<PAGE> 1
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[X] Preliminary proxy statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
MECHANICAL DYNAMICS, INC.
- -------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
MECHANICAL DYNAMICS, INC.
- -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing
fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- --------------------------------------------------------------------------------
(3) Filing party:
- --------------------------------------------------------------------------------
(4) Date filed:
- --------------------------------------------------------------------------------
<PAGE> 2
MECHANICAL DYNAMICS, INC.
2301 COMMONWEALTH BLVD.
ANN ARBOR, MICHIGAN 48105
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 14, 1997
To the Shareholders of Mechanical Dynamics, Inc.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of
Mechanical Dynamics, Inc. (the "Company") will be held at the Ypsilanti
Marriott at Eagle Crest, 1275 S. Huron Street, Ypsilanti, Michigan 48197, at
5:00 p.m. Eastern Standard Time on Wednesday, May 14, 1997 for the following
purposes:
1. To elect three directors to serve until the 2000
Annual Meeting of Shareholders and until their successors are duly
elected and qualified.
2. To ratify and approve the Board of Directors'
selection of Arthur Andersen LLP as the independent auditors of the
Company for the current fiscal year ending December 31, 1997.
3. To approve an increase in the number of shares with
respect to which stock options may be granted or which may be awarded
as restricted stock under the terms of the Company's 1996 Stock
Incentive Plan for Key Employees from 450,000 shares in the aggregate
to 650,000 shares in the aggregate.
4. To transact such other business as may properly come
before the meeting and any adjournment thereof.
Only shareholders of record at the close of business on March 28, 1997
will be entitled to notice of, and to vote at, the meeting or any adjournment
thereof.
All shareholders are cordially invited to attend the meeting. Whether
or not you expect to attend the meeting, please complete, date and sign the
enclosed proxy and return it as promptly as possible to ensure your
representation at the meeting. A return postage-prepaid envelope is enclosed
for that purpose. If you return the proxy, you may withdraw your proxy and
vote your shares in person if you attend the meeting.
Your attention is called to the attached Proxy Statement and the
accompanying proxy. A copy of the Annual Report of the Company for the fiscal
year ended December 31, 1996 accompanies this notice.
By Order of the Board of Directors
Michael E. Korybalski
Chief Executive Officer
Ann Arbor, Michigan
_____________, 1997
<PAGE> 3
MECHANICAL DYNAMICS, INC.
2301 COMMONWEALTH BLVD.
ANN ARBOR, MICHIGAN 48105
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
MAY 14, 1997
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of Mechanical Dynamics, Inc. (the
"Company") for use at the 1997 Annual Meeting of Shareholders to be held at the
Ypsilanti Marriott at Eagle Crest, 1275 S. Huron Street, Ypsilanti, Michigan
48197, at 5:00 p.m. Eastern Standard Time on Wednesday, May 14, 1997, and at
any adjournment thereof, for the purposes set forth in the accompanying Notice
of Annual Meeting of Shareholders. The mailing of this Proxy Statement and
accompanying proxy will take place on or about April 10, 1997.
Solicitation
The Company will bear the entire cost of solicitation of proxies in
the enclosed form, including the preparation, assembly, printing and mailing of
this Proxy Statement, the accompanying proxy and any additional information
furnished to shareholders. The solicitation of proxies by mail may be
supplemented by telephone, telegraph or personal solicitation by directors,
officers or other regular employees of the Company; no additional compensation
will be paid to directors, officers or other regular employees for such
services. Brokers, nominees and other similar record holders will be requested
to forward soliciting material and will be reimbursed by the Company upon
request for their out-of-pocket expenses.
VOTING SECURITIES AND PRINCIPAL HOLDERS
Voting Rights and Outstanding Shares
Only shareholders of record at the close of business on March 28, 1997
will be entitled to notice of, and to vote at, the Annual Meeting or any
adjournment of the meeting. As of the close of business on March 28, 1997, the
Company had 5,760,435 outstanding Common Shares ("Common Shares"), the only
class of stock outstanding and entitled to vote.
Each Common Share is entitled to one vote on each matter submitted for
a vote at the meeting. The presence, in person or by proxy, of the holders of
record of a majority of the outstanding Common Shares entitled to vote, or
2,880,218 shares, is necessary to constitute a quorum for the transaction of
business at the meeting or any adjournment thereof.
1
<PAGE> 4
Revocability of Proxies
A shareholder giving a proxy may revoke it at any time before it is
voted by giving written notice of such revocation to the Secretary of the
Company or by executing and delivering to the Secretary a later dated proxy.
Attendance at the meeting by a shareholder who has given a proxy will not have
the effect of revoking it unless such shareholder gives such written notice of
revocation to the Secretary before the proxy is voted. Any written notice
revoking a proxy, and any later dated proxy, should be sent to Mechanical
Dynamics, Inc., 2301 Commonwealth Blvd., Ann Arbor, Michigan 48105, Attention:
Dave Peralta, Chief Financial Officer.
Valid proxies in the enclosed form which are returned in time for the
meeting and executed and dated in accordance with the instructions on the proxy
will be voted as specified in the proxy. If no specification is made, the
proxies will be voted FOR the election as directors of the nominees listed
below, FOR the selection of Arthur Andersen LLP as independent auditors of the
Company for the current fiscal year ending December 31, 1997 and FOR approval
of an increase in the number of shares with respect to which stock options may
be granted or which may be awarded as restricted stock under the terms of the
Company's 1996 Stock Incentive Plan for Key Employees from 450,000 shares in
the aggregate to 650,000 shares in the aggregate.
