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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: DECEMBER 31, 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)
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MICHIGAN 38-2163045
(State of incorporation) (I.R.S. Employer Identification No.)
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2301 COMMONWEALTH BLVD.
ANN ARBOR, MICHIGAN 48105
(734) 994-3800
(Address of principal executive offices, including zip
code, and telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: NONE Name of each exchange on which registered: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON SHARES, NO PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock of the Registrant held
by non-affiliates of the Registrant as of March 3, 1999, computed by reference
to the Nasdaq closing price on such date, was approximately $30,961,000.
The number of outstanding shares of the Registrant's common stock, as
of March 3, 1999, was 6,237,097.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1999 Annual Meeting of
Shareholders, scheduled to be held on May 13, 1999, are incorporated by
reference into Part III.
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MECHANICAL DYNAMICS, INC.
FORM 10-K
TABLE OF CONTENTS
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PAGE
PART I
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Item 1. Business................................................................................. 3
Item 2. Properties............................................................................... 13
Item 3. Legal Proceedings........................................................................ 13
Item 4. Submission of Matters to a Vote of Security Holders...................................... 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................... 14
Item 6. Selected Consolidated Financial Data..................................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 16
Item 7a. Quantitative and Qualitative Disclosures about Market Risk............................... 24
Item 8. Financial Statements and Supplementary Data.............................................. 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..... 43
PART III
Item 10. Directors and Executive Officers of the Registrant....................................... 43
Item 11. Executive Compensation................................................................... 44
Item 12. Security Ownership of Certain Beneficial Owners and Management........................... 44
Item 13. Certain Relationships and Related Transactions........................................... 44
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................... 45
SIGNATURES........................................................................................ 47
INDEX TO EXHIBITS................................................................................. 48
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PART I
ITEM 1. BUSINESS
GENERAL
Since Mechanical Dynamics, Inc. ("MDI" or the "Company") was
incorporated in Michigan in 1977, the Company has developed, marketed and
supported virtual prototyping solutions. The Company's ADAMS mechanical system
simulation software allows engineering teams to create virtual prototypes of
their complex mechanical system designs on the computer. By realistically
simulating the full-motion behavior of their designs, they can explore multiple
design variations, testing and refining until optimizing system performance. In
doing so, they reduce the need for costly, time-consuming physical prototype
testing, while significantly improving product quality.
ADAMS makes the idea of concurrent engineering real. It enables those
involved at each step of the product development process - from initial concept
through design and testing - to interact with the virtual prototype, to see the
whole system in motion and provide input even from the earliest stages. This not
only shortens the development cycle and increases product quality, but also
improves the product development process itself. Leading manufacturers from
nearly every industry today use the Company's software and consulting services.
In recent years, the Company has made strategic business acquisitions
to expand its ability to develop and market new products to customers. In 1994,
the Company acquired five European entities that previously had distributed the
Company's products in Europe and are now wholly-owned subsidiaries: Mechanical
Dynamics GmbH, a German corporation; Mechanical Dynamics Sarl, a French
corporation; Mechanical Dynamics International Ltd., a United Kingdom
corporation; Mechanical Dynamics Sweden AB, a Swedish corporation; and
Mechanical Dynamics Italy srl, an Italian corporation. In 1997, the Company
established a Japanese subsidiary, Mechanical Dynamics Japan K.K., through a
joint venture agreement with Information Services International-Dentsu, Ltd.
("ISI-Dentsu") of Tokyo, Japan, the distributor of the Company's software in
Japan. In 1997, the Company also acquired StatDesign, Inc., a provider of
engineering software and services for product design and development, primarily
to Ford Motor Company.
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 $1.7 million
consisted of $563,000 in cash and 142,540 shares of the Company's common stock
valued at approximately $1.1 million. Subsequent to the closing of the
acquisition, the operations of DTI were integrated within the Company. See Note
2 of Notes to Consolidated Financial Statements.
In August 1998, the Company established a Canadian subsidiary,
Mechanical Dynamics Ltd. ("MDI-Canada"). Immediately following its formation,
MDI-Canada acquired the Design Analysis Group and certain other assets of H.G.E.
Inc. ("HGE"), an engineering software and services firm focusing on the
aerospace industry based in Toronto, Ontario, Canada. The aggregate purchase
price of approximately $2.2 million consisted principally of cash. Subsequent to
the closing of the acquisition, the operations of HGE were integrated within the
Company. See Note 2 of Notes to Consolidated Financial Statements.
In November 1998, the Company formed a strategic partnership with the
University of Iowa in which component-level durability sensitivity analysis
technology developed by the University will be integrated with the Company's
ADAMS virtual prototyping software to provide system-level durability design
sensitivity analysis capabilities. The Company paid $400,000 to the University
for the ability to jointly develop and market this technology. See Note 2 of
Notes to Consolidated Financial Statements.
ADAMS(R) and the Company's logo are registered trademarks of the
Company. ADAMS/Animation, ADAMS/Car, ADAMS/Controls, ADAMS/Driver,
ADAMS/Exchange, ADAMS/Flex, ADAMS/Linear, ADAMS/Pre, ADAMS/Rail, ADAMS/Solver,
ADAMS/Tire, ADAMS/View, AutoDOE, CAT/ADAMS, Dynamic Designer and MECHANISM/Pro
are trademarks of the Company. All rights reserved. All other trade names and
trademarks appearing in this Form 10-K are the property of their respective
holders.
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PRODUCTS
MDI develops, markets and supports virtual prototyping software packages
capable of simulating the many varied and complex component interactions and
operating environments that companies face when designing their products. The
Company's primary software line is the ADAMS Professional Series. The principal
product in this line, the ADAMS Full Simulation Package, is comprised of
ADAMS/Solver and ADAMS/View, and can be used as a self-contained software
package or with additional modules developed by the Company as well as with
third-party software. In addition, certain original equipment manufacturers
("OEM") license the Company's kinematic motion simulation software in order to
embed the Company's software in the OEM's design software packages. The U.S.
list price for the ADAMS Full Simulation Package is approximately $25,000 per
license depending upon configuration. The U.S. list prices for the Company's
additional software products typically range from $3,000 to $20,000. The Company
also packages several of its additional software products into industry or
application-specific packages. These packages have U.S. list prices ranging from
$13,000 to $66,000. In the future, the Company intends to offer additional
products and packages as part of its ADAMS software product line. Since the
Company's sales are concentrated in this product line, a decline in the demand
for ADAMS software and services would have a material adverse effect on the
Company's business, financial condition and results of operations.
ADAMS and the modular packages of ADAMS software are available on a number
of platforms, including Intel Pentium-based PCs running the Microsoft Windows NT
operating system, UNIX-based workstations and servers from Silicon Graphics,
Hewlett-Packard, Sun Microsystems, IBM and Digital Equipment.
ADAMS PROFESSIONAL SERIES
Full Simulation Package
- ADAMS/Solver is the underlying solution "engine." ADAMS/Solver
automatically formulates and solves the equations of motion to provide complete
kinematic, static and dynamics analysis of mechanical systems.
- ADAMS/View is an interactive graphical environment for the full ADAMS
product line. ADAMS/View combines simple iconic, point-and-click operation with
advanced model-building, simulation, animation and xy plotting capabilities.
Industry-specific packages
- ADAMS/Car was developed by the Company in collaboration with AB
Volvo, Audi AG, BMW, Nissan Motor Co., Renault and Rover Group P.L.C. ADAMS/Car
is a special version of ADAMS designed specifically for advanced vehicle
simulation. Embedded within the software are the specialized design and
analytical expertise of automotive industry leaders. A custom menu-driven user
interface highlights capabilities familiar to vehicle designers so customers can
use ADAMS/Car with little formal training.
- ADAMS/Tire is a comprehensive set of tools for simulating the complex
force interactions between rubber tires and driving surfaces. This can be
important input for understanding vehicle behavior under a variety of
conditions.
- ADAMS/Driver allows the user to add the element of human driver
response to vehicle simulations. ADAMS/Driver can simulate the actions and
reactions of a vehicle's operator under a variety of driving conditions.
- ADAMS/Pre is a pre-processing environment for ADAMS designed
specifically for the automotive environment.
- AutoDOE is a software package used for creating statistically defined
design of experiments programs. Design of experiments methods allow users to run
a battery of simulations on a mechanical system design to determine the effects
of multiple design or manufacturing variations on system performance and
behavior. With design of experiments, product designs can be optimized more
quickly than through the traditional process of testing one factor at a time.
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- ADAMS/Rail was developed by the Company in collaboration with Dutch Rail
and provides virtual prototyping capabilities tailored to the needs of the
worldwide railcar manufacturing industry. The software combines specialized
railcar design and analytical know-how with custom menus and functions developed
specifically for railcar engineers.
Visualization Option
- ADAMS/Animation allows a user to see the complete system in motion -- in
real time, fully shaded and rendered. ADAMS/Animation checks and reports
potential collision of parts and components and shows important measurements on
screen. ADAMS/Animation also allows for multiple light sources, texture mapping,
detailed color specifications and multiple perspectives. These enhance the
understanding of the design and can result in more successful design reviews.
ADAMS INTERFACE PRODUCTS
Interface Products are products specifically designed for the CAD/CAM/CAE
environments. Assemblies created within the Company's partners' software
environments are converted into realistic, fully three-dimensional mechanical
system models. These software environments then verify and evaluate motion
paths, locate lock-up positions, detect interferences, establish work-space
envelopes and calculate joint reaction forces.
ADAMS CAE Interface Products
- ADAMS/Flex automates the exchange of data between ADAMS and finite element
analysis ("FEA") software, including ANSYS and MSC/NASTRAN. This two-way
interface provides for accurate loading conditions for FEA and a more complete
understanding of flexible effects on mechanical systems.
- ADAMS/Linear simplifies the non-linear equations of motion calculated by
ADAMS. Having such data in linear form can significantly enhance the ability to
study the stability and vibratory behavior of mechanical system models.
ADAMS/Linear can also provide an easy link to popular control system design
packages such as MATRIXx and MATLAB.
- ADAMS/Controls simplifies the integration of non-linear ADAMS mechanical
models with control and hydraulic systems developed in leading control system
design packages including MATLAB, MATRIXx and EASY5. The product allows the user
to test how control systems will affect their mechanical system, and visualize
the effects of both controls and mechanics in a virtual system test environment.
