<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:
- --------------------------------------------------------------------------------
(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, 1998
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 Sheraton Inn Ann
Arbor, 3200 Boardwalk, Ann Arbor, Michigan 48108, at 4:00 p.m. Eastern Standard
Time on Thursday, May 14, 1998 for the following purposes:
1. To elect one director to serve until the 2001 Annual Meeting of
Shareholders and until his successor is 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, 1998.
3. 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 April 10, 1998 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, 1997 accompanies this notice.
By Order of the Board of Directors
Michael E. Korybalski
MICHAEL E. KORYBALSKI
Chief Executive Officer
Ann Arbor, Michigan
April 14, 1998
<PAGE> 3
MECHANICAL DYNAMICS, INC.
2301 COMMONWEALTH BLVD.
ANN ARBOR, MICHIGAN 48105
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
May 14, 1998
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 1998 Annual Meeting of Shareholders to be held at the Sheraton
Inn Ann Arbor, 3200 Boardwalk, Ann Arbor, Michigan 48108, at 4:00 p.m. Eastern
Standard Time on Thursday, May 14, 1998, 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 14, 1998.
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 April 10, 1998 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 April 10, 1998, the Company had
6,150,285 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
3,075,143 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: David 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 director of the nominee listed below,
and FOR the selection of Arthur Andersen LLP as independent auditors of the
Company for the current fiscal year ending December 31, 1998.
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<PAGE> 4
Principal Holders of the Company's Voting Securities
As of April 10, 1998, the following five 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 14.2%
AWM Investment Company, Inc................................. 401,000 6.5%
John C. Angell.............................................. 388,040 6.3%
Granahan Investment Management, Inc......................... 387,200 6.3%
The TCW Group, Inc.......................................... 327,300 5.3%
</TABLE>
- ---------------
* Based on 6,150,285 Common Shares outstanding as of April 10, 1998.
I. ELECTION OF DIRECTOR
The Board of Directors proposes that the person named below as nominee for
election as director for a three-year term be elected as director of the Company
to hold office until the Annual Meeting of Shareholders to be held in 2001, and
until his successor is duly elected and qualified.
David E. Cole
The above nominee, David E. Cole, is currently serving as a director of the
Company. If a quorum is present, the nominee 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
nominee listed above unless the giver of the proxy withholds authority to vote
for any such nominee. The nominee listed above has 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 April 10, 1998 with respect to
the nominee 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>
NOMINEE FOR ELECTION AS DIRECTOR FOR A THREE-YEAR TERM
David E. Cole............ 1995 60 Director 23,500(3) * 2001
DIRECTORS CONTINUING IN OFFICE
Michael E. Korybalski.... 1977 51 Chief Executive Officer, 873,879 14.2 2000
Chairman of the Board and
Director
Mitchell I. Quain........ 1996 46 Director 68,592(4) 1.1 2000
Robert R. Ryan........... 1997 40 President, Chief Operating 217,750(5) 3.5 2000
Officer and Director
Herbert S. Amster........ 1990 63 Director 79,930(6) 1.3 1999
Joseph F. Gloudeman...... 1993 62 Director 48,430(7) * 1999
OTHER CURRENT EXECUTIVE OFFICERS
Michael Hoffmann......... -- 41 Senior Vice President -- 39,470(8) *
Worldwide Sales and Service
All directors and executive officers as a group (8 persons)................ 1,362,602(9) 21.9
</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 6,150,285 Common Shares outstanding as of April 10, 1998.
(3) Includes 10,000 shares subject to options exercisable within 60 days of the
Record Date.
(4) Includes 58,592 shares held by trusts of which Mr. Quain holds voting power
as the trustee and 10,000 shares subject to options exercisable within 60
days of the Record Date.
(5) Includes 3,000 shares held by Dr. Ryan's wife as custodian for their
children and 12,500 shares subject to options exercisable within 60 days of
the Record Date.
(6) Includes 4,000 shares held by Mr. Amster's wife and 10,000 shares subject to
options exercisable within 60 days of the Record Date.
(7) Includes 38,430 shares held by a trust of which Dr. Gloudeman holds voting
power as the trustee and 10,000 shares subject to options exercisable within
60 days of the Record Date.
