<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: MARCH 31, 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 April
30, 1997, was 5,770,681.
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MECHANICAL DYNAMICS, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 1997 and December 31 1996................................. 3
Condensed Consolidated Statements of Income
Three Months Ended March 31, 1997 and 1996.......................... 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 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 6. Exhibits and Reports on Form 8-K................................... 12
SIGNATURES.................................................................. 13
INDEX TO EXHIBITS........................................................... 14
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
in thousands 1997 1996
- ------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
-------
Current assets:
Cash and cash equivalents............ $ 21,172 $ 20,570
Accounts receivable.................. 5,131 5,019
Prepaid and deferred expenses........ 922 1,074
-------- --------
Total current assets............. 27,225 26,663
-------- --------
Net property and equipment............ 1,759 1,643
-------- --------
Total other assets.................... 1,479 1,506
-------- --------
$ 30,463 $ 29,812
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------
Current liabilities:
Borrowings under line of credit...... 42 45
Accounts payable..................... 648 762
Accrued expenses..................... 2,902 2,982
Deferred revenue..................... 4,029 3,671
-------- --------
Total current liabilities........ 7,621 7,460
-------- --------
Redeemable common stock 167 167
-------- --------
Shareholders' equity:
Common stock......................... 19,646 19,583
Preferred stock...................... -- --
Retained earnings.................... 3,023 2,546
Cumulative translation adjustment.... 6 56
-------- --------
Total shareholders' equity....... 22,675 22,185
-------- --------
$ 30,463 $ 29,812
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
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MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
in thousands, except per share data 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenue:
Software licenses..................................... $ 3,920 $ 3,841
Services.............................................. 2,781 2,207
---------- ----------
Total revenue..................................... 6,701 6,048
---------- ----------
Cost of revenue:
Software licenses..................................... 103 200
Services.............................................. 1,604 1,361
---------- ----------
Total cost of revenue............................. 1,707 1,561
---------- ----------
Gross profit........................................... 4,994 4,487
---------- ----------
Operating expenses:
Sales and marketing................................... 2,594 2,344
Research and development.............................. 1,074 886
General and administrative............................ 812 684
---------- ----------
Total operating expenses.......................... 4,480 3,914
---------- ----------
Operating income....................................... 514 573
Other income (expense), net............................ 167 1
---------- ----------
Income before income taxes............................. 681 574
Provision for income taxes............................. 204 203
---------- ----------
Net income............................................. $ 477 $ 371
========== ==========
Pro Forma net income per common share.................. $ 0.08 $ 0.10
========== ==========
Weighted average common and common equivalent shares... 5,865,979 3,878,987
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
4
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MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
in thousands 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income......................................................... $ 477 $ 371
Adjustments to reconcile net income to net cash provided by
operating activities --
Depreciation and amortization..................................... 207 141
(Gain) loss on disposal of assets................................. (8) --
Changes in assets and liabilities --
Accounts receivable.............................................. 37 249
Prepaid and deferred expenses.................................... 205 (38)
Other assets..................................................... 14 (129)
Accounts payable................................................. (222) (79)
Accrued expenses................................................. (120) (267)
Deferred revenue................................................. 288 128
-------- -------
Net cash provided by operating activities...................... 878 376
-------- -------
Cash flows from investing activities:
Proceeds from sale of property and equipment....................... 21 --
Purchases of property and equipment................................ (348) (84)
-------- -------
Net cash used in investing activities.......................... (327) (84)
-------- -------
Cash flows from financing activities:
Net borrowings (payments) under line of credit agreements.......... (3) 12
Proceeds from issuance of common stock............................. 63 63
Proceeds from collections on subscriptions receivable.............. -- 10
-------- -------
Net cash provided by financing activities...................... 60 85
-------- -------
Effect of exchange rate changes on cash............................. (9) --
-------- -------
Net increase in cash................................................ 602 377
Cash at beginning of period......................................... 20,570 1,141
-------- -------
Cash at end of period............................................... $ 21,172 $ 1,518
======== =======
Supplemental disclosures of cash flow information --
Interest paid...................................................... $ 1 $ 6
======== =======
Income taxes paid.................................................. $ 95 $ 116
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
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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-month periods ended March 31, 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 its
consolidated financial statements for the periods presented.
