<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal period ended: JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 0-20679
MECHANICAL DYNAMICS, INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2163045
(State of incorporation) (I.R.S. Employer Identification No.)
2301 COMMONWEALTH BLVD.
ANN ARBOR, MICHIGAN 48105
(313) 994-3800
(Address of principal executive offices, including zip
code, and telephone number, including area code)
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.
[X] Yes [ ] No
The number of outstanding shares of the Registrant's common stock, as of
August 8, 1997, was 5,781,991.
<PAGE> 2
MECHANICAL DYNAMICS, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 1997 and December 31, 1996 ...................... 3
Condensed Consolidated Statements of Income
Three and Six Months Ended June 30, 1997 and 1996 ........ 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1997 and 1996 .................. 5
Notes to Condensed Consolidated Financial Statements ..... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .......... 7
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders ................................................ 12
Item 6. Exhibits and Reports on Form 8-K ......................... 12
SIGNATURES ......................................................... 13
INDEX TO EXHIBITS .................................................. 14
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
in thousands 1997 1996
- - --------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $20,784 $20,570
Accounts receivable 5,954 5,019
Prepaid and deferred expenses 1,079 1,074
- - --------------------------------------------------------------------------------
Total current assets 27,817 26,663
- - --------------------------------------------------------------------------------
Net property and equipment 1,913 1,643
Other assets 1,485 1,506
- - --------------------------------------------------------------------------------
Total assets $31,215 $29,812
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Borrowings under lines of credit $ 38 $ 45
Accounts payable 508 762
Accrued expenses 2,755 2,982
Deferred revenue 3,928 3,671
- - --------------------------------------------------------------------------------
Total current liabilities 7,229 7,460
- - --------------------------------------------------------------------------------
Minority interest 448 0
Redeemable common stock 167 167
Shareholders' equity:
Common stock 19,713 19,583
Preferred Stock 0 0
Retained earnings 3,612 2,546
Cumulative translation adjustment 46 56
- - --------------------------------------------------------------------------------
Total shareholders' equity 23,371 22,185
- - --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $31,215 $29,812
================================================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- --------------------------------
in thousands except share and per share data 1997 1996 1997 1996
===================================================================================================================================
<S> <C> <C> <C> <C>
Revenue:
Software licenses $3,996 $3,678 $7,916 $7,519
Services 3,209 2,563 5,990 4,770
- - -----------------------------------------------------------------------------------------------------------------------------------
Total revenue 7,205 6,241 13,906 12,289
- - -----------------------------------------------------------------------------------------------------------------------------------
Cost of revenue:
Software licenses 189 158 292 358
Services 1,658 1,332 3,262 2,693
- - -----------------------------------------------------------------------------------------------------------------------------------
Total cost of revenue 1,847 1,490 3,554 3,051
- - -----------------------------------------------------------------------------------------------------------------------------------
Gross profit 5,358 4,751 10,352 9,238
- - -----------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Sales and marketing 2,897 2,453 5,491 4,797
Research and development 1,061 869 2,135 1,755
General and administrative 772 685 1,584 1,369
- - -----------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 4,730 4,007 9,210 7,921
- - -----------------------------------------------------------------------------------------------------------------------------------
Operating income 628 744 1,142 1,317
Other income, net 189 75 356 76
- - -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 817 819 1,498 1,393
Provision for income taxes 247 258 451 461
- - -----------------------------------------------------------------------------------------------------------------------------------
Net income before minority interest 570 561 1,047 932
Minority interest in net income (loss) of subsidiary (19) 0 (19) 0
- - -----------------------------------------------------------------------------------------------------------------------------------
Net income $589 $561 $1,066 $932
===================================================================================================================================
Net income per common share $0.10 $0.12 $0.18 $0.22
===================================================================================================================================
Common and common equivalent shares 5,828,778 4,729,217 5,877,117 4,294,985
===================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
IN THOUSANDS 1997 1996
===============================================================================================
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,066 $ 932
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 450 262
