##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-QSB  þ     Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2005 OR o     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
Of incorporation or organization)
    
    (I.R.S. Employer
Identification
No.)
 9725 DATAPOINT DRIVE, SUITE 200SAN 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
þ  No o The aggregate market value of the voting stock held by non-affiliates of the registrant,
as of April 30, 2005 was $7,747,330. As of that date 14,617,603 shares of the Registrants
Common Stock were outstanding.




---



MDI, INC.
FORM 10-QSB
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 CEOCertification of CFOCertification of CEO and CFO
  Forward Looking Statements Certain statements contained or incorporated in this report on Form 10-QSB, 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-QSB are subject to change due to global market and economic conditions
beyond the control of the Company. 2




---



##### Table of Contents



PART 1 
 ITEM 1. FINANCIAL STATEMENTS MDI, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(Unaudited) March 31,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    2,546
    
    
    $
    3,368Trade accounts receivable, net
    
    
    2,019
    
    
    
    3,249Inventories
    
    
    930
    
    
    
    742Prepaid expenses and other current assets
    
    
    187
    
    
    
    103Total current assets
    
    
    5,682
    
    
    
    7,462Property and Equipment, net
    
    
    1,235
    
    
    
    1,336Other Assets:Goodwill
    
    
    2,792
    
    
    
    2,792Other intangible assets, net
    
    
    40
    
    
    
    42Other assets
    
    
    564
    
    
    
    573Total assets
    
    $
    10,313
    
    
    $
    12,205LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Trade accounts payable
    
    $
    558
    
    
    $
    1,019Accrued expenses
    
    
    570
    
    
    
    521Deferred legal settlement
    
    
    874
    
    
    
    388Accrued compensation
    
    
    733
    
    
    
    874Accrued royalties
    
    
    21
    
    
    
    82Severance  current portion
    
    
    81
    
    
    
    97Other current liabilities
    
    
    98
    
    
    
    106Deferred revenue
    
    
    231
    
    
    
    218Total current liabilities
    
    
    3,166
    
    
    
    3,305Long-Term Liabilities
    
    
    
    
    
    
    Commitments 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; 18,105,953 shares issued at March
31, 2005 and December 31, 2004
    
    
    181
    
    
    
    181Additional paid-in-capital
    
    
    163,146
    
    
    
    163,146Accumulated deficit
    
    
    (118,456
    )
    
    
    (116,703
    )Treasury stock, at cost (3,488,350 common shares
at March 31, 2005 and December 31, 2004)
    
    
    (38,701
    )
    
    
    (38,701
    )Total stockholders equity
    
    
    7,147
    
    
    
    8,900Total liabilities and stockholders equity
    
    $
    10,313
    
    
    $
    12,205
 The accompanying notes are an integral part of these consolidated financial statements. 3




---



##### Table of Contents



MDI, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(Unaudited) Three months ended March 31,2005
    
    
    2004Net sales
    
    $
    1,948
    
    
    $
    3,459Cost of sales (exclusive of depreciation
shown separately below)
    
    
    962
    
    
    
    2,107Gross profit
    
    
    986
    
    
    
    1,352Other operating costs:Selling, general and administrative
    
    
    2,544
    
    
    
    3,733Depreciation and amortization
    
    
    195
    
    
    
    3222,739
    
    
    
    4,055Operating loss
    
    
    (1,753
    )
    
    
    (2,703
    )Other income (expense):Interest income
    
    
    2
    
    
    
    21Other, net
    
    
    (2
    )
    
    
    29
    
    
    
    50Loss before income taxes and discontinued operations
    
    
    (1,753
    )
    
    
    (2,653
    )Income tax benefit
    
    
    
    
    
    
    Loss from continuing operations
    
    
    (1,753
    )
    
    
    (2,653
    )Income (loss) from discontinued operations
    
    
    8
    
    
    
    (131
    )Net loss
    
    
    (1,745
    )
    
