##### 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 June 30, 2005
 OR
 o
    
    [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
  MDI, INC.
  DELAWARE
    
    75-2626358(State or other jurisdiction
    
    (I.R.S. EmployerOf incorporation or organization)
    
    IdentificationNo.)9725 DATAPOINT DRIVE, SUITE 200SAN ANTONIO, TEXAS
    
    78229(Address of principal executive offices)
    
    (Zip Code)
 (210) 477-5400
 NONE
  COMMON STOCK, $.01 PAR VALUE
 þ o




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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 CEO Required by Rule 13a-14(a)Certification of CFO Required by Rule 13a-14(a)Joint Certification of CEO & CFO Required by Rule 13a-14(b)
  
 Forward Looking Statements
  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)
(Unaudited)
 June 30,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    607
    
    
    $
    3,368Trade accounts receivable, net
    
    
    1,816
    
    
    
    3,249Inventories
    
    
    1,162
    
    
    
    742Prepaid expenses and other current assets
    
    
    195
    
    
    
    103Total current assets
    
    
    3,780
    
    
    
    7,462Property and Equipment, net
    
    
    1,071
    
    
    
    1,336Other Assets:Goodwill
    
    
    2,792
    
    
    
    2,792Other intangible assets, net
    
    
    38
    
    
    
    42Other assets
    
    
    564
    
    
    
    573Total assets
    
    $
    8,245
    
    
    $
    12,205LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Trade accounts payable
    
    $
    909
    
    
    $
    1,019Accrued expenses
    
    
    244
    
    
    
    521Deferred legal settlement
    
    
    350
    
    
    
    388Accrued compensation
    
    
    540
    
    
    
    874Accrued royalties
    
    
    
    
    
    
    82Severance
    
    
    45
    
    
    
    97Other current liabilities
    
    
    89
    
    
    
    106Deferred revenue
    
    
    229
    
    
    
    218Total current liabilities
    
    
    2,406
    
    
    
    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 June 30,
2005 and December 31, 2004
    
    
    181
    
    
    
    181Additional paid-in-capital
    
    
    163,146
    
    
    
    163,146Accumulated deficit
    
    
    (119,764
    )
    
    
    (116,703
    )Treasury stock, at cost (3,488,350 common shares
at June 30, 2005 and December 31, 2004)
    
    
    (38,701
    )
    
    
    (38,701
    )Total stockholders equity
    
    
    5,839
    
    
    
    8,900Total liabilities and stockholders equity
    
    $
    8,245
    
    
    $
    12,205
  3




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##### Table of Contents



MDI, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(Unaudited)
 Three months ended June 30,2005
    
    
    2004Net sales
    
    $
    1,754
    
    
    $
    3,382Cost of sales (exclusive of depreciation shown separately below)
    
    
    951
    
    
    
    1,824Gross profit
    
    
    803
    
    
    
    1,558Other operating costs:Selling, general and administrative
    
    
    2,487
    
    
    
    3,925Depreciation and amortization
    
    
    198
    
    
    
    2832,685
    
    
    
    4,208Operating loss
    
    
    (1,882
    )
    
    
    (2,650
    )Other income (expense):Interest income
    
    
    
    
    
    
    24Other, net
    
    
    628
    
    
    
    55628
    
    
    
    79Loss from continuing operations
    
    
    (1,254
    )
    
    
    (2,571
    )Income (loss) from discontinued operations
    
    
    (45
    )
    
    
    171Net loss
    
    
    (1,299
    )
    
    
    (2,400
    )Dividend requirements on preferred stock
    
    
    (8
    )
    
    
    (8
    )Net loss allocable to common stockholders
    
    $
    (1,307
    )
    
    $
    (2,408
    )Basic and diluted earnings (loss) per share from:Continuing operations
    
    $
    (0.09
    )
    
    $
    (0.18
    )Discontinued operations
    
    
    0.00
    
    
    
    0.01Basic and diluted loss per share
    
    $
    (0.09
    )
    
    $
    (0.17
    )Number of common shares used in computations
    
    
    14,617,603
    
    
    
    14,564,926
  MDI, INC. and SUBSIDIARIES
 4




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CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(Unaudited)
 Six months ended June 30,2005
    
