<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal period ended: MARCH 31, 1998
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
(734) 994-3800
(Address of principal executive offices, including zip
code, and telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
The number of outstanding shares of the Registrant's common stock, as
of May 1, 1998, was 6,205,377.
<PAGE> 2
MECHANICAL DYNAMICS, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 1998 and December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income
Three Months Ended March 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 7
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
INDEX TO EXHIBITS . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALALNCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
in thousands 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS: (UNAUDITED)
Current assets:
Cash and cash equivalents $18,218 $20,261
Accounts receivable 7,995 8,000
Prepaid and deferred expenses 1,203 1,206
- ---------------------------------------------------------------------------------------------------------------
Total current assets 27,416 29,467
- ---------------------------------------------------------------------------------------------------------------
Net property and equipment 3,086 2,887
Other assets 1,882 1,793
- ---------------------------------------------------------------------------------------------------------------
Total assets $32,384 $34,147
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDER'S EQUITY:
Current liabilities:
Borrowings under lines of credit $84 $45
Accounts payable 755 1,474
Accrued expenses 2,707 3,734
Deferred revenue 4,158 4,462
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 7,704 9,715
- ---------------------------------------------------------------------------------------------------------------
Minority interest 478 462
Shareholders' equity:
Common stock 21,714 20,838
Preferred stock 0 0
Retained earnings 2,677 3,290
Cumulative translation adjustment (189) (158)
- ---------------------------------------------------------------------------------------------------------------
Total shareholders' equity 24,202 23,970
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $32,384 $34,147
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------
in thousands, except share and per share data 1998 1997
================================================================================================================
<S> <C> <C>
Revenue:
Software licenses $4,816 $3,920
Services 3,919 2,781
- ----------------------------------------------------------------------------------------------------------------
Total revenue 8,735 6,701
- ----------------------------------------------------------------------------------------------------------------
Cost of revenue:
Software licenses 509 103
Services 2,199 1,604
- ----------------------------------------------------------------------------------------------------------------
Total cost of revenue 2,708 1,707
- ----------------------------------------------------------------------------------------------------------------
Gross profit 6,027 4,994
- ----------------------------------------------------------------------------------------------------------------
Operating expenses:
Sales and marketing 3,307 2,594
Research and development 1,229 1,074
General and administrative 845 812
Purchased in-process research and development 1,200 0
- ----------------------------------------------------------------------------------------------------------------
Total operating expenses 6,581 4,480
- ----------------------------------------------------------------------------------------------------------------
Operating income (loss) (554) 514
Other income, net 218 167
- ----------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and minority interest (336) 681
Provision for income taxes 261 204
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) before minority interest (597) 477
Minority interest in net income of subsidiary 16 0
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) ($613) $477
================================================================================================================
Net income (loss) per common share ($0.10) $0.08
================================================================================================================
Common and common equivalent shares 6,113,210 5,865,979
================================================================================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
in thousands 1998 1997
==================================================================================================================
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($613) $477
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Purchased in-process research and development 1,200 0
Depreciation and amortization 369 207
(Gain) loss on disposal of assets 4 (8)
Minority interest in net income of subsidiary 16 0
Changes in assets and liabilities:
Accounts receivable 93 37
Prepaid and deferred expenses 16 205
Other assets 29 14
Accounts payable (772) (222)
Accrued expenses (1,110) (120)
Deferred revenue (325) 288
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (1,093) 878
- ------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from the sale of property and equipment 12 21
Purchases of property and equipment (555) (348)
Purchase of DTI Asia Pte. Ltd., net of cash acquired (563) 0
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,106) (327)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (payments) under line of credit agreements 39 (3)
Proceeds from the issuance of common stock 144 63
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 183 60
- ------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (27) (9)
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (2,043) 602
Cash and cash equivalents at beginning of period 20,261 20,570
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $18,218 $21,172
==================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $6 $1
==================================================================================================================
Income taxes $812 $95
==================================================================================================================
Details of acquisition of DTI Asia Pte. Ltd.:
Net assets (liabilities), other than cash acquired ($59)
Purchase price in excess of the net assets acquired 154
Purchased in-process research and development 1,200
Stock issued (732)
- --------------------------------------------------------------------------------------------------
Net cash used to acquire DTI Asia Pte. Ltd. $563
==================================================================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of Mechanical Dynamics, Inc. ("MDI" or the "Company") and
its subsidiaries, and have been prepared in accordance with generally accepted
accounting principles for interim financial information and with Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The Company believes all adjustments, consisting of
normal recurring adjustments considered necessary for a fair presentation, have
been included. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Form 10-K for the
year ended December 31, 1997.