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
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RESULTS OF OPERATIONS
REVENUE
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
dollars in thousands 1997 % CHANGE 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Software licenses.......................... $ 3,920 2.1% $ 3,841
% of total revenue........................ 58.5% 63.5%
Services................................... $ 2,781 26.0% $ 2,207
% of total revenue........................ 41.5% 36.5%
Total revenue.............................. $ 6,701 10.8% $ 6,048
</TABLE>
The Company's total revenue increased 10.8% to $6.7 million in the first
quarter of 1997 from $6.0 million in the first quarter of 1996. The growth in
revenue resulted primarily 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 53.8% and
65.4% of the Company's total revenue in the first quarter of 1997 and 1996,
respectively. The decrease in international revenue as a percent of total
revenue was due, in part, to a $280,000 decline in revenue from the licensing
of third party software products through the Company's European subsidiaries.
This decline resulted primarily from the planned termination of a licensing
agreement with a third party software company in March 1996. In addition, the
strengthening of the dollar in 1997, relative to the European and Japanese
currencies, negatively affected international revenue in the first quarter of
1997 by approximately $275,000. 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 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 grew 2.1% over the first quarter of 1996 to
approximately $3.9 million in the first quarter of 1997. Excluding the $280,000
decline in license revenue from third party software products mentioned above,
software licenses revenue grew 10.1% in the first quarter of 1997 as compared
to the first quarter of 1996. This increase 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 grew 26.0% over the first quarter of 1996 to
approximately $2.8 million in the first quarter of 1997. Both the software
maintenance and the professional service components of services revenue
continued to experience solid growth during the first quarter 1997. The overall
increase in services revenue reflects the Company's continued emphasis on
providing total solutions to its customers.
8
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COST OF REVENUE
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
dollars in thousands 1997 % CHANGE 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Cost of software licenses.................. $ 103 (48.5%) $ 200
% of software licenses revenue............ 2.6% 5.2%
Cost of services........................... $1,604 17.9% $1,361
% of services revenue..................... 57.7% 61.7%
</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 decreased
48.5% from the first quarter of 1996 to approximately $103,000 in the first
quarter of 1997. The decrease was primarily due to lower royalties paid to
third parties whose products are licensed through the Company's European
subsidiaries.
Cost of services includes payroll and overhead expenses attributable to
hotline support, consulting, training and funded research and development. Cost
of services revenue grew 17.9% from the first quarter of 1996 to approximately
$1.6 million in the first quarter of 1997. The increase resulted from the
hiring of additional employees to support the growth in services provided to
the Company's customers during 1997. Cost of services as a percent of service
revenue decreased from 61.7% in the first quarter of 1996 to 57.7 % in the
first quarter of 1997, primarily as a result of the strong growth experienced
in the higher-margin software maintenance component of services revenue.
OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------
dollars in thousands 1997 % CHANGE 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales and marketing........................ $ 2,594 10.7% $ 2,344
% of total revenue........................ 38.7% 38.8%
Research and development................... $ 1,074 21.2% $ 886
% of total revenue........................ 16.0% 14.6%
General and administrative................. $ 812 18.7% $ 684
% of total revenue........................ 12.1% 11.3%
</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 first quarter of 1997 as compared to the first quarter of 1996
resulted from the Company's continued expansion of its worldwide sales and
marketing organization. Total sales and marketing headcount increased to 55 at
March 31, 1997, an increase of 22.2% from 45 at March 31, 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.
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 first
quarter of 1997 as compared to the first quarter of 1996 primarily resulted
from an increase in personnel and related costs in support of expanded
product development efforts. The Company intends to continue to invest
significant resources in research and development in the future.
9
<PAGE> 10
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 18.7% during the first quarter of 1997 as compared to the first
quarter of 1996. The absolute dollar increase in these expenses was 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 (EXPENSE), NET
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------
dollars in thousands 1997 % CHANGE 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Other income (expense), net.................... $ 167 >100.0% $ 1
% of total revenue............................ 2.5% --
</TABLE>
Other income (expense), 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 (expense), net in the
first quarter of 1997 as compared to the first quarter of 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. The increase was
partially offset by increased foreign currency transaction losses incurred
during 1997.
PROVISION FOR INCOME TAXES
The Company's effective income tax rate was 30.0% and 35.4% for the first
quarter of 1997 and 1996, respectively. The difference between the effective
rate and the statutory federal rate during the first quarter of 1997 was
primarily due to the benefits of tax-exempt interest income and the Company's
foreign sales corporation.