(8) Includes 16,250 shares subject to options exercisable within 60 days of the
Record Date.
(9) Includes 76,250 Common Shares which all executive officers and directors as
a group have the right to acquire within 60 days of the Record Date.
BIOGRAPHICAL INFORMATION
The following is a brief account of the business experience during the past
five years of the nominee for the Board of Directors of the Company and of each
director whose term of office will continue after the meeting:
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., Thyssen
Inc., and JPE Inc.
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
3
<PAGE> 6
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.
Mitchell I. Quain has served as a director of the Company since 1996. He
has served as Executive Vice President at Furman Selz LLC, an investment banking
company, since 1997. From 1975 to 1997, Mr. Quain was employed at Schroder
Wertheim & Company, where he most recently served as Managing Director, Head of
Equity Capital Markets. Mr. Quain is also a director of Allied Products
Corporation, DeCrane Aircraft Holding, Inc., 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
was elected a Director of the Company in May 1997. 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. and is the Chairman of the Board of Industrial Technology Institute.
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, 1997, the Board of Directors held
six 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, 1997, the Audit Committee held three meetings and
took no actions by written consent.
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, 1997, the Compensation Committee held one meeting
and took no actions by written consent.
4
<PAGE> 7
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 1997, these performance goals
included objective targets for revenue growth (for the whole Company or for the
area of the Company for which the executive is responsible, depending on the
executive) and earnings per share, both of which required improvements over 1996
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 over 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
January 1997. The Compensation Committee reviewed the recommendations and
performance and market data outlined above and established a base salary level
to be effective January 1, 1997 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 earnings per
share targets set near the beginning of the year and 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
5
<PAGE> 8
historical and expected future contributions by the individual executive
officer. For 1997, 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 1997, 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 1997 are set forth in the table
below entitled "Option Grants in Last Fiscal Year."
1997 CHIEF EXECUTIVE OFFICER COMPENSATION
In February 1997, the Committee established a base salary for Mr.
Korybalski for 1997. This base salary represented an increase over Mr.
Korybalski's 1996 base salary. The Compensation Committee also established a
target bonus for Mr. Korybalski under the 1997 bonus plan payable based on the
Company's achievement of objective measures of revenue growth and earnings per
share (both of which targets required improvement from 1996). The 1997 base
salary level and target bonus were based upon a number of factors, including (a)
the Compensation Committee's assessment of the 1996 performance of the Company
and Mr. Korybalski, (b) 1997 Company performance objectives and individual
performance objectives and responsibilities for Mr. Korybalski established in
February 1997, and (c) the market compensation data for similar companies listed
in the Surveys. The performance objectives for 1997 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 1997 warrants the compensation for 1997 as reflected in the Summary
Compensation Table.
6
<PAGE> 9
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 1998.
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, 1997, 1996 and 1995 concerning compensation of (i) all
individuals serving as the Company's Chief Executive Officer during the fiscal
year ended December 31, 1997, and (ii) all other executive officers of the
Company whose total annual salary and bonus exceeded $100,000 in fiscal 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
--------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) ($)(1)
--------------------------- ---- --------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Michael E. Korybalski...................... 1997 190,000 16,477 -- 4,112
Chief Executive Officer 1996 170,000 27,968 -- 3,888
1995 158,000 57,916 -- 3,678
Robert R. Ryan............................. 1997 175,000 15,176 50,000 4,012
President and Chief Operating Officer 1996 150,000 18,330 -- 3,808
1995 135,000 35,368 -- 2,565
Michael Hoffmann........................... 1997 105,000 44,532 25,000 --
Senior Vice President -- 1996 103,000 26,984 10,000 --
Worldwide Sales and Service 1995 100,000 22,241 -- --
</TABLE>
- ---------------
(1) The amounts shown for fiscal 1997 include (i) $3,800 and $3,800 for Messrs.
Korybalski and Ryan, respectively, representing the Company's contribution
to the executive officer in 1997 under the Company's 401(k) Plan, and (ii)
$312 and $212 for Messrs. Korybalski and Ryan, respectively, representing
life insurance premiums paid by the Company in 1997 for life insurance
policies.