Operating results for the three month periods ended March 31, 1998 and
1997 are not necessarily indicative of the results that may be expected for the
full year.
(2) - ACQUISITIONS
In January 1998, the Company acquired 100% of the outstanding capital
stock of DTI Asia Pte. Ltd. ("DTI"), a provider of mechanical design simulation
software embedded in the AutoCAD and Mechanical Desktop product lines from
Autodesk, Inc. The aggregate purchase price of approximately $1.3 million
consisted of $563,000 in cash and 142,540 shares of the Company's common stock
valued at $732,000. The acquisition has been accounted for under the purchase
method of accounting. In connection with the acquisition, the Company recorded
a non-recurring charge to operations in the first quarter of 1998 of
approximately $1.2 million, associated with the write-off of in-process research
and development acquired in the transaction that had not reached technological
feasibility. The remaining excess of the aggregate purchase price over the fair
value of the net assets acquired of approximately $154,000 has been recognized
as goodwill and will be amortized over a ten-year period. The operating results
of DTI have been included in the consolidated results of operations from the
date of acquisition.
(3) - COMPREHENSIVE INCOME
In July 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of financial statements.
The objective of SFAS 130 is to report a measure of all changes in equity of an
enterprise that result from transactions and other economic events of the period
other than transactions with owners. Comprehensive income is the total of net
income and all other non-owner changes in equity. The Company adopted this
standard effective January 1, 1998. Total comprehensive income (loss) was
($644,000) and $427,000 for the three month periods ended March 31, 1998 and
1997, respectively. The difference between net income (loss), as reported in
the accompanying condensed consolidated statements of income, and total
comprehensive income (loss) was the foreign currency translation adjustment for
the respective periods.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion provides an analysis of the Company's financial
condition and results of operations, and should be read in conjunction with the
Company's condensed consolidated financial statements and the notes thereto
included in Item 1 of this Form 10-Q.
OVERVIEW
The Company develops, markets and supports virtual prototyping
solutions. The Company's virtual prototyping software allows the engineer or
designer to design a complete product by simulating, both visually and
mathematically, a product in motion. The Company's principal software product,
ADAMS Full Simulation Package, is used by customers to simulate mechanical
systems. The Company's revenue has in the past been, and is expected in the
future to be, derived primarily from its ADAMS Full Simulation Package and
related software products and services.
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
Except for the historical information contained in this report, the
matters herein contain "forward-looking" statements (as defined in the Private
Securities Litigation Reform Act of 1995) that involve risk and uncertainty.
These forward-looking statements include, but are not limited to, revenue
levels, including the level of international revenue, certain costs and
operating expense levels, the level of other income, the Company's liquidity and
capital needs and various business environment and trend information. Actual
future results and trends may differ materially depending on a variety of
factors, including the volume and timing of orders received during the quarter,
the mix of and changes in distribution channels through which the Company's
products are sold, the timing and acceptance of new products and product
enhancements of the Company or its competitors, changes in pricing, the level of
the Company's sales of third party products, purchasing patterns of distributors
and customers, competitive conditions in the industry, business cycles affecting
the markets in which the Company's products are sold, extraordinary events, such
as litigation or acquisitions, including related charges, and economic
conditions generally or in various geographic areas. All of the foregoing
factors are difficult to forecast. The future operating results of the Company
may fluctuate as a result of these and other risk factors detailed from
time-to-time in the Company's Securities and Exchange Commission reports,
including Item 1 of the Company's Form 10-K filed on March 24, 1998.
Due to all of the foregoing factors, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as an indication of future
performance. It is likely that, in some future quarters, the Company's
operating results will be below the expectations of stock market analysts and
investors. In such an event, the price of the Company's Common Stock would
likely be materially adversely affected.
7
<PAGE> 8
RESULTS OF OPERATIONS
REVENUE
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------
dollars in thousands 1998 1997 % CHANGE
================================================================================================================================
<S> <C> <C> <C>
Software licenses $4,816 $3,920 22.9%
% of total revenue 55.1% 58.5%
Services $3,919 $2,781 40.9%
% of total revenue 44.9% 41.5%
- --------------------------------------------------------------------------------------------------------------------------------
Total revenue $8,735 $6,701 30.4%
================================================================================================================================
</TABLE>
The Company's total revenue increased 30.4% during the three month
period ended March 31, 1998, as compared to the corresponding period in 1997.