Principal Holders of the Company's Voting Securities
As of March 28, 1997, the following six persons were the only persons
known by the Company to beneficially own more than 5% of the Company's Common
Shares.
<TABLE>
<CAPTION>
Amount of Percentage of
Common Shares Common Shares
Name Beneficially Owned Owned*
---- ------------------ -----------------
<S> <C> <C>
Michael E. Korybalski 873,879 15.2%
John C. Angell 388,040 6.7%
Pilgrim Baxter & Associates 373,000 6.5%
Van Wagoner Capital
Management, Inc. 363,100 6.3%
Granahan Investment
Management, Inc. 320,000 5.6%
The TCW Group, Inc. 307,400 5.3%
</TABLE>
___________________________________________________
* Based on 5,760,435 Common Shares outstanding as of March 28, 1997.
2
<PAGE> 5
I. ELECTION OF DIRECTORS
The Board of Directors proposes that the persons named below as
nominees for election as directors for a three-year term be elected as
directors of the Company to hold office until the Annual Meeting of
Shareholders to be held in 2000, and until their successors are duly elected
and qualified.
Michael E. Korybalski
Mitchell I. Quain
Robert R. Ryan
Two of such nominees, Michael E. Korybalski and Mitchell I. Quain, are
currently serving as directors of the Company. At its February 6, 1997
meeting, the Board of Directors of the Company increased the size of the Board
from six members to seven. Robert R. Ryan, President and Chief Operating
Officer of the Company, is the Board of Directors' nominee to fill this newly
created Board position. If a quorum is present, the three nominees receiving
the greatest number of votes cast at the meeting or its adjournment shall be
elected. Withheld votes and broker non-votes will not be deemed votes cast in
determining which nominee receives the greatest number of votes cast, but will
be counted for purposes of determining whether a quorum is present. The
persons named in the accompanying proxy intend to vote all valid proxies
received by them FOR the election of the nominees listed above unless the giver
of the proxy withholds authority to vote for any such nominee. The nominees
listed above have consented to serve if elected. If any nominee is unable or
declines to serve, which is not expected, it is intended that the proxies be
voted in accordance with the best judgment of the proxy holders for another
qualified person.
The following information is furnished as of March 28, 1997 with
respect to the nominees for election as a director, with respect to each person
whose term of office as a director will continue after the meeting, with
respect to each executive officer of the Company and each executive officer
named in the Summary Compensation Table below, and with respect to all
directors and executive officers as a group:
3
<PAGE> 6
<TABLE>
<CAPTION>
AMOUNT AND PERCENTAGE
NATURE OF OF
COMMON SHARES COMMON TERM
DIRECTOR POSITION AND OFFICES BENEFICIALLY SHARES TO
NAME SINCE AGE WITH THE COMPANY OWNED (1) OWNED (2) EXPIRE
---- ----- --- ---------------- --------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
NOMINEES FOR ELECTION AS DIRECTOR FOR A THREE-YEAR TERM
Michael E. Korybalski 1977 50 Chief Executive Officer, 873,879 15.2 2000
Chairman of the Board
and Director
Mitchell I. Quain 1996 45 Director 63,592 (3) 1.1 2000
Robert R. Ryan -- 39 President and Chief Operating 209,750 3.6 2000
Officer
DIRECTORS CONTINUING IN OFFICE
Herbert S. Amster 1990 62 Director 74,930 (4) 1.2 1999
John C. Angell 1977 48 Vice President, Chief Technical 388,040 6.7 1998
Fellow and Director
David E. Cole 1995 59 Director 18,500 (4) * 1998
Joseph F. Gloudeman 1993 61 Director 43,430 (5) * 1999
OTHER CURRENT EXECUTIVE OFFICERS
Michael Hoffmann -- 40 Vice President -- European 33,220 (6) *
Operations
Raymond Gaynor -- 48 Vice President -- Asia/Pacific 42,905 (7) *
Operations
James E. Vincke -- 41 Vice President -- Administration 178,897 (8) 3.1
All directors and executive officers as a group (12 persons) . . 2,015,386 (9) 34.6
</TABLE>
__________________________________
* Less than 1%
(1) All directors, nominees and executive officers named in this Proxy
Statement have sole investment and voting power with respect to shares
of Common Stock beneficially owned by them.
(2) Based on 5,760,435 Common Shares outstanding as of March 28, 1997.
(3) Includes 58,592 shares held by trusts of which Mr. Quain holds voting
power as the trustee and 5,000 shares subject to options exercisable
within 60 days of the Record Date.
(4) Includes 5,000 shares subject to options exercisable within 60 days of
the Record Date.
(5) Includes 38,430 shares held by a trust of which Dr. Gloudeman holds
voting power as the trustee and 5,000 shares subject to options
exercisable within 60 days of the Record Date.
(6) Includes 10,000 shares subject to options exercisable within 60 days
of the Record Date.
(7) Includes 5,000 shares subject to options exercisable within 60 days of
the Record Date.
4
<PAGE> 7
(8) Includes 21,937 shares subject to options exercisable within 60 days
of the Record Date.
(9) Includes 56,937 Common Shares which all executive officers and
directors as a group have the right to acquire within 60 days of March
28, 1997.
