##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q  [X]
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2004 OR [  ]
    
    Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 Commission file number: 0-9463 MDI, INC.  DELAWARE
    
    75-2626358(State or other jurisdiction
    
    (I.R.S. EmployerOf incorporation or organization)
    
    IdentificationNo.)9725 DATAPOINT DRIVESAN ANTONIO, TEXAS
    
    78229(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (210) 477-5400 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 September 30, 2004 was $13,792,888. As of that
date 14,673,286 shares of the Registrants Common Stock were outstanding.




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MDI, INC.
FORM 10-Q
TABLE OF CONTENTS  
 FORWARD LOOKING STATEMENTSPART IITEM 1: FINANCIAL STATEMENTSITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4: CONTROLS AND PROCEDURESPART IIITEM 1: LEGAL PROCEEDINGSITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDSITEM 3: DEFAULTS UPON SENIOR SECURITIESITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSITEM 5: OTHER INFORMATIONITEM 6: EXHIBITS AND REPORTS ON FORM 8-KSIGNATURESCERTIFICATIONSCertification of CEO Required by Rule 13a-14(a) or Rule 15d-14(a)Certification of CFO Required by Rule 13a-14(a) or Rule 15d-14(a)Joint Certification of CEO and CFO
  Forward Looking Statements Certain statements contained or incorporated in this report on Form
10-Q, which are not statements of historical fact, constitute forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995 (the Reform Act). Forward looking statements are made
in good faith by MDI, Inc. (the Company or MDI) pursuant to the safe
harbor provisions of the Reform Act. These statements may involve known
and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements to differ materially from any
future results, performance or achievements, whether expressed or implied.
These risks, uncertainties and factors include the timely development and
acceptance of new products and services, the impact of competitive pricing,
fluctuations in operating results, the ability to introduce new products
and services, technological changes, reliance on intellectual property and
other risks. The objectives set forth in this Form 10-Q are subject to
change due to global market and economic conditions beyond the control of
the Company. 2




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##### Table of Contents



ITEM 1. FINANCIAL STATEMENTS MDI, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data) September 30,
    
    December 31,2004
    
    2003(in thousands, except share and per share data)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    4,705
    
    
    $
    6,307Marketable securities
    
    
    
    
    
    
    1,499Trade accounts receivable, net
    
    
    3,395
    
    
    
    1,877Inventories
    
    
    845
    
    
    
    1,685Receivable from Honeywell International, Inc.
    
    
    697
    
    
    
    1,800Prepaid expenses and other current assets
    
    
    114
    
    
    
    668Assets of discontinued operations
    
    
    306
    
    
    
    5,796Total current assets
    
    
    10,062
    
    
    
    19,632Property and Equipment, net
    
    
    1,424
    
    
    
    2,643Other Assets:Goodwill
    
    
    2,792
    
    
    
    2,792Other intangible assets
    
    
    43
    
    
    
    49Other assets
    
    
    586
    
    
    
    720Total assets
    
    $
    14,907
    
    
    $
    25,836LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Trade accounts payable
    
    $
    993
    
    
    $
    1,296Accrued expenses
    
    
    697
    
    
    
    1,394Accrued compensation
    
    
    986
    
    
    
    1,396Accrued royalties
    
    
    144
    
    
    
    255Severance
    
    
    213
    
    
    
    641Other current liabilities
    
    
    175
    
    
    
    Deferred income
    
    
    271
    
    
    
    494Liabilities of discontinued operations
    
    
    591
    
    
    
    3,938Total current liabilities
    
    
    4,070
    
    
    
    9,414Long-Term LiabilitiesAccrued royalties
    
    
    
    
    
    
    93Severance obligations
    
    
    
    
    
    
    29Total long-term liabilities
    
    
    
    
    
    
    122Commitments and Contingencies
    
    
    
    
    
    
    
 3




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##### Table of Contents



September 30,
    
    December 31,2004
    
    2003(in thousands, except share and per share data)Stockholders Equity:Preferred stock, $5 par value, issuable in series; 2,000,000
shares authorized; Series A, LIBOR + 2% cumulative
convertible; 195,351 shares authorized, issued and outstanding
    
    
    977
    
    
    
    977Common stock, $.01 par value; 50,000,000 shares authorized;
18,121,738 and 17,656,738 shares issued at September 30, 2004
and December 31, 2003, respectively
    
    
    181
    
    
    
    176Additional paid-in-capital
    
    
    163,147
    
    
    
    162,618Deferred stock compensation
    
    
    
    
    
    
    Accumulated deficit
    
    
    (114,895
    )
    
    
    (108,858
    )Accumulated other comprehensive income
    
    
    128
    
    
    
    88Treasury stock, at cost (3,488,350 and 3,488,350 common shares
at September 30, 2004 and December 31, 2003, respectively)
    
    
    (38,701
    )
    
    
    (38,701
    )Total stockholders equity
    
    
    10,837
    
    
    
    16,300Total liabilities and stockholders equity
    
    $
    14,907
    
    
    $
    25,836
 The accompanying notes are an integral part of the consolidated financial statements. 4




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##### Table of Contents



MDI, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data) Three months ended September 30,2004
    