The growth in revenue resulted from an increase in the services provided to the
Company's customers, as well as from increased sales of the Company's software
products. The Company achieved revenue growth in excess of 20% in each of its
major sales geographies including North America, Europe and Asia during the
first quarter of 1998 as compared to the first quarter of 1997.
Revenue from international customers accounted for approximately 62.0%
and 59.5% of the Company's total revenue during the three months ended March 31,
1998 and 1997, respectively. The increase in international revenue as a percent
of total revenue was due primarily to increased sales of the Company's software
products and services in Japan. The absolute increase in international revenue
during the three month period ended March 31, 1998 was partially offset by the
strengthening of the dollar in 1998 relative to the European and Japanese
currencies. The strengthening of the dollar negatively affected the Company's
international revenue during the three month period ended March 31, 1998 by
approximately $363,000. Since most of the Company's international operating
expenses were incurred in foreign currencies, the net impact of exchange rate
fluctuations on income from operations was considerably less than the impact on
revenue. If the dollar continues to strengthen in 1998 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's consolidated operations to date have not been materially
adversely affected by the recent uncertainty in the Asian markets. During the
three month period ended March 31, 1998, the Company experienced a decrease in
revenue from Korea; however, this decrease was more than offset by revenue
growth in Japan. If the economies in Asia continue to deteriorate in 1998, the
Company's overall Asian revenue could be adversely impacted, which could have a
material adverse effect on the Company's consolidated results of operations. The
Company expects that international revenue will continue to account for a
significant portion of its total revenue in future periods.
Software licenses revenue consists primarily of license fees for the
Company's software products and, to a lesser extent, license fees for third
party software products licensed through the Company's European subsidiaries.
Software licenses revenue increased 22.9% during the three month period ended
March 31, 1998, as compared to corresponding period in 1997. This increase
resulted primarily from a higher volume of sales of the Company's ADAMS Full
Simulation Package and several add-on and application-specific products,
including ADAMS/Car, as well as third party software products licensed through
the Company's European subsidiaries.
Services revenue consists of revenue from software maintenance
agreements and professional services, including consulting, training and funded
research and development. Total services revenue increased 40.9% during the
three month period ended March 31, 1998, as compared to corresponding period in
1997. Both the software maintenance and the professional service components of
services revenue experienced solid growth during the first three months of 1998.
Software maintenance revenue and professional services revenue grew 21.5% and
53.3%, respectively, during the three month period ended March 31, 1998, as
compared to the corresponding period in 1997. The overall increase in services
revenue reflects the Company's continued emphasis on providing total solutions
to its customers.
8
<PAGE> 9
COST OF REVENUE
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------
dollars in thousands 1998 1997 % CHANGE
================================================================================================================================
<S> <C> <C> <C>
Cost of software licenses $509 $103 394.2%
% of software licenses revenue 10.6% 2.6%
Cost of services $2,199 $1,604 37.1%
% of services revenue 56.1% 57.7%
================================================================================================================================
</TABLE>
Cost of software licenses includes software royalty fees, media costs,
payroll and other costs attributable to software documentation and distribution,
and an allocation of depreciation, utilities and other overhead expenses
incurred by the Company. Cost of software licenses increased 394.2% from the
first quarter of 1997 to approximately $509,000 in the first quarter of 1998.
The $406,000 absolute dollar increase was due to higher royalties paid to third
parties whose products were licensed through the Company's European
subsidiaries, and, to a lesser extent, additional royalties paid to third
parties whose products are embedded in the Company's ADAMS software.
Cost of services includes payroll and overhead expenses attributable to
hotline support, consulting, training and funded research and development. Cost
of services increased 37.1% during the three month period ended March 31, 1998,
as compared to the corresponding period in 1997. This increase in cost of
services was primarily due to the hiring of additional employees to support the
growth in services provided to the Company's customers during 1998.
OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------
dollars in thousands 1998 1997 % CHANGE
================================================================================================================================
<S> <C> <C> <C>
Sales and marketing $3,307 $2,594 27.5%
% of total revenue 37.9% 38.7%
Research and development $1,229 $1,074 14.4%
% of total revenue 14.1% 16.0%
General and administrative $845 $812 4.1%
% of total revenue 9.7% 12.1%
Purchased in-process research and development $1,200 $0
% of total revenue 13.7% 0.0%
================================================================================================================================
</TABLE>
Sales and marketing expenses include costs associated with the Company's
sales channels, such as personnel, commissions, sales office costs, travel,
promotional events, sales order processing, including license administration and
order fulfillment, and advertising and public relations programs. Sales and
marketing expenses also include an allocation of overhead expenses incurred by
the Company. The absolute dollar increase in sales and marketing expenses
during the three month period ended March 31, 1998, as compared to corresponding
period in 1997, resulted from the Company's continued expansion of its worldwide
sales and marketing organization. Total sales and marketing employees increased
to 79 at March 31, 1998, an increase of 43.6% from 55 at March 31, 1997. The
Company expects to continue to expand its sales and marketing organization in
the future to meet the growing demand for its products and services.
Research and development expenses include all payroll costs attributable
to research and development activities. Research and development expenses also
include an allocation of overhead expenses incurred by the Company. Costs
associated with funded research and development projects are included in cost of
services. The increase in
9
<PAGE> 10
research and development expenses during the three month period ended March 31,
1998, as compared to corresponding period in 1997, primarily resulted from an
increase in personnel and related costs in support of expanded development
efforts. The Company intends to continue to invest significant resources in
research and development in the future.
General and administrative expenses include the cost of salaries,
employee benefits and other payroll costs associated with the Company's finance,
accounting, human resources, information systems and executive management
functions. General and administrative expenses also include an allocation of
overhead expenses incurred by the Company. General and administrative expenses
increased 4.1% during the three month period ended March 31, 1998, respectively,
as compared to the corresponding period in 1997. The absolute dollar increase
in these expenses was primarily due to additional expenses incurred to support
the Company's worldwide growth. 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.
Purchased in-process research and development includes a non-recurring
charge to operations of approximately $1.2 million associated with the write-off
of in-process research and development that had not reached technological
feasibility as of the date of acquisition. The write-off was recorded in
connection with the purchase of DTI Asia Pte. Ltd. in January 1998. The
accounting for the acquisition of DTI Asia Pte. Ltd. is summarized in Note 2 of
Notes to Condensed Consolidated Financial Statements.
OTHER INCOME, NET
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------
dollars in thousands 1998 1997 % CHANGE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Other income, net $218 $167 30.5%
% of total revenue 2.5% 2.5%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Other income, net consists of net interest income (expense), foreign
currency transaction gain (loss) and gain (loss) on the disposal of property and
equipment. The increase in other income, net during the three month period
ended March 31, 1998, as compared to the corresponding period in 1997, primarily
resulted from additional interest earned on cash generated from operations over
the past year, as well as decreased foreign currency transaction losses. From
time to time, the Company may enter into forward exchange contracts to hedge
exposures related to significant foreign currency transactions. The Company
does not use any other types of derivatives to hedge such exposures nor does it
speculate in foreign currency.
PROVISION FOR INCOME TAXES
The Company's effective income tax rate was (77.7)% and 30.0% for the
three months ended March 31, 1998 and 1997, respectively. The difference
between the Company's effective rate and the 34.0% statutory federal rate during
the three month period ended March 31, 1998 was primarily due to the
non-deductibility of the $1.2 million write-off of in-process research and
development incurred in connection with Company's acquisition of DTI Asia Pte.
Ltd. Excluding this charge, the Company's effective tax rate for the first
quarter of 1998 would have been 30.2%. The remaining difference from the 34.0%
statutory federal rate resulted from tax-exempt interest income earned by the
Company as well as tax benefits gained from the Company's foreign sales
corporation.
MINORITY INTEREST IN NET INCOME OF SUBSIDIARY
In April 1997, the Company established a Japanese subsidiary, Mechanical
Dynamics Japan K.K., through a joint venture agreement with ISI-Dentsu of
Tokyo, Japan, the distributor of the Company's software in Japan. The $16,000
recorded as minority interest in net income of subsidiary for the three month
period ended March 31, 1998 represents ISI Dentsu's 34% interest in the net
income of Mechanical Dynamics Japan K.K. during the first quarter of 1998.
10
<PAGE> 11
EMPLOYEES
The number of the Company's worldwide employees increased 38.2% to 239
at March 31, 1998, compared with 173 at March 31, 1997. Reflected in this
increase are 21 new employees who joined the Company as a result of the
Company's acquisitions of StatDesign, Inc. in October 1997 and DTI Asia Pte.
Ltd. in January 1998. Absent the impact of these acquisitions, employment
increased significantly to support the Company's growing operations worldwide.
