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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: DECEMBER 31, 1996,
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: NONE Name of each exchange on which registered: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON SHARES, NO PAR VALUE
(Title of class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock of the Registrant held by
non-affiliates of the Registrant as of March 1, 1997, computed by reference to
the Nasdaq closing price on such date, was $30,455,888.
The number of outstanding shares of the Registrant's common stock, as of
March 1, 1997, was 5,760,435.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1997 Annual Meeting of Shareholders,
scheduled to be held on May 14, 1997, are incorporated by reference into Part
III.
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MECHANICAL DYNAMICS, INC.
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
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PART I
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Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . 10
PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . 10
Item 6. Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. . 11
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . 16
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . 32
PART III
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Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . 32
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . 33
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . 33
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . 34
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
INDEX TO EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
Since Mechanical Dynamics, Inc. ("MDI" or the "Company") was incorporated in
Michigan in 1977, the Company has developed, marketed and supported 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. Mechanical Dynamics' software helps
engineers and designers create optimal designs before the physical testing
process begins, improving the engineer's or designer's ability to create a
design that will meet or exceed the initial product specifications. The use of
the Company's virtual prototyping software can reduce the requirement of
building and testing numerous physical prototypes and can lead to significant
cost savings as well as critical reductions in time-to-market.
On April 1, 1994, the Company acquired five European entities that previously
had distributed the Company's products in Europe and are now wholly-owned
subsidiaries: Mechanical Dynamics GmbH, a German corporation; Mechanical
Dynamics Sarl, a French corporation; Mechanical Dynamics International Ltd., a
United Kingdom corporation; Mechanical Dynamics Sweden AB, a Swedish
corporation; and Mechanical Dynamics Italy srl, an Italian corporation.
Mechanical Dynamics Italy srl owns a majority interest in MEC.Design srl, an
Italian corporation. Pursuant to the terms of the acquisition of the European
subsidiaries, the Company paid to the subsidiaries' shareholders stock of the
Company as well as cash. See Note 2 of Notes to Consolidated Financial
Statements.
In February 1997, the Company established Mechanical Dynamics Japan K.K., a
wholly-owned subsidiary located in Tokyo, Japan. Mechanical Dynamics Japan K.K.
will provide consulting and other professional services directly to customers
in Japan, and will support the Company's Japanese distributor, Information
Services International-Dentsu, Ltd. ("ISI-Dentsu"), in marketing the Company's
software in Japan. The Company has agreed to sell ISI-Dentsu a minority
interest in Mechanical Dynamics Japan K.K., and it is currently anticipated
that such sale will happen in April 1997.
ADAMS(R) and the Company's logo are registered trademarks of the Company.
ADAMS/Android, ADAMS/Animation, ADAMS/Car, ADAMS/Driver, ADAMS/FEA, ADAMS/IGES,
ADAMS/Linear, ADAMS/Rail, ADAMS/Solver, ADAMS/Tire, ADAMS/Vehicle, ADAMS/View
and MECHANISM/Pro are trademarks of the Company. All rights reserved. All other
trade names and trademarks appearing in this Form 10-K are the property of
their respective holders.
PRODUCTS
MDI develops, markets and supports virtual prototyping software packages
capable of simulating the many varied and complex component interactions and
operating environments that companies face when designing their products. The
Company's primary software line is the ADAMS Professional Series. The principal
product in this line, the ADAMS Full Simulation Package, is comprised of
ADAMS/Solver and ADAMS/View, and can be used as a self-contained software
package or with additional modules developed by the Company as well as with
third-party software. In addition, certain original equipment manufacturers
("OEM") license the Company's kinematic motion simulation software in order to
embed the Company's software in the OEM's design software packages. The U.S.
list price for the ADAMS Full Simulation Package is approximately $24,000 per
license depending upon configuration. The U.S. list prices for the Company's
additional software products typically range from $2,000 to $15,000.
ADAMS and the modular packages of ADAMS software are available on a number of
platforms, including UNIX-based workstations and servers from Silicon Graphics,
Hewlett-Packard, Sun Microsystems, IBM and Digital Equipment. ADAMS is also
available on Cray and NEC supercomputers and near supercomputers. During 1996,
the Company developed ADAMS for Intel Pentium-based PCs running the DOS and
Microsoft Windows 95 and NT operating systems.
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ADAMS PROFESSIONAL SERIES
Full Simulation Package
- ADAMS/Solver is the underlying solution "engine." ADAMS/Solver
automatically formulates and solves the equations of motion to provide complete
kinematic, static and dynamics analysis of mechanical systems.
- ADAMS/View is an interactive graphical environment for the full ADAMS
product line. ADAMS/View combines simple iconic, point-and-click operation with
advanced model-building, simulation, animation and xy plotting capabilities.
Modeling Options
- ADAMS/Vehicle is used for the design and analysis of automobile and truck
suspensions or for simulating full vehicle dynamics. A user chooses from a wide
variety of suspension templates to quickly and easily build vehicle models.
- ADAMS/Tire is a comprehensive set of tools for simulating the complex force
interactions between rubber tires and driving surfaces. This can be important
input for understanding vehicle behavior under a variety of conditions.
- ADAMS/Driver allows the user to add the element of human driver response to
vehicle simulations. ADAMS/Driver can simulate the actions and reactions of a
vehicle's operator under a variety of driving conditions.
- ADAMS/Android allows a user to model and simulate human bodies in motion.
ADAMS/Android is used to study the complex dynamic interaction between humans
and mechanical systems, without risking the comfort and safety of live
subjects.
Solution and Integration Options
- ADAMS/FEA automates the exchange of data between ADAMS and finite element
analysis ("FEA") software, including ANSYS and MSC/NASTRAN. This two-way
interface provides for accurate loading conditions for FEA and a more complete
understanding of flexible effects on mechanical systems.
- ADAMS/IGES provides an industry-standard, two-way interface for exchanging
model geometry between ADAMS and many other CAD/CAM/CAE packages. This saves
time in data transfer, while enhancing the accuracy and realism of mechanical
system simulations.
- ADAMS/Linear simplifies the non-linear equations of motion calculated by
ADAMS. Having such data in linear form can significantly enhance the ability to
study the stability and vibratory behavior of mechanical system models.
ADAMS/Linear can also provide an easy link to popular control system design
packages such as MATRIXx and MATLAB.
Visualization Option
- ADAMS/Animation allows a user to see the complete system in motion -- in
real time, fully shaded and rendered. ADAMS/Animation checks and reports
potential collision of parts and components and shows important measurements on
screen. ADAMS/Animation also allows for multiple light sources, texture
mapping, detailed color specifications and multiple perspectives. These enhance
the understanding of the design and can result in more successful design
reviews.
Industry-specific packages
- ADAMS/Car was developed by the Company in collaboration with AB Volvo, Audi
AG, BMW, Nissan Motor Co., Renault and Rover Group P.L.C. ADAMS/Car is a
special version of ADAMS designed specifically for advanced vehicle simulation.
Embedded within the software are the specialized design and analytical
expertise of
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automotive industry leaders. A custom menu-driven user interface highlights
capabilities familiar to vehicle designers so customers can use ADAMS/Car with
little formal training.
- ADAMS/Rail was developed by the Company in collaboration with Dutch Rail
and provides virtual prototyping capabilities specifically tailored to the
needs of the worldwide railcar manufacturing industry. The software combines
specialized railcar design and analytical know-how with custom menus and
functions developed specifically for railcar engineers.
ADAMS EXPLORER SERIES
- ADAMS/Explorer is a product designed for the Windows 95 environment that is
currently under development at the Company. ADAMS/Explorer is targeted to the
design engineer and the non-engineer user, particularly in small- and
medium-sized companies, and is a subset of the ADAMS Professional Series.
ADAMS CAD-EMBEDDED PRODUCTS
- CAD-Embedded Products are products specifically designed for the CAD/CAM
environments. Assemblies created within the Company's partners' software
environments are converted into realistic, fully three-dimensional mechanical
system models. These software environments then verify and evaluate motion
paths, locate lock-up positions, detect interferences, establish work-space
envelopes and calculate joint reaction forces.
- OEM Products are kinematic motion simulation products that are embedded in
OEMs' design software packages. The Company has entered into license agreements
with several OEMs, including Structural Dynamics Research Corporation,
EDS/Unigraphics, Computervision, Bentley Systems, Intergraph and Applicon,
under which the OEMs are licensed to embed the Company's products in the OEMs'
software packages. These products provide limited virtual prototyping
capabilities, and can be upgraded by licensing ADAMS/Solver directly from the
Company.
- MECHANISM/Pro is a program specifically designed for Parametric Technology
Corp.'s ("PTC") Pro/ENGINEER environment. MECHANISM/Pro converts assemblies
created within PTC's Pro/ASSEMBLY software into realistic, fully
three-dimensional mechanical system models. MECHANISM/Pro can verify and
evaluate motion paths, locate lock-up positions, detect interferences,
establish work-space envelopes and calculate joint reaction forces.
- During 1996, the Company reached agreement with a consortium of major
automotive manufacturers to create new software designed to facilitate the
exchange of data between ADAMS and the widely-used CATIA computer-aided design,
manufacturing, and engineering (CAD/CAM/CAE) package from Dassault Systemes.
This product is currently under development at the Company.
- Similar embedded ADAMS simulation capabilities for the PC-based PT/Modeler
from Parametric Technology Corp. and SolidWorks 97 from SolidWorks Corp. are
currently under development at the Company.
SERVICES
The Company provides consulting, training and technical support services to
customers in connection with a wide range of product design and engineering
projects. MDI's primary objectives with regard to its services include: (1)
providing total solutions to its customers' problems; (2) leveraging software
sales; (3) enhancing customer loyalty and repeat and renewal business; (4)
growing the services business of the Company profitably; (5) aggressively
exploring and penetrating new markets; and (6) obtaining customer feedback on
its products.
The Company strives to identify key companies within various industries with
whom it seeks to develop close working relationships. The Company seeks to
foster technological partnerships with these companies by providing a
comprehensive service package, which addresses the particular virtual
prototyping needs of the companies. By doing this, MDI provides a total
solution for the customer, which can lead to increased acceptance of virtual
prototyping in the applicable industry.
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In addition to its consulting services, the Company also provides training to
enable its customers to more easily integrate virtual prototyping technology
into their design and quality control processes.
The Company's services staff provides these services on either a time and
materials or a fixed fee basis depending on the project and the requirements of
the customer. Contract fees range from a few thousand dollars to several
hundred thousand dollars depending upon the scope of the project, and contract
durations range from a few weeks to several years.
A critical component of MDI's strategy is to provide a wide range of customer
support services. These services include hotline support and on-site support
and training. Product support is provided pursuant to renewable annual
maintenance contracts. Customers who purchase maintenance agreements receive
product enhancement releases and hotline support at no additional charge.
On-site support and training are priced separately. Approximately 16.2%, 16.3%,
and 17.5% of the Company's total revenue was realized from maintenance
contracts in 1996, 1995, and 1994, respectively.
CUSTOMERS
The Company's customers include companies in a wide variety of industries.
Historically, the Company's largest customers have been automobile
manufacturers and automotive suppliers. During 1996, 1995, and 1994,
automotive-related customers accounted for approximately 48.1%, 50.7% and 52.2%
of the Company's total revenue, respectively. Ford Motor Company accounted for
approximately 11.8%, 13.2%, and 13.4% of the Company's total revenue in 1996,
1995, and 1994, respectively. No other customer accounted for greater than 10%
of the Company's total revenue in such periods.
