in engineering, marketing and customer service. There is no assurance that these competitors will not develop products that offer superior price or performance features.

Engineering and Software Development

      The Company has two facilities with engineering and software development capabilities — the access control business in Rancho Cucamonga, California and the alarm management software business in Austin, Texas. During the fiscal years ended December 31, 2003, 2002, and 2001, the Company expensed approximately $1.3 million, $1.6 million and $1.1 million, respectively, on engineering and software development costs. The Company is currently evaluating the possible consolidation of its development activities into one location.

Employees

      As of December 31, 2003, the Company had approximately 150 full-time employees worldwide, roughly the same as the end of 2002 and compared with 545 full-time employees worldwide as of December 31, 2001. Approximately 280 of the Company’s former employees joined Honeywell in December 2002 as a result of the Honeywell Asset Sale. Other personnel reductions during 2002 can be attributed to the closure of the Ohio manufacturing plant, involuntary workforce reductions and attrition.

      The Company’s future success will depend in large part on its ability to attract and retain highly skilled technical, managerial, financial and sales personnel. None of the Company’s employees are represented by a union or covered by a collective bargaining agreement. The Company has not experienced a work stoppage or strike. Relations with the Company’s employees are considered good.

Honeywell Asset Sale

      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 due to a license agreement that

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      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 increase to the purchase price is included as a component of discontinued operations in 2003. The final $1.8 million installment is due in June 2004.

      ABC’s corporate headquarters (the “Headquarters Facility”) is located in Lewisville, Texas. The Headquarters Facility consists of approximately 170,000 square feet of office and warehouse space located on 14 acres. In December 2001, the Headquarters Facility was sold to Briarwood Capital Corporation (“Briarwood”) for $6.6 million in a sale-and-leaseback transaction. The Company leased back the Headquarters Facility for $60,000 per month with a term of 30 months. The lease included a $6.9 million purchase option exercisable in November 2003. Briarwood, as part of the negotiation for it to grant a written consent to the Honeywell Asset Sale, increased the purchase option exercise price to $7.55 million. In November 2003, the Company elected not to exercise the purchase option. The current lease expires at the end of June 2004, and all rents have been prepaid as a condition of the written consent related to the Honeywell Asset Sale.

      The Company does not plan to remain in its current Headquarters Facility over the long term. The timing of the Company’s moving from its current Headquarters Facility depends on the timing of the possible divestment of the DSG business units. The timing of the divestiture cannot be ascertained at this time. The Company wishes to consolidate its development resources into one location, as mentioned above, and relocate its corporate staff into the new facility as well.

      As part of the Honeywell Asset Sale, the Company subleased a part of the Headquarters Facility (the “Sublease”) to Pittway Corporation (“Pittway”), a wholly owned subsidiary of Honeywell. The Sublease allowed Pittway to occupy approximately half of the office space and two thirds of the warehouse space in the Headquarters Facility through December 30, 2003. Pittway paid ABC approximately $23,000 per month during 2003. In December 2003, Pittway entered into a new lease with the Company to continue the Sublease through June 2004 at an increased monthly rent of $35,000.

      In addition to the Headquarters Facility, the Company’s principal offices as of December 31, 2003 consisted of the following:

	•	Rancho Cucamonga, California — approximately 40,000 square-foot leased facility; used for engineering, sales and support for the U.S. access control business. The Company is likely to move out of this location into a smaller facility in the second half of 2004, as the Company evaluates a possible consolidation of its development staff into one location. The monthly lease on this facility costs $24,000 and expires at the end of June 2004.
	•	Austin, Texas — approximately 7,000 square-foot leased facility used for engineering, sales and support for the alarm management business. This location could be relocated as the Company evaluates a possible consolidation of its development staff. The monthly lease on this facility costs $6,500 and expires at the end of August 2006.
	•	Fairfax, Virginia — approximately 1,450 square-foot leased facility; used for sales and support for the U.S. access control business. The Company is considering terminating the lease for this office and have the employees work out of their home offices. The monthly lease on this facility costs $4,600 and expires at the end of July 2004.