YEAR 2000
The Company has completed testing to ensure its products are compliant
with the requirements to properly utilize dates beyond December 31, 1999. This
testing was limited to current versions of the Company's existing products. No
areas of non-compliance were noted which required modification to the Company's
software. Costs incurred to complete this testing were not material to the
Company's consolidated financial position or results of operations. The Company
is currently in the process of evaluating its internal information technology
infrastructure for Year 2000 compliance. The Company does not expect that the
cost to modify its information technology infrastructure to be Year 2000
compliant will be material to its consolidated financial position or results of
operations. The Company does not anticipate any material disruption in its
operations as a result of any failure by the Company to be in compliance.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $2.0 million during the first three
months of 1998 to $18.2 million at March 31, 1998, compared with $20.3 million
at December 31, 1997. Through March 31, 1998, cash and cash equivalents
decreased primarily as a result of the $1.1 million in cash used in operations
to fund working capital needs, $563,000 in cash used to acquire DTI Asia Pte.
Ltd. and $555,000 in cash used to purchase property and equipment.
At March 31, 1998, the Company's principal commitments consisted of
obligations under operating leases for facilities and equipment. The Company
had no borrowings under long-term debt arrangements at March 31, 1998.
The Company has an agreement with its principal bank for a $4.0 million
line of credit facility. No borrowings were outstanding under this agreement as
of March 31, 1998. The Company's subsidiaries in Germany, Italy, Sweden, and
France also have line of credit and overdraft facilities that provide for
aggregate borrowing availability of up to $465,000. Approximately $84,000 in
borrowings were outstanding under these facilities as of March 31, 1998.
In January 1998, the Company acquired 100% of the outstanding capital
stock of DTI Asia Pte. Ltd., a provider of mechanical design simulation
software embedded in the AutoCAD and Mechanical Desktop product lines from
Autodesk, Inc. The aggregate purchase price of approximately $1.3 million
consisted of $563,000 in cash and 142,540 shares of the Company's common stock
valued at $732,000. See Note 2 of Notes to Condensed Consolidated Financial
Statements.
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 and
capital expenditures for the next twelve months and the foreseeable future. The
Company has not paid dividends during the period from 1995 through the first
quarter of 1998 and intends to continue its policy of retaining earnings to
finance future growth.
11
<PAGE> 12
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
NUMBER EXHIBIT
- ----------------------------------------------------------------------------------------------
<S> <C>
(10.1) Employment Agreement between the Company and Michael E. Korybalski, as amended
(10.2) Employment Agreement between the Company and Robert R. Ryan, as amended
(10.3) Employment Agreement between the Company and David Peralta
(10.4) Employment Agreement between the Company and David Peralta, as amended
(11) Statement Re Computation of Per Share Earnings
(27) Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the three months ended
March 31, 1998.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 14, 1998 MECHANICAL DYNAMICS, INC.
(Registrant)
By: /s/ Michael E. Korybalski
--------------------------------------
Michael E. Korybalski
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ David Peralta
--------------------------------------
David Peralta
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
13
<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER EXHIBIT TITLE
- --------------------------------------------------------------------------------------------------------------
<S> <C>
(10.1) Employment Agreement between the Company and Michael E. Korybalski, as amended
(10.2) Employment Agreement between the Company and Robert R. Ryan, as amended
(10.3) Employment Agreement between the Company and David Peralta
(10.4) Employment Agreement between the Company and David Peralta, as amended
(11) Statement Re Computation of Per Share Earnings
(27) Financial Data Schedule
</TABLE>
14
<PAGE> 1
EXHIBIT 10.1
FOURTH AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FOURTH AMENDMENT, made as of the 1st day of March, 1998, by and
between MECHANICAL DYNAMICS, INC., a Michigan corporation (the "Company"),
having offices located at 2301 Commonwealth Blvd., Ann Arbor, Michigan 48105,
and MICHAEL E. KORYBALSKI, of Ann Arbor, Michigan ("Employee"), for the purpose
of amending that certain Employment Agreement between the Company and Employee
dated as of April 1, 1994, and amended by agreements dated as of March 1, 1995,
as of March 1, 1996, and as of March 1, 1997 (collectively, the "Employment
Agreement").
WITNESSETH:
WHEREAS, the Company and Employee desire to extend the Employment
Agreement and to confirm the same herein.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
convenants contained herein and in the Employment Agreement, the parties
hereto agree as follows:
A. Section 2 of the Employment Agreement is hereby amended to extend
the term of said Agreement through March 31, 2001.