Provision (credit) for deferred income taxes 0 (35)
(Gain) loss on disposal of assets, net 13 4
Minority interest in net income (loss) of subsidiary (19) 0
Changes in assets and liabilities:
Accounts receivable (721) (91)
Prepaid and deferred expenses 67 (20)
Other assets (14) 34
Accounts payable (407) (51)
Accrued expenses (275) 489
Deferred revenue 160 530
- - -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 320 2,054
- - -----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from the sale of property and equipment 22 0
Purchases of property and equipment (751) (230)
- - -----------------------------------------------------------------------------------------------
Net cash used in investing activities (729) (230)
- - -----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (payments) under line of credit agreements (7) (49)
Proceeds from the issuance of common stock 130 17,850
Proceeds from collections on subscriptions receivable 0 10
Minority investment in consolidated subsidiary 467 0
- - -----------------------------------------------------------------------------------------------
Net cash provided by financing activities 590 17,811
- - -----------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 33 9
- - -----------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 214 19,644
Cash and cash equivalents at beginning of period 20,570 1,141
- - -----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $20,784 $20,785
===============================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $7 $17
Income taxes $403 $234
===============================================================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of Mechanical Dynamics, Inc. ("MDI" or the "Company") and
its subsidiaries, and have been prepared in accordance with generally accepted
accounting principles for interim financial information and with Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The Company believes all adjustments, consisting of
normal recurring adjustments considered necessary for a fair presentation, have
been included. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Form 10-K for the
year ended December 31, 1996.
Operating results for the three and six month periods ended June 30, 1997
and 1996 are not necessarily indicative of the results that may be expected for
the full year.
(2) - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share." The
Company will be required to adopt this new standard for the year and the
quarter ended December 31, 1997. Early adoption is not permitted. The primary
requirements of this standard include: (1) the replacement of primary earnings
per share with basic earnings per share, which eliminates the dilutive effect
of stock options and warrants; (2) the use of average share price in applying
the treasury method to compute dilution for stock options and warrants for
diluted earnings per share; and (3) a disclosure reconciling the numerator and
denominator of earnings per share calculations. The Company believes that the
implementation of this standard will not have a material effect on it's
consolidated financial statements for the periods presented.
(3) - FINANCING ARRANGEMENTS
In June 1997, the Company entered into an agreement with its principal
bank for a $4.0 million line of credit facility. The agreement expires on June
30, 1999. No borrowings were outstanding under this agreement as of June 30,
1997.
(4) - MINORITY INTEREST
In April 1997, the Company established a Japanese subsidiary, Mechanical
Dynamics Japan K.K., through a joint venture agreement with Information
Services International-Dentsu Ltd. ("ISI-Dentsu") of Tokyo, Japan, the
distributor of the Company's software in Japan. The Company owns 66% of
Mechanical Dynamics Japan K.K., while ISI-Dentsu owns a 34% minority interest.
Pursuant to the agreement, the Company and ISI-Dentsu made combined capital
contributions of approximately $1,372,000 to Mechanical Dynamics Japan K.K.
through the second quarter of 1997. Mechanical Dynamics Japan K.K. will
provide consulting and other professional services directly to customers in
Japan, and will support ISI-Dentsu in marketing the Company's software in
Japan.
(5) - REDEEMABLE COMMON STOCK AND SHAREHOLDERS' EQUITY
In July 1997, the redemption privileges associated with the remaining
20,843 shares of redeemable common stock expired. The redemption privileges on
these shares of redeemable common stock outstanding were exercisable at $8.00
per share between June 15, 1997 and July 14, 1997.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion provides an analysis of the Company's financial
condition and results of operations, and should be read in conjunction with
the Company's condensed consolidated financial statements and the notes thereto
included in Item 1 of this Form 10-Q.
OVERVIEW
The Company develops, markets and supports virtual prototyping solutions.
The Company's virtual prototyping software allows the engineer or designer to
design a complete product by simulating, both visually and mathematically, a
product in motion. The Company's principal software product, ADAMS Full
Simulation Package, is used by customers to simulate mechanical systems. The
Company's revenue has in the past been, and is expected in the future to be,
derived almost exclusively from its ADAMS Full Simulation Package and related
software products and services.
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
Except for the historical information contained in this report, the
matters herein contain "forward-looking" statements (as defined in the Private
Securities Litigation Reform Act of 1995) that involve risk and uncertainty.