    
    (2,784
    )Dividend requirements on preferred stock
    
    
    (8
    )
    
    
    (8
    )Net loss allocable to common stockholders
    
    $
    (1,753
    )
    
    $
    (2,792
    )Basic and diluted earnings (loss) per share from:Continuing operations
    
    $
    (0.12
    )
    
    $
    (0.19
    )Discontinued operations
    
    
    0.00
    
    
    
    (0.01
    )Basic and diluted loss per share
    
    $
    (0.12
    )
    
    $
    (0.20
    )Number of common shares used in computations
    
    
    14,617,603
    
    
    
    14,168,388
 The accompanying notes are an integral part of these consolidated financial statements. 4




---



##### Table of Contents



MDI, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Three months ended March 31,2005
    
    
    2004Operating Activities:Net loss
    
    $
    (1,745
    )
    
    $
    (2,783
    )Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:Loss on disposal of fixed assets
    
    
    2
    
    
    
    Loss on sale of investments
    
    
    
    
    
    
    7Write Down of supply agreement and non-compete deferred income
    
    
    
    
    
    
    (100
    )Depreciation and amortization
    
    
    195
    
    
    
    355Provision for losses on accounts receivable
    
    
    (2
    )
    
    
    (308
    )Mark-to-market interest rate swap
    
    
    
    
    
    
    52Changes in operating assets and liabilities, net of dispositions:Trade accounts receivable
    
    
    1,232
    
    
    
    166Inventories
    
    
    (188
    )
    
    
    (439
    )Prepaid and other current assets
    
    
    (75
    )
    
    
    309Other assets
    
    
    
    
    
    
    4Trade accounts payable
    
    
    (461
    )
    
    
    592Accrued and other current liabilities
    
    
    322
    
    
    
    303Net cash used in operating activities
    
    
    (720
    )
    
    
    (1,842
    )Investing Activities:Purchases of property and equipment
    
    
    (94
    )
    
    
    (16
    )Proceeds from redemption of marketable securities
    
    
    
    
    
    
    191Net cash provided by (used in) investing activities
    
    
    (94
    )
    
    
    175Financing Activities:Payment of preferred stock dividends
    
    
    (8
    )
    
    
    (8
    )Net cash used in financing activities
    
    
    (8
    )
    
    
    (8
    )Net decrease in cash and cash equivalents
    
    
    (822
    )
    
    
    (1,675
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    (2
    )Cash and cash equivalents, beginning of period
    
    $
    3,368
    
    
    $
    6,307Cash and cash equivalents, end of period
    
    $
    2,546
    
    
    $
    4,632
 The accompanying notes are an integral part of these consolidated financial statements. 5