SALES AND MARKETING
The Company markets its products through direct sales in North America and in
Europe, approximately 15 value-added resellers throughout North America, a
group of international distributors in over 20 countries and through reselling
alliances with certain integrated mechanical CAD/CAM/CAE software vendors. The
Company conducts sales activities from its headquarters in Ann Arbor, Michigan,
sales offices in Atlanta, GA; Austin, TX; Chicago, IL; Cincinnati, OH; Los
Angeles, CA; Londonderry, NH; Phoenix, AZ; and Victor, NY, as well as its
European subsidiaries' offices in England, France, Germany (three offices),
Italy (two offices) and Sweden. The Company employs engineers and technically
proficient salespersons capable of serving the technology needs of current and
prospective customers' engineering, design and manufacturing staffs.
The Company has formed strategic alliances with several leading hardware
vendors, including Hewlett-Packard, Silicon Graphics and Sun Microsystems.
Through these strategic alliances, the Company and the vendor participate in
various projects which enhance both the visibility and acceptance of the
Company's products, such as joint presentations to customers and the trade
press, joint advertising and promotion, conference presentations and displays.
The Company also has alliances with vendors of complementary computer-aided
engineering technology, such as ANSYS, Inc., Integrated Systems, Inc., The
MacNeal-Schwendler Corporation and The Mathworks, Inc. These relationships
entail collaborative development to support interfaces between the software
products of the Company and each partner, as well as cooperative marketing and
selling activity. By working with these vendors, the Company seeks to satisfy
the needs of its customers across a wide range of computer-aided engineering
applications. The Company and its partners jointly participate in joint
promotional activities, trade shows, user conferences, customer presentations
and customer proposals.
The Company has also formed OEM relationships with several CAD/CAM companies,
including Applicon, Inc., Bentley Systems, Inc., Computervision Corporation,
Dassault Systemes, Electronic Data Systems Corporation (Unigraphics Division),
Intergraph Corporation, Parametric Technology Corp., SolidWorks Corp. and
Structural Dynamics Research Corporation. Through these alliances, the Company
collaborates with its partners to develop and support embedded, add-on software
modules for each CAD environment. These CAD-embedded modules enable CAD users
to model and simulate mechanical systems and interface with the Company's full
ADAMS product line.
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The Company believes that strategic alliances are important to its long-term
success and intends to continue to pursue such alliances in the future.
International revenue (i.e., revenue from sales outside of North America)
accounted for approximately 61.9%, 62.7% and 54.4% of the Company's total
revenue in 1996, 1995 and 1994, respectively. In Asia, the Company primarily
markets its products and services through contractual relationships with
distributors in Japan, Singapore, Korea, Taiwan, India and China. The Company's
largest distributor, ISI-Dentsu, is located in Japan and accounted for
approximately 16.5%, 19.3% and 20.7% of the Company's total revenue in 1996,
1995 and 1994, respectively.
The Company generally prices its software products and services in local
currencies in Europe and Japan. The strengthening of the dollar in 1996,
relative to the European and Japanese currencies, negatively affected 1996
international revenue by approximately $1.2 million. 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 sales will continue to account for a
significant portion of its total revenue in future periods. The Company intends
to continue to expand its operations outside of the United States, which will
require significant management attention and financial resources. International
operations are subject to inherent risks, including unexpected changes in
regulatory requirements, tariffs and taxes, difficulties in staffing and
managing foreign operations, longer payment cycles, greater difficulty in
accounts receivable collection, compliance with applicable export licensing
requirements and other trade barriers and political and economic instability.
Moreover, gains and losses on the conversion to U.S. dollars of receivables and
payables arising from international operations may contribute to fluctuations
in the Company's results of operations. The Company does not currently engage
in hedging transactions. In addition, if for any reason exchange or price
controls or other restrictions on foreign currencies were imposed, the
Company's business, financial condition and results of operations could be
materially adversely affected. Currency exchange fluctuations in countries in
which the Company licenses its products in U.S. dollars could have a material
adverse effect on the Company's business, financial condition and results of
operations by resulting in pricing that is not competitive with products priced
in local currencies. In addition, the laws of certain countries do not protect
the Company's products and intellectual property rights to the same extent as
do the laws of the United States. There can be no assurance that any of these
factors will not have a material adverse effect on the Company's future
international operations and sales and, consequently, on the Company's
business, financial condition and results of operations.
RESEARCH AND DEVELOPMENT
The Company's success depends in large part upon its ability to enhance
current products and to develop and introduce new products on a timely and
cost-effective basis. The Company's current software development efforts are
focused on developing additional products and services to complement its core
competencies of developing, marketing and supporting mechanical system modeling
and simulation software packages. The Company's product development efforts
also emphasize enhancement, integration and extensibility of its virtual
prototyping software.
The Company has historically released one new version of its software to its
customers per year and intends to continue such releases. The Company also
provides periodic releases to its OEM software partners. As part of this
release process, the Company continually communicates with its customers and
partners and solicits comments for improved ease of use and general customer
satisfaction.
The Company's software developers work as a team with the Company's sales,
marketing and consulting personnel to achieve a robust, high-quality product
line.
The Company also sponsors and maintains a network of academic and commercial
research affiliates to promote recognition and commercialization of applicable
emerging technology. Some of the technology areas which have recently been
explored include: kinematics, elastodynamics, numerical methods, design
sensitivity, design-of-
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experiments, optimization, symbolic computing, advance graphics and
visualization, user interfaces, tire dynamics, biomechanics, ergonomics,
controls design and hydraulics.
As of December 31, 1996, the Company's research and development group
consisted of 43 full-time employees. During 1996, 1995, and 1994, the Company's
research and development expenses were approximately $3.7 million, $2.9
million, and $2.4 million, respectively. The Company anticipates that it will
commit substantial resources to research and development in the future.
The virtual prototyping industry is characterized by rapid technological
changes, frequent new product introductions and evolving industry standards
that may render existing products and services obsolete. Consequently, to
maintain its competitive position, the Company must enhance its existing
software products and develop and introduce new products on a timely basis. In
addition, in order to maintain and broaden the market for its software
products, the Company must support a variety of computer systems and graphics
devices. There can be no assurance that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of these products, or that such new products and
product enhancements will adequately meet the requirements of the marketplace
and achieve market acceptance. If the Company is unable to develop and
introduce products in a timely manner in response to changing market conditions
or customer requirements, the Company's business, financial condition and
results of operations would be materially adversely affected.
BACKLOG
The Company typically ships its products within 30 days after acceptance of a
customer purchase order and execution of a software license agreement.
Accordingly, the Company does not believe that its backlog at any particular
point in time is indicative of future revenue levels.
COMPETITION
The markets for the Company's products and services are highly competitive
and subject to rapid change. The Company believes the principal competitive
factors in this market are product quality, ease of use, quality of support,
performance and price, functionality and features, ease of integration with
customers' design processes, strategic alliances and vendor and product
reputation. In general, the Company's current competition comes from two
sources: other virtual prototyping software vendors, including Parametric
Technology Corp., and the internal software development groups of its current
or potential customers. Many companies have their own software development
groups that historically have developed their own software design tools. This
has required the Company and other vendors to compete against these internal
groups to sell their products into these companies. A number of the Company's
competitors have longer operating histories, greater financial, technical,
sales, marketing and other resources, greater name recognition, more extensive
distribution and sales networks and a larger, more established customer base.
Among the Company's current and potential competitors are also a number of
large hardware and software companies that may develop or acquire products that
compete with the Company's products. Current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products to address the needs of
the Company's prospective customers. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. Increased competition is likely to result in price
reductions, reduced operating margins and loss of market share, any of which
could materially adversely affect the Company's business, results of operations
and financial condition. There can be no assurance that the Company will be
able to compete successfully in the future or that competitive pressures will
not have a material adverse effect the Company's business, financial condition
and results of operations.
PROPRIETARY RIGHTS
The Company's success depends in large part upon its proprietary software
technology. The Company currently relies on trade secret, copyright and
trademark laws, and license agreements with all of its customers to protect its
proprietary rights in its software products. The Company also ships its
software with either an encoded password scheme or a security device. The
Company's software copies are locked to a specific central processing unit and
contain codes that will prohibit the user from running the software after a
certain date. The Company generally enters
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into proprietary information and confidentiality agreements with its employees
and distributors, and limits access to and distribution of its software,
documentation and other proprietary information. The Company generally does not
license or release the source code for its proprietary software to third
parties. Despite these precautions, there can be no assurance that a third
party will not copy or otherwise obtain and use the Company's products or
technology without authorization, or develop similar or superior technology
independently. The Company distributes demonstration copies of its products in
North America, Europe and Asia pursuant to "shrink-wrap" licenses. There can be
no assurance that such licenses are enforceable. In addition, effective
copyright and trade secret protection may be unavailable or limited in certain
foreign countries. Litigation may be necessary in the future to enforce the
Company's intellectual property rights, to protect the Company's trade secrets,
to determine the validity and scope of the proprietary rights of others or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could have a
material adverse effect on the Company's business, financial condition and
results of operations. Although the Company believes that its products do not
infringe on the proprietary rights of third parties, and although the Company
has received no communications from third parties alleging the infringement of
the proprietary rights of such parties, there can be no assurance that
infringement claims will not be asserted against the Company in the future or
that any such claims will not require the Company to enter into costly
litigation. Irrespective of the validity or the successful assertion of such
claims, any such litigation could result in substantial costs and a significant
diversion of management's attention and resources, and these results as well as
any adverse judgment that might be rendered could have a material adverse
effect on the Company's business, financial condition and results of
operations. In addition, if any claims or actions are asserted against the
Company, the Company may choose or be required to obtain a license under a
third party's intellectual property rights. There can be no assurance that
under such circumstances a license would be available upon reasonable terms or
at all.
Certain technology used by the Company's products is licensed from third
parties, generally on a nonexclusive basis. The Company believes that there are
alternative sources for each of the material components of technology licensed
by the Company from third parties. However, the termination of any of such
licenses, the failure of the third party licensors to adequately maintain or
update their products, or the substantial increase in the license fee
associated with such licenses, could result in delay in the Company's ability
to deliver certain of its products while it seeks to implement technology
offered by alternative sources and may adversely affect the Company's business,
financial condition and results of operations. Any required replacement
licenses could prove costly. Also, any such delay, to the extent it becomes
extended or occurs at or near the end of a quarter, could result in a material
adverse effect on the Company's quarterly results of operations. While it may
be necessary or desirable in the future to obtain other licenses relating to
one or more of the Company's products or relating to current or future
technologies, there can be no assurance that the Company will be able to do so
on reasonable terms or at all.
EMPLOYEES
As of December 31, 1996, the Company had 160 employees, consisting of 48 in
engineering services, 49 in sales and marketing, 43 in research and development
and 20 in general and administrative capacities. Of these, 105 are located at
the Company's headquarters in Ann Arbor, Michigan, 14 are located at the
Company's offices in Arizona, Georgia, Texas, Illinois, Ohio, California, New
Hampshire and New York, and 41 are located at the Company's European
subsidiaries. None of the Company's employees is represented by a labor union
or is subject to a collective bargaining agreement. The Company believes that
its relations with its employees are good.
The Company's success depends in large part upon the continued service of its
key technical and senior management personnel. The Company's success also
depends on its continuing ability to attract and retain highly qualified
technical, sales and marketing, and managerial personnel. Competition for such
personnel is intense, and there can be no assurance that the Company can retain
its key managerial and technical employees or that it can attract, assimilate
or retain other highly qualified personnel in the future. If the Company is
unable to hire the necessary technical personnel, the development of new
products could be impaired. The Company's inability to attract, assimilate or
retain personnel in the future on a timely basis could have a material adverse
effect on the Company's business, financial condition and results of
operations.