These forward-looking statements include, but are not limited to, revenue
levels, including the level of international revenue, certain costs and
operating expense levels, the level of other income, the Company's liquidity
and capital needs and various business environment and trend information.
Actual future results and trends may differ materially depending on a variety
of factors, including the volume and timing of orders received during the
quarter, the mix of and changes in distribution channels through which the
Company's products are sold, the timing and acceptance of new products and
product enhancements of the Company or its competitors, changes in pricing, the
level of the Company's sales of third party products, purchasing patterns of
distributors and customers, competitive conditions in the industry, business
cycles affecting the markets in which the Company's products are sold,
extraordinary events, such as litigation or acquisitions, including related
charges, and economic conditions generally or in various geographic areas. All
of the foregoing factors are difficult to forecast. The future operating
results of the Company may fluctuate as a result of these and other risk
factors detailed from time-to-time in the Company's Securities and Exchange
Commission reports.
Due to all of the foregoing factors, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as an indication of future
performance. It is likely that, in some future quarters, the Company's
operating results will be below the expectations of stock market analysts and
investors. In such an event, the price of the Company's Common Stock would
likely be materially adversely affected.
7
<PAGE> 8
RESULTS OF OPERATIONS
REVENUE
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------- --------------------------------
dollars in thousands 1997 1996 % CHANGE 1997 1996 % CHANGE
===============================================================================================
<S> <C> <C> <C> <C> <C> <C>
Software licenses $3,996 $3,678 8.6% $ 7,916 $ 7,519 5.3%
% of total revenue 55.5% 58.9% 56.9% 61.2%
Services $3,209 $2,563 25.2% $ 5,990 $ 4,770 25.6%
% of total revenue 44.5% 41.1% 43.1% 38.8%
- - -----------------------------------------------------------------------------------------------
Total revenue $7,205 $6,241 15.4% $13,906 $12,289 13.2%
===============================================================================================
</TABLE>
The Company's total revenue increased 15.4% and 13.2% during the three and
six month periods ended June 30, 1997, respectively, as compared to similar
periods in 1996. The growth in revenue primarily resulted from an increase in
the services provided to the Company's customers, as well as from increased
sales of the Company's software products.
Revenue from international customers accounted for approximately 62.7% and
59.2% of the Company's total revenue during the three months ended June 30,
1997 and 1996, respectively. International revenue accounted for approximately
58.4% and 62.2% of total revenue during the six months ended June 30, 1997 and
1996, respectively. The decrease in international revenue as a percent of
total revenue during the six month period ended June 30, 1997, as compared to
the similar period in 1996, was due, in part, to the strengthening of the
dollar in 1997 relative to the European and Japanese currencies. The
strengthening of the dollar negatively affected the Company's international
revenue during the first six months of 1997 by approximately $600,000. Since
most of the Company's international operating expenses were incurred in foreign
currencies, the net impact of exchange rate fluctuations on income from
operations was considerably less than the impact on revenue. If the dollar
continues to strengthen in 1997 relative to the European and Japanese
currencies, the Company's international revenue will be negatively impacted,
which could have a material adverse effect on the Company's consolidated
results of operations. The decrease in international revenue as a percent of
total revenue during the six month period ended June 30, 1997, as compared to
the similar period in 1996, was also due, in part, to a $280,000 decline in
revenue from the licensing of a third party's software products through the
Company's European subsidiaries. This resulted from the planned termination of
the Company's licensing agreement with the third party software company in
March 1996. The Company expects that international revenue will continue to
account for a significant portion of its total revenue in future periods.
Software licenses revenue consists primarily of license fees for the
Company's software products and, to a lesser extent, license fees for third
party software products licensed through the Company's European subsidiaries.
Software licenses revenue increased 8.6% and 5.3% during the three and six
month periods ended June 30, 1997, respectively, as compared to similar periods
in 1996. Excluding the $280,000 decline in license revenue from a third
party's software products mentioned above, software licenses revenue grew 8.6%
and 9.4% during the three and six month periods ended June 30, 1997,
respectively, as compared to similar periods in 1996. These increases resulted
from a higher volume of sales of the Company's software products.