    2003(In thousands, except share and per share data)Net sales
    
    $
    4,575
    
    
    $
    5,345Cost of sales (exclusive of depreciation shown separately below)
    
    
    2,222
    
    
    
    2,840Gross profit
    
    
    2,353
    
    
    
    2,505Other operating costs:Selling, general and administrative
    
    
    3,673
    
    
    
    3,180Depreciation and amortization
    
    
    195
    
    
    
    5233,868
    
    
    
    3,703Operating loss
    
    
    (1,515
    )
    
    
    (1,198
    )Other income (expense):Interest expense
    
    
    
    
    
    
    (177
    )Interest income
    
    
    17
    
    
    
    85Loss from disposal of fixed assets
    
    
    (489
    )
    
    
    Other, net
    
    
    (46
    )
    
    
    (11
    )(518
    )
    
    
    (103
    )Loss before income taxes and discontinued operations
    
    
    (2,033
    )
    
    
    (1,301
    )Income tax benefit
    
    
    
    
    
    
    Loss from continuing operations
    
    
    (2,033
    )
    
    
    (1,301
    )Discontinued operations
    
    
    1,206
    
    
    
    191Net loss
    
    
    (828
    )
    
    
    (1,110
    )Dividend requirements on preferred stock
    
    
    (8
    )
    
    
    (29
    )Net loss allocable to common stockholders
    
    $
    (836
    )
    
    $
    (1,139
    )Basic and diluted earnings (loss) per share from:Continuing operations
    
    $
    (0.14
    )
    
    $
    (0.09
    )Discontinued operations
    
    
    0.08
    
    
    
    0.01Basic and diluted loss per share
    
    $
    (0.06
    )
    
    $
    (0.08
    )Number of common shares used in computations:Basic
    
    
    14,633,388
    
    
    
    14,148,388Diluted
    
    
    14,633,388
    
    
    
    14,148,388
 The accompanying notes are an integral part of the consolidated financial statements. 5




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##### Table of Contents



AMERICAN BUILDING CONTROL, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data) Nine months ended September 30,2004
    
    2003(In thousands, except share and per share data)Net sales
    
    $
    11,299
    
    
    $
    13,188Cost of sales (exclusive of depreciation shown separately below)
    
    
    6,114
    
    
    
    7,782Gross profit
    
    
    5,185
    
    
    
    5,406Other operating costs:Selling, general and administrative
    
    
    11,051
    
    
    
    10,893Depreciation and amortization
    
    
    798
    
    
    
    1,53311,849
    
    
    
    12,426Operating loss
    
    
    (6,664
    )
    
    
    (7,020
    )Other income (expense):Interest expense
    
    
    (1
    )
    
    
    (658
    )Interest income
    
    
    63
    
    
    
    132Loss from disposal of fixed assets
    
    
    (498
    )
    
    
    Other, net
    
    
    31
    
    
    
    183(405
    )
    
    
    (343
    )Loss before income taxes and discontinued operations
    
    
    (7,069
    )
    
    
    (7,363
    )Income tax benefit
    
    
    
    
    
    
    Loss from continuing operations
    
    
    (7,069
    )
    
    
    (7,363
    )Discontinued operations
    
    
    1,057
    
    
    
    (730
    )Net loss
    
    
    (6,012
    )
    
    
    (8,093
    )Dividend requirements on preferred stock
    
    
    (25
    )
    
    
    (87
    )Net loss allocable to common stockholders
    
    $
    (6,037
    )
    
    $
    (8,180
    )Basic and diluted earnings (loss) per share from:Continuing operations
    
    $
    (0.49
    )
    
    $
    (0.53
    )Discontinued operations
    
    
    0.07
    
    
    
    (0.05
    )Basic and diluted loss per share
    
    $
    (0.42
    )
    
    $
    (0.58
    )Number of common shares used in computations:Basic
    
    
    14,456,216
    
    
    
    14,107,932Diluted
    
    
    14,456,216
    
    
    
    14,107,932
 The accompanying notes are an integral part of the consolidated financial statements. 6




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##### Table of Contents



MDI, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Nine months ended September 30,2004
    
    2003Operating Activities:Net loss
    
    $
    (6,012
    )
    
    $
    (8,093
    )Adjustments to reconcile net loss to net cash used in operating activities:Loss on disposal of fixed assets
    
    
    
    
    
    
    156Loss (gain) on sale of investments
    
    
    55
    
    
    
    Loss (gain) on sale of business
    
    
    (1,355
    )
    
    
    Stock based compensation
    
    
    
    
    
    
    243Amortization of deferred income
    
    
    (351
    )
    
    
    (770
    )Realized foreign currency translation losses
    
    
    48
    
    
    
    83Depreciation and amortization
    
    
    798
    
    
    
    1,620Provision for losses on accounts receivable
    
    
    267
    
    
    
    43Mark-to-market interest rate swap
    
    
    52
    
    
    
    134Changes in operating assets and liabilities, net of dispositions:Trade accounts receivable
    
    
    (1,400
    )
    
    
    (53
    )Inventories
    
    
    1,744
    
    
    
    494Prepaid and other current assets
    
    
    1,901
    
    
    
    380Other assets
    
    
    7
    
    
    
    (919
    )Trade accounts payable
    
    
    (1,673
    )
    
