MDI's CEO J. Collier Sparks Says 'Worst Times' Are Over

J. Collier Sparks, the president and CEO of San Antonio-based MDI Inc. delivered a "state of the company" address recently. In the address, Sparks discussed his aversions to moving the company's stock value artificially, as well as the importance that creating a dealer network would have to MDI. Though he noted that the company was not profitable, he cited new products and dealer relationships that would, he hopes, bring new business to the company.

Sparks' full remarks are published below, as released by the company via Business Wire.

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On behalf of MDI, Inc., I would like to extend my sincere gratitude for your continued support of the Company.

It has been a year since my last public address to our shareholders, partners, vendors and members of our distribution channel. Since that presentation, there have been many changes within MDI. I feel it is the right time for me to provide an update of our Company's activities over the last year and what lies ahead. I provide this update with the understanding that there are many significant challenges that we have yet to overcome.

Our Vision

Our overriding vision for the Company is to become a leading provider of integrated security management solutions and comprehensive video security products. To fully realize this, we are focused on building an organization that delivers high-value innovative solutions for our customers, provides enrichment to our employees and creates positive returns for our shareholders.

Profitability -- Our Overriding Goal

During the first half of this year, the Company implemented various reforms. These reforms were executed with one goal in mind -- to position the Company for profitability. To do so, several strategic changes were made in our corporate structure and employee base. By continuing to properly adjust the size of our work force through reassignments and "smart-sizing" the organization, the Company has established a smaller and more efficient team of core employees. The hard-working and innovative spirits of this team will no doubt contribute towards our achievements as we move forward into the second half of 2005 and beyond. I would like to take this opportunity to thank them for their dedicated efforts.

State-of-the Art Products

In addition to our current product offering, SAFEnet, iTRUST, VIEWpoint and nTEGRITY, we will unveil at the ASIS Show in Orlando later this month our new Integrated Intelligent Video Solution. I would like to invite all of you to join us at booth #4043 for a demonstration on the power of this capability, as it is where much of our research and development efforts have been focused.

At the ASIS show, we will demonstrate how our intelligent video solution performs intelligent analysis that fully automates video monitoring. The system automatically identifies objects, tracks objects, analyzes motion, extracts video intelligence and issues real time alerts via the SAFEnet platform.

The system also analyzes and mines video data and outputs results as real-time events, storing them in a database for future review. Modules include intrusion detection, unaccompanied baggage detection, asset protection, object detection and tracking, exit-entry direction monitoring, motion analysis and behavior analysis. I am sure that you will not be disappointed with its capabilities.

New Business Initiatives

UPGRADES TO OUR INSTALLED CUSTOMER BASE -- Because we were not pleased with our mid-year financial performance, we have made some major changes in July and August, primarily within our newly formed Federal Systems Division. With Jim St. Pierre as President of this division, the team has managed to solidify upgrades from a number of legacy client locations. This is a significant accomplishment because these were customers that had a decision to make...either to keep our systems installed or replace them with the system of a competitor. We worked hard to correct any problems that existed with our installed systems and the result was that we were able to upgrade several of our current systems.

NEW BUSINESS -- Our team has managed to increase the Company's business with implementations of our SAFEnet and VIEWpoint integrated video security solution at a new United States Air Force facility on the West Coast. This project has resulted in approximately $450,000 in revenue. As implementations like this one prove successful, we will use the knowledge gained with each project to increase our penetration into the commercial and the middle market with similar solutions.

Recent Accomplishments

In August, the Company successfully raised approximately $4 million through the sale of common stock to a group of private investors. This gives the Company cash it needs to further its business plan. In addition to this, we recently received notice from Nasdaq in August that we were back in full compliance with the Nasdaq SmallCap Market Place Rules. With these two issues resolved, we can devote all our time and efforts on developing the business.

In order to succeed, our business must be developed through our Security Dealers and Security Solution Partners. As we do not sell directly to end users, our dealers are the primary point of focus in our latest marketing efforts. We have signed 44 new dealers in the first half of 2005. This is equal to the total number of dealers signed in all of 2004.

In July, we announced that we had signed a business agreement with the PSA Security Network, the largest buying cooperative of its kind in the world. This network includes over 250 dealers nationwide. We are dedicated to the PSA network and will invest the necessary resources and manpower to make this relationship a success.

A Word About Our Stock

We care about our shareholders and the ability for them to realize a fair return on their investment over time. But, we do not, and will not, operate the Company, or issue "news releases," or otherwise promote ourselves in a way designed to artificially cause movement in the price of our stock.