ADAMS CAD/CAM Interface Products
- ADAMS/Exchange provides an industry-standard, two-way interface for
exchanging model geometry between ADAMS and many other CAD/CAM packages. This
saves time in data transfer, while enhancing the accuracy and realism of
mechanical system simulations.
- CAT/ADAMS was developed by the Company in collaboration with a consortium
of major automotive manufacturers, and was designed to facilitate the exchange
of data between ADAMS and the widely-used CATIA computer-aided design,
manufacturing, and engineering (CAD/CAM/CAE) package from Dassault Systemes.
- Dynamic Designer was purchased by the Company in conjunction with its
acquisition of DTI, in January 1998. Dynamic Designer is a mechanical design
simulation software product embedded in the AutoCAD and Mechanical Desktop
product lines from Autodesk, Inc. Similar embedded ADAMS simulation capabilities
for SolidWorks 97 from SolidWorks Corp. have been developed by the Company.
- MECHANISM/Pro is a program specifically designed for Parametric Technology
Corp.'s ("PTC") Pro/ENGINEER environment. MECHANISM/Pro converts assemblies
created within PTC's Pro/ASSEMBLY software into realistic, fully
three-dimensional mechanical system models. MECHANISM/Pro can verify and
evaluate
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motion paths, locate lock-up positions, detect interferences, establish
work-space envelopes and calculate joint reaction forces.
ADAMS OEM PRODUCTS
OEM Products are kinematic motion simulation products that are embedded in OEMs'
design software packages. The Company has entered into license agreements or
arrangements with several OEMs, including Structural Dynamics Research
Corporation ("SDRC"), Unigraphics Solutions Inc., Bentley Systems, Engineering
Animation, Inc., Tecnomatix Technologies Ltd., and Applicon, under which the
OEMs are licensed to embed the Company's products in the OEMs' software
packages. These products provide limited virtual prototyping capabilities, and
can be upgraded by licensing ADAMS/Solver directly from the Company.
SERVICES
The Company provides consulting, training and technical support services to
customers in connection with a wide range of product design and engineering
projects. MDI's primary objectives with regard to its services include: (1)
providing total solutions to its customers' problems; (2) leveraging software
sales; (3) enhancing customer loyalty and repeat and renewal business; (4)
growing the services business of the Company profitably; (5) aggressively
exploring and penetrating new markets; and (6) obtaining customer feedback on
its products.
The Company strives to identify key companies within various industries with
whom it seeks to develop close working relationships. The Company seeks to
foster technological partnerships with these companies by providing a
comprehensive service package, which addresses the particular virtual
prototyping needs of the companies. By doing this, MDI provides a total solution
for the customer, which can lead to increased acceptance of virtual prototyping
in the applicable industry.
In addition to its consulting services, the Company also provides training
to enable its customers to more easily integrate virtual prototyping technology
into their design and quality control processes.
The Company's services staff provides these services on either a time and
materials or a fixed fee basis depending on the project and the requirements of
the customer. Contract fees range from a few thousand dollars to several hundred
thousand dollars depending upon the scope of the project, and contract durations
range from a few weeks to several years. From time to time the Company has
incurred losses in connection with fixed price contracts. If the Company
underestimates the expenses required to perform under fixed fee contracts, it
could incur losses on these contracts. The Company has not incurred a material
loss from underestimating the expenses on any fixed fee contract during 1998,
1997 or 1996.
A critical component of MDI's strategy is to provide a wide range of
customer support services. These services include hotline support and on-site
support and training. Product support is provided pursuant to renewable annual
maintenance contracts. Customers who purchase maintenance agreements receive
product enhancement releases and hotline support at no additional charge.
On-site support and training are priced separately. Approximately 16.3%, 15.9%,
and 16.2% of the Company's total revenue was realized from maintenance contracts
in 1998, 1997, and 1996, respectively.
CUSTOMERS
The Company's customers include companies in a wide variety of industries.
Historically, the Company's largest customers have been automobile manufacturers
and automotive suppliers operating in an industry which can be highly cyclical.
During 1998, 1997, and 1996, automotive-related customers accounted for
approximately 54.7%, 50.5%, and 48.1% of the Company's total revenue,
respectively. No customer accounted for greater than 10% of the Company's total
revenue in 1998. Ford Motor Company accounted for approximately 10.6% and 11.8%
of the Company's total revenue in 1997 and 1996, respectively. No other customer
accounted for greater than 10% of the Company's total revenue in 1997 and 1996.
Segments in the auto industry, in each of the United States, Europe and Japan,
have, from time to time, experienced significant economic downturns
characterized by decreased product demand, reductions in capital expenditures,
production over-capacity, price erosion, work slowdowns, strikes and
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layoffs. The Company's operations may in the future reflect substantial
fluctuations from period to period as a consequence of such industry patterns,
general economic conditions affecting the timing of orders from major customers
and other factors affecting capital spending. There can be no assurance that
such factors will not have a material adverse effect upon the Company's
business, financial condition and results of operations.
SALES AND MARKETING
The Company markets its products through direct sales in North America,
Europe and to a lesser extent in Asia, approximately 15 value-added resellers
throughout North America, a group of international distributors in over 20
countries and through reselling alliances with certain integrated mechanical
CAD/CAM/CAE software vendors. The Company conducts sales activities from its
headquarters in Ann Arbor, Michigan, domestic sales offices in Atlanta, GA;
Austin, TX; Chicago, IL; Cleveland, OH; Los Angeles, CA; Phoenix, AZ; San
Francisco, CA; and Washington D.C., as well as its subsidiaries' offices in
England, France, Germany (three offices), Italy (two offices), Sweden (2
offices), Canada (2 offices), Japan and Singapore, and its foreign branch
offices in China and India. The Company employs engineers and technically
proficient salespersons capable of serving the technology needs of current and
prospective customers' engineering, design and manufacturing staffs.
The Company has formed strategic alliances with several leading hardware
vendors, including Hewlett-Packard, Silicon Graphics and Sun Microsystems.
Through these strategic alliances, the Company and the vendor participate in
various projects which enhance both the visibility and acceptance of the
Company's products, such as joint presentations to customers and the trade
press, joint advertising and promotion, conference presentations and displays.
The Company also has alliances with vendors of complementary computer-aided
engineering technology, such as ANSYS, Inc., Integrated Systems, Inc., The
MacNeal-Schwendler Corporation, The Mathworks, Inc. and Structural Research &
Analysis Corp. These relationships entail collaborative development to support
interfaces between the software products of the Company and each partner, as
well as cooperative marketing and selling activity. By working with these
vendors, the Company seeks to satisfy the needs of its customers across a wide
range of computer-aided engineering applications. The Company and its partners
jointly participate in promotional activities, trade shows, user conferences,
customer presentations and customer proposals.
The Company markets and sells third party software products through
distributor agreements with certain other CAE vendors whose technologies help it
provide a total solution to its customers. As of December 31, 1998 the Company
distributes software products of ANSYS, Inc. in both the United Kingdom and
Canada in addition to providing consulting services related to those products.
Throughout Sweden, the Company distributes MATRIXx, a product of Integrated
Systems, Inc. Revenue from third party software products accounted for
approximately 7.1%, 2.2%, and 3.0% of the Company's total revenue in 1998, 1997
and 1996, respectively.
The Company has formed relationships with several CAD/CAM companies,
including Applicon, Inc., Autodesk, Inc., Bentley Systems, Inc., Dassault
Systemes, Engineering Animation, Inc., Parametric Technology Corp., SolidWorks
Corp., Structural Dynamics Research Corporation, Tecnomatix Technologies Ltd.,
and Unigraphics Solutions Inc. Through these alliances, the Company collaborates
with its partners to develop and support embedded, add-on software modules for
each CAD/CAM environment. These embedded modules enable CAD/CAM users to model
and simulate mechanical systems and interface with the Company's full ADAMS
product line. The Company believes that strategic alliances are important to its
long-term success and intends to continue to pursue such alliances in the
future.
International revenue (i.e., revenue from sales outside of North America)
accounted for approximately 62.4%, 65.2%, and 67.0% of the Company's total
revenue in 1998, 1997, and 1996, respectively. In Asia, and, to a lesser extent,
in North America and Europe, the Company markets its products and services
through contractual relationships with distributors. A significant portion of
the Company's revenue in Asia is derived from its distributors in Japan, Korea,
India, China, Taiwan and Singapore. The Company's largest distributor,
ISI-Dentsu, is located in Japan and accounted for approximately 13.2%, 15.3%,
and 16.5% of the Company's total revenue in 1998, 1997, and 1996, respectively.
There can be no assurance that in the future the Company's current distributors
will choose or be able to market or service and support the Company's products
effectively, that economic
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conditions or industry demand will not adversely affect the distributors or that
such distributors will not devote greater resources to marketing and supporting
products of other companies. Additionally, because the Company's products are
typically used by skilled professionals, in order to be effective, a distributor
must possess sufficient technical, marketing and sales resources and must devote
these resources to a lengthy sales cycle, customer training and product service
and support. Only a limited number of distributors possess such resources. The
loss of or a significant reduction in revenue from a distributor could have a
material adverse effect on the Company's business, financial condition and
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 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 1999, 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. A summary of the Company's revenue by
geographic area is presented in Note 8 of Notes to Consolidated Financial
Statements.
The Company generally prices its software products and services in local
currencies in Europe, Canada and Japan. The strengthening of the dollar in 1998,
relative to the European and Japanese currencies, negatively affected 1998
international revenue by approximately $883,000. 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 U.S. dollar continues to strengthen in
1999 relative to the European, Canadian and Japanese currencies, the Company's
international revenue will be negatively impacted, which could have a material
adverse effect on the Company's consolidated results of operations.
The Company expects that international sales will continue to account for a
significant portion of its total revenue in future periods. The Company intends
to continue to expand its operations outside of the United States, which will
require significant management attention and financial resources. International
operations are subject to inherent risks, including unexpected changes in
regulatory requirements, tariffs and taxes, difficulties in staffing and
managing foreign operations, longer payment cycles, greater difficulty in
accounts receivable collection, compliance with applicable export licensing
requirements and other trade barriers and political and economic instability.