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	•	Lausanne, Switzerland — approximately 1,400 square-foot leased facility; used for sales and support for the international access control business. The monthly lease on this facility costs $1,900 and expires at the end of July 2004.

      In July 2003, the Company sold its Ohio manufacturing facility for $1.4 million.

      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 is for $330,000 and is due to be paid by the end of June 2004.

      During the third quarter of 2002, Mr. Niklaus Zenger, the Company’s CEO at the time, authorized the execution of a five-year lease (terminable after three years) for executive office space in Zurich, Switzerland. In the second quarter of 2003, the Company terminated the lease and settled with the landlord for the remaining lease obligation of $80,000.

      ABC is subject to various legal proceedings and claims, that arise in the ordinary course of business.

      A French court awarded the Company a 2.5 million Euro (approximately $3.0 million) judgment against a French company, Aasset Security, for unfair trade practices. The case was handled through the Company’s outside counsel in France on a partial contingency basis. The contingency fee to be paid to outside counsel will be between 35% to 40% of the payments received, depending upon the timing of the receipts. Aasset Security has filed appeals against the verdict. The Company is pursuing the collection of the judgment, though the timing of collection and Aasset’s ability to pay cannot be ascertained. Due to the degree of uncertainty of collection, no judgment amounts have been included in the 2003 financial statements.

      The Company learned that Mr. David Blackshear has made a claim against Honeywell on the basis that the dome products sold to Honeywell as part of the Honeywell Asset Sale infringed Mr. Blackshear’s patent and that the Company underpaid royalties under a licensing agreement the Company entered into with Mr. Blackshear in 1990. Honeywell has advised the Company that Honeywell may seek indemnification from the Company based on the Company’s past sales of dome products. The Company disputes any and all allegations made by Mr. Blackshear. The Company does not believe that it has material, if any, liability.

      Management believes that there are no other existing legal matters that will have a material adverse effect on the Company’s financial condition or results of operations.

      None

PART II

      The Company’s Common Stock, $0.01 par value, has been listed on the NASDAQ under the symbol “ABCX” since January 2, 2003. It previously traded under the symbol “ULTK” since its original listing on NASDAQ on January 18, 1994.

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      The following table sets forth the high and low closing prices of the Company’s Common Stock (“Common Stock”) for each quarter during the years ended December 31, 2003 and 2002:

      As of March 20, 2004, there were approximately 1,200 holders of record of the Common Stock.

      The Company has not declared or paid any cash dividends on the Common Stock since inception. The declaration of any future cash dividends on the Common Stock will depend upon the earnings, capital requirements and financial position of the Company, general economic conditions and other pertinent factors.

      Dividends in the amount of $117,210 were paid annually since the issuance of the Company’s Series A preferred stock. In December 2003, the Company reached an agreement (the “Standstill Agreement”) with the sole holder of its Series A preferred stock, Victoria & Eagle Strategic Fund (“VESF”), not to redeem the preferred shares for a period of 18 months and permanently lower the dividend to 200 basis points over one-year LIBOR. Based on an extrapolation of current rates, the estimated annual preferred dividend for 2004 is approximately $34,000.

      The following selected consolidated financial data for the five fiscal years ended December 31, 2003, have been derived from the Company’s audited consolidated financial statements. The operations effected by the Honeywell Asset Sale are presented as discontinued operations. This data should be read in conjunction with

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(1)	On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Intangible Assets. No amortization for goodwill was recorded in 2002 or 2003.

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(2)	There were significant restructuring activities in each year presented. The following table reflects amounts relating to these activities included in losses from continuing operations in each year (in thousands):

Overview

      The consolidated financial statements include the Company’s accounts and its consolidated subsidiaries. The Company is organized into separate selling segments, which are supported by common administrative functions such as credit, accounting, human resources, internal audit, legal and computer support services (the “Corporate Staff”). All significant inter-company balances and transactions among subsidiaries and divisions have been eliminated in consolidation.

