##### 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 June 30, 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.  DELAWARE
    
    75-2626358(State or other jurisdiction
    
    (I.R.S. EmployerOf incorporation or organization)
    
    Identification No.)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 June 30, 2004 was $22,681,751. As of that date
14,633,388 shares of the Registrants Common Stock were outstanding.




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AMERICAN BUILDING CONTROL, INC.
FORM 10-Q
TABLE OF CONTENTS FORWARD LOOKING STATEMENTSPART I
    
    
    3ITEM 1: FINANCIAL STATEMENTS
    
    
    3ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
    
    
    13ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    15ITEM 4: CONTROLS AND PROCEDURES
    
    
    16PART II
    
    
    17ITEM 1: LEGAL PROCEEDINGS
    
    
    17ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
    
    
    17ITEM 3: DEFAULTS UPON SENIOR SECURITIES
    
    
    17ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    17ITEM 5: OTHER INFORMATION
    
    
    17ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
    
    
    17SIGNATURES
    
    
    18CERTIFICATIONSCertification of Chief Executive Officer - Rule 13a-14(a) or Rule 15d-14(a)Certification of Chief Financial Officer - Rule 13a-14(a) or Rule 15d-14(a)Joint Certification of CEO and CFO - Rule 13a-14(b) or Rule 15d-14(b)
  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. 2




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##### Table of Contents



PART I 
 ITEM 1. FINANCIAL STATEMENTS AMERICAN BUILDING CONTROL, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data) June 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    3,023
    
    
    $
    6,307Marketable securities
    
    
    738
    
    
    
    1,499Trade accounts receivable, net
    
    
    2,357
    
    
    
    1,951Inventories
    
    
    2,128
    
    
    
    2,019Receivable from Honeywell International, Inc.
    
    
    1,200
    
    
    
    1,800Prepaid expenses and other current assets
    
    
    122
    
    
    
    699Assets of discontinued operations
    
    
    4,358
    
    
    
    5,188Total current assets
    
    
    13,926
    
    
    
    19,463Property and Equipment, net
    
    
    2,110
    
    
    
    2,703Other Assets:Goodwill
    
    
    2,792
    
    
    
    2,792Other intangible assets
    
    
    45
    
    
    
    49Other assets
    
    
    705
    
    
    
    755Total assets
    
    $
    19,578
    
    
    $
    25,762LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Trade accounts payable
    
    $
    901
    
    
    $
    1,401Accrued expenses
    
    
    840
    
    
    
    1,653Accrued compensation
    
    
    1,209
    
    
    
    1,396Accrued royalties
    
    
    213
    
    
    
    255Severance
    
    
    133
    
    
    
    641Other current liabilities
    
    
    1,714
    
    
    
    53Deferred income
    
    
    268
    
    
    
    494Liabilities of discontinued operations
    
    
    2,646
    
    
    
    3,447Total current liabilities
    
    
    7,924
    
    
    
    9,340Long-Term LiabilitiesAccrued royalties
    
    
    11
    
    
    
    93Severance obligations
    
    
    
    
    
    
    29Total long-term liabilities
    
    
    11
    
    
    
    122Commitments and Contingencies
    
    
    
    
    
    
    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
June 30, 2004 and
December 31, 2003, respectively
    
    
    181
    
    
    
    176Additional paid-in-capital
    
    
    163,147
    
    
    
    162,618Accumulated deficit
    
    
    (114,059
    )
    
    
    (108,858
    )Accumulated other comprehensive income
    
    
    98
    
    
    
    88Treasury stock, at cost (3,488,350 and 3,488,350 common
shares at June 30, 2004 and December 31, 2003, respectively)
    
    
    (38,701
    )
    
    
    (38,701
    )Total stockholders equity
    
    
    11,643
    
    
    
    16,300Total liabilities and stockholders equity
    
    $
    19,578
    
    
    $
    25,762
 The accompanying notes are an integral part of the consolidated financial statements. 3




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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) Three months ended June 30,(Unaudited)2004
    
    2003Net sales
    
    $
    3,382
    
    
    $
    4,162Cost of sales (exclusive of depreciation shown separately below)
    
    
    1,824
    
    
    
    2,688Gross profit
    
    
    1,558
    
    
    
    1,474Other operating costs:Selling, general and administrative
    
    
    3,925
    
    
    