Services revenue consists of revenue from software maintenance agreements
and professional services, including consulting, training and funded research
and development. Services revenue increased 25.2% and 25.6% during the three
and six month periods ended June 30, 1997, respectively, as compared to similar
periods in 1996. Both the software maintenance and the professional service
components of services revenue have experienced solid growth during the first
six months of 1997. The overall increase in services revenue reflects the
Company's continued emphasis on providing total solutions to its customers.
8
<PAGE> 9
COST OF REVENUE
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------------- -----------------------------------------
dollars in thousands 1997 1996 % CHANGE 1997 1996 % CHANGE
===============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Cost of software licenses $ 189 $ 158 19.6% $ 292 $ 358 -18.4%
% of software licenses revenue 4.7% 4.3% 3.7% 4.8%
Cost of services $1,658 $1,332 24.5% $3,262 $2,693 21.1%
% of services revenue 51.7% 52.0% 54.5% 56.5%
===============================================================================================================================
</TABLE>
Cost of software licenses includes software royalty fees, media costs,
payroll and other costs attributable to software documentation and
distribution, and an allocation of depreciation, utilities and other overhead
expenses incurred by the Company. Cost of software licenses revenue increased
19.6% from the second quarter of 1996 to approximately $189,000 in the second
quarter of 1997. The $31,000 absolute dollar increase was due to additional
royalties paid to third parties whose products are embedded in the Company's
ADAMS software. The 18.4% decrease in cost of software licenses during the six
month period ended June 30, 1997, as compared to a similar period in 1996, was
primarily due to lower royalties paid to a third party whose products were
licensed through the Company's European subsidiaries through the first quarter
of 1996. This resulted from the planned termination of the Company's licensing
agreement with the third party software company in March 1996.
Cost of services includes payroll and overhead expenses attributable to
hotline support, consulting, training and funded research and development.
Cost of services revenue grew 24.5% and 21.1% during the three and six month
periods ended June 30, 1997, respectively, as compared to similar periods in
1996. These increases resulted from the hiring of additional employees to
support the growth in services provided to the Company's customers during 1997.
OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------------- -----------------------------------------
dollars in thousands 1997 1996 % CHANGE 1997 1996 % CHANGE
===============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Sales and marketing $2,897 $2,453 18.1% $5,491 $4,797 14.5%
% of total revenue 40.2% 39.3% 39.5% 39.0%
Research and development $1,061 $ 869 22.1% $2,135 $1,755 21.7%
% of total revenue 14.7% 13.9% 15.4% 14.3%
General and administrative $ 772 $ 685 12.7% $1,584 $1,369 15.7%
% of total revenue 10.7% 11.0% 11.4% 11.1%
===============================================================================================================================
</TABLE>
Sales and marketing expenses include costs associated with the Company's
sales channels, such as personnel, commissions, sales office costs, travel,
promotional events, sales order processing, including license administration
and order fulfillment, and advertising and public relations programs. Sales
and marketing expenses also include an allocation of overhead expenses incurred
by the Company. The absolute dollar increase in sales and marketing expenses
during the three and six month periods ended June 30, 1997, as compared to
similar periods in 1996, resulted from the Company's continued expansion of its
worldwide sales and marketing organization. Total sales and marketing
employees increased to 61 at June 30, 1997, an increase of 35.6% from 45 at
June 30, 1996. The Company expects to continue to expand its sales and
marketing organization in the future to meet the growing demand for its
products and services.
9
<PAGE> 10
Research and development expenses include all payroll costs attributable
to research and development activities. Research and development expenses also
include an allocation of overhead expenses incurred by the Company. The
absolute dollar increase in research and development expenses during the three
and six month periods ended June 30, 1997, as compared to similar periods in
1996, primarily resulted from an increase in personnel and related costs in
support of expanded development efforts in general, including efforts
associated with the July 1997 release of Version 9.0 of the company's ADAMS
software. The Company intends to continue to invest significant resources in
research and development in the future.