B. Except as expressly modified herein, the Employment Agreement shall
remain in full force and effect in accordance with its terms.
IN WITNESS WHEREOF, the parties hereto have duly executed this Fourth
Amendment as of the day and date first above written.
WITNESS: COMPANY
MECHANICAL DYNAMICS, INC.
/s/ Linda K. Moore By: /s/ Robert R. Ryan
- --------------------- -------------------------
Robert R. Ryan, President
EMPLOYEE
/s/ Linda K. Moore By: /s/ Michael E. Korybalski
- --------------------- -------------------------
Michael E. Korybalski
<PAGE> 1
EXHIBIT 10.2
FOURTH AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FOURTH AMENDMENT, made as of the 1st day of March, 1998, by and
between MECHANICAL DYNAMICS, INC., a Michigan corporation (the "Company"),
having offices located at 2301 Commonwealth Blvd., Ann Arbor, Michigan 48105,
and ROBERT R. RYAN, of Brighton, Michigan ("Employee"), for the purpose
of amending that certain Employment Agreement between the Company and Employee
dated as of April 1, 1994, and amended by agreements dated as of March 1, 1995,
as of March 1, 1996, and as of March 1, 1997 (collectively, the "Employment
Agreement").
WITNESSETH:
WHEREAS, the Company and Employee desire to extend the Employment
Agreement and to confirm the same herein.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
convenants contained herein and in the Employment Agreements, the parties
hereto agree as follows:
A. Section 2 of the Employment Agreement is hereby amended to extend
the term of said Agreement through March 31, 2000.
B. Except as expressly modified herein, the Employment Agreement shall
remain in full force and effect in accordance with its terms.
IN WITNESS WHEREOF, the parties hereto have duly executed this Fourth
Amendment as of the day and date first above written.
WITNESS: COMPANY
MECHANICAL DYNAMICS, INC.
/s/ Linda K. Moore By: /s/ Michael E. Korybalski
- --------------------- --------------------------
Michael E. Korybalski, CEO
EMPLOYEE
/s/ Linda K. Moore By: /s/ Robert R. Ryan
- --------------------- --------------------------
Robert R. Ryan
<PAGE> 1
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made as of the 1st day of March, 1997, by and between
MECHANICAL DYNAMICS, INC., a Michigan corporation (the "Company"), having
offices located at 2301 Commonwealth Blvd., Ann Arbor, Michigan 48105, and
DAVID PERALTA, of Ann Arbor, Michigan ("Employee").
WITNESSETH:
WHEREAS, the Company desires to employ the Employee to devote his full
time and attention to the business of the Company and Employee desires to be
so employed.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants herein contained, the parties hereto agree as follows:
1. EMPLOYMENT. The Company hereby agrees to employ Employee in the
capacity of Vice President and Treasurer of the Company. Employee hereby
accepts this employment and agrees to diligently and conscientiously devote his
full and exclusive time and attention to the affairs of the Company. In his
capacity as Vice President and Treasurer of the Company, Employee shall perform
such duties of an executive nature as shall be assigned to him from time to
time by the President, the Executive Vice President or the Board of Directors
and Employee shall at all times discharge his duties in consultation with and
under the supervision of the President, the Executive Vice President and the
Board of Directors.
<PAGE> 2
2. TERM. The term of this Agreement shall commence on the date hereof
and shall terminate on March 31, 1998. At the option of the Company, this
Agreement may be extended for an additional one (1) year term, upon such terms
as may be mutually agreed between Employee and the Company.
3. COMPENSATION. Employee's compensation hereunder, including base
salary, bonus, vacation and other fringe benefits, for the term of this
Agreement are set forth in Attachment I annexed hereto. The Company and
Employee agree that during the term of this Agreement the fringe benefits
offered to Employee shall be equal to the other Vice Presidents and shall
include life insurance in an amount not less than twice Employee's base salary,
if available.
4. DISABILITY. In the event that Employee is absent from his
employment by reason of illness or other incapacity for a period of six (6)
consecutive months, Employee shall nevertheless be entitled to receive his full
base salary hereunder as well as his pro-rata bonus, vacation accruals and all
fringe benefits during said six (6) month period. Thereafter, during the
continued period of his illness or incapacity in excess of six (6) months,
Employee shall be entitled to receive such long-term disability benefits as are
payable under the Company's then long-term disability insurance program. He
shall also receive continued health and life insurance benefits for the
remaining term of this Agreement. Except as provided above, all bonus accruals,
vacation accruals and other fringe benefits shall cease
-2-
<PAGE> 3
at the end of said six (6) month period. Notwithstanding the foregoing,
Employee's salary, bonus, vacation and the other fringe benefits shall be fully
reinstated upon his complete return to employment and the full discharge of his
duties hereunder.