Moreover, gains and losses on the conversion to U.S. dollars of receivables and
payables arising from international operations may contribute to fluctuations in
the Company's results of operations. As more fully described in Note 1 of Notes
to Consolidated Financial Statements, the Company's risk management strategy
uses derivative financial instruments in the form of forward foreign exchange
contracts for the purpose of hedging foreign currency market exposures of its
ongoing business operations. The Company does not enter into derivative
contracts for the purpose of trading or speculative transactions. If for any
reason exchange or price controls or other restrictions on foreign currencies
were imposed, the Company's business, financial condition and results of
operations could be materially adversely affected. Currency exchange
fluctuations in countries in which the Company licenses its products in U.S.
dollars could have a material adverse effect on the Company's business,
financial condition and results of operations by resulting in pricing that is
not competitive with products priced in local currencies. In addition, the laws
of certain countries do not protect the Company's products and intellectual
property rights to the same extent as do the laws of the United States. There
can be no assurance that any of these factors will not have a material adverse
effect on the Company's future international operations and sales and,
consequently, on the Company's business, financial condition and results of
operations.
RESEARCH AND DEVELOPMENT
The Company's success depends in large part upon its ability to enhance
current products and to develop and introduce new products on a timely and
cost-effective basis. The Company's current software development efforts are
focused on developing additional products and services to complement its core
competencies of developing, marketing and supporting mechanical system modeling
and simulation software packages.
The Company has historically released at least one new version of its
software to its customers per year and intends to continue such releases. The
Company also provides periodic releases to its OEM software partners. As part of
this release process, the Company continually communicates with its customers
and partners and solicits comments for improved ease of use and general customer
satisfaction.
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The Company's software developers work as a team with the Company's sales,
marketing and consulting personnel to achieve a robust, high-quality product
line.
The virtual prototyping industry is characterized by rapid technological
changes, frequent new product introductions and evolving industry standards that
may render existing products and services obsolete. Consequently, to maintain
its competitive position, the Company must enhance its existing software
products and develop and introduce new products on a timely basis. In addition,
in order to maintain and broaden the market for its software products, the
Company must support a variety of computer systems and graphics devices. There
can be no assurance that the Company will not experience difficulties that could
delay or prevent the successful development, introduction and marketing of these
products, or that such new products and product enhancements will adequately
meet the requirements of the marketplace and achieve market acceptance. If the
Company is unable to develop and introduce products in a timely manner in
response to changing market conditions or customer requirements, the Company's
business, financial condition and results of operations would be materially
adversely affected.
Software products as complex as those offered by the Company may contain
defects or failures that may be detected at any point in the product's life
cycle. The Company has, in the past, discovered software defects in certain of
its products. The Company's standard warranty provides that if the software does
not function to published specifications, the Company will, within a limited
time period following delivery, use its best efforts to repair or replace the
defective software without charge. To date, the Company has not experienced
significant technical errors or other product performance issues and warranty
costs have been insignificant. There can be no assurance that, despite testing
by the Company, errors will not be found in current or new products after
commencement of commercial shipments, resulting in injury to the Company's
reputation, increased warranty and service costs, loss of market share or
failure to achieve market acceptance. Any such occurrence could have a material
adverse effect upon the Company's business, financial condition and results of
operations.
The Company also sponsors and maintains a network of academic and commercial
research affiliates to promote recognition and commercialization of applicable
emerging technology. Some of the technology areas which have recently been
explored include: kinematics, elastodynamics, numerical methods, design
sensitivity, optimization, symbolic computing, advance graphics and
visualization, user interfaces, tire dynamics, biomechanics, ergonomics,
controls design and hydraulics.
As of December 31, 1998, the Company's research and development group
consisted of 58 full-time employees. During 1998, 1997, and 1996, the Company's
research and development expenses were approximately $5.3 million, $4.7 million,
and $3.6 million, respectively. The Company anticipates that it will commit
substantial resources to research and development in the future.
BACKLOG
The Company typically ships its products within 30 days after acceptance of
a customer purchase order and execution of a software license agreement.
Accordingly, the Company does not believe that its backlog at any particular
point in time is indicative of future revenue levels.
COMPETITION
The markets for the Company's products and services are highly competitive
and subject to rapid change. The Company believes the principal competitive
factors in this market are product quality, ease of use, quality of support,
performance and price, functionality and features, ease of integration with
customers' design processes, strategic alliances and vendor and product
reputation. In general, the Company's current competition comes from three
sources: the traditional method of testing hardware prototypes, whether
performed internally or externally, by the Company's current or potential
customers, other virtual prototyping software vendors, including Parametric
Technology Corp. and The MacNeal-Schwendler Corporation, and the internal
software development groups of its current or potential customers. Many
companies have their own software development groups that historically have
developed their own software design tools. This has required the Company and
other vendors to compete against these internal groups to sell their products
into these companies. A number of the Company's competitors have
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longer operating histories, greater financial, technical, sales, marketing and
other resources, greater name recognition, more extensive distribution and sales
networks and a larger, more established customer base. Among the Company's
current and potential competitors are also a number of large hardware and
software companies that may develop or acquire products that compete with the
Company's products. Current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
increase the ability of their products to address the needs of the Company's
prospective customers. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. Increased competition is likely to result in price reductions, reduced
operating margins and loss of market share, any of which could materially
adversely affect the Company's business, results of operations and financial
condition. There can be no assurance that the Company will be able to compete
successfully in the future or that competitive pressures will not have a
material adverse effect the Company's business, financial condition and results
of operations.
The Company's products address the market for virtual prototyping software.
Because this market is still evolving, it is difficult to assess or predict with
any assurance the growth rate, if any, and size of this market. Also, as is
typical in the case of a new and evolving industry, demand and market acceptance
for virtual prototyping software products and services are subject to a high
level of uncertainty. The Company's future financial performance will depend in
large part on growth in the virtual prototyping market and upon its ability to
successfully market its ADAMS products and services. There can be no assurance
the virtual prototyping market will grow in the future or that the Company's
products and services will achieve wider market acceptance. There are certain
prototyping applications to which the Company's products may not provide an
effective solution due to limitations in the capabilities of the Company's
products and, as such, the Company's products may not be accepted by certain
customers. If the virtual prototyping market fails to grow or grows more slowly
than anticipated, or if the Company's products do not achieve significant market
acceptance, the Company's business, financial condition and results of
operations will be materially adversely affected.
PROPRIETARY RIGHTS
The Company's success depends in large part upon its proprietary software
technology. The Company currently relies on trade secret, copyright and
trademark laws, and license agreements with all of its customers to protect its
proprietary rights in its software products. The Company also ships its software
with either an encoded password scheme or a security device. The Company's
software copies are locked to a specific central processing unit and contain
codes that will prohibit the user from running the software after a certain
date. The Company generally enters into proprietary information and
confidentiality agreements with its employees and distributors, and limits
access to and distribution of its software, documentation and other proprietary
information. The Company generally does not license or release the source code
for its proprietary software to third parties. Despite these precautions, there
can be no assurance that a third party will not copy or otherwise obtain and use
the Company's products or technology without authorization, or develop similar
or superior technology independently. The Company distributes its Dynamic
Designer software products and demonstration copies of its other products in
North America, Europe and Asia pursuant to "shrink-wrap" licenses. There can be
no assurance that such licenses are enforceable. In addition, effective
copyright and trade secret protection may be unavailable or limited in certain
foreign countries. Litigation may be necessary in the future to enforce the
Company's intellectual property rights, to protect the Company's trade secrets,
to determine the validity and scope of the proprietary rights of others or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on the Company's business, financial condition and results of
operations. Although the Company believes that its products do not infringe on
the proprietary rights of third parties, and although the Company has received
no communications from third parties alleging the infringement of the
proprietary rights of such parties, there can be no assurance that infringement
claims will not be asserted against the Company in the future or that any such
claims will not require the Company to enter into costly litigation.
Irrespective of the validity or the successful assertion of such claims, any
such litigation could result in substantial costs and a significant diversion of
management's attention and resources, and these results as well as any adverse
judgment that might be rendered could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
if any claims or actions are asserted against the Company, the Company may
choose or be required to obtain a license under a third party's intellectual
property rights. There can be no assurance that under such circumstances a
license would be available upon reasonable terms or at all.
10
<PAGE> 11
Certain technology used by the Company's products is licensed from third
parties, generally on a nonexclusive basis. The Company believes there are
alternative sources for each of the material components of technology licensed
by the Company from third parties. However, the termination of any such
licenses, the failure of the third parties to adequately maintain or update
their products, including making their products year 2000 compliant, or a
substantial increase in the license fee associated with such licenses could
result in a delay in the Company's ability to deliver certain of its products
while it seeks to implement technology offered by alternative sources and may
adversely affect the Company's business, financial condition and results of
operations. Any required replacement licenses could prove costly. Also, any such
delay, to the extent it occurs at or near the end of a quarter, could result in
a material adverse effect on the Company's quarterly results of operations.
While it may be necessary or desirable in the future to obtain other licenses
relating to one or more of the Company's products or relating to current or
future technologies, there can be no assurance that the Company will be able to
do so on reasonable terms or at all. Further, increased merger and acquisition
activity in the technology industry could affect the Company's relationships
with other third-party developers, and thus adversely affect the Company's
results of operations.
EMPLOYEES
As of December 31, 1998, the Company had 283 employees, consisting of 104 in
engineering services, 93 in sales and marketing, 58 in research and development
and 28 in general and administrative capacities. Of these, 152 are located at
the Company's headquarters in Ann Arbor, Michigan, 27 are located at the
Company's domestic offices in Arizona, California, Georgia, Illinois, Indiana,
Maryland, New Mexico, North Carolina, Ohio, Texas, Washington, and Wisconsin, 16
are located at the Company's Canadian subsidiary, 84 are located at the
Company's European and Asian subsidiaries and 4 are located at the Company's
foreign branch offices in China and India. None of the Company's employees is
represented by a labor union or is subject to a collective bargaining agreement.
The Company believes that its relations with its employees are good.
The Company's success depends in large part upon the continued service of
its key technical and senior management personnel. The Company's success also
depends on its continuing ability to attract and retain highly qualified
technical, sales and marketing, and managerial personnel. Competition for such
personnel is intense, and there can be no assurance that the Company can retain
its key managerial and technical employees or that it can attract, assimilate or
retain other highly qualified personnel in the future. If the Company is unable
to hire the necessary technical personnel, the development of new products could
be impaired. The Company's inability to attract, assimilate or retain personnel
in the future on a timely basis could have a material adverse effect on the
Company's business, financial condition and results of operations.