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ITEM 2. PROPERTIES
The Company occupies approximately 36,000 square feet of space at its
headquarters in Ann Arbor, Michigan under a lease expiring in 2000 (subject to
the Company's right to extend the lease for one successive term of five years).
The Company also leases sales offices in Texas, Illinois, Ohio, California, New
Hampshire, New York, France, Sweden, England, Germany and Italy. The Company
believes that its existing facilities are adequate for its current needs and
that suitable additional space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various ordinary or routine litigation incidental
to its business, none of which, in the opinion of management, is deemed to be
material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the last quarter
of the year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the Nasdaq National Market under the
trading symbol "MDII." The range of high and low sale prices for the Company's
common stock on that market for each of the quarters since the Company's
initial public offering in May 1996 are as follows:
<TABLE>
<CAPTION>
MARKET PRICES
---------------------------
HIGH LOW
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Year ended December 31, 1996:
Second quarter (beginning May 14, 1996) . . . . . . . . . . . . . . . $20.88 $14.25
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.13 11.50
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.13 13.50
</TABLE>
As of December 31, 1996, there were 159 shareholders of record of the
Company's common stock. This may not be an accurate indication of the total
shareholders of the Company as of December 31, 1996, since many nominees hold
the Company's shares in street name for the beneficial owners.
The Company has never declared or paid cash dividends on its capital stock
and anticipates that, for the foreseeable future, it will continue to retain
any earnings for use in the operation of its business.
10
<PAGE> 11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of income data for the years ended December 31,
1996, 1995, 1994 and 1993 and the consolidated balance sheet data as of
December 31, 1996, 1995 and 1994 presented below are derived from the Company's
Consolidated Financial Statements audited by Arthur Andersen LLP. The
consolidated statement of income data for the year ended December 31, 1992 and
the consolidated balance sheet data as of December 31, 1993 and 1992 presented
below have been derived from unaudited financial statements that, in
management's opinion, include all necessary adjustments (consisting only of
normal recurring adjustments) to present fairly the financial condition and
results of operations for such periods and dates.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
in thousands, except per share data 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Revenue . . . . . . . . . . . . . . . . . . . . . $25,383 $21,256 $16,267 $14,874 $11,568
Operating income (loss) . . . . . . . . . . . . . 2,503 1,666 635 1,804 (281)
Net income (loss) . . . . . . . . . . . . . . . . 2,071 1,381 450 1,354 (686)
Accretion of value of warrants . . . . . . . . . -- 234 664 -- --
Net income (loss) available to common
shareholders . . . . . . . . . . . . . . . . . 2,071 1,147 (214) 1,354 (686)
Pro forma net income (loss) per common share . . 0.41 0.30 (0.06) 0.38 (0.20)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------
in thousands 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents . . . . . . . . . . $20,570 $ 1,141 $ 817 $ 60 $ 19
Total assets . . . . . . . . . . . . . . . . 29,812 9,338 7,334 4,626 2,441
Long-term debt, less current portion . . . . -- -- 79 67 395
Redeemable common stock . . . . . . . . . . . 167 859 1,191 -- --
Shareholders' equity (deficit) . . . . . . . 22,185 1,334 (77) (236) (1,627)
</TABLE>
ITEM 7. 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 consolidated financial statements and the notes thereto included
in Item 8 of this Form 10-K.
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.
Actualfuture results and trends may differ materially depended 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
11
<PAGE> 12
new products and product enhancements by 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 and included in Item 1 of this Form 10-K entitled
"Business."
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.
RESULTS OF OPERATIONS
REVENUE
<TABLE>
<CAPTION>
dollars in thousands 1996 % CHANGE 1995 % CHANGE 1994
<S> <C> <C> <C> <C> <C>
Software licenses . . . . . . . . $ 14,590 18.3% $ 12,338 30.2% $ 9,478
% of total revenue . . . . . . 57.5% 58.0% 58.3%
Services . . . . . . . . . . . . $ 10,793 21.0% $ 8,918 31.4% $ 6,789
% of total revenue . . . . . . 42.5% 42.0% 41.7%
Total revenue . . . . . . . . . . $ 25,383 19.4% $ 21,256 30.7% $16,267
</TABLE>
The Company's total revenue increased 19.4% to $25.4 million in 1996 from
$21.3 million in 1995. The growth in revenues resulted from increased sales of
the Company's ADAMS Full Simulation Package, as well as other related software
products and services. During 1996, the Company achieved revenue growth in all
sales geographies. A summary of the Company's revenue by geographic area is
presented in Note 7 of Notes to Consolidated Financial Statements
Revenue from international customers accounted for approximately 61.9%, 62.7%
and 54.4% of the Company's total revenue in 1996, 1995 and 1994, respectively.
The Company expects that international sales will continue to account for a
significant portion of its total revenue in future periods. Outside of North
America and Europe, the Company relies primarily on distributors and sales
representatives for the licensing and support of its products. Distributors and
sales representatives accounted for approximately 27.6%, 25.9% and 29.2% of the
Company's total revenue in 1996, 1995 and 1994, respectively. The Company's
Japanese distributor, ISI-Dentsu, accounted for approximately 16.5%, 19.3% and
20.7% of the Company's total revenue in 1996, 1995 and 1994, respectively.
The Company generally prices its software products and services in local
currencies in Europe and Japan. The strengthening of the dollar in 1996,
relative to the European and Japanese currencies, negatively affected 1996
international revenue by approximately $1.2 million. 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.
Revenue from automotive-related customers accounted for approximately 48.1%,
50.7% and 52.2% of the Company's total revenue in 1996, 1995 and 1994,
respectively. Sales to Ford Motor Company accounted for approximately 11.8%,
13.2% and 13.4% of the Company's total revenue in 1996, 1995 and 1994,
respectively. No other customer accounted for greater than 10% of the Company's
total revenue in such periods.
12
<PAGE> 13
Software licenses revenue consists primarily of license fees for the
Company's software products and, to a lesser extent, license fees from other
companies' software products licensed through the Company's European
subsidiaries. Software licenses revenue grew 18.3% over 1995 to approximately
$14.6 million in 1996. The increase resulted from a higher volume of software
licenses sold worldwide.
Services revenue consists of revenue from software maintenance agreements and
professional services, including consulting, training and funded research and
development. Services revenue grew 21.0% over 1995 to approximately $10.8
million in 1996. Both the software maintenance and the professional service
components of services revenue experienced solid growth in 1996. The overall
increase in services revenue reflects the Company's continued emphasis on
providing total solutions to its customers.
COST OF REVENUE
<TABLE>
<CAPTION>
dollars in thousands 1996 % CHANGE 1995 % CHANGE 1994
<S> <C> <C> <C> <C> <C>
Cost of software licenses . . . . $ 606 (16.8%) $ 728 27.7% $ 570
% of software licenses revenue 4.2% 5.9% 6.0%
Cost of services . . . . . . . . $6,183 19.0% $5,194 35.3% $ 3,838
% of services revenue . . . . . 57.3% 58.2% 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 decreased
16.8% from 1995 to approximately $606,000 in 1996. The decrease was primarily
due to lower royalties paid to third parties whose products were licensed
through the Company's European subsidiaries. The 27.7% increase in cost of
software licenses revenue in 1995 over 1994 resulted from increased costs of
documentation, media and distribution associated with the increased volume of
shipments of the Company's products.
Cost of services includes payroll and overhead expenses attributable to
hotline support, consulting, training and funded research and development. Cost
of services revenue grew 19.0% over 1995 to approximately $6.2 million in 1996.
The increase resulted from the hiring of additional employees to support the
growth in services provided to the Company's customers during 1996.
OPERATING EXPENSES
<TABLE>
<CAPTION>
dollars in thousands 1996 % CHANGE 1995 % CHANGE 1994
<S> <C> <C> <C> <C> <C>
Sales and marketing . . . . . . . $ 9,672 19.1% $ 8,118 25.6% $ 6,465
% of total revenue . . . . . . 38.1% 38.2% 39.7%
Research and development . . . . $ 3,669 24.8% $ 2,940 20.4% $ 2,442
% of total revenue . . . . . . 14.5% 13.8% 15.0%
General and administrative . . . $ 2,750 5.4% $ 2,610 12.6% $ 2,317
% of total revenue . . . . . . 10.8% 12.3% 14.2%
</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 increases in sales and marketing expenses in
1996 and 1995 resulted from the Company's continued expansion of its worldwide
sales and marketing organization, as well as the increase in commissions paid
on the higher level of software licenses revenue. The Company expects to
continue to expand its sales organization in the future to meet the growing
demand for its products and services.
13
<PAGE> 14
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 increases in research and development expenses in 1996 and 1995
primarily resulted from an increase in personnel and related costs in support
of expanded product development efforts. Funded research and development
expenses, which are not included in research and development expenses but are
included in cost of services revenue, were 3.6%, 3.2%, and 2.2% of total
revenue in 1996, 1995, and 1994, respectively. The majority of the revenue
received and expenses incurred for funded research and development was directly
related to projects associated with the ongoing development of the Company's
ADAMS/Car product. 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
grew 5.4% over 1995 to approximately $2.8 million in 1996, in support of the
Company's growing operations worldwide. In 1995, general and administrative
expenses grew 12.6% to approximately $2.6 million. This increase primarily
resulted from the addition of administrative infrastructure in connection with
the Company's acquisition of its European subsidiaries in April 1994. 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)
<TABLE>
<CAPTION>
dollars in thousands 1996 % CHANGE 1995 % CHANGE 1994
<S> <C> <C> <C> <C> <C>
Other income (expense) $ 536 > 100% $ 9 (66.7%) $ 27
% of total revenue 2.1% -- 0.2%
</TABLE>
Other income (expense) consists of net interest income (expense), foreign
currency transaction gain (loss) and gain (loss) on the disposal of property
and equipment. Net interest income (expense) was $556,000, $12,000, and
($57,000) in 1996, 1995 and 1994, respectively. Interest income increased
significantly in 1996, primarily as a result of interest earned on the $17.8
million in net proceeds raised from the Company's initial public offering in
May 1996. Foreign currency transaction gain (loss) amounted to ($31,000),
($31,000) and $80,000 in 1996, 1995 and 1994, respectively. The Company does
not currently engage in any hedging activities to protect itself against
foreign currency transaction gains and losses. Gain (loss) on the disposal of
property and equipment was $11,000, $28,000 and $4,000 in 1996, 1995 and 1994,
respectively.
PROVISION FOR INCOME TAXES
The Company's effective income tax rates were 31.9%, 17.6%, and 32.0% for
1996, 1995, and 1994, respectively. The differences between the consolidated
tax provision and the income tax provision calculated at the United States
Federal statutory rate are summarized in Note 4 of Notes to Consolidated
Financial Statements. In 1996, the difference between the effective and
statutory federal rate was primarily due to the recognition of the value of
certain tax credits and deferred assets, and, to a lesser extent, the benefit
of tax exempt interest income.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $20.6 million at December 31, 1996, compared
to $1.1 million at December 31, 1995. The increase in cash and cash equivalents
of $19.5 million was primarily due to the $17.8 million in net proceeds raised
from the Company's initial public offering in May 1996, and to a lesser extent,
the $2.2 million in cash flow generated from operations. These increases were
partially offset by the $894,000 in cash used to purchase property and
equipment during 1996.
At December 31, 1996, the Company's principal commitments consisted of
obligations under operating leases for facilities and equipment, including
approximately $1.6 million in payments due under noncancelable operating leases
during 1997. The Company had no borrowings under long-term debt arrangements at
December 31, 1996.
14
<PAGE> 15
In December 1996, the Company entered into an agreement with its principal
bank for an unsecured $3.0 million line of credit. No borrowings were
outstanding under this agreement as of December 31, 1996. 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
approximately $660,000. Approximately $45,000 in borrowings were outstanding
under these facilities as of December 31, 1996.
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 1, 1997, no shares of common stock had been repurchased.
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 1996 and intends to continue its policy of retaining earnings to
finance future growth.
15
<PAGE> 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Mechanical Dynamics, Inc.:
We have audited the accompanying consolidated balance sheets of MECHANICAL
DYNAMICS, INC. (a Michigan corporation) and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of income, shareholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Mechanical
Dynamics, Inc. and its subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Detroit, Michigan
January 22, 1997
16
<PAGE> 17
MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
in thousands, except share and per share data 1996 1995
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
-------
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,570 $ 1,141
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,019 4,423
Prepaid and deferred expenses . . . . . . . . . . . . . . . . . . . . . . . . . 1,074 936
---------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,663 6,500
---------- ---------
Net property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,643 1,268
---------- ---------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,506 1,570
---------- ---------
$ 29,812 $ 9,338
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Borrowings under line of credit . . . . . . . . . . . . . . . . . . . . . . . . 45 82
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 762 620
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,982 2,777
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,671 3,666
---------- ---------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 7,460 7,145
---------- ---------
Redeemable common stock:
Redeemable common stock, 20,843 and 0 shares issued and outstanding as of December
31, 1996 and 1995, respectively . . . . . . . . . . . . . . . . . . . . . . . 167 --
Redeemable Class A common stock, 0 and 107,329 shares issued and outstanding as of
December 31, 1996 and 1995, respectively . . . . . . . . . . . . . . . . . . . -- 859
---------- ---------
Total redeemable common stock . . . . . . . . . . . . . . . . . . . . . . . 167 859
---------- ---------
Shareholders' equity:
Common stock, no par value, 15,000,000 shares authorized, 5,739,592 and 0 shares
issued and outstanding as of December 31, 1996 and 1995, respectively . . . . 19,583 --
Preferred stock, no par value, 1,000,000 shares authorized, 0 shares issued and
outstanding as of December 31, 1996 and 1995, respectively . . . . . . . . . . -- --
Convertible preferred stock, $.002 par value, no shares authorized, 0 and 354,932
shares issued and outstanding as of December 31, 1996 and 1995, respectively . -- 265
Class A common stock, $.004 par value, no shares authorized, 0 and 2,027,625
shares issued and outstanding as of December 31, 1996 and 1995, respectively . -- 6
Class B common stock, $.004 par value, no shares authorized, 0 and 1,167,615
shares issued and outstanding as of December 31, 1996 and 1995, respectively . -- 3
Class A common stock warrants . . . . . . . . . . . . . . . . . . . . . . . . . -- 449
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 114
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,546 475
Subscriptions receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (10)
Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . . 56 32
---------- ----------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . 22,185 1,334
---------- ---------
$ 29,812 $ 9,338
========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
17
<PAGE> 18
MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
in thousands, except share and per share data 1996 1995 1994
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Software licenses . . . . . . . . . . . . . . . . . . . . . $ 14,590 $ 12,338 $ 9,478
Services . . . . . . . . . . . . . . . . . . . . . . . . . . 10,793 8,918 6,789
---------- ---------- ---------
Total revenue . . . . . . . . . . . . . . . . . . . . . 25,383 21,256 16,267
---------- ---------- ---------
Cost of revenue:
Software licenses . . . . . . . . . . . . . . . . . . . . . 606 728 570
Services . . . . . . . . . . . . . . . . . . . . . . . . . . 6,183 5,194 3,838
---------- ---------- ---------
Total cost of revenue . . . . . . . . . . . . . . . . . 6,789 5,922 4,408
---------- ---------- ---------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . 18,594 15,334 11,859
---------- ---------- ---------
Operating expenses:
Sales and marketing . . . . . . . . . . . . . . . . . . . . 9,672 8,118 6,465
Research and development . . . . . . . . . . . . . . . . . . 3,669 2,940 2,442
General and administrative . . . . . . . . . . . . . . . . . 2,750 2,610 2,317
---------- ---------- ---------
Total operating expenses . . . . . . . . . . . . . . . . 16,091 13,668 11,224
---------- ---------- ---------
Operating income . . . . . . . . . . . . . . . . . . . . . . . 2,503 1,666 635
---------- ---------- ---------
Other income (expense) . . . . . . . . . . . . . . . . . . . . 536 9 27
---------- ---------- ---------
Income before income taxes . . . . . . . . . . . . . . . . . . 3,039 1,675 662
Provision for income taxes . . . . . . . . . . . . . . . . . . 968 294 212
---------- ---------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,071 $ 1,381 $ 450
========== ========== =========
CALCULATION OF NET INCOME (LOSS) PER SHARE
------------------------------------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,071 $ 1,381 $ 450
Accretion of value of warrants . . . . . . . . . . . . . . . -- 234 664
---------- ---------- ---------
Net income (loss) available to common shareholders . . . . . . $ 2,071 $ 1,147 $ (214)
========== ========== =========
Pro forma net income (loss) per common share . . . . . . . . . $ .41 $ .30 $ (.06)
========== ========== =========
Pro forma weighted average common and common equivalent
shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,070,028 3,849,824 3,694,439
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
18
<PAGE> 19
MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
in thousands, CONVERTIBLE CLASS A CLASS B CLASS A ADDITIONAL RETAINED CUMULATIVE
except share COMMON PREFERRED COMMON COMMON COMMON STOCK PAID-IN EARNINGS SUBSCRIPTIONS TRANSLATION
data STOCK STOCK STOCK STOCK WARRANTS CAPITAL (DEFICIT) RECEIVABLE ADJUSTMENT TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December
31, 1993 $ -- $ 265 $ 5 $ 3 $ -- $ 86 $ (558) $ (37) $ -- $ (236)
Net income -- -- -- -- -- -- 450 -- -- 450
Issuance of
84,450 and
repurchase
of 1,935
shares of
Class B
common
stock -- -- -- -- -- 15 -- (3) -- 12
Accretion of
value of
warrants -- -- -- -- 332 (101) (563) -- -- (332)
Collections
on
subscripti
ons
receivable -- -- -- -- -- -- -- 12 -- 12
Foreign
currency
translation
adjustment -- -- -- -- -- -- -- -- 17 17
-------- ----- ------- ------- ------ --------- ---------- ----- ------- --------
Balance at
December
31, 1994 -- 265 5 3 332 -- (671) (28) 17 (77)
Net income -- -- -- -- -- -- 1,381 -- -- 1,381
Issuance of
21,000
shares of
Class A
common
stock -- -- 1 -- -- 15 -- -- -- 16
Issuance of
45,000 and
repurchase
of 11,775
shares of
Class B
common
stock -- -- -- -- -- 15 (1) (2) -- 12
Accretion of
value of
warrants -- -- -- -- 117 -- (234) -- -- (117)
Compensation
related to
stock
issuances -- -- -- -- -- 84 -- -- -- 84
Collections
on
subscriptions
receivable -- -- -- -- -- -- -- 20 -- 20
Foreign
currency
translation
adjustment -- -- -- -- -- -- -- -- 15 15
-------- ----- ------- ------- ------ --------- ---------- ----- ------- --------
Balance at
December
31, 1995 -- 265 6 3 449 114 475 (10) 32 1,334
Net income -- -- -- -- -- -- 2,071 -- -- 2,071
Issuance of
11,250
shares of
Class B
common
stock -- -- -- -- -- 3 -- -- -- 3
Exercise of
Class A
common
stock
warrants
and
issuance
of 81,060
shares of
Class A
common
stock -- -- -- -- (449) 509 -- -- -- 60
Conversion of
354,932
shares of
Convertible
preferred
stock into
484,758
shares of
Class A
common
stock -- (265) 2 -- -- 263 -- -- -- --
Conversion of
1,178,865
shares of
Class B
common
stock and
2,700,772
shares of
Class A
common
stock into
3,879,637
shares of
no par
common
stock 900 -- (8) (3) -- (889) -- -- -- --
Termination
of
redemption
privileges
for 86,486
shares of
redeemable
common
stock 692 -- -- -- -- -- -- -- -- 692
Issuance of
1,880,798
shares of
common
stock 17,991 -- -- -- -- -- -- -- -- 17,991
Collections
on
subscriptions
receivable -- -- -- -- -- -- -- 10 -- 10
Foreign
currency
translation
adjustment -- -- -- -- -- -- -- -- 24 24
-------- ----- -------- ------- ------ --------- ---------- -------- -------- --------
Balance at
December
31, 1996 $ 19,583 $ -- $ -- $ -- $ -- $ -- $ 2,546 $ -- $ 56 $ 22,185
======== ===== ========= ======= ====== ========= ========== ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
19
<PAGE> 20
MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
in thousands 1996 1995 1994
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,071 $ 1,381 $ 450
Adjustments to reconcile net income to net cash provided by
operating activities --
Depreciation and amortization . . . . . . . . . . . . . . 603 567 453
Provision (benefit) for deferred income taxes . . . . . . (92) (95) (90)
(Gain) loss on disposal of assets . . . . . . . . . . . . (11) (28) (4)
Changes in assets and liabilities, net of effect of
acquisition --
Accounts receivable . . . . . . . . . . . . . . . . . . (548) (1,304) 856
Prepaid and deferred expenses . . . . . . . . . . . . . (133) (188) 992
Other assets . . . . . . . . . . . . . . . . . . . . . . 65 (102) 25
Accounts payable . . . . . . . . . . . . . . . . . . . . 102 (76) (363)
Accrued expenses . . . . . . . . . . . . . . . . . . . . 200 1,311 (371)
Deferred revenue . . . . . . . . . . . . . . . . . . . . (19) 650 (1,009)
---------- ---------- --------
Net cash provided by operating activities . . . . . . 2,238 2,116 939
---------- ---------- --------
Cash flows from investing activities:
Acquisition of foreign subsidiaries, net of cash acquired . -- -- 300
Proceeds from sale of property and equipment . . . . . . . . 28 269 14
Purchases of property and equipment . . . . . . . . . . . . (894) (819) (324)
---------- ---------- --------
Net cash used in investing activities . . . . . . . . (866) (550) (10)
---------- ---------- --------
Cash flows from financing activities:
Net borrowings (payments) under line of credit agreements . (37) (738) 401
Proceeds from issuance of common stock . . . . . . . . . . . 18,054 28 12
Proceeds from collections on subscriptions receivable . . . 10 20 12
Payments of long-term debt . . . . . . . . . . . . . . . . . -- (528) (575)
---------- ---------- --------
Net cash provided by (used in) financing activities . 18,027 (1,218) (150)
---------- ---------- --------
Effect of exchange rate changes on cash . . . . . . . . . . . . 30 (24) (22)
---------- ---------- --------
Net increase in cash . . . . . . . . . . . . . . . . . . . . . 19,429 324 757
Cash at beginning of year . . . . . . . . . . . . . . . . . . . 1,141 817 60
---------- ---------- --------
Cash at end of year . . . . . . . . . . . . . . . . . . . . . . $ 20,570 $ 1,141 $ 817
========== ========== ========
Supplemental disclosures of cash flow information --
Interest paid . . . . . . . . . . . . . . . . . . . . . . . $ 22 $ 59 $ 73
========== ========== ========
Income taxes paid . . . . . . . . . . . . . . . . . . . . . $ 753 $ 413 $ 298
========== ========== ========
Supplemental schedule of noncash investing and financing
activities:
Acquisition of foreign subsidiaries, with purchase price
consisting of the following:
Cash paid . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ -- $ 448
Notes payable issued . . . . . . . . . . . . . . . . . . . -- -- 526
Class A common stock issued under put option . . . . . . . -- -- 859
-- -- ---
---------- ---------- --------
Total fair value of acquisition . . . . . . . . . . . $ -- $ -- $ 1,833
========== ========== ========
Equipment acquired under capital lease . . . . . . . . . . . $ -- $ -- $ 292
========== ========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
20
<PAGE> 21
MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Mechanical Dynamics, Inc. (the "Company") and its subsidiaries develop,
market and support virtual prototyping software and provide consulting,
training, and maintenance services to the automotive, general machinery,
construction equipment, aerospace, defense and other industries on a worldwide
basis.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Foreign Currency
The financial statements of international subsidiaries are translated using
exchange rates in effect at period end for assets and liabilities and at
average rates during the period for results of operations. The resulting
foreign currency translation adjustments are reflected as a separate component
of shareholders' equity. Foreign currency transaction gains and losses are
included in other income and expense.
Revenue
Software licenses revenue consists primarily of license fees for the
Company's software products and, to a lesser extent, license fees from other
companies' software products licensed through the Company's European
subsidiaries. Revenue under paid-up software licensing agreements, including
licenses generated through distributors, is recognized when a customer contract
is fully executed and the software is delivered. Revenue under annual software
licensing arrangements is deferred and amortized over the terms of the
agreements. In either instance, revenue is recognized only when no significant
remaining obligations to the customer exist.
Services revenue consists of revenue from software maintenance agreements and
professional services, including consulting, training and funded research and
development. Revenue related to advance payments received under software
maintenance agreements is deferred and amortized over the terms of the
agreements. Revenue from other services is recognized upon performance of the
service.
Cost of Revenue
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 services includes payroll and overhead expenses attributable to
hotline support, consulting, training and funded research and development.
Research and Development Expenses
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.
21
<PAGE> 22
Product Development
Under the criteria set forth in Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," capitalization of software development costs begins upon
the establishment of technological feasibility of the product. The
establishment of technological feasibility and the ongoing assessment of the
recoverability of these costs require considerable judgment by management with
respect to certain external factors, including, but not limited to, anticipated
future gross product revenue, estimated economic product lives and changes in
software and hardware technology. Amounts that would have been capitalized
under this statement after consideration of the above factors were immaterial,
and therefore no software development costs have been capitalized by the
Company.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to concentrations
of credit risk, as defined by Statement of Financial Accounting Standards No.
105, consist primarily of accounts receivable. The Company's accounts
receivable are concentrated in global automotive-related companies as well as
other equipment, aerospace and defense manufacturers and the Company's
international distributor network. The Company generally does not require
collateral upon delivery of its products.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of 90
days or less to be cash equivalents.
Accounts Receivable
Accounts receivable includes an allowance for doubtful accounts of $175,000
and $105,000 in 1996 and 1995, respectively.
Property and Equipment
Property and equipment is stated at cost. Office furniture and equipment is
depreciated using accelerated methods over estimated useful lives of three to
seven years. Leasehold improvements are amortized using the straight-line
method over the lesser of the respective asset's life or the life of the
related lease, generally ten years. Property and equipment consists of the
following:
<TABLE>
<CAPTION>
in thousands 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Office furniture and equipment . . . . . . . . . . . . . . . . . . . . . . $ 2,568 $ 1,851
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . 718 708
--------- ---------
3,286 2,559
Less -- accumulated depreciation . . . . . . . . . . . . . . . . . . . . . 1,643 1,291
--------- ---------
Net property and equipment . . . . . . . . . . . . . . . . . . . . . $ 1,643 $ 1,268
========= =========
</TABLE>
Goodwill
Included in other assets on the accompanying balance sheets is goodwill of
$1.1 million and $1.2 million as of December 31, 1996 and 1995, respectively.
Goodwill is presented net of accumulated amortization of $250,000 and $154,000
in 1996 and 1995, respectively. The Company acquired its European subsidiaries
in April 1994 which accounts for a majority of the goodwill. (See Note 2.)
Goodwill represents the unamortized cost in excess of fair value of net
assets acquired and is amortized on a straight-line basis over fifteen years.
On an ongoing basis, management reviews the valuation and amortization of
goodwill. As part of this review, the Company considers the value of projected
future undiscounted cash flows attributable to the acquired operations in
evaluating potential impairment.
22
<PAGE> 23
Net Income (Loss) Per Common Share
Net income (loss) available to common shareholders is net of an equity charge
in 1995 and 1994 to accrete the redemption price of warrants outstanding during
the periods.
The calculation of pro forma weighted average shares is based on the
following: the daily weighted average number of shares of common stock
outstanding; the dilutive effect of outstanding stock options and warrants,
including any shares issued below fair market value for all periods presented;
the 1.5-for-1 stock split (see Note 5); and the conversion of the preferred
stock into common stock for all periods.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Stock-Based Compensation
The Company has elected to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees", and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of grant
over the amount the employee must pay to acquire the stock in the accompanying
Statements of Income. As supplemental information, the Company has provided pro
forma disclosure of the fair value at the date of grant of stock options
granted during 1996 and 1995 in Note 5, in accordance with the requirements of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123).
(2) ACQUISITION
On April 1, 1994, the Company purchased certain intangible assets and
software rights from one of its European distributors, and all outstanding
stock of the distributor's majority-owned subsidiaries in France, Germany,
Sweden, Italy and the United Kingdom. The total purchase price of approximately
$1.8 million consisted of $448,000 in cash, $526,000 in notes and $859,000
associated with 107,329 shares of the Company's Class A common stock with
redemption privileges at $8 per share. During 1996, the redemption privileges
associated with 86,486 of these shares terminated. The redemption privileges
associated with the remaining 20,843 shares of redeemable common stock are
exercisable by the holders between June 15, 1997 and July 14, 1997. The
acquisition has been accounted for by the purchase method of accounting. The
excess of the aggregate purchase price over the fair value of the net assets
acquired has been recognized as goodwill. The operating results of all acquired
subsidiaries have been included in the consolidated results of operations from
the date of acquisition.
The following unaudited pro forma summary presents the consolidated results
of operations as if the acquisitions had occurred at the beginning of the
periods presented and does not purport to be indicative of what would have
occurred had the acquisition been made as of those dates or of results which
may occur in the future.
<TABLE>
<S> <C>
In thousands, except per share data 1994
- ----------------------------------------------------------------------------------------------------------
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,038
==========
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 474
Accretion of value of warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 664
----------
Net loss available to common shareholders . . . . . . . . . . . . . . . . . . . . . . . . (190)
==========
Net loss per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (.05)
==========
</TABLE>
23
<PAGE> 24
(3) FINANCING ARRANGEMENTS
The Company has available an unsecured bank line of credit with a maximum
borrowing capacity of $3.0 million. Borrowings on the line of credit bear
interest at the bank's prime rate of interest. No borrowings were outstanding
at December 31, 1996.
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 approximately $660,000, at various fixed and variable interest
rates. Borrowings are collateralized by certain assets of the subsidiaries.
Borrowings outstanding under these agreements were $45,000 at December 31,
1996.
No borrowings were outstanding under long-term debt arrangements as of
December 31, 1996 and 1995.
(4) INCOME TAXES
A summary of income before provision for income taxes and components of the
provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
in thousands 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) before provision for income taxes:
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . $2,874 $1,679 $ 620
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . 165 (4) 42
------ ------ -----
$3,039 $1,675 $ 662
====== ====== =====
Domestic provision (benefit) for income taxes:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . 973 329 260
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . (92) (95) (90)
Foreign provision for income taxes:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 60 42
------ ------ -----
Provision for income taxes . . . . . . . . . . . . . . . . . . $ 968 $ 294 $ 212
====== ====== =====
</TABLE>
The differences between the income tax provision calculated at the United
States Federal statutory rate and the consolidated income tax provision are
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
in thousands 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory provision . . . . . . . . . . . . . . . . . . . $ 1,033 $ 570 $ 225
Nondeductible meals and entertainment . . . . . . . . . . . . . . 28 24 25
Reduction in valuation reserve due to recognition of certain
tax credits and deferred assets . . . . . . . . . . . . . . . . (95) (456) (70)
Foreign losses without tax benefit . . . . . . . . . . . . . . . 5 33 --
Effect of differences between U.S. and foreign tax rates . . . . 31 31 27
Tax exempt interest income . . . . . . . . . . . . . . . . . . . (34) -- --
Foreign withholding taxes paid, net of domestic benefit . . . . . -- 92 5
------- -------- ---------
Provision for income taxes . . . . . . . . . . . . . . . . . . . $ 968 $ 294 $ 212
======= ======== =========
</TABLE>
24
<PAGE> 25
Deferred income taxes represent temporary differences in the recognition of
certain items for income tax and financial reporting purposes. The components
of the net deferred income tax asset are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
in thousands 1996 1995
- -----------------------------------------------------------------------------------------------------------
Deferred tax assets:
<S> <C> <C>
Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 90 $ 50
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 131
Employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 60
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 35
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 42
----- -----
315 318
Valuation reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (95)
----- -----
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 315 $ 223
===== =====
</TABLE>
Income taxes have been provided on all undistributed earnings of foreign
subsidiaries.
At December 31, 1996, the Company had approximately $90,000 of alternative
minimum tax credit carryforwards available, with no expiration.
(5) REDEEMABLE COMMON STOCK AND SHAREHOLDERS' EQUITY
On April 23, 1996, the shareholders of the Company approved an amendment and
restatement to the Company's articles of incorporation that effected (i) a
1.5-for-1 stock split of the Company's common stock, (ii) an increase in the
authorized shares of common stock to 15,000,000 shares, (iii) the conversion of
all classes of common stock to no par common stock, (iv) an increase in the
authorized number of preferred shares to 1,000,000, and (v) an amendment of the
privileges of the preferred stock. All references in the consolidated financial
statements and accompanying notes have also been adjusted to reflect the
amendment and restatement of the articles of incorporation.
Common Stock
Holders of shares of common stock are entitled to one vote per share on all
matters submitted to a vote of holders of shares of common stock, and do not
have any cumulative voting rights. In the event of a liquidation, dissolution
or winding-up of the Company, the holders of shares of common stock are
entitled to share equally and ratably in the assets of the Company, if any,
remaining after the payment of debts and liabilities of the Company, subject to
prior liquidation rights of any outstanding shares of preferred stock.
In May 1996, the Company completed an initial public offering of its stock,
which resulted in the issuance of 1,500,000 shares of common stock at a price
of $11.00 per share. In June 1996, an additional 354,750 shares were sold by
the Company at $11.00 per share, pursuant to the underwriters' exercise of
their over-allotment option.
Preferred Stock
The Board of Directors is authorized to issue up to 1,000,000 shares of
preferred stock in one or more series. Under each issuance of a series of
preferred stock, the Board of Directors is permitted to fix the designations,
preferences, powers and relative rights and restrictions thereof, including
without limitation, the dividend rate, conversion rights, voting rights,
redemption price, and liquidation preference.
Convertible Preferred Stock
On February 8, 1996, the Board of Directors authorized the Company to redeem
all outstanding shares of convertible preferred stock. The holders of
convertible preferred shares had the right to convert such shares into
25
<PAGE> 26
shares of Class A common stock in lieu of accepting cash redemption payments.
As of April 11, 1996, all holders of convertible preferred stock exercised
their right to convert their shares into Class A common stock. Based on a
formula in the agreement, each share of convertible preferred stock was
converted into approximately 1.37 shares of Class A common stock.
Convertible preferred shares had a liquidating preference of approximately
$0.75 per share in the event of voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company. As of December 31,
1995, all shares of convertible preferred stock were recorded in the
accompanying balance sheet at the total potential redemption value.
Class A Common Stock
In April 1996, the Company amended and restated its Articles of Incorporation
to automatically convert each share of Class A common stock into one share of
common stock.
Holders of Class A common stock were entitled to one vote for each share so
held with respect to all matters voted on by the shareholders of the
corporation. During 1995, the Company issued Class A common stock at prices
below fair market value, based on the estimated initial public offering price
of the Company's common stock. The compensation element which equated to the
difference between fair market value and the issuance price was recorded by the
Company in 1995, totaling $37,000. Prior to 1995, management determined that
all issuances of Class A common stock were at prices equal to or in excess of
fair market value.
Class B Common Stock
In April 1996, the Company amended and restated its Articles of Incorporation
to automatically convert each share of Class B common stock into one share of
common stock.
Shares of the Company's Class B nonvoting common stock acquired by employees
vested over time pursuant to a formula stated in the plan, which was based upon
the years of service and years of ownership of the shares. During 1995, the
Company issued Class B common stock at prices below fair market value, based on
the estimated initial public offering price of the Company's common stock. The
compensation element which equated to the difference between fair market value
and the issuance price was recorded by the Company in 1995, totaling $47,000.
Prior to 1995, management determined that all issuances of Class B common stock
were at prices equal to or in excess of fair market value.
Class A Common Stock Warrants
In March 1990, April 1991, and September 1992, 124,155, 23,280, and 14,685
nonnegotiable warrants to acquire Class A common stock of the Company,
respectively, were issued and attached to the Company's subordinated debt. Upon
repayment of this debt in March 1994, the warrants became exercisable through
March 1996. Paid-in capital and retained earnings (deficit) were charged to
accrete the total redemption value of these warrants, which was calculated
based upon a redemption price from a formula in the warrant agreements. The
warrants did not accrete any additional value subsequent to December 31, 1995.
The redemption price was calculated by taking the difference between the
warrant exercise price of $0.75 per share and the ratio of consolidated revenue
to shares of stock outstanding, adjusted for any shares issued subsequent to
March 26, 1990 at prices below $0.75 per share.
The Company was notified on March 11, 1996, that the holder of one-half of
the warrants would exercise their right to purchase 81,060 shares of the
Company's Class A common stock at a price of $0.75 per share. The remaining
warrants were redeemed by the Company in 1996 for a cash value of $449,000;
these warrants were reflected as accrued liabilities in the accompanying
balance sheet as of December 31, 1995.
26
<PAGE> 27
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was adopted
by the Company's Board of Directors in March 1996. A total of 300,000 shares of
common stock have been reserved for issuance under the Purchase Plan. The
Purchase Plan provides that the Company will sell shares to employees who elect
to participate in the Purchase Plan at a price equal to 85% of the lesser of
the fair market value of the common stock on (i) the first trading day of an
offering period or (ii) the last trading day of such offering period.
In December 1996, under the Purchase Plan, the Company issued 17,213 shares
of common stock to various employees at a price of $11.79 per share.
1996 Stock Incentive Plan For Key Employees
The Company's 1996 Stock Incentive Plan For Key Employees (the "Stock Option
Plan") was adopted by the Company's Board of Directors in March 1996. Under the
Stock Option Plan, options will be granted or restricted stock will be awarded
for the purpose of attracting and motivating key employees of the Company. The
Stock Option Plan provides for (i) the grant of "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code, (ii) the grant
of "nonqualified stock options" (options which do not meet the requirements of
Section 422), and (iii) the award of restricted stock. Subject to certain
provisions outlined in the Stock Option Plan, the Compensation Committee of the
Board of Directors will determine which key employees will be granted options
or awarded restricted stock, the number of options granted or shares awarded
and other terms and conditions applicable to each award or grant. A total of
450,000 shares of common stock have been reserved for issuance under the Stock
Option Plan.
Stock option activity for this plan is summarized below:
<TABLE>
<CAPTION>
NUMBER PRICE
OF SHARES PER SHARE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1995 . . . . . . . . . . . . . . . . . . . --
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182,500 $9.00 - $13.50
-------
Outstanding at December 31, 1996 . . . . . . . . . . . . . . . . . . . 182,500 $9.00 - $13.50
=======
</TABLE>
82,500 of the shares outstanding under the Stock Option Plan at December 31,
1996, become vested in April 1997, and expire in April 2001. The remaining
100,000 shares outstanding at December 31, 1996, vest over a four year period
beginning in August 1997, and expire in August 2001. No options under the Stock
Option Plan were exercisable at December 31, 1996.
Non-Employee Director Stock Option Plan
The Company's Non-Employee Director Stock Option Plan (the "Director Stock
Option Plan") was adopted by the Company's Board of Directors in March 1996.
The Director Stock Option Plan provides for the grant of "nonqualified stock
options" to purchase shares of common stock. Upon appointment to the Board of
Directors, each newly-appointed non-employee director will receive an option to
purchase 5,000 shares of common stock of the Company. Furthermore, immediately
following each annual meeting of shareholders of the Company, each non-employee
director who has served as a director for at least six months will
automatically be granted an option to purchase 5,000 shares of common stock of
the Company. The exercise price of any option will be equal to the market
price of the common stock at the time of grant. Each option, if not sooner
terminated as provided in the Director Stock Option Plan, will have a five-year
term from the date of grant and will vest and become exercisable in full on the
first anniversary of the date of grant. A total of 100,000 shares of common
stock have been reserved for issuance under the Director Stock Option Plan.
27
<PAGE> 28
Stock option activity for this plan is summarized below:
<TABLE>
<CAPTION>
NUMBER PRICE
OF SHARES PER SHARE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1995 . . . . . . . . . . . . . . . . . . . . . --
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 $ 11.00
----------
Outstanding at December 31, 1996 . . . . . . . . . . . . . . . . . . . . . 20,000 $ 11.00
==========
</TABLE>
No options under the Director Stock Option Plan were exercisable at December
31, 1996.
1995 Amended and Restated Stock Purchase Plan
In March 1996, the Company's 1995 Amended and Restated Stock Purchase Plan
(the "1995 Plan) was terminated by the Board of Directors.
Under the 1995 Plan, the Board was permitted to issue shares of Class B
common stock to attract, retain and motivate key employees. The price of such
shares was determined by the Board when the opportunity to purchase shares was
presented, but could not be less than the book value of the stock.
In addition, under the 1995 Plan, the Board from time to time also granted
stock options to attract, retain and motivate certain key executive officers.
Stock option activity for this plan is summarized below:
<TABLE>
<CAPTION>
NUMBER PRICE
OF SHARES PER SHARE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1993 71,250 $0.16 -- $0.25
Granted 30,000 $0.25
Exercised (56,250) $0.16 -- $0.25
-------
Outstanding at December 31, 1994 45,000 $0.16 -- $0.25
Exercised (18,750) $0.16
-------
Outstanding at December 31, 1995 26,250 $0.25
Exercised (18,750) $0.25
Canceled (7,500) $0.25
------
Outstanding at December 31, 1996 --
======
</TABLE>
1993 Stock Option Plan
In March 1996, the Company's 1993 Stock Option Plan (the "1993 Plan") was
terminated by the Board of Directors.
Under the 1993 Plan, the Board was permitted to grant options to purchase
shares of Class A common stock to certain key employees. The price of such
options was determined by the Board when the options were granted, but could
not be less than the book value of the stock. Management determined that all
options granted under the 1993 Plan were at exercise prices equal to or in
excess of fair market value. Stock option activity for this plan is summarized
below:
<TABLE>
<CAPTION>
NUMBER PRICE
OF SHARES PER SHARE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1993 . . . . . . . . . . . . . . . . . . . . . 61,671 $ 0.93
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --
------
Outstanding at December 31, 1994, 1995 and 1996 . . . . . . . . . . . . . . 61,671 $ 0.93
======
</TABLE>
All outstanding options under the 1993 Plan were exercisable at December 31,
1996, and expire in April 1998.
28
<PAGE> 29
Stock-Based Compensation
Using the intrinsic value method of accounting for the value of stock options
granted during 1996, no compensation cost was recorded in the accompanying
statement of income. There were no stock options granted during 1995. Had
compensation cost been determined based on the fair value at the date of grant
for awards in 1996 consistent with the provisions of SFAS 123, net income and
net income per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
in thousands, except per share data 1996
- --------------------------------------------------------------------------------------------------------
<S> <C>
Net Income - as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,071
Net Income - pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,698
Net income per share - as reported . . . . . . . . . . . . . . . . . . . . . . . . . . $ .41
Net income per share - pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .33
</TABLE>
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model. Because the SFAS 123 method of
accounting has not been applied to options granted prior to January 1, 1995,
the resulting pro forma compensation cost may not be representative of that to
be expected in future years. The following weighted average assumptions were
used in valuing the option grants:
<TABLE>
<CAPTION>
1996
- -----------------------------------------------------------------------------------------------------
<S> <C>
Expected life (years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.0
Interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5%
Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.0%
</TABLE>
(6) COMMITMENTS AND CONTINGENCIES
Employee Benefit Plans
The Company maintains a 401(k) plan covering substantially all of its
employees. Beginning in January 1996, the Company matched 40% of qualified
employee contributions, up to a maximum of 2.4% of eligible compensation.
During 1995 and 1994, under the plan, the Company provided matching
contributions equal to 25% of qualified employee contributions, up to a maximum
of 1.5% of each employee's eligible compensation. In 1996, 1995 and 1994, the
Company contributed $150,000, $71,000 and $59,000, respectively, to the plan.
Lease Commitments
The Company and its subsidiaries lease office space and certain equipment
under noncancelable operating lease agreements. Future minimum lease payments
at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
in thousands
- --------------------------------------------------------------------------------------------------------
<S> <C>
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,563
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,219
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 921
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 573
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --
---------
$ 4,276
=========
</TABLE>
Total lease expense amounted to $2.0 million, $1.9 million, and $1.7 million
in 1996, 1995 and 1994, respectively.
29
<PAGE> 30
Royalty Agreements
The Company has entered into various agreements which generally provide for
royalty payments by the Company based on a percentage of revenue derived
through the licensing of certain software products. Royalty expense under these
agreements amounted to approximately $480,000, $469,000 and $423,000 and in
1996, 1995 and 1994, respectively.
(7) GEOGRAPHIC OPERATIONS AND SEGMENT INFORMATION
The following table summarizes selected financial information of the
Company's operations by geographic location:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
in thousands 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
United States
Domestic . . . . . . . . . . . . . . . . . . . . . . . . $ 9,667 $ 7,930 $ 7,419
Export . . . . . . . . . . . . . . . . . . . . . . . . . 6,687 5,512 4,289
Europe
Germany . . . . . . . . . . . . . . . . . . . . . . . . 3,907 3,458 1,837
Other European countries . . . . . . . . . . . . . . . . 5,122 4,356 2,722
--------- -------- ---------
Total revenue . . . . . . . . . . . . . . . . . . . $ 25,383 $ 21,256 $ 16,267
========= ======== =========
Operating contribution:
United States . . . . . . . . . . . . . . . . . . . . . . . $ 5,638 $ 4,544 $ 3,544
Europe
Germany . . . . . . . . . . . . . . . . . . . . . . . . 1,315 1,056 503
Other European Countries . . . . . . . . . . . . . . . . 1,686 1,318 760
--------- -------- ---------
Total operating contribution . . . . . . . . . . . 8,639 6,918 4,807
Unallocated expenses, net . . . . . . . . . . . . . . . . . . (5,600) (5,243) (4,145)
--------- -------- ---------
Income before taxes . . . . . . . . . . . . . . . . . . . . $ 3,039 $ 1,675 $ 662
========= ======== =========
Identifiable assets:
United States . . . . . . . . . . . . . . . . . . . . . . . $ 25,816 $ 4,968 $ 4,650
Europe
Germany . . . . . . . . . . . . . . . . . . . . . . . . 1,199 1,270 811
Other European countries . . . . . . . . . . . . . . . . 2,797 3,100 1,873
--------- -------- ---------
Total identifiable assets . . . . . . . . . . . . . $ 29,812 $ 9,338 $ 7,334
========= ======== =========
</TABLE>
A significant portion of United States export revenue is to customers
domiciled in the Asia-Pacific region.
One customer accounted for approximately 11.8%, 13.2% and 13.4% of total
revenue in the years ended December 31, 1996, 1995 and 1994, respectively.
Unallocated expenses, net consist of general corporate expenses, internal
research and product development expenses, interest expense and interest
income.
30
<PAGE> 31
(8) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes selected unaudited quarterly financial
information for 1996 and 1995. The Company believes all adjustments, consisting
of normal recurring adjustments considered necessary for a fair presentation,
have been included in the selected quarterly information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
in thousands, except per MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
share data 1996 1996 1996 1996 1996
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue . . . . . . . . . . $6,048 $6,241 $6,663 $6,431 $25,383
Operating income . . . . . 573 744 812 374 2,503
Net income . . . . . . . . 371 561 713 426 2,071
Pro forma net income per
common share . . . . . . $ .10 $ .12 $ .12 $ .07 $ .41
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
in thousands, except per MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
share data 1995 1995 1995 1995 1995
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue . . . . . . . . . . $ 4,645 $ 5,288 $ 5,324 $ 5,999 $ 21,256
Operating income . . . . . 194 449 468 555 1,666
Net income . . . . . . . . 163 380 361 477 1,381
Pro forma net income per
common share . . . . . . $ .03 $ .08 $ .08 $ .11 $ .30
</TABLE>
31
<PAGE> 32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Certain information required by Part III is omitted from this report in that
the Registrant will file a definitive proxy statement pursuant to Regulation
14A (the "Proxy Statement") not later than 120 days after the end of the fiscal
year covered by this report and certain information included therein is
incorporated herein by reference. Only those sections of the Proxy Statement
that specifically address the items set forth herein are incorporated by
reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the directors of the Company is incorporated by
reference to the Company's Proxy Statement for the 1997 Annual Meeting of
Shareholders scheduled to be held on May 14, 1997.
The executive officers of the Company as of March 1, 1997 are listed below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Michael E. Korybalski . . . . . . . . . . . . 50 Chief Executive Officer and Chairman of the Board
Robert R. Ryan . . . . . . . . . . . . . . . 39 President and Chief Operating Officer
John C. Angell . . . . . . . . . . . . . . . 48 Vice President, Chief Technical Fellow and Director
Alexander J. Dinu . . . . . . . . . . . . . . 39 Vice President -- North American Sales and Service
Raymond J. Gaynor . . . . . . . . . . . . . . 48 Vice President -- Asia-Pacific Operations
Michael Hoffmann . . . . . . . . . . . . . . 40 Vice President -- European Operations
David Peralta . . . . . . . . . . . . . . . . 29 Vice President and Chief Financial Officer
Patrick R. Turner . . . . . . . . . . . . . . 38 Vice President -- Product Development
James E. Vincke . . . . . . . . . . . . . . . 41 Vice President -- Administration
</TABLE>
Michael E. Korybalski, a co-founder of MDI, is currently Chief Executive
Officer and Chairman of the Board and a director of the Company. From 1984 to
February 1997, Mr. Korybalski served as President of the Company. From 1977 to
1984, Mr. Korybalski served as Vice President and General Manager of the
Company. From 1973 to 1977, he was employed as a product engineer with Ford
Motor Company. Mr. Korybalski holds B.S.E. and M.S.E. degrees in mechanical
engineering, as well as an M.B.A., from the University of Michigan.
Robert R. Ryan became the President of the Company in February 1997 and since
1991 has served as the Chief Operating Officer of the Company. Dr. Ryan served
as the Company's Executive Vice President from 1991 to February 1997. From
1988 through 1991, Dr. Ryan served as the Company's Vice President of Product
Development. Before joining the Company, Dr. Ryan held various positions in
sales and engineering services at Structural Dynamics Research Corporation, and
served briefly on the engineering faculty at the University of Michigan. Dr.
Ryan holds a B.S. degree from the University of Cincinnati and M.S. and Ph.D.
degrees in applied mechanics from Stanford University.
John C. Angell, a co-founder of the Company, has served as a Vice President
and as Chief Technical Fellow and director of the Company since 1977. Mr.
Angell holds B.S.E. and M.S.E. degrees in mechanical engineering from the
University of Michigan.
Alexander J. Dinu has served as the Company's Vice President -- North
American Sales and Service since August 1996. From 1993 through August 1996,
Mr. Dinu served as Account Manager with Parametric Technology Corporation. From
1991 to 1993, he served as Marketing Representative at Pansophic Systems. From
1987 to 1990, Mr. Dinu served as Vice President of Sales and Marketing for
Computer Strategies, Inc. Mr. Dinu holds a bachelors degree in business
administration from Western Michigan University.
32
<PAGE> 33
Raymond J. Gaynor became the Company's Vice President -- Asia-Pacific
Operations in February 1997. Mr. Gaynor served as the Company's Managing
Director -- Asia-Pacific Operations from 1995 through February 1997. From 1989
through 1995, Mr. Gaynor served as the Company's Director of International
Sales. From 1983 through 1988, he was an employee at Schlumberger Technologies,
Inc. (now Applicon, Inc.) serving as Country Manager, Manager of Major Accounts
Marketing and as Product Marketing Manager.
Michael Hoffmann became the Company's Vice President -- European Operations
in November 1996. Dr. Hoffmann served as the Company's Managing Director --
European Operations from 1994 through February 1997. From 1993 through 1994,
Dr. Hoffmann served as Managing Director of TEDAS Mechanical Systems GmbH, a
shareholder of the Company. From 1991 through 1992, he served as Technical
Director of TEDAS GmbH. Dr. Hoffmann holds masters and doctorate degrees in
civil engineering from the Technological University of Darmstadt.
David Peralta became the Company's Vice President, Chief Financial Officer
and Treasurer in February 1997, and served as Controller of the Company from
1993 to February 1997. From 1992 to 1993, Mr. Peralta served as Assistant
Corporate Controller at OVAKO Ajax, Inc. From 1989 through 1992, he served as
an auditor at Coopers & Lybrand. Mr. Peralta is a licensed Certified Public
Accountant in the State of Michigan. Mr. Peralta holds a bachelors degree in
accounting from the University of Michigan.
Patrick R. Turner has served as Vice President -- Product Development of the
Company since 1993. From 1989 to 1993, Mr. Turner was employed by the Company
as the Manager of the Preview Group and, more recently, the Director of
Interface Products. Mr. Turner holds a B.S. in Mechanical Engineering from
Michigan Technological University and a M.S. in Mechanical Engineering from the
Massachusetts Institute of Technology.
James E. Vincke became the Company's Vice President -- Administration in
February 1997. Mr. Vincke served as Vice President and Chief Financial Officer
of the Company from 1989 to February 1997 and has served in various positions
with the Company since 1979. Mr. Vincke holds B.S.E. and M.S.E. degrees in
mechanical engineering, as well as an M.B.A., from the University of Michigan.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement for the 1997 Annual Meeting of Shareholders scheduled
to be held on May 14, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement for the 1997 Annual Meeting of Shareholders scheduled
to be held on May 14, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
33
<PAGE> 34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
ITEM 14(A)1. FINANCIAL STATEMENTS
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Income for the Years Ended December 31, 1996,
1995 and 1994
Consolidated Statements of Shareholders' Equity (Deficit) for the Years
Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996,
1995 and 1994
Notes to Consolidated Financial Statements
ITEM 14(A)2. FINANCIAL STATEMENT SCHEDULES
None.
ITEM 14(A)3. EXHIBITS
NUMBER EXHIBIT
- -------------------------------------------------------------------------------
(3.1) Restated Articles of Incorporation, incorporated herein by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-1, Registration No. 333-2900
(3.2) Restated Bylaws, incorporated herein by reference to Exhibit 3.4
to the Company's Registration Statement on Form S-1, Registration
No. 333-2900
(4.2) Line of Credit Promissory Note between KeyBank National
Association and the Company dated December 30, 1996
(11) Statement Re Computation Of Per Share Earnings Per Share
(21) Subsidiaries Of The Registrant
(23.1) Consent Of Independent Public Accountants
(27) Financial Data Schedule
ITEM 14(B). REPORTS ON FORM 8-K
None.
34
<PAGE> 35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 28, 1997 MECHANICAL DYNAMICS, INC.
(Registrant)
By:/s/ Michael E. Korybalski
-------------------------
Michael E. Korybalski
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ Michael E. Korybalski Chairman of the Board and March 27, 1997
- -----------------------------------
Michael E. Korybalski Chief Executive Officer
(Principal Executive Officer)
/s/ David Peralta
- ----------------------------------- Chief Financial Officer March 26, 1997
David Peralta (Principal
Financial and Accounting Officer)
/s/ Herbert S. Amster
- ----------------------------------- Director March 27, 1997
Herbert S. Amster
/s/ John C. Angell
- ----------------------------------- Director March 27, 1997
John C. Angell
/s/ David E. Cole
- ---------------------------------- Director March 25, 1997
David E. Cole
/s/ Joseph F. Gloudeman
- ---------------------------------- Director March 25, 1997
Joseph F. Gloudeman
/s/ Mitchell I. Quain
- ---------------------------------- Director March 25, 1997
Mitchell I. Quain
</TABLE>
35
<PAGE> 36
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER EXHIBIT TITLE
- ------------------------------------------------------------------------------------------------------------
<S> <C>
(3.1) Restated Articles of Incorporation, incorporated herein by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1, Registration No. 333-2900
(3.2) Restated Bylaws, incorporated herein by reference to Exhibit 3.4 to the Company's Registration
Statement on Form S-1, Registration No. 333-2900
(4.2) Line of Credit Promissory Note between KeyBank National Association and the Company dated
December 30, 1996
(11) Statement Re Computation Of Per Share Earnings
(21) Subsidiaries Of The Registrant
(23.1) Consent Of Independent Public Accountants
(27) Financial Data Schedule
</TABLE>
36
<PAGE> 1
Exhibit 4.2
LINE OF CREDIT PROMISSORY NOTE
(Uncommitted/Demand)
$3,000,000.00 Arm Arbor, Michigan
December 30, 1996
FOR VALUE RECEIVED, the undersigned, Mechanical Dynamics, Inc., a Michigan
corporation (the "Borrower"), whose address is 2301 Commonwealth Boulevard, Ann
Arbor, Michigan 48105, hereby promises to pay to the order of KeyBank National
Association, a national banking association (the "Bank"), with its banking
offices located at 100 S. Main Street, Ann Arbor, Michigan 48104, or at such
other place or places that may be designated by the Bank, on demand, the
principal sum of Three Million Dollars ($3,000,000.00), or so much thereof as
may be outstanding from time to time, whichever is less, together with interest
thereon as herein below provided.