5. DEATH. In the event that Employee dies during the term of
this Agreement while still employed hereunder and drawing his full base salary,
then the Company shall continue to pay an amount equal to one hundred percent
(100%) of Employee's monthly base salary (as of the date of his death) to his
estate for a period of two (2) months subsequent to the date of his death.
Such payments shall be in addition to any other death benefits payable to
Employee's estate from life insurance or otherwise.
6. CHANGE OF DUTIES; RELOCATION. In the event that during the
term of this Agreement the Board of Directors chooses to change the Employee's
title as an officer of the Company and/or his duties hereunder, this Agreement
shall nevertheless remain in full force and effect in accordance with its terms
and no such change shall constitute grounds upon which Employee may terminate
this Agreement. In the event that the Board of Directors directs Employee to
relocate away from Ann Arbor, Michigan, then Employee shall be entitled to
resign and to receive as severance compensation, the base salary and fringe
benefits provided in Section 7.1 hereof.
7. TERMINATION.
7.1. Without Cause. In the event Employee is discharged
from his employment during the term of this Agreement
-3-
<PAGE> 4
without "Cause" (as hereinafter defined), then the Company shall continue to
pay Employee's base salary and provide all fringe benefits and pro rata bonus,
if applicable, in each case as in effect at the date of Employee's termination,
for a period equal to the greater of six (6) months from the date of
termination or the remaining term of this Agreement. Such payment and benefits
shall be in lieu of all other payments and benefits to which Employee might
otherwise be entitled under the Company's employee policies and procedures
and/or under this Agreement.
7.2 For Cause; Resignation; Retirement. In the event
that Employee is discharged from his employment during the term of this
Agreement for "Cause" (as hereinafter defined), or Employee voluntarily resigns
or retires, then Employee shall be entitled to receive only such payments
and/or benefits as would be provided to other employees of the Company under
similar circumstances in accordance with the Company's employee policies and
procedures then in effect.
7.3 Definition. For purposes of this Agreement, the
term "Cause" shall mean:
(i) Failure or refusal of Employee to work; or
(ii) Violation of directives of the Board of Directors or President
by Employee; or
(iii) Intentional misrepresentation to or concealment of a material
fact regarding the operations of the company from the Board of
Directors, the President, or the Executive Vice President by Employee;
or
-4-
<PAGE> 5
(iv) A material breach of this Agreement by Employee;
or
(v) Conviction of a crime involving moral turpitude.
Except in the case of (v) above, termination of this Agreement for
"Cause" shall only become effective thirty (30) days after Employee has
received written notice of such termination from the Company specifying the
details of such "Cause". During such thirty (30) day period, Employee shall
be entitled to a formal meeting with the Board of Directors for the purpose of
presenting reasons why the Agreement should not be terminated.
7.4 Change of Control. In the event that more than fifty percent
(50%) of the issued and outstanding capital stock of the Company is purchased
by any entity, person or group of persons acting in concert, and if the
remaining term of this Agreement is less than one (1) year from the effective
date of such change of control, then the terms of this Agreement shall be
automatically extended through a date one (1) year from such effective date.
7.5 Release. Anything contained in this Section 7 to the contrary
notwithstanding, the payment of any sums to Employee under subsections 7.1,
7.2 or 7.4 hereof, shall be conditioned upon (I) Employee executing and
delivering to the Company the Full And Final Release attached hereto as
Attachment II (the "Release") and (ii) in the event Employee is over forty (40)
years of age on the date of execution of the Release, upon
- 5 -
<PAGE> 6
Employee not exercising his right to revoke said Release after having executed
it.