ACQUISITIONS
The Company periodically acquires or invests in businesses, software
products and technologies which are complementary to the Company's business. The
risks associated with such acquisitions or investments include, among others,
the difficulty of assimilating the operations and personnel of the companies,
the failure to realize anticipated synergies and the diversion of management's
time and attention. In addition, such investments and acquisitions may involve
significant transaction-related costs. There can be no assurance that the
Company will be successful in overcoming such risks or that such investments and
acquisitions will not have a material adverse effect upon on the Company's
business, financial condition or results of operations.
Such investments and acquisitions may contribute to fluctuations in
quarterly results of operations due to merger-related costs and charges
associated with eliminating redundant expenses or write-offs of impaired assets
recorded in connection with the acquisitions, any of which could negatively
impact results of operations for a given period. In addition, acquisitions may
result in the allocation of purchase price to in-process research and
development. The SEC has recently raised issues regarding the methodologies used
and allocation of purchase price to in-process research and development and has
required some companies to adjust or restate prior periods to reduce allocations
to in-process research and development, thereby increasing intangible assets and
future amortization expense. While the Company believes that its purchase price
allocations are appropriate, if the SEC were to require a change in any of the
allocations, this would result in higher amortization expense, which could have
an adverse effect upon the Company's results of operations.
11
<PAGE> 12
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company's quarterly operating results have in the past varied and may
vary in the future depending on factors such as mix of direct and indirect
sales, product mix, service mix, increased competition, size and timing of
significant orders, seasonal factors and budgeting cycles of customers, product
releases and pricing changes by the Company or its competitors, timing of new
product announcements, market acceptance or delays in the introduction of new or
enhanced versions of the Company's products and general economic conditions. A
significant portion of the Company's revenue in previous quarter has been
derived from sales to a limited number of customers, and the Company currently
anticipates that future quarters will continue to reflect this trend. In
addition, like many software companies, the Company has generally recognized a
substantial portion of its revenue in the last month of each quarter, with this
revenue concentrated in the last weeks of the quarter. Accordingly, the
cancellation or deferral of even a small number of purchases of the Company's
products could have a material adverse effect on the Company's business, results
of operations and financial condition in any particular quarter. To the extent
that significant sales occur earlier than expected, operating results for
subsequent quarters may fail to keep pace or even decline. The Company's
quarterly operating results have also fluctuated as a result of seasonality of
customer buying patterns. Revenue is typically lower or constant in the first
quarter of the year in relation to the previous year's last quarter due
primarily to budgeting cycles of customers. The Company's third quarter revenue
is also typically lower or constant in relation to the second quarter of the
year due to the decreased level of sales from its European operations in the
third quarter. Revenue from quarter to quarter is difficult to forecast, as
minimal order backlog exists at the end of any quarter because the Company's
products typically are shipped and revenue recognized promptly after receipt of
the customers' orders.
The Company's expense levels are based, in part, on its expectations as to
future revenue. If revenue levels are below expectations, operating results are
likely to be adversely affected. In particular, net income may be
disproportionately affected by a reduction in revenue because only a small
portion of the Company's expenses varies with its revenue. There can be no
assurance that the Company will be able to grow in future periods, that it will
be able to sustain its historical rate of revenue growth or that its operations
will remain profitable. As a result of the foregoing and other 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 indications of
future performance. Fluctuations in operating results may also result in
volatility in the price of the shares of the Company's common stock.
STOCK PRICE VOLATILITY
The trading price of the Company's common stock could be subject to wide
fluctuations in response to quarterly variations in operating results,
announcements of technological innovations, the introduction of new products or
pricing changes by the Company or its competitors, proprietary rights or
litigation, changes in earnings estimates by analysts and other events or
factors. In addition, the stock market has from time to time experienced extreme
price and volume fluctuations that have been unrelated to the operating
performance of particular companies. These broad market fluctuations may
adversely affect the market price of the Company's common stock. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has sometimes occurred against companies.
There can be no assurance that such litigation will not occur in the future with
respect to the Company. Such litigation could result in substantial costs and a
significant diversion of management's attention and resources, and could have a
material adverse effect on the Company's business, financial condition and
results of operations. Any adverse determination in such litigation could also
subject the Company to significant liabilities.
12
<PAGE> 13
ITEM 2. PROPERTIES
The Company occupies approximately 39,000 square feet of space at its
headquarters in Ann Arbor, Michigan. Approximately 3,200 square feet will expire
in December 1999 with the remaining 35,800 square feet expiring in July 2000
(subject to the Company's right to extend the lease for one successive term of
five years). The Company also leases sales offices in Michigan, Texas,
California, Maryland, France, Sweden, England, Germany, Italy, Japan, Canada,
China and India. The Company believes that its existing facilities are adequate
for its needs for the next 12-18 months. Due to continued expansion, the Company
will need to secure additional space after the expiration of its existing
headquarters lease and is currently investigating its options for a new
headquarters.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various ordinary or routine litigation incidental
to its business, none of which, in the opinion of management, is deemed to be
material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the last quarter
of the year ended December 31, 1998.
13
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on The Nasdaq Stock Market under the
symbol "MDII." The range of high and low sale prices for the Company's common
stock on that market for each of the quarters in the last two years are as
follows:
<TABLE>
<CAPTION>
MARKET PRICES
-------------------------------------
HIGH LOW
- ------------------------------------------------------------------------------------------------ ------------------
<S> <C> <C>
Year ended December 31, 1998:
Fourth quarter.......................................................... $ 8.25 $ 3.75
Third quarter........................................................... 11.00 6.31
Second quarter.......................................................... 14.00 9.63
First quarter........................................................... 10.50 6.63
Year ended December 31, 1997:
Fourth quarter.......................................................... $10.00 $ 6.50
Third quarter........................................................... 8.63 5.75
Second quarter.......................................................... 10.38 5.81
First quarter........................................................... 13.75 6.25
</TABLE>
As of December 31, 1998, there were 203 shareholders of record of the
Company's common stock. This may not be an accurate indication of the total
shareholders of the Company as of December 31, 1998, since many nominees hold
the Company's shares in street name for the beneficial owners.
The Company has never declared or paid cash dividends on its capital stock
and anticipates that, for the foreseeable future, it will continue to retain any
earnings for use in the operation of its business.
In January 1998, the Company acquired 100% of the outstanding capital stock
of DTI Asia Pte. Ltd. In connection with this purchase, the Company issued
142,540 shares of the Company's common stock, none of which have been registered
under the Securities Act of 1933. The consideration for this transaction was a
cash payment of approximately $563,000 and the issuance of 142,540 shares of the
Company's common stock valued for this purpose at approximately $1.1 million.
These shares were issued in reliance upon the exemption from registration
contained in Section 4(2) of the Securities Act of 1933.
14
<PAGE> 15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of income data for the years ended December 31,
1998, 1997, 1996, 1995 and 1994 and the consolidated balance sheet data as of
December 31, 1998, 1997, 1996, 1995 and 1994 presented below are derived from
the Company's consolidated financial statements audited by Arthur Andersen LLP.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
In thousands, except per share data 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Revenue $ 36,575 $30,191 $25,383 $21,256 $ 16,267
Operating income (loss) (556)(1) 965 2,503 1,666 635
Net income (loss) (217) 744 2,071 1,381 450
Accretion of value of warrants -- -- -- 234 664
Net income (loss) available to common
shareholders (217) 744 2,071 1,147 (214)
Pro forma diluted net income (loss) per common
share (0.04) 0.13 0.41 0.30 (0.06)
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------
AS OF DECEMBER 31,
-------------------------------------------------------------------
In thousands 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA (3):
Cash and cash equivalents...................... $ 16,843 $ 20,261 $ 20,570 (4) $ 1,141 $ 817
Total assets................................... 36,247 34,147 29,812 9,338 7,334
Long-term debt, less current portion........... -- -- -- -- 79
Redeemable common stock........................ -- -- 167 859 1,191
Shareholders' equity (deficit)................. 25,600 23,970 22,185 (4) 1,334 (77)
</TABLE>
NOTES:
(1) For the year ended December 31, 1998, the Company recorded approximately
$1.7 million in charges to operations for acquisition and related costs
resulting primarily from the acquisitions of DTI Asia Pte. Ltd., certain
assets of HGE, Inc. and technology from the University of Iowa.
(2) For the year ended December 31, 1997, the Company recorded a $1.7 million
charge to operations for acquisition and related costs resulting from the
acquisition of StatDesign, Inc.
(3) The Company has never declared or paid cash dividends on its capital stock
and anticipates that, for the foreseeable future, it will continue to
retain any earnings for use in the operation of its business.
(4) For the year ended December 31, 1996, the Company completed an initial
public offering of its stock, which resulted in the issuance of 1,500,000
shares at $11.00 per share. An additional 354,750 shares were sold by the
Company at $11.00 per share to cover over-allotments. The offering,
including the over-allotments, raised $17.8 million in net proceeds.
15
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion provides an analysis of the Company's financial
condition and results of operations, and should be read in conjunction with the
Company's consolidated financial statements and the notes included in Item 8 of
this Form 10-K.
OVERVIEW
The Company develops, markets and supports virtual prototyping solutions.
The Company's virtual prototyping software allows an 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 to be in the future,
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 by the Company or its competitors; changes in pricing; the level of
the Company's sales of third-party products; purchasing patterns of distributors
and customers; competitive conditions in the industry; business cycles affecting
the markets in which the Company's products are sold; extraordinary events, such
as litigation; risks inherent in seeking and consummating acquisitions,
including the diversion of management attention to the assimilation of the
operations and personnel of the acquired business; fluctuations in foreign
exchange rates; the impact of undetected errors or defects, including those
associated with Year 2000 date functions, on the Company's current products,
vendors and internal systems; and economic conditions generally or in various
geographic areas. All of the foregoing factors are difficult to forecast. The
future operating results of the Company may fluctuate as a result of these and
other risk factors detailed from time to time in the Company's Securities and
Exchange Commission reports and included in Item 1 of this Form 10-K entitled
"Business."
Due to all of the foregoing factors, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as an indication of future performance.
It is likely that, in some future quarters, the Company's operating results will
be below the expectations of stock market analysts and investors. In such an
event, the price of the Company's common stock would likely be materially
adversely affected.