The outstanding principal balance of this Note, together with all accrued
and unpaid interest, shall be due and payable in full immediately upon Bank's
demand. Until such demand, the Borrower may borrow, repay and reborrow
hereunder; provided, however, that: (i) each advance requested by the Borrower
under this credit facility shall be made only in the sole and absolute
discretion of the Bank; and (ii) the aggregate unpaid principal amount of all
loan advances outstanding at any one time hereunder shall not exceed Three
Million Dollars ($3,000,000.00).
All interest accrued on the outstanding principal balance of this Note
shall be due and payable on the first calendar day of each month, with the
first such payment being due and payable on the 1st day of January, 1997.
The unpaid principal balance of each advance made under this Note, as the
same shall exist from time to time, shall bear interest, at the Borrower's
option, at the Bank's Prime Rate or at the Libor Rate. The Prime Rate as used
herein shall mean the prime interest rate of the Bank as announced by the Bank
at its offices in Ann Arbor, Michigan, as such rate may vary from time to time.
The "Libor Rate" as used herein is a floating rate of interest calculated by
adding a "Margin" to an "Index", which when added together shall be the Libor
Rate. The Libor Rate shall be calculated on the last day of each month (the
"Calculation Date"), and the Libor Rate will be adjusted on the first day of
the month after the Calculation Date ("Adjustment Date"). If the Calculation
Date or Adjustment Date should fall on a Saturday, Sunday or other day or legal
holiday on which the Bank is closed, the Calculation Date will be the next
business day on which the Bank shall be open to conduct substantially all of
its business, and the Adjustment Date will then fall on the next following
business day. The "Index" and "Margin" are defined as follows:
(a) "Index" is the 30 Day London InterBank Offered Rate ("Libor")
for which deposits in United States dollars are offered by prime banks in the
London InterBank market as quoted in the Wall Street Journal, Midwest Edition,
on the Calculation Date for contracts entered into two days after the
Calculation Date, rounded up to the next higher whole multiple of 1/16% if such
rate is not a multiple. Should the Index not be available on the Calculation
Date, or should the Index be discontinued or the Bank be prohibited by rule, law
or regulation from using said Index, the Bank may select any other index to be
used as the Index. The Bank agrees to reasonably select a replacement Index
which, in the sole and absolute discretion of the Bank, is similar in nature to
the original Index.
<PAGE> 2
(b) "Margin" is that amount added to the Index to arrive at the
Libor Rate. The Margin used to calculate the Libor Rate herein is two and one-
half percent (2.5%).
All calculations made herein regarding the Libor Rate, Index and the Margin
shall be made by the Bank.
The Libor interest rate is used as an index only, and funds for
Borrower's loans are not being purchased or otherwise matched by the Bank from
or on the London InterBank Market. In connection with the Libor interest rate,
Borrower expressly acknowledges that:
Notwithstanding any other provisions of this Note, if any law, rule
regulation or interpretation thereof shall change or be introduced that
increases the cost or expenses to the Bank of making the Libor interest rate
loans, the Bank may require the Borrower to, from time to time, pay those
additional amounts sufficient to reimburse the Bank for those increased costs
and expenses in order to maintain the Bank's return upon said Libor interest
rate loan. The Bank will submit a written certificate to the Borrower
evidencing said increased costs of making or funding the Libor interest rate
loans. Upon such notice from the Bank, the Borrower will: (a) pay the
additional costs as required by the Bank; or (b) either prepay the Libor
interest rate loans outstanding in full, with interest accrued thereon, or
convert the outstanding loans to an interest rate which is mutually agreeable
to the Borrower and the Bank not so affected by the increased costs. The Bank
agrees to use its best efforts to obtain a rate which is equivalent, or as near
equivalent as possible, to the Libor interest rate loan and which generates a
return to the Bank upon the outstanding principal which is equivalent to the
return upon the Libor interest rate loan received by the Bank prior to the
increased costs associated with the Libor interest rate loans; and
Notwithstanding any other provisions of this Note, if any law, rule,
regulation or interpretation thereof shall change or be introduced that makes
it unlawful for the Bank to continue the use of the Libor Index, and the Bank
does not demand payment in full, then the Bank will give the Borrower written
notice of that occurrence and the Borrower will: (a) prepay the Libor interest
rate loans outstanding in full, with interest accrued thereon; or (b) convert
the outstanding loans to an interest rate which is mutually agreeable to the
Borrower and the Bank not so affected by said law, rule, regulation or
interpretation. The Bank will use its best efforts to obtain an interest rate
which is equivalent to the Libor interest rate which was determined to be
unlawful.
Until payment in full of this Note is due, whether based upon
Borrower's default or otherwise, in the event that any payment of interest due
under this Note is not paid within six (6) business days after the same becomes
due and payable, a late charge of two (2.0%) of the required amount of such
payment so overdue, or Two Hundred Dollars ($200.00), whichever is less, may
be charged by the Bank and an additional late charge may be charged on the first
day of each calendar month thereafter until the installment is paid. No
payments will be accepted without payment of this fee.
Upon default by Borrower to make any payment when due, Bank may declare
the entire outstanding principal balance hereof, together with accrued
interest thereon, immediately due and payable in full, without notice, and the
unpaid principal balance under this Note shall thereafter bear interest at an
annual variable rate equal to three percent (3.0%) in excess of the Libor Rate
or Prime Rate, as applicable, or the highest lawful rate, if less.
2
<PAGE> 3
The Borrower agrees that upon default in the making of any payment
under this Note, the Borrower shall pay to the Bank all costs of collecting,
securing or attempting to collect or secure this Note, including, without
limitation, reasonable attorneys' fees and court costs and other expenses
whether the same be collected or secured by suit or otherwise.
Presentment for payment, notice of dishonor, protest, notice of
protest, and diligence in collection are hereby expressly waived by the
Borrower, and the time of payments or any part thereof may be released by the
Bank without in any way limiting liability hereunder. The failure of the Bank
to exercise any of its rights, powers and/or remedies shall not constitute a
waiver of the right to exercise the same at any other time.
This Note is payable upon demand. The inclusion of specific default
provisions or rights of the Bank shall not preclude the Bank's right to
declare payment of this Note on its demand.
None of the terms and provisions contained in this Note shall ever be
construed to create a contract for the use, forbearance or detention of money
requiring payment of interest at a rate in excess of the maximum interest rate
permitted to be charged by the laws of the State of Michigan. The Borrower or
any other party now or hereafter becoming liable for the payment of this Note
shall never be required to pay interest on this Note at a rate in excess of the
maximum interest rate that may be lawfully charged under the laws of the State
of Michigan, and the provisions of this paragraph shall control over all other
provisions hereof and of any other instruments executed in connection herewith
or executed to secure the indebtedness evidenced hereby which may be in
apparent conflict with this paragraph. In the event that the Bank shall
collect monies which are deemed to constitute payments in the nature of
interest and which would otherwise increase the effective rate on this Note to
a rate in excess of that permitted to be charged by the laws of the State of
Michigan, all such sums deemed to constitute interest in excess of the maximum
rate shall be considered to have been applied to reduce any other sums due and
payable under this Note.
Mechanical Dynamics, Inc. a Michigan
corporation
By: James E. Vinike
-------------------------
Its: CFO
------------------------
________________________
FOR BANK USE ONLY
1. Fed Tax ID #s_____________ 3. Obligation #__________________
and____________________ 4. Loan Officer Initials_________
2. Obligor#__________________ 5. Loan Officer#_________________
1:society:mechanic.2nt
3
<PAGE> 1
EXHIBIT 11
MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
in thousands, except share and per share data 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,071 $ 1,381 $ 450
Accretion of value of warrants . . . . . . . . . . . . . . . -- 234 664
------------- ------------- -------------
Net income (loss) available to common shareholders . . . . . $ 2,071 $ 1,147 $ (214)
============= ============= =============
Weighted average common shares outstanding . . . . . . . . . 4,990,215 3,256,694 3,162,431
Shares issued below fair market value . . . . . . . . . . . -- 47,250 47,250
Converted preferred shares . . . . . . . . . . . . . . . . . -- 484,758 484,758
Effect of stock options and warrants . . . . . . . . . . . . 78,813 61,112 --
------------- ------------- -------------
Pro forma adjusted shares outstanding 5,070,028 3,849,824 3,694,439
============= ============= =============
Pro forma net income (loss) per common share . . . . . . . . $ .41 $ .30 $ (.06)
============= ============= =============
FULLY DILUTED EARNINGS PER SHARE:
Net income (loss) available to common shareholders . . . . . $ 2,071 $ 1,147 $ (214)
============= ============= =============
Weighted average common shares outstanding . . . . . . . . . 4,990,215 3,256,694 3,162,431
Shares issued below fair market value . . . . . . . . . . . -- 47,250 47,250
Converted preferred shares . . . . . . . . . . . . . . . . . -- 484,758 484,758
Effect of stock options and warrants . . . . . . . . . . . . 113,691 75,020 --
------------- ------------- -------------
Pro forma adjusted shares outstanding 5,070,028 3,863,722 3,694,439
============= ============= =============
Pro forma net income (loss) per common share . . . . . . . . $ .41 $ .30 $ (.06)
============= ============= =============
</TABLE>
<PAGE> 1
EXHIBIT 21
MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
LEGAL ENTITY INCORPORATION OWNERSHIP
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mechanical Dynamics, Inc. Michigan, USA
Mechanical Dynamics GmbH Germany 100% owned by Mechanical Dynamics, Inc.
Mechanical Dynamics SarL France 100% owned by Mechanical Dynamics, Inc.
Mechanical Dynamics International, Ltd. United Kingdom 100% owned by Mechanical Dynamics, Inc.
Mechanical Dynamics Sweden AB Sweden 100% owned by Mechanical Dynamics, Inc.
Mechanical Dynamics Italy srl Italy 100% owned by Mechanical Dynamics, Inc.
Mechanical Dynamics Japan K.K. Japan 100% owned by Mechanical Dynamics, Inc.
MEC.Design srl Italy 99% owned by Mechanical Dynamics Italy srl
</TABLE>
<PAGE> 1
EXHIBIT 23.1
MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 333-17957.
March 26, 1997 ARTHUR ANDERSEN LLP
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001011451
<NAME> MECHANICAL DYNAMICS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 20,570
<SECURITIES> 0
<RECEIVABLES> 5,019
<ALLOWANCES> 175
<INVENTORY> 0
<CURRENT-ASSETS> 26,663
<PP&E> 3,286
<DEPRECIATION> 1,643
<TOTAL-ASSETS> 29,812
<CURRENT-LIABILITIES> 7,460
<BONDS> 0
167
0
<COMMON> 19,583
<OTHER-SE> 2,602
<TOTAL-LIABILITY-AND-EQUITY> 29,812
<SALES> 0
<TOTAL-REVENUES> 25,383
<CGS> 0
<TOTAL-COSTS> 22,880
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,039
<INCOME-TAX> 968
<INCOME-CONTINUING> 2,071
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,071
<EPS-PRIMARY> .41
<EPS-DILUTED> .41
</TABLE>