---



##### Table of Contents



MDI, Inc. Notes to Consolidated Financial Statements Note 1: General / Nature of Operations and Significant Accounting Principles General Since 1979, MDI has remained an established leader in the integrated access control and
physical security products business. As a manufacturer of high-grade access control solutions
for both the enterprise and small to mid-sized markets, the Company has held notable
competitive positions in the government and commercial integrated systems space for over two
decades; successfully assisting end users in protecting their people, facilities and assets.
The Company promotes their solutions via global dealer channels and maintains an impressive
portfolio of dedicated partners with a strong end-user referral base. The MDI product family
has protected thousands of customers around the world, including many of the worlds most
security-minded government agencies including the Department of Homeland Security, major
financial institutions, healthcare organizations, manufacturing companies, energy and power
providers, gaming and entertainment establishments, educational institutions and Fortune
ranked corporations. 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 from ABCX to
MDII effective Monday, September 27, 2004, the effective date of the Companys name change
with NASDAQ. 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. On April 4,
2005, MDI received a letter from the NASDAQ notifying the Company that, based on its review of
the Companys 10K filed on March 31, 2005, the NASDAQ staff determined that MDIs
stockholders equity was $8.9 million. NASDAQ advised the Company that it was not in
compliance with the minimum $10 million stockholders equity requirement for continued listing
on the NASDAQ National Market. In the April 4, 2005 letter, the Company was advised that it could consider applying to
list its securities on The NASDAQ Small Cap Market if it satisfies the requirements for
continued listing on that market. On April 29, 2005, the Company was notified it had been
approved for listing of its common stock on the NASDAQ Small Cap Market. MDI will continue to
trade under its current ticker symbol, MDII, on the NASDAQ Small Cap Market, effective May 3,
2005. The Company is in compliance with the core NASDAQ Small Cap initial listing
requirements, but continues not to meet the $1.00 minimum bid price. To maintain its Small Cap
listing, the Company must also be in compliance with the initial Small Cap listing
requirements on May 10, 2005, the last day of the companys current 180 bid price deficiency
grace period. By transferring to the NASDAQ Small Cap Market and being in compliance with the
core initial listing requirements on May 10, 2005, MDI will be afforded an extended 180-day
grace period in which to satisfy the minimum bid price requirement provided it meets other
applicable listing criteria. In a subsequent letter dated May 11, 2005, the Company was
notified that it was officially granted the 180 day extension to regain the minimum $1.00 per
share listing requirement. The new deadline for meeting the stock price minimum requirement
is November 7, 2005. Per NASDAQ, the company may be eligible to transfer back to the NASDAQ
National Market if its bid price maintains the minimum $1.00 per share requirement for 30
consecutive trading days and it has maintained compliance with all other continued listing
requirements. The Company maintains an internet website at www.mdisecure.com. Our Annual Report on Form
10-K, Quarterly Reports on Form 10-Q(SB), Current Reports on Form 8-K, and any amendments to
those reports, are available free of charge on our website, under the heading Investors (see
Investor Info & SEC Filings), immediately after they are filed with, or furnished to, the
Securities and Exchange Commission (SEC). 6




---



##### Table of Contents



The certifications of our Chief Executive Officer and Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 about the disclosure contained in this Quarterly
Report on Form 10-QSB, are included as Exhibits 31.1 and 31.2 to this Quarterly Report and are
available free of charge on our website under the heading Investors (see Investor Info & SEC
Filings). Basis of Presentation The accompanying financial statements have been derived from the accounts of MDI, 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, 2004
which are included in the Companys Annual Report on Form 10-K. All significant inter-company balances and transactions have been eliminated in consolidation. 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 March 31,2005
    
    
    2004Net loss from continuing operations
allocable to common stockholders:As reported
    
    $
    (1,753
    )
    
    $
    (2,792
    )Deduct: Total stock-based compensation under fair value
based method for all awards, net of taxes
    
    
    (275
    )
    
    
    (426
    )Pro forma
    
    $
    (2,028
    )
    
    $
    (3,218
    )Basic and diluted loss per share from continuing
operationsAs reported
    
    $
    (0.12
    )
    
    $
    (0.20
    )Pro forma
    
    $
    (0.14
    )
    
    $
    (0.23
    )
 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. 7




---



##### Table of Contents



The table below shows the roll-forward of warranty accrual for the three months ended March
31, 2005 and 2004 (in thousands): Three months ended March 31,2005
    
    
    2004Beginning balance
    
    $
    80
    
    
    $
    72Charged to expense
    
    
    2
    
    
    
    Usage
    
    
    (14
    )
    
    
    (1
    )Closing balance
    
    $
    68
    
    
    $
    71
 Reclassifications Certain amounts have been reclassified in the prior period financial statements to conform to
the current period presentation. Note 2: Discontinued Operations In November 2004, the Company sold 100% of its Swiss business unit, MDI Monitor Dynamics
Intl. S.A., to the local Swiss management team for a nominal amount. On July 1, 2004, the Company
sold its SecurityandMore and Industrial Vision Source distribution businesses to Mace Security
International, Inc. (Mace). On December 20, 2002, the Company sold its closed-circuit
television (CCTV) business to Honeywell International, Inc. (Honeywell). Financial statements
for the three months ended March 31, 2005 and 2004 report the Companys SecurityandMore, IVS,
CCTV, and foreign entity businesses as discontinued operations. Note 3: Trade Accounts Receivable Supplemental information on net trade accounts receivable (in thousands): March 31,
    