    
    2004Net sales
    
    $
    3,702
    
    
    $
    7,069Cost of sales (exclusive of depreciation shown separately below)
    
    
    1,913
    
    
    
    3,984Gross profit
    
    
    1,789
    
    
    
    3,085Other operating costs:Selling, general and administrative
    
    
    5,029
    
    
    
    7,955Depreciation and amortization
    
    
    394
    
    
    
    6085,423
    
    
    
    8,563Operating loss
    
    
    (3,634
    )
    
    
    (5,478
    )Other income (expense):Interest income
    
    
    2
    
    
    
    45Loss form disposal of fixed assets
    
    
    (2
    )
    
    
    Other, net
    
    
    628
    
    
    
    85628
    
    
    
    130Loss from continuing operations
    
    
    (3,006
    )
    
    
    (5,348
    )Income (loss) from discontinued operations
    
    
    (38
    )
    
    
    164Net loss
    
    
    (3,044
    )
    
    
    (5,184
    )Dividend requirements on preferred stock
    
    
    (17
    )
    
    
    (17
    )Net loss allocable to common stockholders
    
    $
    (3,061
    )
    
    $
    (5,201
    )Basic and diluted earnings (loss) per share from:Continuing operations
    
    $
    (0.21
    )
    
    $
    (0.37
    )Discontinued operations
    
    
    0.00
    
    
    
    0.01Basic and diluted loss per share
    
    $
    (0.21
    )
    
    $
    (0.36
    )Number of common shares used in computations
    
    
    14,617,603
    
    
    
    14,366,657
  5




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##### Table of Contents



MDI, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Six months ended June 30,2005
    
    
    2004Operating Activities:Net loss
    
    $
    (3,044
    )
    
    $
    (5,184
    )Adjustments to reconcile net loss to net cash used in operating activities:Loss on disposal of fixed assets
    
    
    2
    
    
    
    Loss on sale of investments
    
    
    
    
    
    
    30Depreciation and amortization
    
    
    394
    
    
    
    945Provision for losses on accounts receivable
    
    
    (8
    )
    
    
    28Mark-to-market interest rate swap
    
    
    
    
    
    
    52Changes in operating assets and liabilities, net of dispositions:Trade accounts receivable
    
    
    1,441
    
    
    
    (68
    )Inventories
    
    
    (420
    )
    
    
    405Prepaid and other current assets
    
    
    (83
    )
    
    
    1,226Trade accounts payable
    
    
    (110
    )
    
    
    (257
    )Accrued and other current liabilities
    
    
    (789
    )
    
    
    (1,676
    )Net cash used in operating activities
    
    
    (2,617
    )
    
    
    (4,499
    )Investing Activities:Purchases of property and equipment
    
    
    (127
    )
    
    
    (43
    )Proceeds from redemption of marketable securities
    
    
    
    
    
    
    741Net cash provided by (used in) investing activities
    
    
    (127
    )
    
    
    698Financing Activities:Purchase of treasury stock
    
    
    
    
    
    
    534Payment of preferred stock dividends
    
    
    (17
    )
    
    
    (17
    )Net cash used in financing activities
    
    
    (17
    )
    
    
    517Net decrease in cash and cash equivalents
    
    
    (2,761
    )
    
    
    (3,284
    )Cash and cash equivalents, beginning of period
    
    $
    3,368
    
    
    $
    6,307Cash and cash equivalents, end of period
    
    $
    607
    
    
    $
    3,023
  6




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##### Table of Contents



MDI, Inc.
 Notes to Consolidated Financial Statements
 Note 1: General / Nature of Operations and Significant Accounting Principles
 General
    www.mdisecure.com
  Basis of Presentation
  7




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##### Table of Contents



Stock-Based Compensation
  Three months ended June 30,2005
    
    
    2004Net loss from continuing operations
allocable to common stockholders:As reported
    
    $
    (1,262
    )
    
    $
    (2,579
    )Deduct: Total stock-based compensation under fair value
based method for all awards
    
    
    (267
    )
    
    
    (345
    )Pro forma
    
    $
    (1,529
    )
    
    $
    (2,924
    )Basic and diluted loss per share from continuing
operationsAs reported
    