      Product sales are recorded when goods are shipped to the customer. Most sales made to domestic customers are on net 30-day or net 60-day credit terms after a credit review is performed to establish creditworthiness and to determine an appropriate credit limit. International sales are made under varying terms depending upon the creditworthiness of the customer and include the use of letters of credit, payment in advance of shipment and open trade terms and revenue is deferred when collection is determined not to be probable.

      Cost of sales for most of the Company’s products includes the cost of the product shipped plus freight, customs and other costs associated with delivery from foreign contract manufacturers or from domestic suppliers.

      Operating expenses include selling, general and administrative expenses, as well as depreciation. Selling, general and administrative costs include salaries, commissions and related benefits, telephone, advertising, warranty, printing, product literature, sales promotion, legal, audit and other professional fees, supplies, engineering and travel.

Application of Critical Accounting Policies and Estimates

      Management’s discussion and analysis of the Company’s financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally acceptable in the United States of America (“GAAP”). The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Because of the use of estimates in the preparation of financial statements, actual results could differ from those estimates.

      The following critical accounting policies are affected by significant judgments and estimates used in the preparation of the Company’s consolidated financial statements:

      The Company’s inventories are comprised principally of goods held for resale, which are valued at the lower of cost (first in-first out) or market. Inventories are written down to their estimated net realizable value for obsolescence, returned inventory deemed not economical to repair or discontinued product lines. This

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      Goodwill is tested for impairment annually or at other times if events have occurred or circumstances exist that indicate the carrying value of goodwill may no longer be recoverable. The impairment test for goodwill involves a two-step process: step one consists of a comparison of the fair value of a reporting unit with its carrying amount, including the goodwill allocated to each reporting unit. If the carrying amount exceeds the fair value, step two requires the comparison of the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill. Any excess of the carrying value of the reporting unit goodwill over the implied fair value of the reporting unit goodwill will be recorded as an impairment loss. Fair value of the business units is determined using the income approach. Under the income approach, value is dependent on the present value of future cash flows and discount rates. The determination of fair value involves estimates of future sales growth, product costs, selling and administrative costs and costs of capital.

      Whenever certain events or changes in circumstances indicate that the carrying value of the long-lived assets may not be recoverable, an evaluation is performed. Such events or circumstances include, but are not limited to, a prolonged industry downturn, a significant decline in the Company’s market value or significant reductions in projected future cash flows. In assessing the recoverability of long-lived assets, the carrying value is compared to the undiscounted future cash flows the assets are expected to generate. If the total of the undiscounted future cash flows is less than the carrying amount of the assets, then the net book values of such assets are written down based on the excess of the carrying amount over the fair value of the assets. Fair value is generally determined by calculating the discounted future cash flows, which includes estimating long-term forecasts of the amounts and timing of overall market growth, utilization of assets, discount rate and terminal growth rates. Differences between the Company’s estimates and actual results would change the calculation of discounting future cash flows, which could require an impairment charge.

      Deferred tax assets are regularly assessed for their likelihood and the amounts believed to be realizable. A valuation allowance is provided against deferred tax assets not expected to be realized. Projected future taxable income estimates are incorporated in the considerations. Significant management judgment is required in projecting future taxable income to support the realization of net deferred tax assets and any required valuation allowance. Due to uncertainties related to the Company’s ability to generate taxable income and utilize the net deferred tax asset, a valuation allowance has been recorded against the net deferred tax asset balance. If the Company generates taxable income in future periods, the valuation allowance would be reduced, resulting in a tax benefit in the financial statements.

Results of Operations

      Financial statements for the years ended December 31, 2002 and 2001 have been restated to report the Company’s CCTV business as discontinued operations (see note 2 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 13 to the Company’s Consolidated Financial Statements for additional detail).

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      The following table contains information regarding the percentage of net sales for the years ended December 31, 2003, 2002 and 2001 and the percentage changes in these income and expense items from year to year:

      For the year ended December 31, 2003, net sales were $39.8 million, a decrease of $4.4 million or 10% from 2002.