    
    (455
    )Accrued and other current liabilities
    
    
    (3,375
    )
    
    
    (3,276
    )Net cash used in operating activities
    
    
    (9,294
    )
    
    
    (10,413
    )Investing Activities:Purchases of property and equipment
    
    
    73
    
    
    
    (340
    )Software development costs
    
    
    (183
    )
    
    
    (400
    )Proceeds from the sale of property and equipment
    
    
    517
    
    
    
    1,462Proceeds from the sale of business
    
    
    5,340Proceeds from redemption of marketable securities
    
    
    1,444
    
    
    
    645Purchases of marketable securities
    
    
    
    
    
    
    (4,243
    )Earn out payments on prior acquisitions
    
    
    
    
    
    
    (148
    )Net cash provided by (used in) investing activities
    
    
    7,191
    
    
    
    (3,024
    )Financing Activities:Issuance of common stock
    
    
    534
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    (18
    )Payment of preferred stock dividends
    
    
    (25
    )
    
    
    (87
    )Net cash provided by (used in) financing activities
    
    
    509
    
    
    
    (105
    )Net decrease in cash and cash equivalents
    
    
    (1,594
    )
    
    
    (13,542
    )Effect of exchange rate changes on cash
    
    
    (8
    )
    
    
    20Cash and cash equivalents, beginning of period
    
    $
    6,307
    
    
    $
    16,436Cash and cash equivalents, end of period
    
    $
    4,705
    
    
    $
    2,914Supplemental cash flow information:Cash paid during the year for:Interest
    
    $
    
    
    
    $
    510Income taxes
    
    $
    
    
    
    $
    338
 The accompanying notes are an integral part of the consolidated financial statements. 7




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##### Table of Contents



MDI, Inc. General MDI is a leader in the access control business and is an important
participant in many Homeland Security projects. MDIs new Security SuiteTM
of products has been launched successfully. In the Companys opinion, it
is the first fully integrated system incorporating access control, video,
audio alarm monitoring, and system auditing functions. The Company
distributes its PointGuardTM access control product primarily to the small
to mid market commercial customer through a dealer network. ABM provides
alarm management software to central monitoring stations that are owned by
either organizations for their own internal use, such as large
universities, or commercial operators such as surveillance companies. MVP
sells monitoring and recording devices to operators of public transit
vehicles. MVP also sells third-party products as well as the Companys own
branded products. On September 22, 2004, the Company filed a Certificate of Ownership and
Merger with the Secretary of State of Delaware pursuant to Section 253 of the
Delaware General Corporation Law whereby ABC Merger Corp., a wholly-owned
subsidiary of the Company, was merged with and into the Company. As part of
the merger, the registrant changed its name to MDI, Inc. effective as of the
close of business on September 24, 2004. In accordance with the Certificate,
the By-Laws of the Company were amended to reflect the change in the Companys
name. The Companys trading symbol with the NASDAQ National Market (NASDAQ)
was changed to MDII effective Monday, September 27, 2004, the effective date
of the Companys name change with NASDAQ. 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 thirty consecutive business days, then
NASDAQ could notify the Company that it is in default and give it a period of
time to cure the deficiency after which NASDAQ could begin delisting
proceedings. Those proceedings could 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 have 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. During the third quarter
2004, the Companys stock price closed below $1.00 per share at the end of a
number of trading sessions. On November 11, 2004, the Company received a
NASDAQ Stock Market letter notifying the Company that for the last 30
consecutive business days, the Companys common stock bid price had closed
under the minimum $1.00 per share requirement for continued inclusion. The
letter provides the Company 180 calendar days, or until May 10, 2005, to
regain compliance. Compliance is regained by the Company maintaining a common
stock closing bid price of $1.00 or more for a minimum of ten consecutive
business days. After the Companys common stock shares have traded above
$1.00 per share for those ten days, NASDAQ will notify the Company that it has
regained compliance. A press release was issued detailing the NASDAQ
notification event. Notes to Consolidated Financial Statements Note 1: Nature of Operations Basis of Presentation The accompanying financial statements have been derived from the accounts
of MDI, Inc. and its subsidiaries (the Company). All significant
inter-company balances and transactions have been eliminated in consolidation.
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. 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. At the end of September 2004, the Swiss
entity had a net asset value of $75 thousand and a favorable adjustment for
foreign currency translation of $127 thousand. Based upon the Companys 8




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##### Table of Contents



plan to discontinue the Swiss operations prior to the end of 2004, the
Company does not anticipate any future exposure due to fluctuation in foreign
currency after 2004. Stock-Based Compensation The Company accounts for stock-based compensation to employees using the
intrinsic value method. Compensation costs for stock options granted to
employees 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. 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. For stock options granted under the
Companys 2002 Stock Option Incentive Plan, the vesting period varies by
individual grants as determined by the Compensation Committee of the Board of
Directors. The following table illustrates the effect on operations and per
share data as if the Company had applied the fair value method to employee
stock-based compensation (in thousands, except per share data): Three months ended September 30,2004
    
    2003Net loss from continuing operations
allocable to common stockholders:As reported
    
    $
    (2,041
    )
    
    $
    (1,330
    )Add: Total stock based compensation under intrinsic value method
    
    
    
    
    