General and administrative expenses include the cost of salaries, employee
benefits and other payroll costs associated with the Company's finance,
accounting, human resources, information systems and executive management
functions. General and administrative expenses also include an allocation of
overhead expenses incurred by the Company. General and administrative expenses
increased 12.7% and 15.7% during the three and six month periods ended June 30,
1997, respectively, as compared to similar periods in 1996. The absolute
dollar increases in these expenses were primarily due to additional expenses
incurred to support the Company's worldwide growth, as well as to support the
operations of a publicly-traded company. The Company expects general and
administrative expenses to increase in absolute dollars in the future.
However, these expenses may vary as a percentage of total revenue from period
to period.
OTHER INCOME, NET
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------------- ---------------------------------------
dollars in thousands 1997 1996 % CHANGE 1997 1996 % CHANGE
========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Other income, net $189 $75 152.0% $356 $76 368.4%
% of total revenue 2.6% 1.2% 2.6% 0.6%
</TABLE>
Other income, net consists of net interest income (expense), foreign
currency transaction gain (loss) and gain (loss) on the disposal of property
and equipment. The increase in other income, net in the three and six month
periods ended June 30, 1997, as compared to similar periods in 1996, primarily
resulted from interest earned on the $17.8 million in net proceeds raised
from the Company's initial public offering in May 1996, as well as interest
earned on cash generated from operations over the past year. These increases
were partially offset by increased foreign currency transaction losses incurred
during 1997.
PROVISION FOR INCOME TAXES
The Company's effective income tax rate was 30.1% and 33.1% for the first
six months of 1997 and 1996, respectively. The difference between the
Company's effective rate and the 34.0% statutory federal rate during the first
six months of 1997 was primarily due to the benefits of tax-exempt interest
income and the Company's foreign sales corporation.
MINORITY INTEREST IN NET INCOME (LOSS) OF SUBSIDIARY
In April 1997, the Company established a Japanese subsidiary, Mechanical
Dynamics Japan K.K., through a joint venture agreement with ISI-Dentsu of
Tokyo, Japan, the distributor of the Company's software in Japan. The
($19,000) in minority interest in net income (loss) of subsidiary represents
ISI Dentsu's 34% interest in the net loss of Mechanical Dynamics Japan K.K.
during the second quarter of 1997.
10
<PAGE> 11
EMPLOYEES
The number of the Company's worldwide employees increased 32.6% to 187 at
June 30, 1997, compared with 141 at June 30, 1996. Employment increased
significantly to support the Company's growing operations worldwide.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $214,000 during the first six months
of 1997 to $20.8 million at June 30, 1997, compared with $20.6 million at
December 31, 1996. Through June 30, 1997, cash and cash equivalents increased
primarily as a result of the $467,000 minority investment made into Mechanical
Dynamics Japan K.K., $320,000 in cash generated from operations, and $130,000
in proceeds from stock issued under the Company's employee stock purchase plan.
These increases were partially offset by the $751,000 in cash used to purchase
property and equipment during 1997.
At June 30, 1997, the Company's principal commitments consisted of
obligations under operating leases for facilities and equipment. The Company
had no borrowings under long-term debt arrangements at June 30, 1997.
In June 1997, the Company entered into an agreement with its principal
bank for a $4.0 million line of credit facility. No borrowings were
outstanding under this agreement as of June 30, 1997. The Company's
subsidiaries in Germany, Italy, Sweden, and France also have line of credit and
overdraft facilities that provide for aggregate borrowing availability of up to
$660,000. Approximately $38,000 in borrowings were outstanding under these
facilities as of June 30, 1997.
In January 1997, the Company announced that the Board of Directors had
authorized the Company to repurchase up to 500,000 shares of its common stock.
As of June 30, 1997, no shares of common stock had been repurchased.
In April 1997, the Company established a Japanese subsidiary, Mechanical
Dynamics Japan K.K., through a joint venture agreement with ISI-Dentsu of
Tokyo, Japan, the distributor of the Company's software in Japan. The Company
owns 66% of Mechanical Dynamics Japan K.K., while ISI-Dentsu owns a 34%
minority interest. Pursuant to the agreement, the Company and ISI-Dentsu made
combined capital contributions of approximately $1,372,000 to Mechanical
Dynamics Japan K.K. through the second quarter of 1997. Mechanical Dynamics
Japan K.K. will provide consulting and other professional services directly to
customers in Japan, and will support ISI-Dentsu in marketing the Company's
software in Japan.