BIOGRAPHICAL INFORMATION
The following is a brief account of the business experience during the
past five years of the nominees for the Board of Directors of the Company and
of each director whose term of office will continue after the meeting:
Michael E. Korybalski, a co-founder of the Company, is currently Chief
Executive Officer and Chairman of the Board and a director of the Company.
From 1984 to February 1997, Mr. Korybalski served as President of the Company.
From 1977 to 1984, Mr. Korybalski served as Vice President and General Manager
of the Company. From 1973 to 1977, he was employed as a product engineer with
Ford Motor Company. Mr. Korybalski holds B.S.E. and M.S.E. degrees in
mechanical engineering, as well as a M.B.A., from the University of Michigan.
Mitchell I. Quain has served as a director of the Company since 1996.
He has been employed at Schroder Wertheim & Company, an investment banking
company, since 1975, where he currently serves as Managing Director, Head of
Equity Capital Markets. Mr. Quain is also a director of Allied Products
Corporation and Strategic Distribution Inc.
Robert R. Ryan became the President of the Company in February 1997
and since 1991 has served as the Chief Operating Officer of the Company. Dr.
Ryan served as the Company's Executive Vice President from 1991 to February
1997. From 1988 through 1991, Dr. Ryan served as the Company's Vice President
of Product Development. Before joining the Company, Dr. Ryan held various
positions in sales and engineering services at Structural Dynamics Research
Corporation, and served briefly on the engineering faculty at the University of
Michigan. He holds a B.S. from the University of Cincinnati and a M.S. and
Ph.D. in applied mechanics from Stanford University.
Herbert S. Amster has served as a director of the Company since 1990.
He is now an independent management consultant. Mr. Amster was Chairman of the
Board and Chief Executive Officer of Irwin Magnetic Systems, Inc., a
manufacturer of minicartridge tape drives, from 1985 through 1989; Senior Vice
President Corporate Development, and a director, of Cipher Data Products
Incorporated, from 1989 through 1990; and Senior Vice President Corporate
Development, of Archive Corporation, since 1990. He is currently also a
director of Jacobson Stores Inc., TriMas Corporation, First of America Bank --
Michigan and is the Chairman of the Board of Industrial Technology Institute.
John C. Angell, a co-founder of the Company, has served as a Vice
President and as Chief Technical Fellow and director of the Company since 1977.
Mr. Angell holds B.S.E. and M.S.E. degrees in mechanical engineering from the
University of Michigan.
5
<PAGE> 8
David E. Cole has served as a director of the Company since 1995. Dr.
Cole has served as the President of Applied Theory Inc., an automotive
consulting firm since 1979, as Director of the Office for the Study of
Automotive Transportation, University of Michigan Transportation Research
Institute, since 1978 and as an Associate Professor of Mechanical Engineering
and Applied Mechanics at the University of Michigan since 1971. He is
currently also a director of MSX International, Saturn Electronics &
Engineering Corp. and Thyssen Inc., a subsidiary of Thyssen AG.
Joseph F. Gloudeman has served as a director of the Company since
1993. Dr. Gloudeman has served as President of Gloudeman Consulting, a
high-tech consulting firm, since 1992; as Chairman of the Board, since 1992,
and President, USA Operations, since 1994, of R.O.S.E. Informatik GmbH, a
German software company. Dr. Gloudeman is the former President and Chief
Executive Officer of The MacNeal Schwendler Corporation, and a former Vice
President, Marketing for CRAY Research-Supercomputer.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During the fiscal year ended December 31, 1996, the Board of Directors
held five meetings and took action by written consent on six occasions.
Audit Committee
The Board of Directors has an Audit Committee which consists of two
directors. Mr. Amster and Dr. Cole are the current members of this committee.
The Audit Committee makes recommendations to the Board of Directors concerning
the appointment of independent auditors and reviews the Company's accounting
principles, policies and reporting practices, aids management in the
establishment and supervision of the Company's financial controls, discusses
the Company's financial controls with the independent auditors and reviews the
scope and results of audits and other accounting-related services and fees.
During the fiscal year ended December 31, 1996, the Audit Committee held one
meeting and took no actions by written consent.
Compensation Committee
The Board of Directors has a Compensation Committee which consists of
two directors. Mr. Amster and Dr. Gloudeman are the current members of this
committee. The Compensation Committee makes recommendations to the Board of
Directors concerning salaries and incentive compensation for the Company's
officers and employees and administers the Company's Employee Stock Purchase
Plan and the Company's 1996 Stock Incentive Plan for Key Employees. During the
fiscal year ended December 31, 1996, the Compensation Committee held one
meeting and took action by written consent on one occasion.
The Company does not have a nominating committee.
6
<PAGE> 9
COMPENSATION COMMITTEE REPORT
The Compensation Committee's overall compensation policy applicable to
the Company's executive officers is to provide a compensation package that is
intended to attract and retain qualified executives for the Company and to
provide them with incentives to achieve the Company's goals and increase
shareholder value. The Compensation Committee applies this philosophy in
determining compensation for Company executive officers in three areas: salary,
bonuses and stock options. The Compensation Committee believes that the
compensation of the Chief Executive Officer and the Company's other executive
officers should be influenced by the Company's performance. Consistent with
this philosophy, the Compensation Committee approves performance goals for each
executive officer (after receiving the recommendations of Michael E. Korybalski,
Chairman of the Board and Chief Executive Officer, for executive officers other
than himself) near the beginning of each year. For 1996, these performance
goals included objective targets for revenue growth and operating income (for
the whole Company or for the area of the Company for which the executive is
responsible, depending on the executive), both of which required improvements
over 1995 levels, and specific tasks to be performed by some of the executives
relating to their areas of responsibility (the "Performance Goals").