    
    Deduct: Total stock-based compensation under fair value
based method
    
    
    (752
    )
    
    
    (97
    )Pro forma
    
    $
    (2,793
    )
    
    $
    (1,427
    )Basic and diluted loss per share from continuing operationsAs reported
    
    $
    (0.14
    )
    
    $
    (0.09
    )Pro forma
    
    $
    (0.19
    )
    
    $
    (0.10
    )
 Nine months ended September 30,2004
    
    2003Net loss from continuing operations
allocable to common stockholders:As reported
    
    $
    (7,094
    )
    
    $
    (7,450
    )Add: Total stock based compensation under intrinsic value method
    
    
    
    
    
    
    Deduct: Total stock-based compensation under fair value
based method
    
    
    (1,447
    )
    
    
    (175
    )Pro forma
    
    $
    (8,541
    )
    
    $
    (7,625
    )Basic and diluted loss per share from continuing operationsAs reported
    
    $
    (0.49
    )
    
    $
    (0.53
    )Pro forma
    
    $
    (0.59
    )
    
    $
    (0.54
    )
 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 85 to 90 percent; risk-free interest rates ranging
from 3.2 to 3.9 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 9




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##### Table of Contents



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, 2004 and 2003 (in thousands): Three months ended September 30,2004
    
    2003Beginning balance
    
    $
    194
    
    
    $
    159Charged to expense
    
    
    4
    
    
    
    14Usage
    
    
    
    
    
    
    Usage, DSG
    
    
    (120
    )
    
    
    Closing balance
    
    $
    78
    
    
    $
    173
 Nine months ended September 30,2004
    
    2003Beginning balance
    
    $
    184
    
    
    $
    128Charged to expense
    
    
    26
    
    
    
    46Usage
    
    
    (12
    )
    
    
    (1
    )Usage, DSG
    
    
    (120
    )
    
    
    Closing balance
    
    $
    78
    
    
    $
    173
 Reclassifications Certain amounts have been reclassified in the prior period financial
statements to conform to the current period presentation. Note 2: Discontinued Operations On September 29, 2004, the Company tentatively approved a management
buyout of its Switzerland based business unit in order to avoid continuing
losses within the division, subject to normal closing activities. The Company
also decided that, should the management buyout not be consummated during the
fourth quarter, that operations in Switzerland will be discontinued prior to
the end of the year. Accordingly, the Switzerland business unit performance
is presented as a component of discontinued operations for all periods. On July 1, 2004, the Company sold its SecurityandMore and Industrial
Vision Source distribution businesses to Mace Security International, Inc.
(Mace). The SecurityandMore and Industrial Vision Source businesses are
presented as discontinued operations for all periods. 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 final settlements related to the
CCTV business are included in discontinued operations. 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 and
are in the process of liquidation. During the liquidation process, certain
claims have been made against the Companys French, Belgian and German
entities. At the end of September 2004 an accrual of $25 thousand remained
for the unsettled claims. 10




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##### Table of Contents



Following is a summary of the discontinued operations (in thousands): Three months ended September 30, 2004DSG Business
    
    Switzerland Business
    
    CCTV Business
    
    Total Discontinued OperationsNet Sales
    
    $
    
    
    
    $
    177
    
    
    $
    (0
    )
    
    $
    177Cost of Sales
    
    
    18
    
    
    
    118
    
    
    
    194
    
    
    
    330Gross Profit
    
    
    (18
    )
    
    
    60
    
    
    
    (194
    )
    
    
    (153
    )Other Operating Costs:Selling, general and
administrative
    
    
    11
    
    
    
    109
    
    
    
    (28
    )
    
    
    92Depreciation and amortization
    
    
    
    
    
    
    2
    
    
    
    1
    
    
    
    411
    
    
    
    111
    
    
    
    (27
    )
    
    
    95Operating income (loss):
    
    $
    (29
    )
    
    $
    (52
    )
    
    $
    (167
    )
    
    $
    (248
    )Other net income (expense)
    
    
    
    
    
    
    
    
    
    
    91
    
    
    
    91Gain on sale of business
    
    
    1,363
    
    
    
    
    
    
    
    
    
    
    
    1,363Net income (loss)
    
    $
    1,334
    
    
    $
    (52
    )
    
    $
    (76
    )
    
    $
    1,206
 Three months ended September 30, 2003DSG Business
    
    Switzerland Business
    
    CCTV Business
    
    Total Discontinued OperationsNet Sales
    
    $
    5,130
    
    
    $
    192
    
    
    $
    14
    
    
    $
    5,337Cost of Sales
    
    
    3,899
    
    
    
    105
    
    
    
    10
    
    
    
    4,013Gross Profit
    
    
    1,232
    
    
    
    88
    
    
    
    4
    
    
    
    1,324Other Operating Costs:Selling, general and
administrative
    
    
    767
    
    
    
    340
    
    
    
    381
    
    
    
    1,489Depreciation and amortization
    
    
    26
    
    
    
    2
    
    
    
    1
    
    
    
    30794
    
    
    
    342
    
    
    
    382
    
    
    
    1,518Operating income (loss):
    
    $
    438
    
    
    $
    (254
    )
    
    $
    (378
    )
    
    $
    (195
    )Other net income (expense)
    
    
    
    
    