EMPLOYEES
The number of the Company's worldwide employees increased 20.1% to 173 at
March 31, 1997, compared with 144 at March 31, 1996. Employment increased
significantly to support the Company's growing operations worldwide.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $21.2 million at March 31, 1997, compared
to $20.6 million at December 31, 1996. The increase in cash and cash
equivalents of $602,000 during the first quarter of 1997 primarily resulted
from the $878,000 in cash flow generated from operations, which was offset by
the $348,000 in cash used to purchase property and equipment.
At March 31, 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 March 31, 1997.
The Company has an agreement with its principal bank for an unsecured $3.0
million line of credit. No borrowings were outstanding under this agreement as
of March 31, 1997. The Company's subsidiaries in Germany, Italy, Sweden, and
France also have line of credit and overdraft facilities that provide for
aggregate borrowing
10
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availability of approximately $660,000. Approximately $42,000 in borrowings
were outstanding under these facilities as of March 31, 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 March 31, 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 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., with ISI-Dentsu holding the remaining minority
portion. Pursuant to the agreement, the Company and ISI-Dentsu will make
combined capital contributions of approximately $1.3 million 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 first of quarter of 1997 and intends to continue its policy of
retaining earnings to finance future growth.
11
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
NUMBER EXHIBIT
- -------------------------------------------------------------------------------
<S> <C>
(2) Joint Venture Agreement between Mechanical Dynamics, Inc. and
Information Services International - Dentsu, Ltd.
(11) Statement Re Computation of Per Share Earnings
(27) Financial Data Schedule
</TABLE>
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the three months
ended March 31, 1997.
12
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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: May 12, 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> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER EXHIBIT TITLE
- ------ ------------------------------------------------------------------------
<S> <C>
(2) Joint Venture Agreement between Mechanical Dynamics, Inc. and
Information Services International - Dentsu, Ltd.
(11) Statement Re Computation of Per Share Earnings
(27) Financial Data Schedule
</TABLE>
14
<PAGE> 1
EXHIBIT 2
AGREEMENT
THIS AGREEMENT, made this 6th day of February, 1997, by and between
MECHANICAL DYNAMICS, INC., a Michigan corporation, with its principal place of
business located at 2301 Commonwealth Blvd., Ann Arbor, Michigan 48105 ("MDI"),
and INFORMATION SERVICES INTERNATIONAL - DENTSU, LTD., a corporation organized
under the laws of Japan, with its principal place of business located at
4-11-10, Nakano, Nakano-Ku, Tokyo, 164, Japan
("ISI-D").
RECITALS
WHEREAS, MDI is engaged in the development and licensing of computer
software products for mechanical systems simulation (the "MDI Software"); and
WHEREAS, ISI-D has, for some time, been the sole distributor of MDI
Software in Japan pursuant to a separate agreement between the parties (the
"Distributorship Agreement"); and
WHEREAS, MDI has recently formed a wholly owned subsidiary, Mechanical
Dynamics Japan K.K. (the "Company"), for the purpose of providing engineering
consulting services in conjunction with MDI Software to customers located in
Japan and to augment and further leverage the licensing of MDI Software in
Japan; and
WHEREAS, ISI-D has indicated its desire to invest in the Company and
become a shareholder and to work closely with MDI in furthering the purposes
and activities of the Company in Japan and MDI desires and agrees to such
investment and participation by ISI-D.
NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements contained herein, the parties hereto agree as follows:
1. RECITALS.
The foregoing recitals are incorporated herein by reference and made a
part hereof.
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Rev 1/22/97
<PAGE> 2
2. THE COMPANY.
(a) The Company was formed February 5, 1997, pursuant to Articles of
Incorporation, a true copy of which is attached hereto as Exhibit I (the
"Articles").
(b) Pursuant to the Articles, the Company is authorized to issue and sell
4,000 shares of common stock, par value Y.50,000. At or prior to Closing (as
hereinafter defined), MDI has or will purchase and pay Y.112,200,000 for 2,244
fully paid and non-assessable shares of the Company's common stock (the "MDI
Shares").
(c) Pursuant to the Articles, all shareholders of the Company (the
"Shareholders") have pre-emptive rights to purchase shares of the Company's
common stock ("Shares") to prevent forced dilution. MDI hereby agrees that the
Articles will not be amended to modify or delete such preemptive rights without
the written consent of all other Shareholders of the Company.
(d) As presently constituted, the Board of Directors of the Company
consists of three (3) members. The current members of the Board of Directors
are Ray Gaynor, Tony Spagnuolo and Hiromasa Kita, with Messrs. Kita and
Spagnuolo being "representative" directors. Immediately following Closing, Mr.
Kita will resign as a Director of the Company and MDI will cause a person
selected by ISI-D to be elected to the Company's Board of Directors as his
replacement and designated a "representative" director. All Directors will
serve without compensation, except that each Director will be reimbursed by the
Company for all expenses incurred in connection with his activities as a
Director of the Company.
(e) The Board of Directors of the Company will adopt a resolution
providing that an annual Operating Budget for the Company must be approved each
year by its Board of Directors.
(f) The Articles do not require the payment of dividends in any year and
provide that dividends will be paid only upon authorization of the Company's
Board of Directors.
3. INVESTMENT BY ISI-D.
MDI hereby agrees to cause the Company to sell to ISI-D and ISI-D hereby
agrees to purchase from the Company 1,156 Shares of the Company's common stock
(the "ISI-D Shares") for a purchase price of Y.57,800,000 (the "Purchase
Price"). Upon payment of the Purchase Price at Closing, the ISI-D Shares will
be fully paid
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Rev 1/22/97
<PAGE> 3
and nonassessable and will represent 34% of the total 3,400 of Company Shares
issued and outstanding at such date.
4. FURTHER INVESTMENT.
Neither MDI nor ISI-D shall have any obligation to provide additional
funding to the Company by way of purchase of additional Shares or loans.
5. STAFFING.
MDI and ISI-D hereby agree that for the period ending December 31, 1998,
and thereafter, for such additional period as the parties may agree, each party
will provide employees to staff and operate the Company. MDI and ISI-D agree
to enter into a separate agreement which will specify the number of employees
to be provided to the Company by each party, the duties of such employees, the
method for compensating such employees, provisions for changing and/or rotating
employees and will include such additional provisions relating to the staffing
of the Company as the parties may agree.
6. CLOSING.
The closing of the purchase of the ISI-D Shares shall be held at the
offices of the Company's attorneys, Messrs. Blakemore & Mitsuki, at 1st Akiyma
Bldg., 3-22, Toranomon 2-Chome, Minato-ku, Tokyo 105, Japan, on or before
Monday, March 31, 1997 (the "Closing"). At the Closing, in exchange for
delivery of the Purchase Price to the Company in immediately available funds,
the Company will issue to ISI-D a stock certificate representing 1,150 Shares
of the Company's fully paid and nonassessable common stock.
7. ISI-D REPRESENTATION ON THE COMPANY'S BOARD OF DIRECTORS.
MDI and ISI-D hereby agree that ISI-D shall be entitled to (a) one (1)
representative on the Company's Board of Directors when the total number of
members of said Board is three (3) or four (4) directors and (b) two (2)
representatives on the Board of Directors when the total number of members of
said Board is five (5) or six (6). MDI agrees that the total number of Board
members of the Company will not be increased beyond six (6) without the consent
of ISI-D. Pursuant to this Agreement, MDI hereby irrevocably agrees that so
long as ISI-D owns the ISI-D Shares, MDI will vote the MDI Shares to elect one
(1) or two (2) representatives selected by ISI-D to the Company's Board of
Directors, as the case may be, in accordance with the agreement contained in
this Section 7.
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8. RESTRICTION ON SALE OR TRANSFER OF COMPANY SHARES.
No Share of the Company's common stock owned by MDI or ISI-D or any other
Shareholder shall be sold, assigned, conveyed, pledged, encumbered or otherwise
transferred in any manner whatsoever to any person, partnership, corporation or
other entity without the prior written consent of all other Shareholders,
except as specifically permitted in this Agreement. Any attempted sale,
assignment, conveyance, pledge, encumbrance or transfer in violation of this
Agreement shall be void. It is understood and agreed that the stock
certificates representing the MDI Shares, the ISI-D Shares and any other Shares
hereafter issued and sold by the Company, shall contain the following
restrictive legend:
"THE SALE, ASSIGNMENT, CONVEYANCE, PLEDGE, ENCUMBRANCE OR TRANSFER
OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS RESTRICTED BY THE
TERMS OF A CERTAIN SHAREHOLDER AGREEMENT, DATED FEBRUARY 6, 1997,
A COPY OF WHICH IS AVAILABLE FOR INSPECTION DURING REGULAR
BUSINESS HOURS AT THE OFFICE OF THE COMPANY AND SUCH SHARES SHALL
NOT BE SOLD, ASSIGNED, CONVEYED, ENCUMBERED OR TRANSFERRED, EXCEPT
IN ACCORDANCE WITH THE PROVISIONS OF SUCH AGREEMENT."
9. VOLUNTARY SALE OF SHARES.
In the event that any Shareholder desires to sell the Shares which it
owns, it shall first offer, in writing, all (but not less than all) Shares that
it owns for sale to the other Shareholder(s), pro rata, and the other
Shareholder(s) shall have the option to purchase such Shares at the price
determined pursuant to Section 12(a) of this Agreement and upon the terms
specified in Section 13 of this Agreement. The other Shareholder(s) shall have
sixty (60) days from the date of such offer within which to consummate the
purchase of said Shares. If any Shareholder elects not to purchase its pro
rata number of Shares, such Shares shall be offered to the remaining
Shareholder(s) at the same price and terms for an additional thirty (30) day
period. If any of such Shares so offered remain unpurchased at the end of said
sixty (60) days plus the additional thirty (30) day period, if applicable, then
the remaining Shares may be conveyed to any person free of the restrictions of
this Agreement at anytime thereafter.
10. REQUIRED OFFER BY ISI-D.
In the event that (a) the Distributorship Agreement is terminated by
either party and not renewed or extended within
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<PAGE> 5
ninety (90) days following the date of termination (the "Last Renewal Date")
or (b) ISI-D begins distributing and/or marketing in Japan any Competitive
Software Product (as hereinafter defined) (the "Competition Date"), then
ISI-D shall be deemed to have offered on the Last Renewal Date or the
Competition Date, as the case may be, the ISI-D Shares for sale to MDI at the
price determined under Section 12(a) hereof and upon the terms specified in
Section 13 hereof. MDI shall have ninety (90) days from the date of such offer
within which to consummate the purchase of said ISI-D Shares. If MDI fails to
purchase such Shares within said ninety (90) day period, then ISI-D shall
continue as a Shareholder of the Company and the ISI-D Shares shall continue to
be subject to all of the terms and provisions of this Agreement. For purposes
of this Section 10, the term "Competitive Software Product" shall mean any
software program which is similar to and competitive with the MDI Software and
which performs non-linear multi-body systems analysis (sometimes referred to as
kinematic mechanisms analysis), including without limitation, DADS software,
but excluding SDRC's GEOMOD and Concept Solid Kinematics software. In the
event that Section 3.6(c) of the Distributorship Agreement becomes void, then
clause (b) above and all references to the "Competition Date" in this
Section 10 shall automatically be stricken from this Agreement. MDI and ISI-D
agree that the Company shall not be deemed a "distributor" of MDI Software for
purposes of the Distributorship Agreement even though the Company may arrange
licenses for MDI Software products to be entered into directly by MDI with
selected customers in Japan specifically requesting such assistance.
11. MDI OPTION TO PURCHASE ISI-D SHARES.
In the event that a "deadlock" arises between MDI and ISI-D as the result
of a failure to achieve two-thirds (2/3rds) Shareholder approval of any
proposal put to a vote of the Shareholders where such super majority approval
is required under Japanese law, then MDI shall have the option thereafter
within sixty (60) days, exercisable by written notice to ISI-D, to purchase
all, but not less than all, of the ISI-D Shares at the price determined
pursuant to Section 12(b) hereof, and upon the terms specified in Section 13
hereof; provided, that the purchase of the ISI-D Shares must be consummated
within sixty (60) days from the date that MDI delivers notice of its exercise
of this option to ISI-D. Failure to exercise this option shall not void this
Section which shall remain in effect with respect to any subsequent "deadlock".
12. PURCHASE PRICE OF SHARES.
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<PAGE> 6
(a) For purposes of Sections 9 and 10 of this Agreement, the purchase
price ("Price") for the Shares to be purchased shall be the greater of
57,800,000 Yen (if the ISI-D Shares are being sold or 112,200,000 Yen if the MDI
Shares are being sold) or the price calculated by application of the following
formula:
(i) First calculate the price per Share as
1.0 times Total Service Revenue (see * below)
divided by
Total Company Shares Outstanding
=
Price Per Share
* Where "Total Service Revenue" means the
Company's total revenues generated from
consulting service activities for its most
recent calendar year.
(ii) Then calculate the Price as:
Price Per Share
X
Number of Shares to be Purchased
(b) For purposes of Section 11 of this Agreement, the Price for the Shares
to be purchased shall be the greater of Y.57,800,000 or the price calculated by
application of the following formula:
(i) First calculate the price per Share as
1.5 times Total Service Revenue (see * below)
divided by
Total Company Shares Outstanding
=
Price Per Share
* Where "Total Service Revenue" means the
Company's total revenues generated from
consulting service activities for the twelve-
month period ended on the last day of the
month immediately preceding the month in
which notice of its election to exercise the
option is given by MDI.
(ii) Then calculate the Price as:
Price Per Share
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<PAGE> 7
X
Number of Shares to be Purchased
(c) Appropriate adjustment in the Price shall be made for any stock
dividend, stock split or recapitalization by the Company.
13. TERMS OF PAYMENT OF PURCHASE PRICE.
(a) For purposes of Sections 9, 10 and 11 of this Agreement, the "terms"
of payment of the Price of the Shares shall be cash at closing.
(b) The certificate(s) representing the Shares being purchased, duly
endorsed in blank, shall be delivered at closing against the payment of the
Price in immediately available funds.
14. SHARES ISSUED SUBSEQUENT TO THE DATE OF THIS AGREEMENT.
All Shares issued and sold by the Company subsequent to the date of this
Agreement, whether to a present Shareholder(s) or to a new Shareholder(s),
shall be and remain subject to the restrictions of this Agreement.
Furthermore, the parties agree that the Company shall not sell or issue Shares
to any person or company not now a Shareholder, unless such person or company
executes an acceptance of the terms and provisions of this Agreement.
15. TERMINATION OF AGREEMENT.
(a) This Agreement shall terminate upon the occurrence of any of the
following events:
(i) Cessation of the Company's business;
(ii) Bankruptcy, receivership or dissolution of the
Company;
(iii) Whenever there in only one (1) surviving Shareholder
bound by the terms of this Agreement;
or
(iv) The voluntary agreement of all parties then bound
by the terms of this Agreement.
(b) Upon termination of this Agreement, each Shareholder shall surrender
to the Company the certificate(s) for its Shares and the Company shall issue to
it in lieu thereof a new certificate(s) for an equal number of Shares without
the legend required by the provisions of Section 8 hereof.
16. NOTICE.
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<PAGE> 8
Any notice required to be given under the terms of this Agreement shall be
deemed to be validly given when hand delivered or when mailed postage prepaid,
addressed to a party hereto at its address as set forth herein.
17. MISCELLANEOUS.
(a) This Agreement may not be amended or modified except by written
agreement signed by all of the parties hereto.
(b) This Agreement shall be governed by and construed under and in
accordance with the laws of Japan.
(c) This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
MECHANICAL DYNAMICS, INC. INFORMATION SERVICES
INTERNATIONAL - DENTSU, LTD.
By: /s/Michael E. Korybalski By: /s/Ken Ichiriki
----------------------------- ----------------------------
Name: Michael E. Korybalski Name: Ken Ichiriki
Title: President Title: President
Date: February 6, 1997 Date: April 7, 1997
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<PAGE> 1
EXHIBIT 11
MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
in thousands, except share and per share data 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
PRIMARY EARNINGS PER SHARE:
Net income............................................. $ 477 $ 371
========== ==========
Weighted average common shares outstanding............. 5,760,435 3,326,332
Converted preferred shares............................. -- 484,758
Effect of stock options and warrants................... 105,544 67,897
---------- ----------
Pro forma adjusted shares outstanding 5,865,979 3,878,987
========== ==========
Pro forma net income (loss) per common share........... $ 0.08 $ 0.10
========== ==========
FULLY DILUTED EARNINGS PER SHARE:
Net income............................................. $ 477 $ 371
========== ==========
Weighted average common shares outstanding............. 5,760,435 3,326,332
Converted preferred shares............................. -- 484,758
Effect of stock options and warrants................... 105,544 69,867
---------- ----------
Pro forma adjusted shares outstanding 5,865,979 3,880,957
========== ==========
Pro forma net income (loss) per common share........... $ 0.08 $ 0.10
========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001011451
<NAME> MECHANICAL DYNAMICS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 21,172
<SECURITIES> 0
<RECEIVABLES> 5,131
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 27,225
<PP&E> 1,759
<DEPRECIATION> 0
<TOTAL-ASSETS> 30,463
<CURRENT-LIABILITIES> 7,621
<BONDS> 0
167
0
<COMMON> 19,646
<OTHER-SE> 3,029
<TOTAL-LIABILITY-AND-EQUITY> 30,463
<SALES> 0
<TOTAL-REVENUES> 6,701
<CGS> 0
<TOTAL-COSTS> 6,187
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 681
<INCOME-TAX> 204
<INCOME-CONTINUING> 477
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 477
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