SALARY
The Compensation Committee's policy is to offer salaries to its
executive officers that are competitive in its industry for similar positions
requiring similar qualifications. The Compensation Committee also adjusts
salaries to reflect its subjective assessment of the executive's performance of
his or her Performance Goals, the amount of salary change appropriate for such
performance and the Company's financial condition (after receiving the
performance evaluations and recommendations of Mr. Korybalski). In determining
executive officers' salaries, the Compensation Committee considers information
provided by the Chief Executive Officer, whose recommendations are based upon
salary surveys specific to the Company's industry, size and geographic location
(the "Surveys"). Such Surveys are prepared by an independent organization
using information provided from approximately 200 companies. These Surveys
summarize information from companies deemed comparable by the Compensation
Committee in terms of such things as product or industry, geography and/or
revenue levels. In addition to their base salaries, the Company's executive
officers, including the Chief Executive Officer, are each eligible to receive a
cash bonus and are entitled to participate in the 1996 Stock Incentive Plan for
Key Employees. The bonus for the Chief Executive Officer and for other
executives is based primarily on Company performance.
The foregoing information was presented to the Compensation Committee
in February 1996. The Compensation Committee reviewed the recommendations and
performance and market data outlined above and established a base salary level
to be effective January 1, 1996 for each executive officer, including the Chief
Executive Officer. In addition to considering the results of the performance
evaluations and information concerning competitive salaries, the Compensation
Committee and Chief Executive Officer place significant weight on the financial
condition of the Company in considering salary adjustments.
7
<PAGE> 10
BONUSES
The Compensation Committee's policy is to pay bonuses to executives
that compensate them for achieving the Company's revenue growth and operating
income targets set near the beginning of the year and for achieving individual
goals based on their areas of responsibility. These bonuses are intended to
make a significant portion of each executives' compensation dependent on the
Company's performance and to provide executive officers with incentives to
achieve Company goals, increase shareholder value and work as a team. They are
also intended to recognize the executives' individual contributions to the
Company.
The Compensation Committee determines annually the total amount of
cash bonuses available for executive officers. The individual target amounts
are determined based on the Compensation Committee's judgment of the value of
the individual executive's achievement of his or her Performance Goals. In all
cases, the relative target amounts for individual officers are based upon the
total dollars available for bonuses, and historical and expected future
contributions by the individual executive officer. For 1996, the objectives
used by the Company as the basis for incentive compensation were based
primarily on Company performance. Executive officers earn a percentage of the
target amounts under the bonus plan relating to the achievement of the
Performance Goals, as determined by the Compensation Committee annually in its
discretion. Awards are weighted so that proportionately higher awards are
received when the Company's performance exceeds targets and proportionately
smaller or no awards are made when the Company does not meet targets.
STOCK OPTIONS
The Compensation Committee's policy is to grant stock options to the
Company's executives in amounts reflecting the Compensation Committee's
subjective evaluation of the executive's position, responsibilities, ability to
influence, and expected contributions to, the Company's overall performance.
Other factors considered by the Compensation Committee include consistency in
numbers of options granted to executives at similar levels in the Company, past
performance, the Surveys and the recommendations of Mr. Korybalski, without any
specific weight given to any of the factors listed above. In determining the
size of the individual grants, the Compensation Committee also considers the
amounts of options outstanding and previously granted both in the aggregate and
with respect to the optionee, the amount of options remaining available for
grant under the 1996 Stock Incentive Plan for Key Employees and the aggregate
amount of current awards, and for new officers, the amount necessary to attract
other officers to the Company. The Compensation Committee believes that
employee equity ownership provides significant additional motivation to
executive officers to maximize value for the Company's shareholders. Under the
terms of the 1996 Stock Incentive Plan for Key Employees, the Compensation
Committee grants stock options with an exercise price equal to the prevailing
market price. Such options will have value only if the Company's stock price
increases. Therefore, the Compensation Committee believes that stock options
serve to align the interest of executive officers closely with other
shareholders because of the direct benefit executive officers receive to
improve stock performance.
8
<PAGE> 11
Under the 1996 Stock Incentive Plan for Key Employees, the
Compensation Committee may grant options with a term of up to 10 years to
provide a long-term incentive, and to grant options that vest over a specified
period to provide the executive with an incentive to remain at the Company.
The Compensation Committee's policy is that certain new executives with the
Company may be provided with options to attract them to the Company. The
Compensation Committee's policy is to grant stock options when the executive
first joins the Company, in connection with a significant change in
responsibilities, and, occasionally, to achieve equity within a peer group.
The Compensation Committee in its discretion may, however, grant additional
stock options to executives for other reasons. In 1996, the Compensation
Committee considered these factors, as well as the number of options held by
such executive officers as of the date of grant that remained unvested. Option
grants for 1996 are set forth in the table below entitled "Option Grants in
Last Fiscal Year."
1996 CHIEF EXECUTIVE OFFICER COMPENSATION
In February 1996, the Committee established a base salary for Mr.
Korybalski for 1996. This base salary represented an increase over Mr.