Long-term cash requirements, other than for normal operating expenses, are
anticipated for the development of new software products and enhancements of
existing products, financing growth, repurchases of the Company's common stock
and the possible acquisition of software products, technologies and businesses
complementary to the Company's business. The Company believes that cash flows
from operations, together with existing cash balances, and available borrowings
will be adequate to meet the Company's cash requirements for working capital,
capital expenditures and stock repurchases for the next twelve months and the
foreseeable future. The Company has not paid dividends during the period from
1994 through the second of quarter of 1997 and intends to continue its policy
of retaining earnings to finance future growth.
11
<PAGE> 12
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on May 14,
1997. At the Annual Meeting, the shareholders of the Company (1) elected
Michael E. Korybalski, Mitchell I. Quain and Robert R. Ryan as Directors of the
Company to hold office until the Annual Meeting of Shareholders to be held in
2000; (2) ratified and approved 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; and (3) approved an increase in the number of
shares available under the Company's 1996 Stock Incentive Plan for Key
Employees from 450,000 shares to 650,000 shares. The votes were as follows:
<TABLE>
<CAPTION>
WITHHELD BROKER
FOR OR AGAINST ABSTAINED NON-VOTES
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(1) Election of Directors:
Michael E. Korybalski 4,527,663 4,764
Mitchell I. Quain 4,527,663 4,764
Robert R. Ryan 4,527,663 4,764
(2) Approval of Arthur Andersen: 4,529,770 400 2,257
(3) Approval to Increase the Shares in the
Company's 1996 Stock Incentive
Plan for Key Employees: 3,845,716 683,561 3,150
- - ------------------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
NUMBER EXHIBIT
- - --------------------------------------------------------------------------------
(4.2) Line of Credit Demand Note between KeyBank National Association and
the Company dated June 30, 1997
(11) Statement Re Computation of Per Share Earnings
(27) Financial Data Schedule
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the three months
ended June 30, 1997.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 13, 1997 MECHANICAL DYNAMICS, INC.
(Registrant)
By: /s/ Michael E. Korybalski
---------------------------------------------------
Michael E. Korybalski
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
By: /s/ David Peralta
---------------------------------------------------
David Peralta
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
13
<PAGE> 1
EXHIBIT 4.2
DEMAND NOTE
Amount: $4,000,000.00 NO: ______________________
June 30, 1997
PROMISE TO PAY - The undersigned, MECHANICAL DYNAMICS, INC., a Michigan
corporation, herein after referred to as "Borrower", for value received,
promises to pay to KeyBank National Association, (herein after "Bank") or
order, in lawful money of the United States of America, on demand but not later
than June 30, 1999, the principal sum of Four Million and No/100 Dollars
($4,000,000.00) or the extent such sum has been advanced to the undersigned by
the Bank and remains due and unpaid, as indicated on the books and records of
the Bank, together with interest on the unpaid outstanding principal balance of
each advance. Interest shall be calculated from the date of each advance until
repayment of each advance.
INTEREST RATE - The outstanding principal balance shall earn interest at a
rate equal to the LIBOR Rate plus two and a quarter percent (2.25%) per annum
("Effective Rate"), until maturity, but no more than the maximum rate allowed
by law. The "LIBOR Rate", as used herein, means the average rate [rounded up
if necessary, to the next highest one sixteenth of one percent (1/16%)] of
interbank offered effective rates for thirty (30) day U.S. dollar deposits in
the London market based on quotations at major banks as determined by reference
to the Wall Street Journal ("WSJ") edition published on its last publication
date of every month ("Determination Date") and distributed in Ann Arbor,
Michigan. In the event such average rate is not published in the WSJ or the
WSJ is not otherwise available to Bank on the Determination Date, Bank may use
the London interbank offered rate for thirty (30) day dollar deposits (or its
reported equivalent as determined in the sole discretion of Bank) as reported
by any nationally recognized financial reporting service on the Determination
Date. Borrower acknowledges that the published or reported LIBOR Rate may be
with respect to contracts entered into as of a date other than the
Determination Date.