2005 Summary

I will now summarize some of our activities and accomplishments over the first half of 2005.

(i) Upon completing our review of our mid-year results, it became apparent that we did not require the level of staffing that we had for the first half of the year. As a result, we have been able to reduce our headcount by 25%. As our business increases, we will ramp-up to meet demand.

(ii) We successfully launched a new line of video security products, which we sell under the VIEWpoint brand. This new product line was developed based on the needs and requirements of our Security Dealers and their customers.

(iii) We successfully launched a new mid-level integrated access control product, which is based on the SAFEnet software platform. This application, which we branded as iTRUST, is more affordable and easier to use than our enterprise-level SAFEnet system because it is designed to handle the access control and monitoring functions for organizations who need an entry-level system.

(iv) Our SAFEnet Open System Integration platform was awarded integrated physical security product of the year by Network Defense Product News (a Government Security News Publication) at the ISC West conference in Las Vegas.

(v) At the same conference, we introduced our nTEGRITY line of access control readers and biometrics. This line gives our Security Dealers an affordable package for iTRUST customers while allowing them to purchase everything they need from one single source, minimizing order complications and delays.

(vi) We introduced the Company's first formal software maintenance packages, complete with tiered pricing levels, focused on streamlining technical support while increasing revenue.

(vii) SAFEnet became the first (and only) security product in the industry to receive NIST certification on its proprietary Advanced Encryption Algorithm.

(viii) MDI received UL 1076 and UL 294 certification on SAFEnet in advance of the new UL Listing requirements.

(ix) The Company's iTRUST small business solution was awarded Security Technology of the Year for 2005 by Secure Convergence Magazine.

(x) MDI's SAFEnet and VIEWpoint products were chosen to secure Singapore's National Day Parade.

(xi) MDI signed an agreement with the PSA Security Network to offer its iTRUST, VIEWpoint and nTEGRITY products to over 250 PSA Member Dealers.

2005 Challenges

Despite our accomplishments in 2005, there are many challenges in front of us that we will have to meet head on. These challenges include:

(i) REVENUE. Our primary focus is to create new sources of revenue and to generate new business from our existing customer base. Sounds basic, doesn't it? Well, it is. The Federal Systems group will manage our legacy business. Our Enterprise Sales group will manage our commercial business. Our Small Business group will manage our middle-market business. We will invest our resources by hiring a new team of territory sales representatives as part of the Small Business group. These representatives will target all PSA Dealers and other middle-market security dealers with our iTRUST, VIEWpoint and nTEGRITY product brands. The sales cycle for the middle-market products is weeks, not months. Accordingly, this business should lead to a more predictable revenue stream as in the Enterprise Business.

(ii) MARKETING. We are focusing our marketing efforts on developing new sales and distribution channels. We will continue to grow our international business by developing established distribution partners who have the capability and customer relationships in key countries. Combined programs that include our marketing, outside sales and inside sales departments working together to deliver valuable product information to our dealers will assist in gaining dealer mind-share, which should eventually transfer into market share.

(iii) CASH. Even though we have just raised approximately $4 million, which is to be used for general operating purposes, we are continually mindful that we need to invest our cash wisely and to keep a watchful eye out for unnecessary expenses.

(iv) PEOPLE. To keep and attract the needed people to run our Company will be a challenge. Today, we are blessed with a core group that has endured some tough times over the last year or so, but who remain committed to seeing our Company succeed. As their President, I am grateful for their hard work and dedication. I also am mindful that the cost of replacing people is expensive and time consuming. I believe that employees are the key to a Company's success and that they should share in its success.

Looking to the Future

Now that we have overcome our short-term cash challenge, and with our increased focus on sales, I believe that we will be successful in obtaining significant orders for our products. However, reaching profitability will not be easy. Let me be specific. Our latest 10-QSB for the quarter ended June 30, 2005, shows revenue for the quarter of $1.8 million. It also shows operating expenses for that period of $2.7 million. Assuming our costs and margins remain constant, we will continue to use more cash than we will generate from operations, until we increase revenues. Therefore, our future efforts will be focused on generating revenue. Based on the above assumptions, we will need an additional $900,000 in revenue each month to become profitable.

To this end, our Federal Systems, Enterprise Sales and Small Business Sales groups will be the core components in our strategy. We will invest in our Sales team and give them the products and tools necessary to deliver the right message, to the right prospects, with the right frequency.

In closing, it is my firm belief that the worst times are behind us and the future looks very bright. I will continue to communicate with you, our shareholders and partners, as we progress down this journey together.

Thank you for your continued support.

J. Collier Sparks
President and CEO
MDI Inc.

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