Korybalski's 1995 base salary. The Compensation Committee also established a
target bonus for Mr. Korybalski under the 1996 bonus plan payable based on the
Company's achievement of objective measures of revenue growth and operating
income (both of which targets required improvement from 1995). The 1996 base
salary level and target bonus were based upon a number of factors, including
(a) the Compensation Committee's assessment of the 1995 performance of the
Company and Mr. Korybalski, (b) 1996 Company performance objectives and
individual performance objectives and responsibilities for Mr. Korybalski
established in February 1996, and (c) the market compensation data for similar
companies listed in the Surveys. The performance objectives for 1996 included
satisfactorily managing the Company's overall corporate business plan, such as
meeting the Company's profitability projections and the Company's sales
targets, and strengthening the Company's financial position.
The Compensation Committee has concluded that Mr. Korybalski's
performance in 1996 warrants the compensation for 1996 as reflected in the
Summary Compensation Table.
COMPLIANCE WITH SECTION 162(M) OF THE INTERNAL REVENUE CODE OF 1986.
The Company intends to comply with the requirements of Section 162(m)
of the Internal Revenue Code of 1986, as amended, for 1997.
COMPENSATION COMMITTEE
Herbert S. Amster
Joseph F. Gloudeman
9
<PAGE> 12
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information for each of the fiscal
years ended December 31, 1996 and 1995 concerning compensation of (i) all
individuals serving as the Company's Chief Executive Officer during the fiscal
year ended December 31, 1996, and (ii) the four most highly compensated
executive officers of the Company whose total annual salary and bonus exceeded
$100,000 in fiscal 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION SECURITIES ALL OTHER
NAME AND ------------------- UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) ($) (1)
------------------ ---- --------- -------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Michael E. Korybalski, Chief
Executive Officer . . . . 1996 170,000 27,968 -- 3,888
1995 158,000 57,916 -- 3,678
Robert R. Ryan, President and
Chief Operating Officer . . 1996 150,000 18,330 -- 3,808
1995 135,000 35,368 -- 2,565
Michael Hoffmann, Vice President -
European Operations . . . 1996 103,000 26,984 10,000 --
1995 100,000 22,241 -- --
Raymond J. Gaynor, Vice President -
Asia/Pacific Operations . . 1996 88,000 35,467 5,000 3,600
1995 85,000 80,125 -- 1,625
James E. Vincke, Vice President -
Administration . . . . . . 1996 105,000 8,554 -- 3,288
1995 100,000 25,247 -- 1,893
</TABLE>
__________________________________
(1) The amounts shown for fiscal 1996 include (i) $3600, $3600, $3600 and
$3126 for Messrs. Korybalski, Ryan, Gaynor and Vincke, respectively,
representing the Company's contribution to the executive officer in
1996 under the Company's 401(k) Plan, and (ii) $288, $208, $0 and
$162 for Messrs. Korybalski, Ryan, Gaynor and Vincke, respectively,
representing life insurance premiums paid by the Company in 1996 for
life insurance policies.
10
<PAGE> 13
Option Grants Table
The following table sets forth information concerning individual
grants of stock options made during the fiscal year ended December 31, 1996 to
each of the executive officers of the Company named in the Summary Compensation
Table above:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- ------------------------------------------------------------------------------------------------------------------
POTENTIAL
% OF REALIZABLE VALUE AT
TOTAL ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION --------------------------
NAME GRANTED (#) YEAR ($/SH) DATE 5% ($) 10% ($)
---- ----------- ---------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael E. Korybalski . -- -- -- -- -- --
Robert R. Ryan . . . . -- -- -- -- -- --
Michael Hoffmann . . . 10,000 (1) 4.9 9.00 4/23/01 24,866 54,946
Raymond J. Gaynor . . . 5,000 (2) 2.5 9.00 4/23/01 12,433 27,473
James E. Vincke . . . . -- -- -- -- -- --
</TABLE>
- ------------------------
(1) These options were granted on April 23, 1996 and all 10,000 options
become fully exercisable on April 23, 1997. In the event the option
holder's employment with the Company is terminated for any reason
other than death or disability, the Compensation Committee may, in its
discretion, permit the exercise of such option holder's unexercised
options for a period not to exceed three months after such
termination.
(2) These options were granted on April 23, 1996 and all 5,000 options
become fully exercisable on April 23, 1997. In the event the option
holder's employment with the Company is terminated for any reason
other than death or disability, the Compensation Committee may, in its
discretion, permit the exercise of such option holder's unexercised
options for a period not to exceed three months after such
termination.
Aggregated Option Exercises and Fiscal Year-End Option Value Table
The following table sets forth information concerning each exercise of
stock options during the fiscal year ended December 31, 1996 by each of the
executive officers named in the Summary Compensation Table above and the value
of unexercised options held by such persons as of December 31, 1996:
11
<PAGE> 14
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES FY-END (#) FY-END ($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE (1)
- ---- ------------ ------------ ------------- -----------------
<S> <C> <C> <C> <C>
Michael E. Korybalski . 0 0 0/0 0/0
Robert R. Ryan . . . . 0 0 0/0 0/0
Michael Hoffmann . . . 0 0 0/10,000 0/48,750
Raymond J. Gaynor . . . 0 0 0/5,000 0/24,375
James E. Vincke . . . . 0 0 21,937/0 283,975/0
</TABLE>
- ------------------------------
(1) Calculated on the basis of the fair market value of the underlying
securities at December 31, 1996 of $13.875, minus the aggregate
exercise price.