RESULTS OF OPERATIONS
REVENUE
<TABLE>
<CAPTION>
In thousands 1998 % CHANGE 1997 % CHANGE 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Software licenses ........... $19,659 13.9% $17,258 18.3% $14,590
% of total revenue ........ 53.7% 57.2% 57.5%
Services .................... $16,916 30.8% $12,933 19.8% $10,793
% of total revenue ........ 46.3% 42.8% 42.5%
Total revenue ............... $36,575 21.1% $30,191 18.9% $25,383
</TABLE>
16
<PAGE> 17
In August 1998, the Company acquired the Design Analysis Group and
certain other assets of H.G.E. Inc. ("HGE"), an engineering software and
services firm based in Toronto, Ontario, Canada. Revenue from the Design
Analysis Group has been in the past, and is expected to be in the future,
derived primarily from sales of third-party software products, professional
services and sales of the Company's software products. The operating results of
the Design Analysis Group have been included in the Company's consolidated
results of operations from the date of acquisition.
The Company's total revenue increased 21.1% to $36.6 million in 1998
from $30.2 million in 1997. During 1997, total revenue increased 18.9% from
$25.4 million in 1996. The growth in revenue during 1998 resulted primarily from
an increase in services provided to the Company's customers, as well as an
increase in sales of third-party products. The growth in revenue during 1997
resulted from increased sales of the Company's ADAMS Full Simulation Package, as
well as other related software products and services. During both years, the
Company achieved revenue growth in each of its major sales geographies,
including North America, Europe and Asia. A summary of the Company's revenue by
geographic area is presented in Note 8 of Notes to Consolidated Financial
Statements.
Revenue from international customers accounted for approximately 62.4%,
65.2% and 67.0% of the Company's total revenue in 1998, 1997 and 1996,
respectively. The decrease in international revenue as a percent of total
revenue during 1998, as compared to 1997, was due primarily to weakness
experienced in certain countries in Asia, as well as an increase in revenue from
North America, due in part to the Company's August 1998 acquisition of HGE. The
revenue shortfall experienced by the Company in Asia during 1998 resulted
primarily from continuing economic pressures facing Japan and Korea, as well as
the strengthening of the dollar relative to the Japanese yen, as described
below. The decrease in international revenue as a percent of total revenue
during 1997, as compared to 1996, was due in part to the strengthening of the
dollar during 1997, as well as increased sales of the Company's software
products and services in North America. If the economies in Asia continue to
deteriorate in 1999, 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. Consequently, the Company remains cautious
in its overall outlook for Asian revenue in 1999. The Company expects that
international revenue will continue to account for a significant portion of its
total revenue in future periods.
Outside of North America and Europe, the Company relies primarily on
distributors and sales representatives for the licensing and support of its
products. Distributors and sales representatives accounted for approximately
21.3%, 27.8% and 27.6% of the Company's total revenue in 1998, 1997 and 1996,
respectively. The decrease in revenue from distributors and sales
representatives in 1998, as compared to 1997, resulted primarily from increased
revenue from professional services provided directly to the Company's customers
as well as revenue generated from sales of third-party software products. The
Company's Japanese distributor, Information Services International-Dentsu, Ltd.
("ISI-Dentsu"), accounted for approximately 13.2%, 15.3% and 16.5% of the
Company's total revenue in 1998, 1997 and 1996, respectively.
The Company generally prices its software products and services in
local currencies in Europe, Canada and Japan. The strengthening of the dollar in
1998, relative to the European and Japanese currencies, negatively affected 1998
international revenue by approximately $883,000, including $550,000 from the
Japanese yen. 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
U.S. dollar continues to strengthen in 1999 relative to the European, Canadian
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 strengthening of the dollar in 1997,
relative to the European and Japanese currencies, negatively affected 1997
international revenue by approximately $1.2 million.
Revenue from automotive-related customers accounted for approximately
54.7%, 50.5% and 48.1% of the Company's total revenue in 1998, 1997 and 1996,
respectively. No customer accounted for greater than 10% of the Company's total
revenue in 1998. Sales to Ford Motor Company accounted for approximately 10.6%
and 11.8% of the Company's total revenue in 1997 and 1996, respectively. No
other customer accounted for greater than 10% of the Company's total revenue in
1997 and 1996.
17
<PAGE> 18
Software licenses revenue consists primarily of license fees for the
Company's software products and, to a lesser extent, license fees from third
party software products licensed through the Company's European and Canadian
subsidiaries. Software licenses revenue grew 13.9% over 1997 to approximately
$19.7 million in 1998. The increase resulted from a higher volume of software
licenses sold worldwide, primarily from third party products. In 1997, software
licenses revenue grew 18.3% over 1996 to approximately $17.3 million. Revenue
from third-party products accounted for $2.6 million in revenue in 1998, or 7.1%
of total revenue, compared to $678,000, or 2.2% of total revenue, in 1997.
Services revenue consists primarily of revenue from software maintenance
agreements and professional services, including consulting, training and funded
research and development. Total services revenue grew 30.8% over 1997 to
approximately $16.9 million in 1998. The overall increase in services revenue
reflects the Company's continued emphasis on providing total solutions to its
customers. Software maintenance revenue grew 23.8% in 1998 to $5.9 million,
while professional services revenue grew 37.8% in 1998 to $10.9 million. Total
services revenue grew 19.8% over 1996 to approximately $12.9 million in 1997.
Both the software maintenance and the professional service components of
services revenue experienced solid growth in 1997. Software maintenance revenue
totaled $4.8 million in 1997, a 16.9% increase over 1996. Professional services
revenue totaled $7.9 million in 1997, a 23.3% increase over 1996.
COST OF REVENUE
<TABLE>
<CAPTION>
In thousands 1998 % CHANGE 1997 % CHANGE 1996
- ---------------------------------------- ------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Cost of software licenses........... $ 2,479 213.4% $ 791 30.5% $ 606
Gross profit margin on software
licenses revenue................ 87.4% 95.4% 95.8%
Cost of services.................... $ 9,581 35.6% $ 7,066 14.3% $ 6,183
Gross profit margin on services
revenue......................... 43.4% 45.4% 42.7%
</TABLE>
Cost of software licenses includes software royalty fees, media costs,
payroll and other costs attributable to software documentation and distribution,
and an allocation of depreciation, utilities and other overhead expenses
incurred by the Company. Cost of software licenses revenue increased 213.4% from
1997 to approximately $2.5 million in 1998. The increase was primarily due to
additional royalties paid to third parties whose products are licensed through
the Company's European and Canadian subsidiaries, and, to a lesser extent,
additional royalties paid to third parties whose products are embedded in the
Company's ADAMS software. In 1997, cost of software licenses revenue increased
30.5% from 1996 to approximately $791,000. The $185,000 absolute dollar increase
was primarily due to additional royalties paid to third parties whose products
are embedded in the Company's ADAMS software.
Gross profit margin on software licenses revenue was 87.4%, 95.4% and 95.8%
during the years ended December 31, 1998, 1997 and 1996, respectively. The
decline in gross profit margin during 1998, as compared to 1997, was due to the
increased sales of third party software products compared to sales of the
Company's software products.
Cost of services includes payroll and overhead expenses attributable to
hotline support, consulting, training and funded research and development. Cost
of services revenue grew 35.6% over 1997 to approximately $9.6 million in 1998.
In 1997, cost of services revenue grew 14.3% over 1996 to approximately $7.1
million. The increases resulted from the hiring of additional employees to
support the growth in services provided to the Company's customers during 1998
and 1997.
Gross profit margin on services revenue was 43.4%, 45.4% and 42.7% during
the years ended December 31, 1998, 1997 and 1996, respectively. The decline in
gross profit margin during 1998, as compared to 1997, was primarily due to the
increased professional services revenue as a percentage of total services
revenue. Historically, professional services revenue has generated lower profit
margins than revenue from software maintenance agreements.
18
<PAGE> 19
OPERATING EXPENSES
<TABLE>
<CAPTION>
In thousands 1998 % CHANGE 1997 % CHANGE 1996
- ---------------------------------------- ------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Sales and marketing................. $ 14,245 22.3% $ 11,644 21.1% $ 9,612
% of total revenue................ 38.9% 38.6% 37.9%
Research and development............ $ 5,265 11.3% $ 4,729 29.7% $ 3,647
% of total revenue................ 14.4% 15.7% 14.4%
General and administrative.......... $ 3,472 8.4% $ 3,202 17.0% $ 2,736
% of total revenue................ 9.5% 10.6% 10.8%
Goodwill amortization............... $ 341 227.9% $ 104 8.3% $ 96
% of total revenue................ 0.9% 0.3% --
Acquisition-related costs and
non-recurring charges............. $ 1,748 3.4% $ 1,690 -- $ --
% of total revenue................ 4.8% 5.6% --
</TABLE>
Sales and marketing expenses include costs associated with the Company's
sales channels, such as personnel, commissions, sales office costs, travel,
promotional events, sales order processing, including license administration and
order fulfillment, and advertising and public relations programs. Sales and
marketing expenses also include an allocation of overhead expenses incurred by
the Company. The absolute dollar increases in sales and marketing expenses in
1998 and 1997 resulted from the Company's continued expansion of its worldwide
sales and marketing organization, as well as the increase in commissions paid on
the higher level of revenue. During 1998, the number of employees in sales and
marketing increased from 75 to 93. The Company expects to continue to expand its
sales organization in the future to meet the growing demand for its products and
services.
Research and development expenses include all payroll costs attributable to
research and development activities. Research and development expenses also
include an allocation of overhead expenses incurred by the Company. The absolute
dollar increases in research and development expenses in 1998 and 1997 primarily
resulted from an increase in personnel and related costs in support of expanded
product development efforts. Funded research and development expenses, which are
not included in research and development expenses but are included in cost of
services revenue, were 0.7%, 2.7% and 3.6%, of total revenue in 1998, 1997 and
1996, respectively. The majority of the revenue received and expenses incurred
for funded research and development was directly related to projects associated
with the ongoing development of the Company's content-rich software products,
including ADAMS/Car and ADAMS/Rail. The Company intends to continue to invest
significant resources in research and development in the future.
General and administrative expenses include the cost of salaries, employee
benefits and other payroll costs associated with the Company's finance,
accounting, human resources, information systems and executive management
functions. General and administrative expenses also include an allocation of
overhead expenses incurred by the Company. General and administrative expenses
grew 8.4% over 1997 to approximately $3.5 million in 1998, in support of the
Company's growing operations worldwide. General and administrative expenses grew
17.0% over 1996 to approximately $3.2 million in 1997. 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.