The Effective Rate shall be adjusted as of the first day of each month based
upon the LIBOR Rate published or reported on the Determination Date, as
applicable. Interest shall accrue on the unpaid principal balance from the
date of each advance under this Note and be calculated upon the actual number
of days elapsed over a year assumed to have 360 days. Interest shall be
payable monthly beginning July 31, 1997, and on the last day of each month
thereafter until maturity of this note.
The LIBOR Rate is used as an index only, and funds for Borrower's loans may or
may not be purchased or otherwise matched by the Bank from or on the London
Interbank Market.
DEFAULT RATE - Bank reserves the right to increase the interest rate after
default, whether by acceleration or otherwise, to a rate equal to the Effective
Rate plus three percent (3.00%) per annum, but no more than the maximum rate
allowed by law.
LOAN FEES - Borrower agrees that all loan fees are earned fully as of the
date of the loan and will not be subject to refund upon early payment (whether
voluntary or as a result of default), except as otherwise required by law.
APPLICATION OF PAYMENTS - Each payment will be applied first to interest,
then to costs, and the balance to principal.
FEES - Bank may charge a fee to cover additional administrative costs
incurred for any payment received by Bank six (6) business days or more after
the due date; such fee will be equal to two percent (2%) of the required
principal payment or $200.00, whichever is less. No payments will be accepted
without payment of this fee. In addition, Bank may charge a fee to cover
administrative costs incurred in origination and/or renewal of this Note, which
shall be payable upon execution of the Note.
<PAGE> 2
EVENTS OF DEFAULT - Any one of the following events shall be deemed a default
under the terms of this Note, triggering the Bank's remedies as provided under
statutory or contract law: (a) failure to pay any payment required under the
terms herein; (b) any default in the performance of any of the terms and
conditions of any document evidencing this loan transaction including the Loan
Agreement, this Note, any security agreement, mortgage or other instrument;
(c) any default in any terms and conditions of any other loan agreement between
Bank and the undersigned; (d) the death, dissolution, or insolvency of the
undersigned, or the appointment of a trustee or receiver for the undersigned,
or the making of any assignment for the benefit of creditors or the
commencement of any bankruptcy proceeding by or against the undersigned; (e)
the placement or issuance of any lien, levy, writ of garnishment or execution
or similar process against the undersigned or any property of the undersigned;
(f) the death of any guarantor of this Note.
BANK'S RIGHTS - Upon the occurrence of any one or more of the above events of
default, unless the Bank shall otherwise elect, the full amount of the
indebtedness evidenced hereby and all other liabilities of the undersigned to
the Bank shall become immediately due and payable, without notice or demand.
Thereafter, Bank shall have all the rights and remedies provided by law,
whether common, statutory or otherwise, including all the remedies granted to
Bank under the Uniform Commercial Code, the right to offset any deposit
accounts held by Bank, the right to repossess and dispose of any collateral
pledged for this or any other loan agreement between Bank and the undersigned,
the right to foreclose any mortgage by advertisement as provided under Michigan
law, etc. The undersigned shall be liable for any deficiency remaining after
disposition of any property in which the Bank has a security interest to secure
payment of the indebtedness evidenced hereby, and the computation of such
deficiency or of the amount required to redeem such property shall include
actual attorneys' fees, legal expenses and any other costs incurred. This Note
has been delivered to Bank and accepted by Bank in the State of Michigan. If
there is a lawsuit, Borrower agrees upon Bank's request to submit to the
jurisdiction of the courts of Washtenaw County, the State of Michigan. Bank
and Borrower hereby waive the right to any jury trial in any action,
proceeding, or counterclaim brought by either Bank or Borrower against the
other. This Note shall be governed by and construed in accordance with the
laws of the State of Michigan.
WAIVER - Each endorser hereof and any other party liable for the indebtedness
evidenced hereby severally waives demand, presentment, notice of dishonor and
protest of this Note and consents to any extension or postponement of time of
its payment without limit as to the number or period thereof, to any
substitution, exchange or release of all or any part of the collateral securing
this Note, to the addition of any party hereto, and to the release or discharge
of or suspension of any rights and remedies against any person who may be
liable hereon for the payment of the indebtedness evidenced hereby.