    4,514Depreciation and amortization
    
    
    283
    
    
    
    5384,208
    
    
    
    5,052Operating loss
    
    
    (2,650
    )
    
    
    (3,578
    )Other income (expense):Interest expense
    
    
    
    
    
    
    (185
    )Interest income
    
    
    24
    
    
    
    29Other, net
    
    
    55
    
    
    
    17979
    
    
    
    23Loss before income taxes and discontinued operations
    
    
    (2,571
    )
    
    
    (3,555
    )Income tax benefit
    
    
    
    
    
    
    Loss from continuing operations
    
    
    (2,571
    )
    
    
    (3,555
    )Income (Loss) from discontinued operations
    
    
    171
    
    
    
    (767
    )Net loss
    
    
    (2,400
    )
    
    
    (4,322
    )Dividend requirements on preferred stock
    
    
    (8
    )
    
    
    (29
    )Net loss allocable to common stockholders
    
    $
    (2,408
    )
    
    $
    (4,351
    )Basic and diluted loss per share from:Continuing operations
    
    $
    (0.18
    )
    
    $
    (0.26
    )Discontinued operations
    
    $
    0.01
    
    
    
    (0.05
    )Basic and diluted loss per share
    
    $
    (0.17
    )
    
    $
    (0.31
    )Number of common shares used in computations:Basic
    
    
    14,564,926
    
    
    
    14,149,199Diluted
    
    
    14,564,926
    
    
    
    14,149,199
 The accompanying notes are an integral part of the consolidated financial statements. 4




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AMERICAN BUILDING CONTROL, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data) Six months ended June 30,(Unaudited)2004
    
    2003Net sales
    
    $
    7,069
    
    
    $
    9,518Cost of sales (exclusive of depreciation shown separately below)
    
    
    3,984
    
    
    
    5,944Gross profit
    
    
    3,085
    
    
    
    3,574Other operating costs:Selling, general and administrative
    
    
    7,955
    
    
    
    8,508Depreciation and amortization
    
    
    608
    
    
    
    1,0148,563
    
    
    
    9,522Operating loss
    
    
    (5,478
    )
    
    
    (5,948
    )Other income (expense):Interest expense
    
    
    
    
    
    
    (484
    )Interest income
    
    
    45
    
    
    
    48Other, net
    
    
    85
    
    
    
    217130
    
    
    
    (219
    )Loss before income taxes and discontinued operations
    
    
    (5,348
    )
    
    
    (6,167
    )Income tax benefit
    
    
    
    
    
    
    Loss from continuing operations
    
    
    (5,348
    )
    
    
    (6,167
    )Income (Loss) from discontinued operations
    
    
    164
    
    
    
    (816
    )Net loss
    
    
    (5,184
    )
    
    
    (6,983
    )Dividend requirements on preferred stock
    
    
    (17
    )
    
    
    (58
    )Net loss allocable to common stockholders
    
    $
    (5,201
    )
    
    $
    (7,041
    )Basic and diluted earnings (loss) per share from:Continuing operations
    
    $
    (0.37
    )
    
    $
    (0.44
    )Discontinued operations
    
    
    0.01
    
    
    
    (0.06
    )Basic and diluted loss per share
    
    $
    (0.36
    )
    
    $
    (0.50
    )Number of common shares used in computations:Basic
    
    
    14,366,657
    
    
    
    14,084,844Diluted
    
    
    14,366,657
    
    
    
    14,084,844
 The accompanying notes are an integral part of the consolidated financial statements. 5




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AMERICAN BUILDING CONTROL, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Six months ended June 30,(Unaudited)2004
    
    2003Operating Activities:Net loss
    
    $
    (5,184
    )
    
    $
    (6,983
    )Adjustments to reconcile net loss to net cash used in operating activities:Loss on disposal of fixed assets
    
    
    
    
    
    
    156Deferred compensation expense
    
    
    
    
    
    
    21Other compensation expense
    
    
    
    
    
    
    202Amortization of deferred income
    
    
    281
    
    
    
    238Loss (gain) on sale of investments
    
    
    30
    
    
    
    Depreciation and amortization
    
    
    664
    
    
    
    1,118Provision for losses on accounts receivable
    
    
    28
    
    
    