      The PSG segment revenue was $16.9 million compared to $18.4 million in 2002, a decrease of 8.0%. The decrease was primarily due to lower sales of video products as part of access control projects. Though the Company retained the video part of the access control business after the Honeywell Asset Sale, Honeywell has increasingly supplied video components directly to the integrators who purchase access control products from the Company. Additionally, revenues from the Company’s central station alarm management unit were $0.4 million less year on year, a decrease of 32% for that unit.

      The DSG revenue was $22.6 million compared to $25.4 million in 2002, a decrease of 11.0%. The decline can largely be attributed to the IVS^TM business unit, which sells video products into industrial customers. The IVS^TM business has been adversely impacted by the investment slump in the technology sector, as its main customers are semiconductor plants. The MVP^TM business unit also saw sales decrease due to product transition, as the public transit business shifts toward digital solutions. MVP^TM’s digital products are not expected to be available until the second quarter of 2004. The SecurityandMore business unit’s revenue stayed consistent year on year.

      Gross profit margin improved to 30.3% in 2003, versus 28.1% in 2002. The improvement was due to more a favorable product mix towards the PSG segment, as well as increased high-margin royalty revenues.

      Selling, general and administrative expenses were $19.8 million in 2003, compared to $23.7 million in 2002, a decrease of $3.9 million, or 17%, over 2002. The decrease was primarily due to less employee turnover and severance expenses. The 2002 expenses included $3.4 million in salary and severance for former executives and employees: former chief executive officers (“CEO”) Niklaus Zenger ($1.4 million for salaries and severance) and George Broady ($1.2 million for severance), former President Peter Beare ($0.3 million

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      Goodwill impairment charges were $1.7 million in 2003, compared to $3.3 million in 2002. The 2003 charges included goodwill impairments of $1.0 million related to the international access control unit and $0.7 million related to the central station alarm management unit. The 2002 charges included a $2.7 million write-down of the Company’s SAP enterprise software system and a $0.6 million impairment of goodwill related to the central station alarm management unit.

      Depreciation and amortization expenses were $2.0 million in 2003, a decrease of $0.3 million from 2002. The decrease was due to a smaller asset base, particularly in the SAP software cost.

      Other expense in 2003 was $(0.1) million, compared with $2.2 million in 2002. The 2002 expense included $2.8 million in interest expense. The Company paid off its bank debts at the end of 2002 with proceeds from the Honeywell Asset Sale.

      Discontinued operations had a gain of $0.2 million in 2003, reflecting the increase of the purchase price, the costs of the dissolution process of international entities, the business content of which, with the exception of Switzerland, was sold to Honeywell in the Honeywell Asset Sale. The gain was compared to a $10.2 million loss in 2002, as the discontinued operations have tapered off in 2003. The 2002 discontinued operations loss was mainly due to professional fees on the Honeywell Asset Sale of $2.7 million, $2.2 million in realized accumulated currency losses and other expenses of $1.6 million caused by the transaction.

      For the year ended December 31, 2002, net sales were $44.2 million, a decrease of $16.8 million (28%) from 2001.

      Sales in the DSG segment declined $17.8 million (40%), to $26.7 million in 2002 compared to $44.5 million in 2001, due to the discontinuation of sales to Sam’s Club during the fourth quarter of 2001 and a 17% decrease in revenues of the industrial and mobile video applications due to an overall decline in the semiconductor, telecommunications and public transportation industries. The Sam’s Club business was partially replaced by sales to another national retailer in the second half of 2002.

      The PSG segment revenues increased by $1.0 million (6%) to $17.1 million in 2002 compared to $16.1 million in 2001, as a result of additional sales related to U.S. government programs.

      Gross profit margins improved from 27.5% in 2001 to 28.1% in 2002. The margin increased as a result of a more favorable product mix towards the access control business and away from the lower-margin consumer/do-it-yourself business and the industrial video business.