Compensation of Directors
Each non-employee member of the Company's Board of Directors is paid
$1,000 per month and reimbursed for out-of-pocket expenses incurred in
attending Board meetings. Each non-employee director is also eligible to
receive annual stock option awards for 5,000 shares of the Company's Common
Stock under the Company's Non-Employee Director Stock Option Plan.
The Company's Board of Directors adopted the Non-Employee Director
Stock Option Plan (the "Director Stock Option Plan") in March 1996. The
Director Stock Option Plan provides for the grant of "nonqualified" options to
purchase shares of Common Stock. In April 1996, all four non-employee
directors on the Company's Board of Directors were each granted an option to
purchase 5,000 shares of Common Stock of the Company at an exercise price of
$11.00 per share. These options become fully exercisable one year from the
date of grant, April 1997, and expire in April 2001. Immediately following
each annual meeting of shareholders of the Company, each non-employee director
who has served as a director for at least six months will automatically be
granted an option to purchase 5,000 shares of Common Stock of the Company.
Upon appointment to the Board of Directors, each newly-appointed non-employee
director will receive an option to purchase 5,000 shares of Common Stock of the
Company. A total of 100,000 shares of Common Stock are reserved for issuance
under the Director Stock Option Plan.
12
<PAGE> 15
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
Michael E. Korybalski entered into an employment agreement with the
Company dated as of April 1, 1994, and amended as of March 1, 1995, March 1,
1996 and March 1, 1997. The agreement provides that Mr. Korybalski will serve
as the Company's Chief Executive Officer until March 31, 2000, at which point
the employment agreement can be extended at the option of the Company for an
additional three-year term. Mr. Korybalski's base salary under the agreement
for 1997 is $190,000. Mr. Korybalski's employment may be terminated by the
Company with or without cause. Mr. Korybalski's base salary is determined by
the Board of Directors on an annual basis. In the event the Board chooses to
change his duties or directs him to relocate, or if he is terminated without
cause, Mr. Korybalski would then be entitled to his base salary, bonus and
benefits for a period equal to the longer of the remaining term of the
agreement or one year from the date of his resignation. In the event he is
terminated with cause, then he would be entitled to receive only such payments
and/or benefits as would be provided to other employees of the Company in
accordance with the Company's employee policies and procedures. In the event
of a change of control, the agreement is automatically extended through a date
three years from the effective date of such change in control. In the event
Mr. Korybalski is terminated in connection with a change in control, then the
Company will pay severance benefits under the same formula as in the event of
termination without cause. During the term of the agreement, and for a period
of two years thereafter, Mr. Korybalski will be subject to noncompetition and
nonsolicitation restrictions.
The Company's President and Chief Operating Officer, Robert R. Ryan,
entered into an employment agreement with the Company dated as of April 1,
1994, as amended March 1, 1995, March 1, 1996 and March 1, 1997, pursuant to
which he will serve in such capacities until March 31, 1999, at which point the
employment agreement can be extended at the option of the Company for an
additional two-year term. Dr. Ryan's base salary under the agreement for 1997
is $175,000. Dr. Ryan's base salary is determined by the Board of Directors on
an annual basis. Dr. Ryan's employment may be terminated by the Company with
or without cause. In the event the Board chooses to change his duties or
directs him to relocate, or if he is terminated without cause, Dr. Ryan would
then be entitled to his base salary, bonus and benefits for a period equal to
the longer of the remaining term of the agreement or one year from the date of
his resignation. In the event he is terminated with cause, then he would be
entitled to receive only such payments and/or benefits as would be provided to
other employees of the Company in accordance with the Company's employee
policies and procedures. In the event of a change of control, the agreement is
automatically extended through a date three years from the effective date of
such change in control. In the event Dr. Ryan is terminated in connection with
a change in control, then the Company will pay severance benefits under the
same formula as in the event of termination without cause. During the term of
the agreement, and for a period of two years thereafter, Dr. Ryan will be
subject to noncompetition and nonsolicitation restrictions.
James E. Vincke, the Company's Vice President -- Administration, has
entered into an employment agreement with the Company as of April 1, 1994, as
amended as of March 1, 1995, March 1, 1996 and March 1, 1997. Mr. Vincke's
1997 base salary is $105,000. This agreement
13
<PAGE> 16
terminates March 31, 1998, can be extended at the option of the Company and
provides that Mr. Vincke may be terminated with or without cause. In the event
Mr. Vincke is terminated without cause, he is entitled to his salary, all
fringe benefits and pro rata bonus, if applicable, in effect at the date of
termination, for a period equal to the greater of six months from the date of
termination or the remaining term of his agreement. In the event Mr. Vincke is
discharged for cause, or if he voluntarily resigns or retires, then he is
entitled to receive only such payments and/or benefits as would be provided to
other employees of the Company under similar circumstances. Upon a change in
control, the agreement will automatically be extended through a date one year
from the effective date of such change of control. During the term of this
agreement, and for a period of two years thereafter, Mr. Vincke will be subject
to noncompensation and nonsolicitation restrictions.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 1996, Mr. Amster and Dr.
Gloudeman served as the members of the Company's Compensation Committee. None
of the members of the Company's Compensation Committee was, during the fiscal
year ended December 31, 1996, an officer or employee of the Company.