    
    December 31,2005
    
    
    2004Gross trade accounts receivable
    
    $
    2,216
    
    
    $
    3,523Less: allowance for doubtful
accounts
    
    
    (197
    )
    
    
    (274
    )$
    2,019
    
    
    $
    3,249
 Note 4: Earnings Per Share The Company computes basic earnings (loss) per share based on the weighted-average number of
common shares outstanding. Diluted earnings per share is computed based on the weighted average
number of shares outstanding, plus the number of additional common shares that would have been
outstanding if dilutive potential common shares had been issued. For the three months ended March 31, 2005 and 2004, there were 3,014,873 and 3,133,015 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 three months ended March
31, 2005 and 2004, there were 195,351 shares of preferred stock outstanding, 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. 8




---



##### Table of Contents



Note 5: Comprehensive Loss Supplemental information on comprehensive loss is as follows (in thousands): Three months ended March 31,2005
    
    
    2004Net loss
    
    $
    (1,745
    )
    
    $
    (2,792
    )Other comprehensive income (loss):Currency translation adjustment
    
    
    
    
    
    
    (2
    )$
    (1,745
    )
    
    $
    (2,794
    )
 Note 6: Severance and Royalty Settlement Expenses Accruals for severance and royalty settlement expenses are as follows (in thousands): Accrued at
    
    
    2005 Charges
    
    
    Amount paid
    
    
    Accrued atDecember 31, 2004
    
    
    (credits)
    
    
    in cash
    
    
    March 31, 2005Royalty Claim
    
    $
    82
    
    
    $
    
    
    
    $
    (61
    )
    
    $
    21Severance
    
    
    97
    
    
    
    22
    
    
    
    (38
    )
    
    
    81$
    179
    
    
    $
    22
    
    
    $
    (99
    )
    
    $
    102
 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. The final payment is due in April 2005. Severance The Company accrued $22 thousand in severance charges during the first quarter 2005 and
paid $38 thousand related to 2004 severance during the same period. The remaining $81
thousand in severance is the amount remaining from the 2004 restructuring costs. 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Financial statements for the three months ended March 31, 2005 and 2004 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 months ended March 31, 2005 and 2004 and the percentage changes in
these income and expense items from year to year: 9




---



##### Table of Contents



PercentagePercentage of Net Sales
    
    
    Increase (Decrease)Three Months ended March 31,
    
    
    Between Periods2005
    
    
    2004
    
    
    2005 vs. 2004Net Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    -43.7
    %Cost of sales
    
    
    49.4
    %
    
    
    60.9
    %
    
    
    -54.3
    %Gross profit
    
    
    50.6
    %
    
    
    39.1
    %
    
    
    -27.1
    %Operating expenses:Selling, general and administrative
    
    
    130.6
    %
    
    
    107.9
    %
    
    
    -31.9
    %Depreciation and amortization
    
    
    10.0
    %
    
    
    9.3
    %
    
    
    -39.4
    %Operating loss
    
    
    -90.0
    %
    
    
    -78.1
    %
    
    
    35.1
    %Other income (expense)
    
    
    -0.0
    %
    
    
    1.5
    %
    
    
    106.8
    %Loss before taxes and discontinued operations
    
    
    -90.0
    %
    
    
    -76.7
    %
    
    
    33.9
    %Income taxes
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Loss from continuing operations
    