    274Non-cash charges reversed
    
    
    
    
    
    
    (341
    )Mark-to-market interest rate swap
    
    
    52
    
    
    
    83Changes in operating assets and liabilities:Trade accounts receivable
    
    
    (68
    )
    
    
    (202
    )Inventories
    
    
    405
    
    
    
    597Prepaid and other current assets
    
    
    1,221
    
    
    
    (8
    )Other assets
    
    
    5
    
    
    
    149Trade accounts payable
    
    
    (257
    )
    
    
    (328
    )Accrued and other current liabilities
    
    
    (1,676
    )
    
    
    (2,768
    )Net cash provided by used in operating activities
    
    
    (4,499
    )
    
    
    (7,792
    )Investing Activities:Purchases of property and equipment
    
    
    (43
    )
    
    
    (567
    )Proceeds from the sale of property and equipment
    
    
    
    
    
    
    1,462Proceeds from redemption of marketable securities
    
    
    741
    
    
    
    Purchases of marketable securities
    
    
    
    
    
    
    (1,531
    )Earn out payments on prior acquisitions
    
    
    
    
    
    
    (73
    )Net cash used in investing activities
    
    
    698
    
    
    
    (709
    )Financing Activities:Issuance of common stock
    
    
    534
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    (18
    )Payment of preferred stock dividends
    
    
    (17
    )
    
    
    (58
    )Net cash provided by (used in) financing activities
    
    
    517
    
    
    
    (76
    )Net decrease in cash and cash equivalents
    
    
    (3,285
    )
    
    
    (8,577
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    38Cash and cash equivalents, beginning of period
    
    $
    6,307
    
    
    $
    16,436Cash and cash equivalents, end of period
    
    $
    3,023
    
    
    $
    7,897Supplemental cash flow information:Cash paid during the year for:Interest
    
    $
    
    
    
    $
    292Income taxes
    
    $
    
    
    
    $
    7
 The accompanying notes are an integral part of the consolidated financial statements. 6




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American Building Control, Inc. Notes to Consolidated Financial Statements Note 1: Basis of
Presentation and Nature of Operations 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
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. 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. In 2003, following the Honeywell Asset Sale, the Company reorganized
its business activities in order to focus on designing, marketing, selling
and servicing niche security products for use in industrial, governmental
and consumer surveillance markets. The Company formed two separate
operating segments: Professional Security Group (PSG) and Diversified
Sales Group (DSG). Following the sale of the units
comprising substantially all of the DSG segments to Mace, the
Company is now able to focus its resources and efforts on the further
development of its core business which is primarily comprised of
MDI Security
Systems, Inc. (MDI) and ABM Data Systems (ABM). The Company is now
organized into a single segment. MDI is a leader in the access control business and is an important
participant in many Homeland Security projects. MDIs new Security Suite
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 audit functions. MDI also distributes its
PointGuard 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. The Company also sells monitoring and recording devices to operators of public
transit vehicles. All significant inter-company balances and transactions have been
eliminated in consolidation. The local currency is considered the functional currency for the Companys
foreign operations. Assets and liabilities are translated into U.S. Dollars at
the rate of exchange in effect at the balance sheet date. Revenues and expenses
are translated into U.S. Dollars at the average monthly exchange rates
prevailing during the year. 7




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##### Table of Contents



Stock-Based Compensation 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. 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): Three months ended June 30,2004
    
    2003Net loss from continuing operations allocable to common stockholders:As reported
    
    $
    (2,579
    )
    
    $
    (3,584
    )Deduct: Total stock-based compensation under fair value
based method for all awards
    
    
    (345
    )
    
    
    (109
    )Pro forma
    
    $
    (2,924
    )
    
    $
    (3,693
    )Basic and diluted loss per share from continuing operationsAs reported
    
    $
    (0.18
    )
    
    $
    (0.26
    )Pro forma
    
    $
    (0.20
    )
    
    $
    (0.26
    )
 Six months ended June 30,2004
    
    2003Net loss from continuing operations allocable to common stockholders:As reported
    
    $
    (5,365
    )
    
    $
    (6,225
    )Deduct: Total stock-based compensation under fair value
based method for all awards
    
    
    (773
    )
    
    
    (464
    )Pro forma
    
    $
    (6,138
    )
    