PERFORMANCE GRAPH
The following line graph compares for the period since the Company
became a reporting company pursuant to the Securities Exchange Act of 1934, as
amended, on May 14, 1996, through the fiscal year ended December 31, 1996: (i)
the yearly cumulative total shareholder return (i.e., the change in share price
plus the cumulative amount of dividends, divided by the initial share price,
expressed as a percentage) on the Company's Common Shares, with (ii) the
cumulative total return of the NASDAQ Market Index, and with (iii) the
cumulative total return on the Common Stock of the Hambrecht & Quist Technology
Index (assuming dividend reinvestment and weighted based on market
capitalization at the end of each year):
[GRAPH HERE]
14
<PAGE> 17
<TABLE>
<CAPTION>
Mechanical H&Q Nasdaq Stock
Dates Dynamics, Inc. Technology Market - U.S.
----- -------------- ---------- -------------
<S> <C> <C> <C>
5/14/96 100 100 100
May-96 161.36 98.81 100.79
Jun-96 137.50 91.90 96.25
Jul-96 126.14 83.16 87.68
Aug-96 134.09 88.09 92.59
Sep-96 160.80 97.86 99.68
Oct-96 130.68 96.19 98.59
Nov-96 131.82 105.69 104.70
Dec-96 126.14 103.37 104.58
</TABLE>
- ------------------------
Stock and index prices scaled to 100
(Total return assumes reinvestment of dividends.)
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of
a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Officers, directors and greater than ten-percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) reports they file.
Based solely on review of the copies of such reports furnished to the
Company during or with respect to fiscal 1996, or written representations that
no Forms 5 were required, the Company believes that during the fiscal year
ended December 31, 1996 all Section 16(a) filing requirements applicable to its
officers, directors and greater than ten-percent beneficial owners were
complied with, except that two reports covering one transaction were filed late
by a director of the Company, Mitchell I. Quain, and four reports reflecting
the share ownership of Patrick Ryan Turner, an executive officer of the
Company, were filed late.
II. APPOINTMENT OF COMPANY'S
INDEPENDENT AUDITORS
INDEPENDENT ACCOUNTANTS
Arthur Andersen LLP are the independent auditors for the Company and
have reported on the Company's financial statements in the Company's 1996
Annual Report to Shareholders which accompanies this Proxy Statement.
15
<PAGE> 18
The shareholders are being asked to ratify and approve the Board of
Directors' selection of Arthur Andersen LLP as the independent auditors of the
Company for the current fiscal year ending on December 31, 1997. The Board of
Directors recommends a vote FOR approval of the selection of Arthur Andersen
LLP as the independent auditors of the Company.
A representative of Arthur Andersen LLP is expected to be present at
the Annual Meeting of Shareholders and will be available to respond to
appropriate questions.
III. INCREASE IN NUMBER OF SHARES UNDER THE
COMPANY'S 1996 STOCK INCENTIVE PLAN FOR KEY EMPLOYEES
The Board of Directors believes that it would be in the best interests
of the Company and its shareholders to increase the number of shares of common
stock of the Company (the "Common Stock") that is available to be granted as
options or restricted stock under the Company's 1996 Stock Incentive Plan For
Key Employees (the "Stock Option Plan") and, subject to shareholder approval,
has approved an increase in the number of shares available under the Stock
Option Plan from 450,000 in the aggregate to 650,000 in the aggregate.
As of March 28, 1997, there were 335,500 shares subject to outstanding
options under the Stock Option Plan.
1996 STOCK INCENTIVE PLAN FOR KEY EMPLOYEES
The Company's Board of Directors adopted the Stock Option Plan in
March 1996. Under the Stock Option Plan, options will be granted or restricted
stock will be awarded for the purpose of attracting and motivating key
employees of the Company. The Stock Option Plan will be administered by the
Compensation Committee of the Board of Directors. The Stock Option Plan
currently provides for a total of 450,000 shares of Common Stock which are
reserved for issuance under the Stock Option Plan. The Stock Option Plan
provides for (i) the grant of "incentive stock options" within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended, (ii) the grant of
"nonqualified stock options" (options which do not meet the requirements of
Section 422), and (iii) the award of restricted stock. The Stock Option Plan
also contains certain restrictions against transfer and other terms and
conditions which are to be determined by the Compensation Committee. The
Compensation Committee will determine which individuals will be granted options
or awarded restricted stock, the number of options granted or shares awarded
and other terms and conditions applicable to each grant or award.
The Board of Directors may amend or revise the terms of the Stock
Option Plan; provided, however, without the approval or ratification of the
shareholders the Board of Directors may not (i) increase the maximum number of
shares subject to the Stock Option Plan, (ii) increase the maximum number of
shares for which any participant may be granted options or awards under the
Stock Option Plan, (iii) change the class of persons eligible to be
participants, (iv) materially
16
<PAGE> 19
increase the benefits of any participant or (v) alter or impair any option or
award previously granted or awarded under the Stock Option Plan.
Under the terms of the Stock Option Plan, the exercise price of an
incentive stock option will be not less than the fair market value of the
Common Stock at the time of the grant (or not less than 110% of the fair market
value if the optionee owns more than 10% of the total combined voting stock of
the Company at the time of grant). The exercise price of nonqualified options
will not be less than 75% of the fair market value of the stock on the date the
option is granted. If an optionholder ceases to be an employee for any reason
other than death or disability, the Compensation Committee may, in its
discretion, permit the exercise of such options for a period not to exceed
three months following the termination of employment. The Compensation
Committee may, in its discretion, permit the exercise of nonqualified options
held by a terminated optionholder for a period not to extend beyond the
expiration date of such nonqualified option. No option under the Stock Option
Plan may be exercised more than ten years after its date of grant. In the case
of an incentive option granted to a participant who, at the time of grant, owns
more than 10% of the total combined voting stock of the Company, such option
will expire not more than five years after its date of grant.