7
<PAGE> 10
Option Grants Table
The following table sets forth information concerning individual grants of
stock options made during the fiscal year ended December 31, 1997 to each of the
executive officers of the Company named in the Summary Compensation Table above:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------- VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION --------------------
NAME GRANTED(#) YEAR ($/SH) DATE 5%($) 10%($)
---- ---------- ---------- -------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Michael E. Korybalski............... -- -- -- -- -- --
Robert R. Ryan...................... 50,000(1) 15.2 8.00 2/6/02 110,513 244,204
Michael Hoffmann.................... 25,000(2) 7.6 8.00 2/6/02 55,256 122,102
</TABLE>
- ---------------
(1) These options were granted on February 6, 1997 and all 50,000 options become
exercisable over a period of four years, at a rate of 25% on each
anniversary date after the date of grant. 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 February 6, 1997 and all 25,000 options become
exercisable over a period of four years, at a rate of 25% on each
anniversary date after the date of grant. 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, 1997 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, 1997:
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
(#) ($)
SHARES VALUE ------------------------------ ----------------------------
NAME ACQUIRED ON REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
---- EXERCISE(#) ----------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Michael E.
Korybalski.......... 0 0 0 0/0
Robert R. Ryan........ 0 0 0/50,000 0/0
Michael Hoffmann...... 0 0 10,000/25,000 0/0
</TABLE>
- ---------------
(1) Calculated on the basis of the fair market value of the underlying
securities at December 31, 1997 of $6.688, minus the aggregate exercise
price.
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
8
<PAGE> 11
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 May 1997, 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 $9.13 per share. These
options become fully exercisable one year from the date of grant, May 1998, and
expire in May 2002. 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, March
1, 1997 and March 1, 1998. The agreement provides that Mr. Korybalski will serve
as the Company's Chief Executive Officer until March 31, 2001, 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
1998 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, March 1, 1997 and March 1, 1998,
pursuant to which he will serve in such capacities until March 31, 2000, 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 1998 is $185,000. 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
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 1997, 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, 1997, 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, 1997: (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):
<TABLE>
<CAPTION>
Mechanical Nasdaq Stock
Measurement Period Dynamics, H&Q Market -
(Fiscal Year Covered) Inc. Technology U.S.
<S> <C> <C> <C>
5/14/96 100 100 100
Jun-96 137.50 91.16 96.25
Sep-96 160.23 96.77 99.67
Dec-96 126.14 103.77 104.57
Mar-97 65.91 98.91 98.90
Jun-97 65.91 119.06 117.03
Sep-97 71.02 144.29 136.83
Dec-97 60.80 121.66 128.32
</TABLE>
- ---------------
Stock and index prices scaled to 100
(Total return assumes reinvestment of dividends.)
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive 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"). Executive 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 1997, or written representations that
no Forms 5 were required, the Company believes that during the fiscal year ended
December 31, 1997 all applicable Section 16(a) filing requirements were complied
with by each of its executive officers, directors and greater than ten-percent
beneficial owners.
10
<PAGE> 13
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 1997 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, 1998. 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. OTHER MATTERS
SHAREHOLDER PROPOSALS
Proposals of shareholders that are intended to be presented at the
Company's 1999 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, 1998 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.
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,
1997 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 14, 1998
11
<PAGE> 14
PROXY MECHANICAL DYNAMICS, INC. PROXY
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS OF MECHANICAL DYNAMICS, INC. TO BE HELD
MAY 14, 1998
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 Thursday, May 14, 1998, at 4:00 p.m., Eastern
Standard Time, at the Sheraton Inn Ann Arbor, 3200 Boardwalk, Ann Arbor,
Michigan 48108 (or at any adjournment(s) thereof), as follows:
1. Election of Director -- Nominee: David E. Cole
[ ] FOR the nominee listed above [ ] WITHHOLD AUTHORITY
to vote for the
nominee listed above
[ ] ABSTAIN
2. Proposal to ratify and approve Arthur Andersen LLP as the independent
auditors of the Company for the fiscal year ending December 31, 1998:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. In their discretion with regard to such other business as may properly come
before the Annual Meeting (or any adjournment(s) thereof).
<PAGE> 15
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 nominee named in Proposal 1 and in favor of
Proposal 2.
Dated: , 1998
----------------------------------
---------------------------------------------
---------------------------------------------
Shareholder should sign here
---------------------------------------------
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.