Goodwill amortization includes the amortization of purchase price in excess
of net assets on the Company's acquisitions. Goodwill amortization increased
227.9% in 1998, as compared to 1997, due to increased goodwill associated with
the Company's 1998 and 1997 acquisitions. The Company amortizes goodwill over
the periods estimated to be benefited from the acquisitions, after considering
such factors as demand, competition, service lives of employees and expected
actions of competitors. Goodwill amortization increased 8.3% in 1997, as
compared to 1996, due to increased goodwill associated with the acquisition of
StatDesign, Inc. ("StatDesign") in October 1997.
19
<PAGE> 20
Acquisition-related costs and non-recurring charges were approximately $1.7
million in each of the years ending December 31, 1998 and 1997, and consist
primarily of the write-off of purchased in-process research and development
("R&D") associated with the Company's acquisitions in these years. In each
acquisition, the value assigned to purchased in-process R&D was determined by an
independent appraisal of the acquired company's assets, both tangible and
intangible. The portion of the aggregate purchase price assigned to in-process
R&D was determined by identifying research projects for which technological
feasibility had not yet been established. The appraisals considered such factors
as the estimated percent complete of each project in process at the date of
acquisition, the estimated remaining costs to develop the in-process R&D into
commercially viable products and the estimated discounted net future cash flows
from such products. If the Company were unable to complete the R&D projects in a
timely manner or lost key personnel from the acquired companies, revenue and
operating income in future periods could be adversely impacted. These
acquisitions are discussed below and the related accounting treatment is
summarized in Note 2 of Notes to Consolidated Financial Statements.
In November 1998, the Company acquired certain technology from the
University of Iowa and recorded a non-recurring charge to operations of $400,000
for the write-off of purchased in-process R&D. The purchase price was allocated
to in-process R&D as the software had not reached technological feasibility and
no other tangible or intangible assets were identified. The technology acquired
consisted of component-level durability sensitivity analysis technology.
Significant projects in process at the date of acquisition included further
development of this technology and integration with the Company's ADAMS software
to provide system-level durability design sensitivity prediction capabilities.
Since the acquisition, the Company, along with scientists from the University of
Iowa, have developed a plan to jointly enhance and integrate the University's
technology with that of the Company's such that a commercial product is expected
to be available for release in the second half of the year 2000. Costs
associated with the completion of these projects have, thus far, been consistent
with the Company's expectations as of the acquisition date.
In August 1998, the Company acquired certain assets of HGE and recorded a
non-recurring charge to operations of $203,000 for the write-off of purchased
in-process R&D. The technology consisted of a metal stamping analysis program
that simulates strain in thin metal sheets. Significant projects in process at
the date of acquisition included the incorporation of springback functionality
into the acquired company's technology. Springback is a term used to describe
how a material's elasticity relaxes after it has been bent. The value of the
in-process R&D was appraised using the income approach, and involved the
following assumptions: the net cash inflows from the in-process R&D commencing
in the second half of the year 2000, operating expenses consistent with
historical levels and a risk-adjusted discount rate of 32.5%. Incorporation of
the springback technology is in the development stages. Costs associated with
the completion of the project are expected to be consistent with the assumptions
used in the valuation.
In January 1998, the Company acquired DTI Asia Pte. Ltd. ("DTI") and
recorded a non-recurring charge to operations of $980,000 for the write-off of
purchased in-process R&D. DTI was a start-up company, established in 1994, and
consisted of four employees located on three continents whose time was primarily
dedicated to developing motion simulation technology for the mid-range CAD
market. Significant projects in process at the date of acquisition included: (1)
integrating the Company's ADAMS solution engine with the acquired company's
existing technology; (2) developing advanced "wizards" to increase ease of use;
and (3) adding finite element analysis capabilities. The value of the in-process
R&D was appraised using the milestone approach, and involved the following
assumptions: the net cash inflows from the in-process R&D commencing in the
fourth quarter of 1998, operating expenses consistent with historical levels and
a risk-adjusted discount rate of 35.0%. Since the acquisition, the Company has
completed integration of the ADAMS solution engine and released a new version of
the acquired company's product line featuring increased ease of use. Costs
associated with the completion of these projects were consistent with the
assumptions used in the valuation.
In October 1997, the Company acquired StatDesign and recorded a
non-recurring charge to operations of $1.7 million for the write-off of
purchased in-process R&D. Established in 1992, StatDesign provided design of
experiments ("DOE") technology, custom graphical user interfaces, and consulting
services for product design and development. DOE methods allow users to run a
battery of simulations on a mechanical system design to determine the effects of
multiple design or manufacturing variations on system performance and behavior.
Significant projects
20
<PAGE> 21
in process at the date of acquisition included improvements to simulation,
enhancement of modeling technology, added suspension capability, added
powertrain capability, enhanced graphics and user interface and the modulization
of post-processing functions. Completion of these projects has involved
significantly enhancing, or, in some cases, reconstructing the internal
architecture of the existing technology to achieve the desired performance
guidelines and generalizing the technology to appeal to a broader customer base.
The value of the in-process R&D was appraised using the income approach, and
involved the following assumptions: the net cash inflows from the in-process R&D
commencing in the second half of 1998, operating expenses consistent with
historical levels and a risk-adjusted discount rate of 32.5%. Since the
acquisition, the Company has successfully broadened the former user base of
StatDesign's technology through significant progress on the projects listed
above. Costs associated with the completion of these projects were consistent
with the assumptions used in the valuation.
OTHER INCOME, NET
<TABLE>
<CAPTION>
In thousands 1998 % CHANGE 1997 % CHANGE 1996
- ---------------------------------------- ------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Other income, net..................... $ 828 4.7% $ 791 47.6% $ 536
% of total revenue.................. 2.3% 2.6% 2.1%
</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. Net interest income was $828,000, $953,000, and $556,000 in 1998,
1997 and 1996, respectively. The decline in interest income in 1998, compared to
1997, was due to lower cash and cash equivalents balances primarily as a result
of cash paid for the Company's 1998 and 1997 acquisitions. Interest income
increased significantly in 1997, primarily as a result of twelve months of
interest earned on the $17.8 million in net proceeds raised from the Company's
initial public offering in May 1996. Foreign currency transaction gain (loss)
amounted to $64,000, ($129,000) and ($31,000) in 1998, 1997 and 1996,
respectively. Gain (loss) on the disposal of property and equipment was
($64,000), ($33,000) and $11,000 in 1998, 1997 and 1996, respectively.
PROVISION FOR INCOME TAXES
The Company's effective income tax rates were 176.1%, 57.9% and 31.9% for
1998, 1997 and 1996, respectively. The differences between the consolidated tax
provision and the income tax provision calculated at the United States federal
statutory rate are summarized in Note 4 of Notes to Consolidated Financial
Statements. In 1998 and 1997, the difference between the effective and statutory
federal rate was primarily due to the non-deductibility of the expense
associated with purchased in-process research and development on certain
acquisitions. These unfavorable differences were partially offset by the benefit
of the Company's foreign sales corporation, and the benefit of tax-exempt
interest income. Excluding the acquisition-related charges, the Company's
effective tax rate for 1998 and 1997 would have been 29.6% and 29.5%.
MINORITY INTEREST IN NET INCOME (LOSS) OF SUBSIDIARIES
In April 1997, the Company established a Japanese subsidiary, Mechanical
Dynamics Japan K.K. ("MDI-Japan"), through a joint venture agreement with
ISI-Dentsu of Tokyo, Japan, the distributor of the Company's software in Japan.
Minority interest in net income (loss) of subsidiaries of $10,000 in 1998 and
($5,000) in 1997 represents ISI-Dentsu's 34% interest in the net income (loss)
of MDI-Japan.
EMPLOYEES
The number of the Company's worldwide employees increased 20.9% to 283 at
December 31, 1998, compared with 234 at December 31, 1997. Reflected in this
increase are new employees who joined the Company as a result of the Company's
acquisitions of DTI and HGE in 1998. Absent the impact of the acquisitions,
employment increased to support the Company's growing operations worldwide.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs using a two-digit
format, as opposed to four digits, to indicate the year. Such computer systems
will be unable to interpret dates beyond the year 1999, which could cause
21
<PAGE> 22
a system failure or other computer errors. The Company has assessed and
identified risks in four areas of its business and has developed a plan for Year
2000 information systems compliance in each. The areas are: (1) the Company's
products, including third party software embedded in the Company's products, (2)
business management and accounting systems, (3) computing and communications
infrastructure, and (4) the Company's suppliers.
Since the Company's products perform few date processing tasks, there is not
a significant risk of a material disruption as a result of the Year 2000. The
Company has completed testing on current versions of the Company's primary
products, including the software delivery and license systems of the products.
No areas of non-compliance were noted which required modification to the
Company's software. The Company's product development group is currently adding
Year 2000 readiness to its quality assurance process for all products to ensure
no Year 2000 problems are introduced during the development of software and
maintenance activities. The Company's primary business management and accounting
systems were replaced by the Company effective January 1999. The cost of the new
systems, including certain hardware upgrades, was approximately $150,000. These
systems are based on third-party products that have been certified for Year 2000
compliance. The Company's computing and communications infrastructure is
currently being reviewed. An inventory of all infrastructure components has been
established. All critical components of the infrastructure will be migrated to
Year 2000 readiness by the third quarter of 1999. A list of key suppliers to the
Company has been developed. Key suppliers have been contacted and are being
asked to show adequate readiness or alternate vendors will be identified.
The Company does not expect that the costs to address its Year 2000 needs
will be material to its consolidated financial position or results of
operations. While the Company believes that its efforts to address Year 2000
issues for which it is responsible should be successful, it is possible that
there will be undetected errors or defects associated with Year 2000 date
functions in the Company's products and internal systems or those of its key
suppliers. If this should occur, it is possible that the Company could be
involved in litigation. Further, although the Company does not believe that it
has any obligation to continue to support prior versions of its products after
the termination of maintenance contracts covering those products, nor any
obligation to make prior versions of its products, including custom applications
written by the Company, Year 2000 compliant, it is possible that its customers
may take a contrary position and initiate litigation. Because of the
unprecedented nature of litigation in this area, it is uncertain how the Company
may be affected by it. In the event of such litigation or the occurrence of one
or more problems associated with Year 2000 compliance, the Company's business,
financial condition, or results of operations could be materially adversely
affected.