      Selling, general and administrative expenses were $23.7 million in 2002, an increase of $7.2 million (44%) over 2001. There were $2.6 million (76%) of additional expenses in 2002 in the PSG segment for additional investment in engineering, marketing and customer support infrastructure in California and an increase in the sales and sales support personnel in Switzerland. The DSG segment expenses were $1.1 million lower in 2002 due to personnel reductions in the Consumer do-it-yourself business resulting from the loss of the Sam’s Club business in the fourth quarter of 2001. The 2002 expenses included $3.4 million in salary and severance for former executives and employees. The remaining increase relates primarily to Board of Directors expenses, increased Securities and Exchange Commission (“SEC”) compliance costs and legal expenses. The Corporate segment also included an additional $0.2 million accrual related to the abandonment of the Zurich lease.

      Asset, goodwill and other asset impairment charges were $3.3 million in 2002, compared to $4.5 million in 2001. The 2002 charges included a $2.7 million write-down of the Company’s SAP enterprise software system in the Corporate segment and a $0.6 million impairment of goodwill related to the alarm management unit. The Company recorded an impairment charge in the Corporate segment of $4.5 million in 2001 as part of the sale and refinance of the Headquarters Facility.

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      Depreciation and amortization expenses were $2.3 million in 2002, a decrease of $2.2 million (49%) over 2001. Goodwill amortization of $1.6 million was recorded in 2001. As a result of the Company’s adoption of SFAS 142, Goodwill and Intangible Assets, on January 1, 2002, there was no goodwill amortization expense in 2002. The remainder of the change relates to reduced depreciation expense in 2002.

      Other expense in 2002 was $2.2 million, compared with other income of $6.2 million in 2001. The 2002 expense included $2.8 million in interest expense. The other income in 2001 included the $7.7 million gain on the sale of the Company’s shares of common stock of Detection Systems, Inc., a $1.3 million gain on the sale of the Industrial Furnace Camera business and $3.3 million of interest expense.

Financial condition, liquidity and capital resources

      At the end of 2003, the Company had $7.8 million in cash and marketable securities, down from $16.4 million at the end of 2002. The decrease was mainly due to the settlement of accrued liabilities, such as severance payments accrued at the end of 2002, costs of discontinued operations as well as the on-going operating losses.

      During 2002 the Company repaid its domestic line of credit facility. The Company maintains a small credit facility in Switzerland with a balance less than $250,000 to fund the working capital needs of its Swiss business.

      For 2004, 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 the Company 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 conjunction with 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 December 31, 2003 in thousands;

      The Company’s significant operating leases include facilities and office equipment. Monthly payments for facilities range from $1,900 to $24,000, excluding the Headquarters Facility. The Company’s leasing obligation with respect to the Headquarters Facility ends in June 2004. The rents for December 2003 through June 2004 were prepaid in 2002.

Factors Affecting the Company’s Future Results or the Price of the Company’s Stock.

      Set forth below and elsewhere in this report and other documents the Company files with the SEC are risks and uncertainties that could cause the Company’s results to differ materially from the results contemplated by the forward-looking statements contained in this report and other public statements that the Company makes.

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      The Company has suffered losses in each of the last four years. The Company has significant built-in costs that it needs to reduce in order to reflect the smaller size of the Company after the Honeywell Asset Sale in 2002, as well as the possible DSG segment divestiture in 2004. Additional costs related to reorganizing the Company to better pursue its new strategy may adversely affect earnings in 2004. The Company may incur significant operating expenses to re-focus its business and can give no assurance that it will achieve profitability or be capable of sustaining profitable operations.

      The Company does not have a significant line of credit or other loan facility in place. The Company’s working capital consists of the cash remaining from the Honeywell Asset Sale and any cash generated by a planned DSG divestment. The Company currently has no other plan nor need for additional capital from either equity or debt in the next 12 to 18 months. Even if the Company were to seek additional equity capital, the Company may not be able to locate purchasers of its equity securities to raise additional capital.

      The Company may not keep pace with technological advances or the Company may pursue technologies that do not become commercially accepted and, in either case, customers may not buy the Company’s products and the Company’s revenues may decline.

      The demand for the Company’s products can change quickly and in ways the Company may not anticipate because the Company’s industry is generally characterized by:

	•	rapid and sometimes disruptive technological developments;
	•	evolving industry standards,
	•	changes in customer requirements;
	•	limited ability to accurately forecast future customer orders;
	•	frequent new product introductions and enhancements.