GENERAL PROVISIONS - This Note is payable on Demand, or if no demand is made,
in one payment of all outstanding principle plus all accrued unpaid interest on
May 31, 1999. The inclusion of specific default provisions or rights of Bank
shall not preclude Bank's right to declare payment of this Note on its demand.
Bank may delay or forgo enforcing any of its rights or remedies under this Note
without losing them. Borrower and any other person who signs, guarantees or
endorses this Note, to the extent allowed by law, waive presentment, demand for
payment, protest and notice of dishonor. Upon any change in the terms of this
Note, and unless otherwise expressly stated in writing, no party who signs this
Note, whether as maker, guarantor, accommodation maker or endorser, shall be
released from liability. All such parties agree that Bank may renew or extend
(repeatedly and for any length of time) this loan, or release any party or
guarantor or collateral; or impair, fail to realize upon or perfect Bank's
security interest in the collateral; and take any other action deemed necessary
by Bank without the consent of or notice to anyone. All such parties also
agree that Bank may modify this loan without the consent of or notice to anyone
other than the party with whom the modification is made.
MISCELLANEOUS - No delay on the part of the Bank in the exercise of any right
or remedy shall operate as a waiver thereof, no single or partial exercise by
the Bank of any right or remedy shall preclude any other future exercise
thereof or the exercise of any other right or remedy, and no waiver or
indulgence by the Bank of any default shall be effective unless in writing and
signed by the Bank, nor shall a waiver on one occasion be construed as a bar
to, or waiver of, any such right on any future occasion. The undersigned, if
more than one, shall be jointly and severally liable hereunder and the term
"undersigned" shall mean any one or more of them. Any reference to KeyBank
National Association or Bank herein shall be deemed to include any subsequent
holder of this Note.
<PAGE> 3
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
2301 Commonwealth Blvd. Mechanical Dynamics, Inc.
Ann Arbor, MI 48105
BY: /s/ James E. Vincke, Vice President -
Administration
---------------------------------------
James E. Vincke
Tax ID# ___________________
<PAGE> 1
EXHIBIT 11
MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- ----------------------------
in thousands except share and per share data 1997 1996 1997 1996
============================================================================================================================
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
Net income $ 589 $ 561 $ 1,066 $ 932
Weighted average common shares outstanding 5,770,681 4,642,704 5,765,558 4,226,384
Effect of stock options and warrants 58,097 86,513 111,559 68,601
- - ----------------------------------------------------------------------------------------------------------------------------
Adjusted share outstanding 5,828,778 4,729,217 5,877,117 4,294,985
- - ----------------------------------------------------------------------------------------------------------------------------
Net income per common share $0.10 $0.12 $0.18 $0.22
============================================================================================================================
FULLY DILUTED EARNINGS PER SHARE:
Net income $ 589 $ 561 $ 1,066 $ 932
Weighted average common shares outstanding 5,770,681 4,642,704 5,765,558 4,226,384
Effect of stock options and warrants 111,559 103,544 111,559 103,544
- - ----------------------------------------------------------------------------------------------------------------------------
Adjusted share outstanding 5,882,240 4,746,248 5,877,117 4,329,928
- - ----------------------------------------------------------------------------------------------------------------------------
Net income per common share $0.10 $0.12 $0.18 $0.22
============================================================================================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001011451
<NAME> MECHANICAL DYNAMICS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 20,784
<SECURITIES> 0
<RECEIVABLES> 5,954
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 27,817
<PP&E> 1,913
<DEPRECIATION> 0
<TOTAL-ASSETS> 31,215
<CURRENT-LIABILITIES> 7,229
<BONDS> 0
167
0
<COMMON> 19,713
<OTHER-SE> 3,658
<TOTAL-LIABILITY-AND-EQUITY> 31,215
<SALES> 0
<TOTAL-REVENUES> 13,906
<CGS> 0
<TOTAL-COSTS> 12,764
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,498
<INCOME-TAX> 451
<INCOME-CONTINUING> 1,066
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,066
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