    
    -90.0
    %
    
    
    -76.7
    %
    
    
    33.9
    %Loss from discontinued operations
    
    
    0.4
    %
    
    
    -3.8
    %
    
    
    106.1
    %Net loss
    
    
    -89.6
    %
    
    
    -80.5
    %
    
    
    37.3
    %Net loss allocable to common stockholders
    
    
    -90.0
    %
    
    
    -80.7
    %
    
    
    37.2
    %
 Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004 For the three months ended March 31, 2005, net sales were $ 1.9 million, a decrease of $ 1.5
million (44%) over the same period in 2004. The decrease in revenues is largely attributed to
fewer opportunities to bid on large projects during the first quarter 2005. During the same period
in 2004, the Company was successful in winning several large government related security contracts. Gross profit margins increased from 39% during the three months ended March 31, 2004 to 51%,
or a 27% increase. The margin increase primarily resulted from the Companys continued emphasis,
begun in the last half of 2004, on higher margin product lines and more effectively managing its
inventory and purchasing systems. Selling, general and administrative expenses (SG&A) were $2.5 million for the three months
ended March 31, 2005, a decrease of $1.2 million (32%) over the same period in 2004. The decrease
was related to the Companys consolidation, relocation and restructuring during the last half of
2004. The cost reductions included a $0.9 million decrease in salaries and a $0.2 million decrease
in facility costs during the period ended March 31, 2005. Depreciation and amortization expenses were $195 thousand for the three months ended March 31,
2005, a decrease of $127 thousand (39%) over the same period in 2004. The decrease was primarily
caused by the reduction of amortized software development costs as compared to 2004. There were essentially no other income and expenses during the three months ended March 31,
2005 compared to a net income of $50 thousand during the same period in 2004. The reduction in
other income and expenses was due to a $19 thousand decrease in interest income and a decrease in
miscellaneous other income of $31 thousand compared to the period ended March 31, 2004. Net income from discontinued operations in the third quarter of 2005 was $8 thousand compared
to a net loss in the first quarter of 2004 of $131 thousand. The $139 thousand increase was
primarily due to a net refund of value added taxes of $8 thousand in 2005 and a $131 thousand
reduction in legal settlements incurred in the first quarter of 2004. Financial Condition, Liquidity and Capital Resources In the first three months of 2005, the Companys cash and cash equivalents decreased $0.9
million from $3.4 million at December 31, 2004 to $2.5 million at March 31, 2005, which includes
$0.8 million of cash collected in connection with the Asset Security settlement. The largest
component was the conversion of net current assets to cash in the amount of approximately $0.8
million of the net cash used in operations of $0.9 million. For 2005, the Companys primary source of liquidity will be its cash and cash equivalents.
Although cash requirements will fluctuate depending on the timing and extent of many factors, the
Company believes that it should have enough liquidity to satisfy its liquidity requirements for at
least the next 12 months. The Company also plans to continue consolidation and the rationalization
of operating expenses in conjunction with operational and financial performance. The Company is
considering options to raise additional capital required to pursue its strategic opportunities and
growth initiatives. 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. The Companys significant
operating leases include facilities and office equipment. Monthly payments for the Companys two
facilities total approximately $42 thousand. These amounts are as of March 31, 2005 (in
thousands): 10




---



##### Table of Contents



Total
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009Contractual
obligations and
commitments:Operating leases
    
    $
    2,542
    
    
    $
    430
    
    
    $
    519
    
    
    $
    536
    
    
    $
    544
    
    
    $
    513Royalty obligations
    
    
    21
    
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Severance obligations
    
    
    81
    
    
    