Shares awarded under the Stock Option Plan typically will be subject
to vesting and unvested shares awarded to a participant will be forfeited and
transferred back to the Company if the participant ceases to be employed by the
Company for any reason other than death or permanent disability. If the
participant is terminated by action of the Company without cause or by
agreement of the Company and the participant, the Compensation Committee may,
at its discretion, release some or all of the shares from the restrictions. If
a participant ceases to be an employee of the Company because of death or
permanent disability, the restrictions will lapse with respect to such shares,
unless otherwise determined by the Compensation Committee.
The full text of the Stock Option Plan is set forth as Exhibit 10.9 to
the Company's Registration Statement on Form S-1, Registration No. 333-2900.
The discussion above, except with respect to the number of shares covered by
the Stock Option Plan, is qualified in its entirety by reference to the actual
text of the Stock Option Plan.
This proposed increase in the number of shares under the Stock Option
Plan requires the affirmative vote of a majority of the votes present in person
or by proxy at the Annual Meeting. The Board of Directors recommends a vote
FOR approval of the increase in the number of shares under the Stock Option
Plan.
17
<PAGE> 20
IV. OTHER MATTERS
SHAREHOLDER PROPOSALS
Proposals of shareholders that are intended to be presented at the
Company's 1998 Annual Meeting of Shareholders must be received by the Company's
Secretary at the Company's offices, 2301 Commonwealth Blvd., Ann Arbor,
Michigan 48105, no later than December 31, 1997 to be considered for inclusion
in the Proxy Statement and Proxy relating to that meeting. Such proposals
should be sent by certified mail, return receipt requested.
OTHER BUSINESS
Neither the Company nor the members of its Board of Directors intend
to bring before the Annual Meeting any matters other than those set forth in
the Notice of Annual Meeting of Shareholders, and they have no present
knowledge that other matters will be presented for action at the Annual Meeting
by others. However, if other matters are properly presented to the meeting,
the persons named in the enclosed proxy intend to vote the shares represented
thereby in accordance with their best judgment.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The audited financial statements and the Company's "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in the Company's Annual Report to Shareholders for the fiscal year
ended December 31, 1996 are hereby specifically incorporated by reference into
this Proxy Statement.
By Order of the Board of Directors
Michael E. Korybalski
Chief Executive Officer
Ann Arbor, Michigan
___________, 1997
18
<PAGE> 21
PROXY
MECHANICAL DYNAMICS, INC.
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS OF
MECHANICAL DYNAMICS, INC. TO BE HELD MAY 14, 1997
The undersigned hereby appoints Michael E. Korybalski and Robert R. Ryan,
and each of them, with full power of substitution, as attorneys and proxies of
the undersigned, to vote all shares of Mechanical Dynamics, Inc. (the "Company")
which the undersigned is entitled to vote at the Annual Meeting of Shareholders
of the Company to be held on Wednesday, May 14, 1997, at 5:00 p.m., Eastern
Standard Time, at the Ypsilanti Marriot at Eagle Crest, 1275 S. Huron Street,
Ypsilanti, Michigan 48197 (or at any adjournment(s) thereof), as follows:
1. Election of Directors --
Nominees: Michael E. Korybalski
Mitchell I. Quain
Robert R. Ryan
[ ] FOR all nominees listed above [ ] WITHHOLD AUTHORITY
(except as marked to to vote for all nominees
the contrary below) listed above
[ ] ABSTAIN
(INSTRUCTION: To withhold authority to vote for any individual nominee,
write that nominee's name on the space provided below.)
- --------------------------------------------------------------------------------
2. Proposal to ratify and approve Arthur Andersen LLP as the independent
auditors of the Company for the fiscal year ending December 31, 1997:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Proposal to increase the number of shares available under the Company's
1996 Stock Incentive Plan for Key Employees from 450,000 shares to 650,000
shares:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. In their discretion with regard to such other business as may properly come
before the Annual Meeting (or any adjournment(s) thereof).
<PAGE> 22
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED. IF NO DIRECTION IS MADE, THE SHARES REPRESENTED BY
THIS PROXY WILL BE VOTED IN FAVOR OF THE NOMINEES NAMED IN PROPOSAL 1 AND IN
FAVOR OF PROPOSALS 2 AND 3.
Dated: ________________________, 1997
_____________________________________
_____________________________________
SHAREHOLDER SHOULD SIGN HERE
NOTE: PLEASE DATE THIS PROXY AND SIGN
EXACTLY AS YOUR NAME APPEARS ON YOUR
STOCK CERTIFICATE. IF THE SHARES ARE
REGISTERED IN MORE THAN ONE NAME, EACH
JOINT OWNER SHOULD SIGN. WHEN SIGNING
AS ATTORNEY, ADMINISTRATOR, PERSONAL
REPRESENTATIVE, EXECUTOR, GUARDIAN OR
TRUSTEE, ADD YOUR TITLE TO THE
SIGNATURE.
PLEASE PROMPTLY DATE, SIGN AND MAIL THIS PROXY TO THE COMPANY.