    $
    (0.09
    )
    
    $
    (0.18
    )Pro forma
    
    $
    (0.10
    )
    
    $
    (0.20
    )
 Six months ended June 30,2005
    
    
    2004Net loss from continuing operations
allocable to common stockholders:As reported
    
    $
    (3,023
    )
    
    $
    (5,365
    )Deduct: Total stock-based compensation under fair value
based method for all awards
    
    
    (541
    )
    
    
    (773
    )Pro forma
    
    $
    (3,564
    )
    
    $
    (6,138
    )Basic and diluted loss per share from continuing
operationsAs reported
    
    $
    (0.21
    )
    
    $
    (0.37
    )Pro forma
    
    $
    (0.24
    )
    
    $
    (0.42
    )
  Warranty Reserves
  8




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##### Table of Contents



Three months ended June 30,2005
    
    
    2004Beginning balance
    
    $
    68
    
    
    $
    184Charged to expense
    
    
    1
    
    
    
    8Usage
    
    
    
    
    
    
    (8
    )Closing balance
    
    $
    69
    
    
    $
    184
 Six months ended June 30,2005
    
    
    2004Beginning balance
    
    $
    80
    
    
    $
    184Charged to expense
    
    
    3
    
    
    
    16Usage
    
    
    (14
    )
    
    
    (16
    )Closing balance
    
    $
    69
    
    
    $
    184
 Reclassifications
  Note 2: Discontinued Operations
  Note 3: Trade Accounts Receivable
  June 30,
    
    
    December 31,2005
    
    
    2004Gross trade accounts receivable
    
    $
    1,972
    
    
    $
    3,523Less: allowance for doubtful
accounts
    
    
    (156
    )
    
    
    (274
    )$
    1,816
    
    
    $
    3,249
 9




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##### Table of Contents



Note 4: Earnings Per Share
   Note 5: Comprehensive Loss
  Three months ended June 30,2005
    
    
    2004Net loss
    
    $
    (1,299
    )
    
    $
    (2,400
    )Other comprehensive income (loss):Unrealized loss on marketable
securities
    
    
    
    
    
    
    10Currency translation adjustment
    
    
    
    
    
    
    1$
    (1,299
    )
    
    $
    (2,389
    )
 Six months ended June 30,2005
    
    
    2004Net loss
    
    $
    (3,044
    )
    
    $
    (5,184
    )Other comprehensive income (loss):Unrealized loss on marketable
securities
    
    
    
    
    
    
    9Currency translation adjustment
    
    
    
    
    
    
    1$
    (3,044
    )
    
    $
    (5,174
    )
 Note 6: Severance and Royalty Settlement Expenses
  Accrued at
    
    
    2005 Charges
    
    
    Amount paid
    
    
    Accrued atDecember 31, 2004
    
    
    (credits)
    
    
    in cash
    
    
    June 30, 2005Royalty Claim
    
    $
    82
    
    
    $
    
    
    
    $
    (82
    )
    
    $
    Severance
    
    
    97
    
    
    
    22
    
    
    
    (74
    )
    
    
    45$
    179
    
    
    $
    22
    
    
    $
    (156
    )
    
    $
    45
 Royalty Claim
 10




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Severance
  Note 7: Litigation
   Note 8: Subsequent Event; Sale of Common Stock
  
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Results of Operations
  11




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PercentagePercentage of Net Sales
    
    
    Increase (Decrease)Three Months ended June 30,
    
    
    Between Periods2005
    
    
    2004
    
    
    2005 vs. 2004Net Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    -48.1
    %Cost of sales
    
    
    54.2
    %
    
    
    53.9
    %
    
    
    -47.9
    %Gross profit
    
    
    45.8
    %
    
    
    46.1
    %
    
    
    -48.5
    %Operating expenses:Selling, general and administrative
    
    
    141.8
    %
    
    
    116.1
    %
    
    
    -36.6
    %Depreciation and amortization
    
    
    11.3
    %
    
    
    8.4
    %
    
    
    -30.0
    %Operating loss
    
    
    -107.3
    %
    
    
    -78.4
    %
    
    
    29.0
    %Other income (expense)
    