EURO CONVERSION
In January 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and the Euro, making the Euro their common legal currency on that date. There
will be a transition period from January 1, 1999 to January 1, 2002, during
which the old currencies will remain legal tender in the participating countries
as denominations of the Euro. During the transition period, public and private
parties may pay for goods and services using either the Euro or the
participating country's former currency. Conversion rates, however, will no
longer be computed directly from one former currency to another.
The Company is currently evaluating the business implications of conversion
to the Euro, including technical adaptation of information technology and other
systems to accommodate Euro-denominated transactions, long-term competitive
implications of the conversion, and the effect on market risk with respect to
financial instruments. At this time, the Company does not expect that the Euro's
introduction will have a material impact on its results of operations during or
after the transition period.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $16.8 million at December 31, 1998, compared
to $20.3 million at December 31, 1997. The decrease in cash and cash equivalents
of $3.4 million was primarily due to the $2.3 million in cash used for capital
expenditures; $2.0 million in cash used in the acquisition of HGE in August
1998; $563,000 in cash used in the acquisition of DTI; and $400,000 in cash used
to purchase certain technology from the University of Iowa. These decreases were
partially offset by the $921,000 in cash generated from operations in 1998 and
$402,000 in proceeds from stock issued by the Company during 1998.
22
<PAGE> 23
At December 31, 1998, the Company's principal commitments consisted of
obligations under operating leases for facilities and equipment, including
approximately $1.7 million in payments due under noncancelable operating leases
during 1999. The Company had no borrowings under long-term debt arrangements at
December 31, 1998.
In November 1998, the Board of Directors authorized management of the
Company to repurchase up to 500,000 shares of the Company's common stock. No
shares have been repurchased to date.
In December 1998, the Company entered into an agreement with its principal
bank for an unsecured $4.0 million line of credit. No borrowings were
outstanding under this agreement as of December 31, 1998. The Company's
subsidiaries in Italy, Sweden, and France also have line of credit and overdraft
facilities that provide for aggregate borrowing availability of approximately
$260,000. Approximately $105,000 in borrowings were outstanding under these
facilities as of December 31, 1998.
In November 1998, the Company formed a strategic partnership with the
University of Iowa in which component-level durability sensitivity analysis
technology developed by the University will be integrated with the Company's
ADAMS virtual prototyping software to provide system-level durability design
sensitivity analysis capabilities. The Company paid $400,000 to the University
for an exclusive perpetual license to jointly develop and market this
technology. See Note 2 of Notes to Consolidated Financial Statements.
In August 1998, the Company acquired the Design Analysis Group and certain
other assets of HGE, an engineering software and services firm focusing on the
aerospace industry. The aggregate purchase price of approximately $2.2 million
consisted principally of cash. See Note 2 of Notes to Consolidated Financial
Statements.
In January 1998, the Company acquired 100% of the outstanding capital stock
of 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 $1.7 million consisted of $563,000 in cash and
142,540 shares of the Company's common stock valued at approximately $1.1
million. See Note 2 of Notes to 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,
capital expenditures and stock repurchases for the next twelve months and the
foreseeable future. The Company has not paid dividends during the period 1996
through 1998 and intends to continue its policy of retaining earnings to finance
future growth.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities. It requires that
an entity record all derivatives as either assets or liabilities at fair value.
Under certain conditions, a derivative may be designated as a hedge of (1)
potential changes in the fair value of an asset or liability or firm commitment,
(2) the foreign currency exposure of a forecasted transaction, or (3) the
foreign currency exposure of the net investment in a foreign operation. The
accounting for changes in the fair value of a derivative instrument depends on
the intended use of the derivative and the resulting designation. The statement
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. The Company's derivative activities are currently limited to entering into
forward contracts to hedge potential changes in the fair value of its
receivables denominated in certain foreign currencies.
23
<PAGE> 24
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in foreign exchange and
interest rates. To reduce the risk from changes in foreign exchange rates, the
Company selectively uses financial instruments. The Company does not hold or
issue financial instruments for trading purposes.
FOREIGN CURRENCY
The Company, at various times, enters into forward exchange contracts to
hedge certain exposures related to identifiable foreign currency transactions
that are relatively certain as to both timing and amount. The Company does not
use any other types of derivative financial instruments to hedge such exposures,
nor does it use derivatives for speculative purposes. In general, the Company
uses forward exchange contracts to hedge against large, selective transactions
that present the most exposure to exchange rate fluctuations. At December 31,
1998, the Company had forward foreign currency exchange contracts of $1.2
million (notional amounts). The contracts outstanding at December 31, 1998
mature through June 7, 1999 and are intended to hedge various foreign currency
commitments due from foreign subsidiaries and the Company's distributors. Due to
the short-term nature of these financial instruments, the fair value of these
contracts is not materially different than their notional amount at December 31,
1998. The Company did not engage in hedging activities prior to 1998.
Gains and losses on the forward contracts are largely offset by gains and
losses on the underlying exposures. The Company conducts business in
approximately seven foreign currencies, predominantly Japanese yen, German marks
and British pounds. A hypothetical 10% appreciation of the U.S. dollar from
December 31, 1998 market rates would increase the unrealized value of the
Company's existing forward contracts at December 31, 1998 by $105,000.
Conversely, a hypothetical 10% depreciation of the U.S. dollar from December 31,
1998 market rates would decrease the unrealized value of the Company's forward
contracts by $129,000. In either scenario, the gains and losses on the forward
contracts are largely offset by the gains or losses on the underlying
transactions.
INTEREST RATES
The Company maintains its cash and cash equivalents in highly liquid
investments with maturities of 90 days or less. The Company has the ability to
hold its fixed income investments to maturity, and therefore would not expect
its operating results or cash flows to be affected to any significant degree by
the effect of a hypothetical 10% change in market interest rates on its cash and
cash equivalents.
24
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Mechanical Dynamics, Inc.:
We have audited the accompanying consolidated balance sheets of MECHANICAL
DYNAMICS, INC. (a Michigan corporation) and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mechanical Dynamics, Inc.
and its subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Detroit, Michigan,
January 29, 1999
25
<PAGE> 26
MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
In thousands, except share data 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................................................... $ 16,843 $ 20,261
Accounts receivable, net of allowance for doubtful accounts of $261 and $235 .... 9,893 8,000
Prepaid and deferred expenses ................................................... 1,873 1,206
-------- --------
Total current assets ........................................................ 28,609 29,467
-------- --------
Property and equipment, net of accumulated depreciation of $3,551 and $2,314 ....... 3,674 2,887
Goodwill, net of accumulated amortization of $695 and $354 ......................... 3,820 1,498
Other assets ....................................................................... 144 295
-------- --------
$ 36,247 $ 34,147
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit ................................................. $ 105 $ 45
Accounts payable ................................................................ 1,781 1,474
Accrued compensation ............................................................ 1,579 1,461
Other accrued expenses .......................................................... 1,965 2,273
Deferred revenue ................................................................ 4,745 4,462
-------- --------
Total current liabilities ................................................... 10,175 9,715
-------- --------
Minority interest .................................................................. 472 462
-------- --------
Shareholders' equity:
Common stock, no par value, 15,000,000 shares authorized, 6,225,206 and 5,984,061
shares issued and outstanding in 1998 and 1997, respectively .................. 22,332 20,838
Preferred stock, no par value, 1,000,000 shares authorized, 0 shares issued and
outstanding ................................................................... -- --
Retained earnings ............................................................... 3,073 3,290
Cumulative translation adjustment ............................................... 195 (158)
-------- --------
Total shareholders' equity .................................................. 25,600 23,970
-------- --------
$ 36,247 $ 34,147
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
26
<PAGE> 27
MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
In thousands, except share and per share data 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Software licenses ................................. $ 19,659 $ 17,258 $ 14,590
Services .......................................... 16,916 12,933 10,793
----------- ----------- -----------
Total revenue ................................. 36,575 30,191 25,383
----------- ----------- -----------
Cost of revenue:
Software licenses ................................. 2,479 791 606
Services .......................................... 9,581 7,066 6,183
----------- ----------- -----------
Total cost of revenue ......................... 12,060 7,857 6,789
----------- ----------- -----------
Gross profit ......................................... 24,515 22,334 18,594
----------- ----------- -----------
Operating expenses:
Sales and marketing ............................... 14,245 11,644 9,612
Research and development .......................... 5,265 4,729 3,647
General and administrative ........................ 3,472 3,202 2,736
Goodwill amortization ............................. 341 104 96
Acquisition-related costs and non-recurring charges 1,748 1,690 --
----------- ----------- -----------
Total operating expenses ...................... 25,071 21,369 16,091
----------- ----------- -----------
Operating income (loss) .............................. (556) 965 2,503
Other income, net .................................... 828 791 536
----------- ----------- -----------
Income before income taxes and minority interest ..... 272 1,756 3,039
Provision for income taxes ........................... 479 1,017 968
----------- ----------- -----------
Income (loss) before minority interest ............... (207) 739 2,071
Minority interest in net income (loss) of subsidiaries 10 (5) --
----------- ----------- -----------
Net income (loss) .................................... $ (217) $ 744 $ 2,071
=========== =========== ===========
Basic net income (loss) per common share ............. $ (0.04) $ 0.13 $ 0.42
=========== =========== ===========
Weighted average common shares ....................... 6,186,469 5,805,936 4,990,215
=========== =========== ===========
Diluted net income (loss) per common share ........... $ (0.04) $ 0.13 $ 0.41
=========== =========== ===========
Weighted average common and common equivalent shares . 6,186,469 5,867,753 5,070,028
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
27
<PAGE> 28
MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
CONVERTIBLE CLASS A & B ADDITIONAL
COMMON PREFERRED COMMON STOCK PAID-IN RETAINED
In thousands, except share data STOCK STOCK AND WARRANTS CAPITAL EARNINGS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995............. $ -- $ 265 $ 458 $ 114 $ 475
Net income............................. -- -- -- -- 2,071
Foreign currency translation adjustment -- -- -- -- --
Issuance of 11,250 shares of Class B
common stock.......................... -- -- -- 3 --
Exercise of Class A common stock
warrants and issuance of 81,060 shares
of Class A common stock............... -- -- (449) 509 --
Conversion of 354,932 shares of
Convertible preferred stock into
484,758 shares of Class A common stock -- (265) 2 263 --
Conversion of 1,178,865 shares of Class
B common stock and 2,700,772 shares of
Class A common stock into 3,879,637
shares of no par common stock......... 900 -- (11) (889) --
Termination of redemption privileges for
86,486 shares of redeemable common stock 692 -- -- -- --
Issuance of 1,880,798 shares of common 17,991 -- -- -- --
stock.................................