    
    (4
    )
    
    
    390
    
    
    
    386Gain on sale of business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    438
    
    
    $
    (258
    )
    
    $
    12
    
    
    $
    191
 Nine months ended September 30, 2004DSG Business
    
    Switzerland Business
    
    CCTV Business
    
    Total Discontinued OperationsNet Sales
    
    $
    10,433
    
    
    $
    522
    
    
    $
    19
    
    
    $
    10,974Cost of Sales
    
    
    8,096
    
    
    
    212
    
    
    
    180
    
    
    
    8,488Gross Profit
    
    
    2,337
    
    
    
    309
    
    
    
    (160
    )
    
    
    2,486Other Operating Costs:Selling, general and
administrative
    
    
    2,091
    
    
    
    681
    
    
    
    293
    
    
    
    3,065Depreciation and amortization
    
    
    60
    
    
    
    7
    
    
    
    4
    
    
    
    712,151
    
    
    
    688
    
    
    
    297
    
    
    
    3,136Operating income (loss):
    
    $
    186
    
    
    $
    (379
    )
    
    $
    (458
    )
    
    $
    (650
    )
 11




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##### Table of Contents



Nine months ended September 30, 2004DSG Business
    
    Switzerland Business
    
    CCTV Business
    
    Total Discontinued OperationsOther net income (expense)
    
    
    1
    
    
    
    19
    
    
    
    324
    
    
    
    344Gain on sale of business
    
    
    1,363
    
    
    
    
    
    
    
    
    
    
    
    1,363Net income (loss)
    
    $
    1,550
    
    
    $
    (360
    )
    
    $
    (134
    )
    
    $
    1,057
 Nine months ended September 30, 2003DSG Business
    
    Switzerland Business
    
    CCTV Business
    
    Total Discontinued OperationsNet Sales
    
    $
    16,854
    
    
    $
    1,867
    
    
    $
    170
    
    
    $
    18,892Cost of Sales
    
    
    13,114
    
    
    
    1,106
    
    
    
    279
    
    
    
    14,499Gross Profit
    
    
    3,740
    
    
    
    762
    
    
    
    (109
    )
    
    
    4,393Other Operating Costs:Selling, general and
administrative
    
    
    2,593
    
    
    
    1,135
    
    
    
    1,615
    
    
    
    5,343Depreciation and amortization
    
    
    80
    
    
    
    7
    
    
    
    67
    
    
    
    1542,673
    
    
    
    1,142
    
    
    
    1,682
    
    
    
    5,497Operating income (loss):
    
    $
    1,067
    
    
    $
    (381
    )
    
    $
    (1,791
    )
    
    $
    (1,104
    )Other net income (expense)
    
    
    (7
    )
    
    
    20
    
    
    
    361
    
    
    
    374Gain on sale of business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    1,061
    
    
    $
    (361
    )
    
    $
    (1,430
    )
    
    $
    (730
    )
 Note 3: Receivable from Honeywell 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 license agreement
royalties 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. Under the provisions of the Asset Purchase
Agreement between the Company and Honeywell International Inc., a final
$1.8 million installment of the purchase price was payable on June 20,
2004. In October 2003, Honeywell received notifications that its use of
certain assets acquired from the Company may be subject to restrictions.
Based on these notifications, Honeywell elected to withhold $1.2 million
from the $1.8 million final payment until such time as the possible
restrictions were resolved. Honeywell paid the Company $600 thousand plus
interest in June 2004 and $250 thousand plus interest in July 2004. The
payment of the remaining $950 thousand was subject to resolution of one
remaining issue. On October 21, 2004, the Company concluded an Addendum to Asset
Purchase Agreement with Honeywell International, Inc. and a Settlement and
Release Agreement with Honeywell International, Inc. (Honeywell) and David
M. Blackshear (Blackshear). The terms of the Addendum settled all matters
between the Company, Honeywell and Blackshear related to the purchase price
payable for the CCTV Business and each party released the other of any
further liabilities. Under the terms of the Settlement Agreement and the
Addendum, the Company agreed to pay to Blackshear approximately $188
thousand in full 12




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##### Table of Contents



satisfaction of all claims associated with the sale by the Company to
Honeywell of three patents acquired by the Company from Blackshear. The
Company and Honeywell each received from Blackshear a full and final release
of all claims related to the three current patents and for any future
patents owned by Blackshear. Honeywell paid to the Company the remaining
balance of the final $950 thousand amount it owed, less settlement cost of
$188 thousand and legal fees of $117 thousand, together with accumulated
interest owed. The Company accrued for the Blackshear settlement and legal
fees as of September 30, 2004 and the accrual was included in discontinued
operations. Note 4: Trade Accounts Receivable Supplemental information on net trade accounts receivable (in thousands): September 30,
    
    December 31,2004
    
    2003Gross trade accounts receivable
    
    $
    3,572
    
    
    $
    2,001Less: allowance for doubtful
accounts
    
    $
    (54
    )
    
    
    (124
    )Less: allowance for doubtful accounts, DSG
    
    $
    (123
    )
    
    
    $
    3,395
    
    
    $
    1,877
 Note 5: 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 nine months ended September 30, 2004 and 2003, there were
2,801,232 and 1,247,935 stock options 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 nine months ended September 30,
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 6: Comprehensive Loss Supplemental information on comprehensive loss is as follows (in
thousands): Three months ended September 30,2004
    
