SECURITIES AND EXCHANGE COMMISSION

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.

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 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.

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

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, 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 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. 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.

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     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 operators of public transit vehicles. Both IVS^TM and MVP^TM 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):

     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.

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     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):

     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):

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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):

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):

     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.

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     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, IVS^TM and MVP^TM. SecurityandMore sells easy-to-install surveillance monitoring kits 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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     Geographic Information (in thousands):

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):

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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:

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.

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     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):

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     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.

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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

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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.

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