    
    35.8
    %
    
    
    2.3
    %
    
    
    -694.9
    %Loss before taxes and discontinued operations
    
    
    -71.5
    %
    
    
    -76.0
    %
    
    
    51.2
    %Income taxes
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Loss from continuing operations
    
    
    -71.5
    %
    
    
    -76.0
    %
    
    
    51.2
    %Loss from discontinued operations
    
    
    -2.6
    %
    
    
    5.1
    %
    
    
    126.3
    %Net loss
    
    
    -74.1
    %
    
    
    -71.0
    %
    
    
    45.9
    %Net loss allocable to common stockholders
    
    
    -74.5
    %
    
    
    -71.2
    %
    
    
    45.7
    %
 PercentagePercentage of Net Sales
    
    
    Increase (Decrease)Six Months ended June 30,
    
    
    Between Periods2005
    
    
    2004
    
    
    2005 vs. 2004Net Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    -47.6
    %Cost of sales
    
    
    51.7
    %
    
    
    56.4
    %
    
    
    -52.0
    %Gross profit
    
    
    48.3
    %
    
    
    43.6
    %
    
    
    -42.0
    %Operating expenses:Selling, general and administrative
    
    
    135.8
    %
    
    
    112.5
    %
    
    
    -36.8
    %Depreciation and amortization
    
    
    10.6
    %
    
    
    8.6
    %
    
    
    -35.2
    %Operating loss
    
    
    -98.2
    %
    
    
    -77.5
    %
    
    
    33.7
    %Other income (expense)
    
    
    17.0
    %
    
    
    1.8
    %
    
    
    -383.1
    %Loss before taxes and discontinued operations
    
    
    -81.2
    %
    
    
    -75.7
    %
    
    
    43.8
    %Income taxes
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Loss from continuing operations
    
    
    -81.2
    %
    
    
    -75.7
    %
    
    
    43.8
    %Loss from discontinued operations
    
    
    -1.0
    %
    
    
    2.3
    %
    
    
    123.2
    %Net loss
    
    
    -82.2
    %
    
    
    -73.3
    %
    
    
    41.3
    %Net loss allocable to common stockholders
    
    
    -82.7
    %
    
    
    -73.6
    %
    
    
    41.1
    %
 Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004
    12




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Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
       Financial Condition, Liquidity and Capital Resources
   13




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Contractual Obligations and Commitments
  Total
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009Contractual obligations and commitments:Operating leases
    
    $
    2,399
    
    
    $
    287
    
    
    $
    519
    
    
    $
    536
    
    
    $
    544
    
    
    $
    513Severance obligations
    
    
    45
    
    
    
    45
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,444
    
    
    $
    332
    
    
    $
    519
    
    
    $
    536
    
    
    $
    544
    
    
    $
    513
    
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rates
   
 ITEM 4. CONTROLS AND PROCEDURES
  14




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##### Table of Contents



PART II
 
 ITEM 1. LEGAL PROCEEDINGS
    
 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
      1.
    
    On May 11, 2005 the Company announced that it had received a letter from The Nasdaq
granting the Company an additional 180 days, or until November 7, 2005, to meet the minimum
$1.00 bid price. The Company transferred to the Nasdaq Small Cap Market from the National
Market on May 3, 2005.
 2.
    
    On May 2, 2005, the Company issued a press release announcing that it will transfer the
listing of its Common Stock from the Nasdaq National Market to the Nasdaq Small Cap Market,
commencing at the opening of business on May 3, 2005.By letter dated April 27, 2005, John C. Macaulay informed the Company of his resignation from
his positions on the Board of Directors, effective as of April 27, 2005. Mr. Macaulay served
as the Chairman of the Audit Committee, was Vice Chairman of the Board and served as a member
of the Boards Nominating and Compensation Committees.
 3.
    
    On April 4, 2005, MDI, Inc. received a letter dated April 4, 2005 from The Nasdaq Stock
Market, notifying the Company that the Company does not comply with the minimum $10,000,000
stockholders equity requirement for continued listing on The Nasdaq National Market.
 15




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SIGNATURES
  MDI, INC.Dated: August 15, 2005
    By:
    /s/ Jon D. GreenwoodJon D. GreenwoodSenior Vice President and Chief Financial Officer 16