    2003Net loss
    
    $
    (828
    )
    
    $
    (1,110
    )Other comprehensive income (loss):Unrealized loss on marketable
securities
    
    
    (13
    )
    
    
    (14
    )Currency translation adjustment
    
    
    (1
    )
    
    
    (2
    )$
    (842
    )
    
    $
    (1,126
    )
 Nine months ended September 30,2004
    
    2003Net loss
    
    $
    (6,012
    )
    
    $
    (8,093
    )Other comprehensive income (loss):Unrealized loss on marketable
securities
    
    
    (4
    )
    
    
    (20
    )Currency translation adjustment
    
    
    
    
    
    
    43$
    (6,016
    )
    
    $
    (8,070
    )
 13




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##### Table of Contents



Note 7: Severance and Other Accrued Expenses Accruals for severance, restructuring and settlement expenses are as
follows (in thousands): Accrued at December 31,
    
    2004 Charges
    
    Amount paid in
    
    Accrued at September 30,2003
    
    (credits)
    
    cash
    
    2004Royalty Claim
    
    $
    329
    
    
    $
    
    
    
    $
    (185
    )
    
    $
    144United Kingdom Lease
    
    
    330
    
    
    
    
    
    
    
    (330
    )
    
    
    2003 Severance
    
    
    670
    
    
    
    (120
    )
    
    
    (550
    )
    
    
    2004 Severance
    
    
    
    
    
    
    804
    
    
    
    (591
    )
    
    
    213$
    1,329
    
    
    $
    684
    
    
    $
    (1,656
    )
    
    $
    357
 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 $68,000 was paid
in June 2004. There are no further lease obligations in the United Kingdom
at September 30, 2004. 2003 Severance At December 31, 2003, unpaid obligations related to executive and
management severance was approximately $0.7 million. Through September
2004, $550 thousand was paid in cash for 2003 severance, and $120 thousand
was credited to income to reflect discounting of the obligations due to
accelerated payments. As of September 30, 2004, all severance related
payments for 2003 have been settled. 2004 Severance Mr. Brian Tate separated from his role as Chief Executive Officer and
Chairman of the Board in November 2003 and as an employee of the Company on
December 31, 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 in severance. As a condition to receiving the severance
payment, Mr. Tate exercised his right to purchase 155,000 shares of the
Companys common stock and paid $161,200 to the Company in April 2004. Mr. Danny Mills separated from the Company on July 9, 2004 as an employee
and as its President and Chief Executive Officer. Pursuant to an agreement
entered into between Mr. Mills and the Company dated July 9, 2004, all
employment-related issues between Mr. Mills and the Company have been
concluded. Mr. Mills was paid $90,000 in severance. Following the sale of the DSG business units and the subsequent
consolidation of the Company, employees leaving the Company were paid
severance. During the first nine months of 2004, the Company incurred $804
thousand and paid $591 thousand in cash for severance payments related to
consolidation activities, Mr. Mills, and Mr. Tate. At September 30, 2004, the
remaining accrued severance was $213 thousand, all related to 2004
reorganization events. 14




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Financial statements for the three and nine months ended September 30,
2004 and 2003 report the Companys SecurityandMore, IVS, CCTV, and foreign
entity businesses as discontinued operations. The following table contains
information regarding the percentage of net sales of certain income and expense
items for the three and nine months ended September 30, 2004 and 2003 and the
percentage changes in these income and expense items from year to year,
including the effect of the gain from the sale of the DSG business units: Percentage of Net Sales
    
    PercentageIncrease (Decrease)Three Months ended September 30,
    
    Between Periods2004
    
    2003
    
    2004 vs. 2003Net Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    -14.4
    %Cost of sales
    
    
    48.6
    %
    
    
    53.1
    %
    
    
    -21.8
    %Gross profit
    
    
    51.4
    %
    
    
    46.9
    %
    
    
    -6.1
    %Operating expenses:Selling, general and administrative
    
    
    80.3
    %
    
    
    59.5
    %
    
    
    15.5
    %Depreciation and amortization
    
    
    4.3
    %
    
    
    9.8
    %
    
    
    -62.7
    %Operating loss
    
    
    -33.1
    %
    
    
    -22.4
    %
    
    
    -26.5
    %Other income (expense)
    
    
    -11.3
    %
    
    
    -1.9
    %
    
    
    -402.9
    %Loss before taxes and discontinued operations
    
    
    -44.4
    %
    
    
    -24.3
    %
    
    
    -56.3
    %Income taxes
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Loss from continuing operations
    
    
    -44.4
    %
    
    
    -24.3
    %
    
    
    -56.3
    %Profit (Loss) from discontinued operations
    
    
    26.4
    %
    
    
    3.6
    %
    
    
    531.4
    %Net loss
    
    
    -18.1
    %
    
    
    -20.8
    %
    
    
    25.4
    %
 Percentage of Net Sales
    
    PercentageIncrease (Decrease)Nine Months ended September 30,
    
    Between Periods2004
    
    2003
    
    2004 vs. 2003Net Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    -14.3
    %Cost of sales
    
    
    54.1
    %
    
    
    59.0
    %
    
    
    -21.4
    %Gross profit
    
    
    45.9
    %
    
    
    41.0
    %
    
    
    -4.1
    %Operating expenses:Selling, general and administrative
    
    
    97.8
    %
    
    
    82.6
    %
    
    
    1.5
    %Depreciation and amortization
    
    
    7.1
    %
    
    
    11.6
    %
    
    
    -47.9
    %Operating loss
    
    
    -59.0
    %
    
    
    -53.2
    %
    
    
    -5.1
    %Other income (expense)
    
    
    -3.6
    %
    
    
    -2.6
    %
    
    
    -18.1
    %Loss before taxes and discontinued operations
    
    
    -62.6
    %
    
    
    -55.8
    %
    
    
    4.0
    %Income taxes
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Loss from continuing operations
    
    
    -62.6
    %
    
    
    -55.8
    %
    
    
    4.0
    %Income (loss) from discontinued operations

    
    
    9.4
    %
    
    
    -5.5
    %
    
    
    244.8
    %Net loss
    
    
    -53.2
    %
    
    
    -61.4
    %
    
    
    25.7
    %
 15




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##### Table of Contents



Three Months Ended September 30, 2004 Compared to Three Months Ended September
30, 2003 For the three months ended September 30, 2004, net sales were $ 4.6
million, a decrease of $ 700 thousand (14%) over the same period in 2003. The
decrease in revenues are largely attributive to $540 thousand in patent
infringement settlements and related licenses issued included as revenue for
the third quarter of 2003. Gross profit margins increased from 46.9% during the three months ended
September 30, 2003 to 51.4%, or a 9% increase. The margin increase is
attributed to ongoing cost reductions in manufacturing and sourcing related to
the continuing transition to new hardware designs. Additionally, this margin
performance relates to managements decision to focus more sales effort on the higher margin SAFEnet access
control products and services. Selling, general and administrative expenses (SG&A) were $3.7 million
for the three months ended September 30, 2004, an increase of $0.5 million
(15%) over the same period in 2003. The increase was related primarily to costs
incurred during the Companys consolidation and restructuring. During the
third quarter of 2004 the Company closed its 160,000 square foot headquarters
facility in Lewisville, Texas and relocated to a 32,000 square foot facility in
San Antonio, Texas. During the third quarter of 2004, the Company recorded
approximately $190 thousand for employee severance related to the consolidation
efforts, $90 thousand for the separation of Mr. Mills and $65 thousand for employee relocation expense. Depreciation and amortization expenses were $195 thousand for the three
months ended September 30, 2004, a decrease of $328 thousand (63%) over the
same period in 2003. Primary factors causing this decrease was less building
depreciation in 2004 and the write-off of the Companys SAP system in 2003. Other income and expenses during the three months ended September 30, 2004
yielded a net loss of $518 thousand, compared to a net loss of $103 thousand
during the same period in 2003. The change primarily resulted from the
Companys disposition of approximately $400 thousand of leasehold improvements
and fixed assets related to the relocation from the headquarters facility in
Lewisville, Texas during the third quarter of 2004. Net income from discontinued operations in the third quarter of 2004 was
$1.2 million compared to net income in the third quarter of 2003 of $191
thousand. The $1.0 million increase was primarily due to the $1.4 million gain
from the sale of the DSG business unit less $305 thousand Honeywell/Blackshear
settlement and legal costs. Nine Months Ended September 30, 2004 Compared to Nine Months Ended September
30, 2003 For the nine months ended September 30, 2004, net sales were $11.3
million, a decrease of $1.9 million (14%) over the same period in 2003. The
decrease in sales is attributed to the MDI business that delayed product
releases during the first half of 2004 to allow additional time for field
testing of new technologies. Another factor in the decrease in revenues was
the $540 thousand in patent infringement settlements and related licenses
issued included as revenue for the third quarter of 2003. Gross profit for the first nine months of 2004 was $5.2 million compared
to $5.4 million for the same period in 2003, a decrease of 4%. However, gross
profit margins increased from 41% during the nine months ended September 30,
2003 to 46%, or an 11% increase, for the same period ended 2004. The margin
increase is attributed to ongoing cost reductions in manufacturing and sourcing
related to the continuing transition to new hardware designs during 2004. The
margin increase is also related to core security product sales as the Company
now focuses more effort on the higher margin SAFEnet access control products
and services. Selling, general and administrative expenses (SG&A) were $11 million for
the nine months ended September 30, 2004, an increase of $0.2 million (2%) over
the same period in 2003. The increase was primarily related to costs associated
with the consolidation and restructuring of the Company during 2004. During
the second quarter of 2004, the Company closed the MDI mixed-use facility in
Rancho Cucamonga, California and the MDI engineering group moved to smaller
office space in Ontario, California. During the third quarter of 2004 the
Company closed its headquarters facility in Lewisville, Texas and relocated to
a office and warehouse facility in San Antonio, Texas. The Company has also
consolidated its ABM Data Systems business and its Fairfax, VA operations into
the San Antonio facility. During the first nine months of 2004, the Company
recorded $804 thousand for severance and $75,000 for lease settlement costs
related to the consolidation efforts. 16




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##### Table of Contents



Depreciation and amortization expenses were $0.8 million for the nine
months ended September 30, 2004, a decrease of $0.7 million (47%) over the same
period in 2003. Primary factors causing this decrease was less building
depreciation in 2004 and the write-off of Companys SAP system in 2003. Other income and expenses during the nine months ended September 30, 2004
yielded a net loss of $0.4 million, compared to a net loss of $0.3 million
during the same period in 2003. The $0.1 million increase was caused by a $0.5
million loss on the Companys disposal of fixed assets when it moved from its
Lewisville headquarters. In the same period of 2003 there was net interest
expense totaling $0.5 million and other income of $0.2 million. Net income from discontinued operations in the first three quarters of
2004 was $1.1 million compared to a net ($0.7) million in the first three
quarters of 2003. The losses in 2003 were primarily due to costs incurred
while liquidating the Companys international legal entities following the
Honeywell asset sale. The 2004 income is largely attributed to the sale of the
DSG business unit yielding a net gain of $1.4 million offset by the Blackshear
settlement for $188 thousand and related legal costs of $117 thousand. Financial Condition, Liquidity and Capital Resources In the first nine months of 2004, the Companys cash and cash equivalents,
including its marketable securities held for sale, decreased from $6.3 million
at December 31, 2003 to $4.7 million at September 30, 2004. The largest
components of the net cash used in operations of $9.3 million were $6.0 million
net loss and payment of accrued expenses and other liabilities related to
reorganization of $5.0 million. During the third quarter 2004 all of the Companys remaining marketable
securities were either called or sold. During the next twelve months, the Companys primary source of liquidity
will be its cash. Although cash requirements will fluctuate depending on the
timing and extent of many factors, the Company believes that available cash on
hand should satisfy its liquidity requirements for at least the next 12 months.
In July 2004, the Company generated cash by divesting its non-core DSG
business units to Mace Security for $5.6 million before approximately $0.4
million in expenses, and collected $250 thousand of the final purchase price
holdback payment from Honeywell. During the October 2004, the Company
received the final $697 thousand Honeywell payment for the CCTV asset sale. 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 September 30, 2004 (in thousands): Total
    
    2004
    
    2005
    
    2006
    
    2007Contractual
obligations and
commitments:Operating leases
    
    $
    1,063
    
    
    $
    124
    
    
    $
    449
    
    
    $
    396
    
    
    $
    94Royalty obligation
    
    
    240
    
    
    
    144
    
    
    
    46
    
    
    
    25
    
    
    
    25Severance obligations
    
    
    213
    
    
    
    213
    
    
    
    
    
    
    
    
    
    
    
    $
    1,516
    
    
    $
    481
    
    
    $
    495
    
    
    $
    421
    
    
    $
    119
 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 been completed. The San Antonio facility now houses
all executive, sales (except for regional sales managers), marketing, technical
support, assembly, integration and sustaining engineering activities. A
separate engineering facility is maintained in Ontario, California to house
development activities. The accrued severance at September 30, 2004, relates to positions
terminated during the Companys current restructuring coupled with the San
Antonio and Rancho Cucamonga (Ontario) consolidation initiatives. 17




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##### Table of Contents



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 5% of the
total consolidated sales during the first three quarters 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. The Company
plans to discontinue the operations in Switzerland during the fourth quarter of
2004. 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 (i) 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, and (ii) due to the selling of
business units and operations consolidation into essentially one facility, the
Company has improved internal monitoring controls over financial reporting
during the quarter ended September 30, 2004. 18




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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 September 30, 2003  1.
    
    On July 9, 2004, American Building Control, Inc. (the Company)
issued a Press Release (the Press Release) announcing that its
President and Chief Executive Officer, Mr. Danny W. Mills, has resigned
from the Company, effective Friday, July 9, 2004.2.
    
    On July 12, 2004, American Building Control, Inc. (American Building
Control) issued a Press Release (the Press Release) announcing that
it had closed the sale of the assets of its two distribution and retail
based operating units to Mace Security Products, Inc., a wholly-owned
subsidiary of Mace Security International, Inc.3.
    
    On August 2, 2004, American Building Control, Inc. (the Company)
issued a Press Release (the Press Release) announcing that James
Collier Sparks had been appointed the President and Chief Executive
Officer of the Company, effective Friday, July 30, 2004.4.
    
    On August 16, 2004, American Building Control, Inc. issued a Press
Release announcing its second quarter fiscal 2004 results. 19




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5.
    
    On September 22, 2004, the Company filed a Certificate of Ownership
and Merger (the Certificate) with the Secretary of State of Delaware
changing its name to MDI, Inc. and its stock trading symbol to MDII
effective as of the close of business on September 24, 2004.6.
    
    On October 21, 2004, the Company concluded an Addendum to Asset
Purchase Agreement with Honeywell International, Inc. and a Settlement
and Release Agreement with Honeywell International, Inc. and David M.
Blackshear settling all claims among the parties. The Company issued a
Press Release on October 21, 2004 describing the basic terms of those
agreements. 20




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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. AMERICAN BUILDING CONTROL, INC.Dated: November 15, 2004
    
    By:
    
    /s/ Jon D. GreenwoodJon D. GreenwoodSenior Vice President and Chief Financial Officer
 21