    $
    (6,689
    )Basic and diluted loss per share from continuing operationsAs reported
    
    $
    (0.37
    )
    
    $
    (0.44
    )Pro forma
    
    $
    (0.43
    )
    
    $
    (0.47
    )
 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 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. 8




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##### Table of Contents



The table below shows the roll-forward of warranty accrual for the three
and six months ended June 30, 2004 and 2003 (in thousands): Three months ended June 30,2004
    
    2003Beginning balance
    
    $
    184
    
    
    $
    143Charged to expense
    
    
    8
    
    
    
    16Usage
    
    
    (8
    )
    
    
    (0
    )Closing balance
    
    $
    184
    
    
    $
    159
 Six months ended June 30,2004
    
    2003Beginning balance
    
    $
    184
    
    
    $
    128Charged to expense
    
    
    16
    
    
    
    32Usage
    
    
    (16
    )
    
    
    (1
    )Closing balance
    
    $
    184
    
    
    $
    159
 Reclassifications Certain amounts have been reclassified in the prior period financial
statements to conform to the current period presentation. Note 2: 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 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. 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 from the
$1.8 million final payment until such time as the possible restrictions were
resolved. Honeywell paid to the Company $600,000 plus interest in June
2004 and $250,000 plus interest in July 2004. The payment of the remaining
$950,000 is subject to resolution of one outstanding issue. The Company and
Honeywell are working jointly to resolve the issue and expect to have a
resolution in the third quarter. Note 3: Trade Accounts Receivable Supplemental information on net trade accounts receivable (in thousands): June 30,
    
    December 31,2004
    
    2003Gross trade accounts receivable
    
    $
    2,554
    
    
    $
    2,258Less: allowance for doubtful accounts
    
    $
    (197
    )
    
    
    (307
    )$
    2,357
    
    
    $
    1,951
 9




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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 (loss) 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 six months ended June 30, 2004 and 2003, 2,730,515 and 1,074,635
stock options were outstanding, respectively, but were not included in the
computation of diluted loss per share because the effect would have
been anti-dilutive. For the six months ended June 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 5: Comprehensive Loss Supplemental information on comprehensive loss is as follows (in
thousands): Three months ended June 30,2004
    
    2003Net loss
    
    $
    (2,400
    )
    
    $
    (4,322
    )Other comprehensive income (loss):Unrealized gain (loss) on marketable
securities
    
    
    10
    
    
    
    (5
    )Currency translation adjustment
    
    
    1
    
    
    
    51$
    (2,389
    )
    
    $
    (4,276
    )
 Six months ended June 30,2004
    
    2003Net loss
    
    $
    (5,184
    )
    
    $
    (6,983
    )Other comprehensive income (loss):Unrealized loss on marketable securities
    
    
    9
    
    
    
    (5
    )Currency translation adjustment
    
    
    1
    
    
    
    44$
    (5,174
    )
    
    $
    (6,944
    )
 Note 6: 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 June 30,2003
    
    (credits)
    
    cash
    
    2004Royalty Claim
    
    $
    329
    
    
    $
    
    
    
    $
    (116
    )
    
    $
    213United Kingdom Lease
    
    
    330
    
    
    
    
    
    
    
    (330
    )
    
    
    2003 Severance
    
    
    670
    
    
    
    (52
    )
    
    
    (550
    )
    
    
    682004 Severance
    
    
    
    
    
    
    401
    
    
    
    (336
    )
    
    
    65$
    1,329
    
    
    $
    349
    
    
    $
    (1,332
    )
    
    $
    346
 10




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##### Table of Contents



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. 2003 Severance At December 31, 2003, unpaid obligations related to executive and
management severance was approximately $0.7 million, including
$0.3 million related to the separation of Mr. Bryan Tate, our Former CEO. During the first half
of 2004, $550 thousand was paid in cash for 2003 severance, and $52
thousand was credited to income to reflect discounting of the obligations
due to accelerated payments. As of June 30, 2004, $68 thousand was accrued
for remaining severance related to 2003 separations. 2004 Severance Mr. Tate separated as an employee of the Company on December 31, 2003 and
as its Chief Executive Officer and 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 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. During
the first half of 2004 the Company incurred $101,000 and paid $36,000
in cash for severance expenses related to consolidation activities.
At June 30, 2004, the total accrued severance was $133,000
comprised of the remaining $68,000 from 2003 and $65,000 for 2004 as
of the end of June 2004. 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
on 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). Prior to the sale of the DSG businesses to Mace, the Company had two
operating segments: the Professional Security Group (PSG) and the
Diversified Sales Group (DSG). In addition to the PSG and DSG operating
segments, the Company maintains corporate functions, including human
resources, legal, finance, information technologies, accounting, reporting
and executive, located in San Antonio, Texas. 11