      The loss of the services of any key personnel or the Company’s inability to hire new personnel with the requisite skills could restrict the Company’s ability to develop new products, enhance existing products in a timely manner, sell products to its customers or effectively manage the Company’s operations.

      The Common Stock trades on the NASDAQ exchange. NASDAQ has a number of continued listing requirements, including a minimum share price requirement of $1.00 per share. If the Company’s share price falls below $1.00 per share for 30 consecutive business days, then NASDAQ could notify the Company and give the Company 90 days to cure the deficiency or NASDAQ could begin delisting proceedings. Those proceedings would lead to the Common Stock no longer trading on NASDAQ. Delisting from NASDAQ could result in a reduction in the liquidity of any investment in the Common Stock and an adverse effect on the trading price of the Common Stock. Delisting could also reduce the ability of holders of the Common Stock to purchase or sell shares as quickly and inexpensively as they have done historically. This lack of liquidity could make it more difficult for the Company to raise equity capital in the future. During 2003, the Company’s stock price closed below $1.00 per share at the end of a number of trading sessions.

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      Some of the Company’s products might require a higher level of investment in engineering and distribution. If revenues generated from these products become a greater percentage of the Company’s total revenues and if the expenses associated with these products on a percentage of revenues basis do not decrease, then the Company’s operating margins will be reduced.

      The Company has sometimes received notices from others claiming that the Company infringes their patent and intellectual property rights, and the Company has been involved in litigations on patent and intellectual property rights (see Note 7 of the Notes to Consolidated Financial Statements). Companies are more frequently seeking patent protection because of developments in the law that may extend the ability to obtain such patents. As a result, the Company expects to receive more patent infringement claims. Responding to any infringement claim, regardless of its validity, could:

	•	be time consuming to defend;
	•	result in costly litigation;
	•	divert management’s time and attention;
	•	require the Company to enter into royalty and licensing agreements that the Company would not normally find acceptable;
	•	require the Company to stop selling or to redesign products; and
	•	require the Company to pay damages.

      The Company is exposed to minimal market risks issues. Exposure to these risks is managed through regular operating and financing activities.

Foreign Exchange

      Changes in the foreign currency rates are not expected to have a material adverse effect on the Company’s future consolidated financial position or results of operations. The access control office in Lausanne, Switzerland is the Company’s only active foreign-based operation. This office accounted for approximately 5% of worldwide sales in 2003; consequentially changes in the exchange rates between the U.S. Dollar and Swiss Franc are not expected to have a material adverse effect on the Company’s future consolidated financial position or results of operations.

      The Company issued long-term, inter-company loans to its foreign subsidiaries. Since these loans were denominated in U.S. Dollars, the foreign subsidiaries were exposed to the effect of changes in spot exchange rates of their local currencies relative to the U.S. Dollar. Most of these loans have generated foreign currency losses during the past few years. In the past, these losses were shown as a component of accumulated other comprehensive losses and not included as a component of operating income. As a result of the Honeywell Asset Sale, management determined that these loans could not be repaid and recognized approximately $0.1 million of accumulated foreign currency losses in the consolidated results of operations during 2003.

Interest Rates

      The Company had no debt as of December 31, 2003. After the Honeywell Asset Sale, the Company’s credit facility with Frost National Bank was fully repaid in December 2002.

      An interest rate swap agreement with Bank One remained in effect through February 15, 2004. The Company paid $52,000 on February 17, 2004 for the final settlement of the interest rate swap contract. The final settlement was fully accrued for at December 31, 2003.

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Stockholders

      We have audited the accompanying consolidated balance sheets of American Building Control, Inc. and Subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

      We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Building Control, Inc. and Subsidiaries as of December 31, 2003 and 2002, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

      As discussed in Note 7 to the financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Intangible Assets.”

	GRANT THORNTON LLP

Dallas, Texas

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AMERICAN BUILDING CONTROL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

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AMERICAN BUILDING CONTROL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS