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