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##### Table of Contents



Following the sale of the DSG businesses, the Company reorganized into
a single reporting segment. The Company is now comprised of MDI, MDI
Switzerland and ABM. Geographic Information (in thousands): Three months endedJune 30,2004
    
    2003Sales:United States
    
    $
    3,266
    
    
    $
    3,860Switzerland
    
    
    116
    
    
    
    302$
    3,382
    
    
    $
    4,162
 Six months endedJune 31,2004
    
    2003Sales:United States
    
    $
    6,725
    
    
    $
    7,706Switzerland
    
    
    344
    
    
    
    1,812$
    7,069
    
    
    $
    9,518
 Note 8: 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 June 2004 an
accrual of $0.4 million, included in discontinued operations, remained for the
unsettled claims. Note 9: Marketable Securities Marketable securities consist of 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 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 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.
The following table summarizes these securities (dollars in thousands): Security
    
    Coupon
    
    Callable
    
    Maturity
    
    Amortized
    
    Unrealized
    
    MarketType
    
    Rate
    
    Date
    
    Date
    
    Cost
    
    Loss
    
    ValueFHLB
    
    
    6.59
    %
    
    
    8/6/2004
    
    
    
    8/6/2014
    
    
    $
    126
    
    
    $
    6
    
    
    $
    120FNMA
    
    
    5.50
    %
    
    
    4/16/2004
    
    
    
    4/16/2018
    
    
    
    511
    
    
    
    18
    
    
    
    493FRMC
    
    
    6.35
    %
    
    
    5/15/2004
    
    
    
    5/15/2016
    
    
    
    129
    
    
    
    4
    
    
    
    125$
    766
    
    
    $
    28
    
    
    $
    738
 The security above that was callable May 15, 2004 was actually called on July
16, 2004. The security above that was callable on April 16, 2004 has not been
called at the time of this filing and continues to earn 5.50% interest since
April 16, 2004. 12




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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 six months ended June 30, 2004 and
2003 report the Companys SecurityandMore, IVS and CCTV 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 six months ended June 30, 2004 and 2003 and the percentage changes in these
income and expense items from year to year: PercentagePercentage of Net Sales
    
    Increase (Decrease)Three Months ended June 30,
    
    Between Periods2004 vs.2004
    
    2003
    
    2003Net Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    -18.7
    %Cost of sales
    
    
    53.9
    %
    
    
    64.6
    %
    
    
    -32.1
    %Gross profit
    
    
    46.1
    %
    
    
    35.4
    %
    
    
    5.7
    %Operating expenses:Selling, general and administrative
    
    
    116.1
    %
    
    
    108.5
    %
    
    
    -13.0
    %Depreciation and amortization
    
    
    8.4
    %
    
    
    12.9
    %
    
    
    -47.4
    %Operating loss
    
    
    -78.4
    %
    
    
    -86.0
    %
    
    
    25.9
    %Other income (expense)
    
    
    2.3
    %
    
    
    0.6
    %
    
    
    -243.5
    %Loss before taxes and discontinued operations
    
    
    -76.0
    %
    
    
    -85.4
    %
    
    
    27.7
    %Income taxes
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Loss from continuing operations
    
    
    -76.0
    %
    
    
    -85.4
    %
    
    
    27.7
    %Loss from discontinued operations
    
    
    5.1
    %
    
    
    -18.4
    %
    
    
    122.3
    %Net loss
    
    
    -71.0
    %
    
    
    -103.8
    %
    
    
    44.5
    %
 PercentagePercentage of Net Sales
    
    Increase (Decrease)Six Months ended June 30,
    
    Between Periods2004 vs.2004
    
    2003
    
    2003Net Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    -25.7
    %Cost of sales
    
    
    56.4
    %
    
    
    62.5
    %
    
    
    -33.0
    %Gross profit
    
    
    43.6
    %
    
    
    37.5
    %
    
    
    -13.7
    %Operating expenses:Selling, general and administrative
    
    
    112.5
    %
    
    
    89.4
    %
    
    
    -6.5
    %Depreciation and amortization
    
    
    8.6
    %
    
    
    10.7
    %
    
    
    -40.0
    %Operating loss
    
    
    121.1
    %
    
    
    100.0
    %
    
    
    -7.9
    %Other income (expense)
    
    
    1.8
    %
    
    
    -2.3
    %
    
    
    159.4
    %Loss before taxes and discontinued operations
    
    
    -75.7
    %
    
    
    -64.8
    %
    
    
    13.3
    %Income taxes
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Loss from continuing operations
    
    
    -75.7
    %
    
    
    -64.8
    %
    
    
    13.3
    %Loss from discontinued operations
    
    
    2.3
    %
    
    
    -8.6
    %
    
    
    120.1
    %Net loss
    
    
    -73.3
    %
    
    
    -73.4
    %
    
    
    25.8
    %
 Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003 For the three months ended June 30, 2004, net sales were $3.4 million, a
decrease of $780 thousand (19%) over the same period in 2003. The decrease in
sales is attributed to the MDI business that delayed product releases to allow
additional time for field testing of new technologies. Gross profit margins increased from 35.4% during the three months ended
June 30, 2003 to 46.1%, or a 30.2% increase. The margin increase is attributed
to cost reductions in manufacturing and sourcing related to the transition to
new hardware designs. Additionally, higher margin service revenues increased
within the MDI business during 2004. 13




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##### Table of Contents



Selling, general and administrative expenses (SG&A) were $3.9 million
for the three months ended June 30, 2004, a decrease of $0.6 million (13%) over
the same period in 2003. The decrease was related primarily to cost reductions
related to the consolidation and restructuring of the Company. During the
second quarter of 2004, the Company closed the 45,000 square foot MDI mixed-use
facility in Rancho Cucamonga, California and the MDI engineering group moved to
a 6,000 square feet office in Ontario, California. The former 160,000 square
feet headquarters facility in Lewisville, Texas has relocated to a 32,000
square foot facility in San Antonio, Texas. The Company has also consolidated
its Austin, Texas-based ABM Data Systems business and its Fairfax, VA
operations into the San Antonio facility. During June 2004, the Company recorded
$101,000 for severance and $75,000 for lease settlements related to the
consolidation efforts. Depreciation and amortization expenses were $0.3 million for the three
months ended June 30, 2004, a decrease of $0.3 million (47%) 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 June 30, 2004 were
$0.1 million of income, compared to a net $0.0 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 disposition of its Lewisville Headquarters facility during the
second quarter of 2003 that was not present in 2004. Net income from discontinued operations in the second quarter of 2004 was
$0.2 million compared to losses in the second quarter of 2003 of $0.8 million.
The losses in 2003 were primarily due to costs incurred while liquidating the
Companys international legal entities following the Honeywell asset sale. The
net income in the second quarter of 2004 is largely attributed to $155,000 of
deferred income recognized related to the Honeywell Supply Agreement. Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003 For the six months ended June 30, 2004, net sales were $7.1 million, a
decrease of $2.4 million (26%) over the same period in 2003. Sales in
Switzerland decreased $1.5 million (83%), to $0.3 million during the first half
of 2004 compared to $1.8 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 was delivered in the first quarter of 2003. Video product
sales in the United States accounted for a additional decrease of $0.7 million
compared to the first half of 2003. Gross profit margins increased from 37.5% during the six months ended June
30, 2003 to 43.6%, or a 13.7% increase. The margin increase is related to fewer
video product sales as the segment now focuses on the higher margin SAFEnet
access control products. Selling, general and administrative expenses (SG&A) were $8.0 million
for the six months ended June 30, 2004, a decrease of $0.6 million (7%) over
the same period in 2003. The decrease was related primarily to cost reductions
related to the consolidation and restructuring of the Company. During the first half of 2004, the Company incurred net $349,000 in severance expenses. Depreciation
and amortization expenses were $0.6 million for the six months ended June 30,
2004, a decrease of $0.4 million (40%) 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 six months ended June 30, 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 $0.5
million of interest and loan amortization costs incurred due to the Companys
sale/leaseback disposition of its Lewisville Headquarters facility during the
first half of 2003 that was not present in 2004. Net income from discontinued operations in the first half of 2004 was $0.2
million compared to losses in the first half of 2003 of $0.8 million. The
losses in 2003 were primarily due to costs incurred while liquidating the
Companys international legal entities following the Honeywell asset sale. The
net income in the second quarter of 2004 is largely attributed to $220,000 of
deferred income recognized related to the Honeywell Supply Agreement. 14




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##### Table of Contents



Financial Condition, Liquidity and Capital Resources In the first six 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 $3.8 million at June 30, 2004. The largest components
of the net cash used in operations of $4.5 million were $5.2 million net loss
offset $0.7 million of depreciation. The callable securities held by the Company have coupon rates ranging from
5.5 to 6.6 percent and mature from August 2014 to April 2018 (see note 9 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. In July 2004, the Company
generated cash by divesting its non-core DSG business units to Mace for $5.6
million before approximately $0.4 million in expenses, and
collecting $250
thousand of the final purchase price holdback payment from Honeywell.
As a result of the sale of the DSG segments to Mace, the Company
anticipates an approximate gain of $1 million during the third
quarter. 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 June 30, 2004 (in thousands): Total
    
    2004
    
    2005
    
    2006
    
    2007Contractual obligations and commitments:Operating leases
    
    $
    1,048
    
    
    $
    288
    
    
    $
    369
    
    
    $
    301
    
    
    $
    90Royalty obligation
    
    
    299
    
    
    
    203
    
    
    
    46
    
    
    
    25
    
    
    
    25Severance obligations
    
    
    133
    
    
    
    133
    
    
    
    
    
    
    
    
    
    
    
    $
    1,480
    
    
    $
    624
    
    
    $
    415
    
    
    $
    326
    
    
    $
    115
 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 early in the third
quarter, the facility will house all executive, sales, marketing, technical
support, assembly, integration and sustaining research and development
activities. Subsequent to the end of the second quarter, Mr. Mills resigned from all positions as an officer of the Company and its affiliates, and from his employment with the Company effective as of July 9, 2004. The Company
anticipates approximately $100,000 expense during the third quarter of 2004 towards the possible severance costs described in Mr. Mills employment agreement with the Company. Additionally, Mr. Mills may be entitled to a portion of the 2004 management incentive plan if earned at the end of the year. 
 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 half 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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     At the Companys annual meeting of shareholders (the Meeting), held on
June 21, 2004, the shareholders took the following action:  (1)
    
    The election of four(4)persons as directors of the Company, to
hold office until their successors were elected and qualified. 15




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##### Table of Contents



Election of Directors Votes
    
    VotesDirector
    
    Received
    
    WithheldElectedCarlo Loi
    
    
    8,959,599
    
    
    
    142,641Lance Borvansky
    
    
    8,840,961
    
    
    
    142,641John Macaulay
    
    
    8,945,829
    
    
    
    37,773James Power
    
    
    6,219,047
    
    
    
    0Not Re-electedDanny Mills
    
    
    2,741,616
    
    
    
    6,241,986
 (2) The
ratification of the Companys appointment of Grant Thornton LLP as
the Companys independent auditors for the fiscal year ending
December 31, 2004. Results from the Shareholders meeting were
8,968,427 votes were cast for; 12,963 votes were cast against; and
2,212 votes abstained from voting on the proposal to appoint Grant
Thornton. ITEM 5. 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) no change in internal
control over financial reporting occurred during the quarter ended June 30,
2004, that has materially affected, or is reasonably likely to materially
affect, such internal control over financial reporting. 16




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##### Table of Contents



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 June 30, 2003  1.
    
    On June 22, 2004, a report was filed which furnished a press release
relating to the results of American Building Controls Annual Meeting of
Shareholders2.
    
    On June 23, 2004, a report was filed which furnished a press release
announcing that the Company has entered into an agreement to sell the
assets of its two distribution and retail based operating units to Mace
Security Products, Inc. 17




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##### Table of Contents



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:
August 16, 2004
    
    By:
    
    /s/ Jon D. GreenwoodJon D. GreenwoodSenior Vice President and Chief Financial Officer
 18