    81
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,644
    
    
    $
    532
    
    
    $
    519
    
    
    $
    536
    
    
    $
    544
    
    
    $
    513
 During 2004, the Company vacated its former headquarters facility in Lewisville, Texas
and consolidated operations previously maintained in Austin, Texas; Rancho Cucamonga,
California; and Fairfax, Virginia into its new headquarters facility in San Antonio, Texas.
The headquarters facility consists of approximately 33,000 square feet of office and warehouse
space. The San Antonio facility now houses all executive, sales (except for regional sales
managers), marketing, technical support, assembly, integration and sustaining engineering
activities. The Company also maintains a 6,000 square foot office facility in Ontario, California.
The California facility is dedicated to the Companys development engineering staff. Royalty obligations consist of the final payment of a royalty claim settlement (see Note
6). The accrued severance at March 31, 2005, essentially relates to remaining severance costs
related to the Companys restructuring during 2004 (see Note 6). 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rates An interest rate swap agreement with Bank One remained in effect through February 15, 2004.
This agreement expired and terminated in February 2004, and the company paid $52,000 for final
settlement of the obligation. The Company had no debt during 2004 or at March 31, 2005 and incurred no interest expenses. 
 ITEM 4. CONTROLS AND PROCEDURES The Companys management, with the participation of the Companys principal executive
officer and principal financial officer, evaluated the effectiveness of the Companys
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated
under the Securities Exchange Act of 1934, as amended) within 90 days before the filing of
this quarterly report. Based on this evaluation, the Companys principal executive officer
and principal financial officer have concluded that the Companys disclosure controls and
procedures were effective as of the end of the reported period to ensure that information that
is required to be disclosed by the Company in the reports if files or submits under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms. There were no changes in the
Companys internal controls over financial reporting during the quarter ended March 31, 2005
that have materially affected, or are reasonably likely to materially affect, the Companys
internal controls over financial reporting. 
 PART II 
 ITEM 1. LEGAL PROCEEDINGS MDI is subject to various legal proceedings and claims, that arise in the ordinary course
of business. In November 2003, a French Trial court awarded the Company and its French subsidiary a
2.5 million Euro (approximately $3.0 million) judgment against a French company, Aasset
Security, for unfair trade practices. Of this 2.5 million Euro, the court ordered Aasset
Security to begin to pay 1 million Euro in monthly installments of 75,000 Euro. As of March
31, 2005, Aasset Security has paid a total of 682,000 Euros. As of April 30, 2005, Aasset
Security has paid a total of 757,000 Euros. Pursuant to the terms of a 2001 agreement with
French legal counsel, the case has been handled on a partial contingency basis. The
contingency fee to be paid to outside counsel may be between 35% to 40% of the payments
received, depending 11




---



##### Table of Contents



upon the timing of the receipts. It is the position of the Company that no fees will be
paid under the contingency fee arrangement until there is a final, non-appealable award in
favor of the Company and its French subsidiary. Aasset Security filed several appeals against
the initial decision of the trial court, the latest one of which was heard by a French Appeal
court. The decision from the Appeal court was given on April 20, 2005. The Appeal courts
decision resulted in a 1.0 million Euro reduction in the original judgment to 1.5 million
Euro. The Company will continue to pursue the collection of the remaining balance owed,
though the timing of collection and Aasset Securitys ability to pay are uncertain. Due to
the degree of uncertainty of collection, no amounts have been included as income, and no
legal expenses have been included in the financial statements. All cash receipts have been
included in the Companys cash balance, and a corresponding liability has been recorded as
Deferred Legal Settlement in the financial statements pending legal resolution. Management believes that there are no other existing legal matters that will have a
material adverse effect on the Companys financial condition or results of operations. 
 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-QSB. 31.1  Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of
the Securities Exchange Act of 1934, as amended (the Exchange Act). 31.2  Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of
the Exchange Act. 32.1  Joint Certification of Chief Executive Officer and Chief Financial Officer required by Rule
13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the
United States Code. (*) b) Reports on Form 8-K. The following reports on Form 8-K were filed during the three
months ended March 31,2005: None. 
 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. MDI, INC.Dated: May 13, 2005
    By:
    /s/ Jon D. GreenwoodJon D. GreenwoodSenior Vice President and Chief Financial Officer 12