8. RESTRICTIVE COVENANT. Employee agrees that during the term of this
Agreement and for a period of two (2) years after the termination or expiration
of this Agreement, he will not directly or indirectly, for his own benefit, or
for or with any other person, firm, or corporation (a) own, manage, engage in,
be employed by, or consult for, any business in the United States which
competes directly with the business presently conducted by the Company, or (b)
encourage, solicit, attempt to hire as an employee or consultant or otherwise
attempt to persuade any other employee of the Company to leave the employ of
the Company. For purposes of this Agreement, the "business presently conducted
by the Company" shall mean the development, manufacture, marketing or licensing
of computer programs or software for mechanical systems simulation (often
referred to as "multi-body system analysis"). Employee further agrees that the
Companys remedy at law for any breach of this restrictive convenant is
inadequate and that the Company shall be entitled to injunctive relief with
respect to any breach of this covenant.
9. NOTICE. Any notice to be delivered under this Agreement shall be
given in writing and delivered, personally or by certified mail, postage
prepaid, addressed to the Company or Employee at their last known addresses.
10. ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding of the parties hereto regarding the subject
- 6 -
<PAGE> 7
matter hereof, and there are no other agreements, conditions or representations,
oral or written, express or implied, with regard thereto. This Agreement may
be amended only in writing, signed by both parties.
11. BINDING EFFECT. The provisions of this Agreement shall
be binding upon and shall inure to the benefit of both of the parties hereto
and their respective successors and assigns.
12. GOVERNING LAW. This Agreement shall be governed by and
construed under in accordance with the laws of the State of Michigan.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and date first above written.
WITNESS: COMPANY
MECHANICAL DYNAMICS, INC.
/s/ Linda K. Moore By: /s/ Robert R. Ryan
- --------------------------- -------------------------
Robert R. Ryan, President
EMPLOYEE
/s/ Linda K. Moore /s/ David Peralta
- --------------------------- -------------------------
David Peralta
-7-
<PAGE> 1
EXHIBIT 10.4
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FOURTH AMENDMENT, made as of the 1st day of March, 1998, by and
between MECHANICAL DYNAMICS, INC., a Michigan corporation (the "Company"),
having offices located at 2301 Commonwealth Blvd., Ann Arbor, Michigan 48105,
and DAVID PERALTA, of Livonia, Michigan ("Employee"), for the purpose
of amending that certain Employment Agreement between the Company and Employee
dated as of March 1, 1997, (the "Employment Agreement").
WITNESSETH:
WHEREAS, the Company and Employee desire to extend the Employment
Agreement and to confirm the same herein.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
convenants contained herein and in the Employment Agreement, the parties
hereto agree as follows:
A. Section 2 of the Employment Agreement is hereby amended to extend
the term of said Agreement through March 31, 1999.
B. Except as expressly modified herein, the Employment Agreement shall
remain in full force and effect in accordance with its original terms.
IN WITNESS WHEREOF, the parties hereto have duly executed this Fourth
Amendment as of the day and date first above written.
WITNESS: COMPANY
MECHANICAL DYNAMICS, INC.
/s/ Linda Moore By: /s/ Robert R. Ryan
- --------------------- -------------------------
Robert R. Ryan, President
EMPLOYEE
/s/ Linda Moore /s/ David Peralta
- --------------------- -------------------------
David Peralta
<PAGE> 1
EXHIBIT 11
MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
in thousands, except share and per share data 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BASIC EARNINGS PER SHARE:
Net income (loss) ($613) $477
Weighted average common shares outstanding 6,113,210 5,760,435
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share ($0.10) $0.08
==================================================================================================================
DILUTED EARNINGS PER SHARE:
Net income (loss) ($613) $477
Weighted average common shares outstanding 6,113,210 5,760,435
Effect of stock options and warrants 0 105,544
- ------------------------------------------------------------------------------------------------------------------
Adjusted shares outstanding 6,113,210 5,865,979
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share ($0.10) $0.08
==================================================================================================================
</TABLE>
15
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001011451
<NAME> MECHANICAL DYNAMICS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 18,218
<SECURITIES> 0
<RECEIVABLES> 8,273
<ALLOWANCES> (278)
<INVENTORY> 0
<CURRENT-ASSETS> 27,416
<PP&E> 5,660
<DEPRECIATION> (2,574)
<TOTAL-ASSETS> 32,384
<CURRENT-LIABILITIES> 7,704
<BONDS> 0
0
0
<COMMON> 21,714
<OTHER-SE> 2,488
<TOTAL-LIABILITY-AND-EQUITY> 32,384
<SALES> 0
<TOTAL-REVENUES> 8,735
<CGS> 0
<TOTAL-COSTS> 9,289
<OTHER-EXPENSES> 11
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (229)
<INCOME-PRETAX> (336)
<INCOME-TAX> 261
<INCOME-CONTINUING> (613)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (613)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