Collections on subscriptions receivable -- -- -- -- --
-------- ------ --------- ------ --------
Comprehensive income.....................
Balance at December 31, 1996............. 19,583 -- -- -- 2,546
Net income............................. -- -- -- -- 744
Foreign currency translation adjustment -- -- -- -- --
Termination of redemption privileges for
20,843 shares of redeemable common stock 167 -- -- -- --
Issuance of 223,626 shares of common 1,088 -- -- -- --
stock................................. -------- ------ --------- ------ --------
Comprehensive income.....................
Balance at December 31, 1997............. 20,838 -- -- -- 3,290
Net loss............................... -- -- -- -- (217)
Foreign currency translation adjustment -- -- -- -- --
Issuance of 241,145 shares of common 1,494 -- -- -- --
stock................................. -------- ------ --------- ------ --------
Comprehensive income.....................
Balance at December 31, 1998............. $ 22,332 $ -- $ -- $ -- $ 3,073
======== ====== ========= ====== ========
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE
SUBSCRIPTIONS TRANSLATION COMPREHENSIVE
In thousands, except share data RECEIVABLE ADJUSTMENT TOTAL INCOME
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995............. $ (10) $ 32 $ 1,334
Net income............................. -- -- 2,071 $ 2,071
Foreign currency translation adjustment -- 24 24 24
Issuance of 11,250 shares of Class B
common stock.......................... -- -- 3
Exercise of Class A common stock
warrants and issuance of 81,060 shares
of Class A common stock............... -- -- 60
Conversion of 354,932 shares of
Convertible preferred stock into
484,758 shares of Class A common stock -- -- --
Conversion of 1,178,865 shares of Class
B common stock and 2,700,772 shares of
Class A common stock into 3,879,637
shares of no par common stock......... -- -- --
Termination of redemption privileges for
86,486 shares of redeemable common stock -- -- 692
Issuance of 1,880,798 shares of common -- -- 17,991
stock.................................
Collections on subscriptions receivable 10 -- 10
----- ------- --------- -------
Comprehensive income..................... $ 2,095
=======
Balance at December 31, 1996............. -- 56 22,185
Net income............................. -- -- 744 $ 744
Foreign currency translation adjustment -- (214) (214) (214)
Termination of redemption privileges for
20,843 shares of redeemable common stock -- -- 167
Issuance of 223,626 shares of common -- -- 1,088
stock................................. ----- ------- --------- -------
Comprehensive income..................... $ 530
=======
Balance at December 31, 1997............. -- (158) 23,970
Net loss............................... -- -- (217) $ (217)
Foreign currency translation adjustment -- 353 353 353
Issuance of 241,145 shares of common -- -- 1,494
stock................................. ----- ------- --------- -------
Comprehensive income..................... $ 136
=======
Balance at December 31, 1998............. $ -- $ 195 $ 25,600
===== ======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
28
<PAGE> 29
MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................. $ (217) $ 744 $ 2,071
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Acquisition-related costs and non-recurring charges ............. 1,748 1,690 --
Depreciation and amortization ................................... 1,726 968 603
(Gain) loss on disposal of assets ............................... 64 33 (11)
Minority interest in net income (loss) of subsidiaries .......... 10 (5) --
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable ........................................... (2,245) (2,304) (548)
Prepaid and deferred expenses ................................. (273) (22) (179)
Other assets .................................................. 117 (45) 19
Accounts payable .............................................. 452 499 102
Accrued expenses .............................................. (134) 580 200
Deferred revenue .............................................. (327) 551 (19)
-------- -------- --------
Net cash provided by operating activities ................... 921 2,689 2,238
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment ............................... (2,250) (2,177) (866)
Purchase of technology from the University of Iowa ................ (400) -- --
Acquisition of DTI Asia Pte. Ltd., net of cash acquired ........... (563) -- --
Acquisition of certain assets of HGE, Inc., net of cash acquired .. (2,040) -- --
Acquisition of StatDesign Inc., net of cash acquired .............. -- (1,374) --
-------- -------- --------
Net cash used in investing activities ....................... (5,253) (3,551) (866)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock ............................ 402 220 18,054
Net borrowings (payments) under line of credit agreements ......... 60 -- (37)
Minority investment in consolidated subsidiary and other .......... -- 467 10
-------- -------- --------
Net cash provided by financing activities ................... 462 687 18,027
-------- -------- --------
Effect of exchange rate changes on cash .............................. 452 (134) 30
-------- -------- --------
Net increase (decrease) in cash ...................................... (3,418) (309) 19,429
Cash at beginning of year ............................................ 20,261 20,570 1,141
-------- -------- --------
Cash at end of year .................................................. $ 16,843 $ 20,261 $ 20,570
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Supplemental schedule of non-cash investing and financing
activities: Details of acquisitions:
DTI STATDESIGN
--- ----------
<S> <C> <C>
Net assets (liabilities), excluding cash acquired $ (59) $ 22
Purchase price in excess of net assets acquired . 734 530
Purchased in-process research and development ... 980 1,690
Common stock issued ............................. (1,092) (868)
------- -------
Net cash used ............................... $ 563 $ 1,374
======= =======
</TABLE>
<TABLE>
<CAPTION>
HGE, INC.
---------
<S> <C>
Net liabilities, excluding cash acquired ...... $ (118)
Purchase price in excess of net assets acquired 1,955
Purchased in-process research and development . 203
-------
Net cash used ............................. $ 2,040
=======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
29
<PAGE> 30
MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Mechanical Dynamics, Inc. (the "Company") and its subsidiaries develop,
market and support virtual prototyping software and provide consulting,
training, and maintenance services to the automotive, aerospace, defense, rail,
general machinery and other industries on a worldwide basis.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
In August 1998, the Company established a Canadian subsidiary, Mechanical
Dynamics Ltd. ("MDI-Canada"). Immediately following its formation, MDI-Canada
acquired the Design Analysis Group and certain other assets of H.G.E. Inc. (see
Note 2).
In April 1997, the Company established a Japanese subsidiary, Mechanical
Dynamics Japan K.K. ("MDI-Japan"), through a joint venture agreement with
Information Services International-Dentsu, Ltd. ("ISI-Dentsu") of Tokyo, Japan,
the distributor of the Company's software in Japan. The Company owns 66% of
MDI-Japan, while ISI-Dentsu owns a 34% minority interest.
Foreign Currency
The financial statements of international subsidiaries are translated using
exchange rates in effect at period end for assets and liabilities and at average
rates during the period for results of operations. The resulting foreign
currency translation adjustments are reflected as a separate component of
shareholders' equity. Foreign currency transaction gain (loss) amounted to
$64,000, ($129,000) and ($31,000) in 1998, 1997 and 1996, respectively, and is
included in other income, net in the accompanying consolidated statements of
income.
Revenue
Software licenses revenue consists primarily of license fees for the
Company's software products and, to a lesser extent, license fees from other
companies' software products licensed through the Company's European and
Canadian subsidiaries. Revenue under paid-up software licensing agreements,
including licenses generated through distributors, is recognized when a customer
contract is fully executed and the software is delivered. Revenue under annual
software licensing arrangements is deferred and amortized over the terms of the
agreements. In either instance, revenue is recognized only when no significant
remaining obligations to the customer exist.
Services revenue consists primarily of revenue from software maintenance
agreements and professional services, including consulting, training and funded
research and development. Revenue related to advance payments received under
software maintenance agreements is deferred and amortized over the terms of the
agreements. Revenue from other services is recognized upon performance of the
service.
Cost of Revenue
Cost of software licenses includes software royalty fees, media costs,
payroll and other costs attributable to software documentation and distribution
and an allocation of depreciation, utilities and other overhead expenses
incurred by the Company.
30
<PAGE> 31
Cost of services includes payroll and overhead expenses attributable to
hotline support, consulting, training and funded research and development.
Research and Development Expenses
Research and development expenses include all payroll costs attributable to
research and development activities. Research and development expenses also
include an allocation of overhead expenses incurred by the Company.
Under the criteria set forth in Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," capitalization of software development costs begins upon
the establishment of technological feasibility of the product. The establishment
of technological feasibility and the ongoing assessment of the recoverability of
these costs require considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future gross
product revenue, estimated economic product lives and changes in software and
hardware technology. Amounts that would have been capitalized under this
statement after consideration of the above factors were immaterial, and
therefore no software development costs have been capitalized by the Company.
Cash and Cash Equivalents
The Company considers all highly liquid investments with initial maturities
of 90 days or less to be cash equivalents.
Property and Equipment
Property and equipment is stated at cost. Office furniture and equipment is
depreciated using accelerated or straight-line methods over estimated useful
lives of three to seven years. Leasehold improvements are amortized using the
straight-line method over the lesser of the respective asset's life or the life
of the related lease, generally ten years. Property and equipment consists
primarily of office furniture and equipment.
Goodwill
Goodwill represents the unamortized cost in excess of fair value of net
assets acquired and is amortized on a straight-line basis over five to fifteen
years. On an ongoing basis, management reviews the valuation and amortization of
goodwill. As part of this review, the Company considers the value of projected
future undiscounted cash flows attributable to the acquired operations in
evaluating potential impairment.
Fair Value of Financial Instruments and Concentration of Credit Risk
The Company, at various times, enters into forward exchange contracts to
hedge certain exposures related to identifiable foreign currency transactions
that are relatively certain as to both timing and amount. Gains and losses on
the forward contracts are recognized concurrently with the gains and losses from
the underlying transactions. The forward exchange contracts used are classified
as "held for purposes other than trading." The Company does not use any other
types of derivative financial instruments to hedge such exposures, nor does it
use derivatives for speculative purposes. At December 31, 1998, the Company had
forward foreign currency exchange contracts of $1.2 million (notional amounts).
The contracts outstanding at December 31, 1998 mature through June 7, 1999 and
are intended to hedge various foreign currency commitments due from the
Company's foreign subsidiaries and international distributors. The fair value of
the outstanding contracts is not materially different from their notional amount
at December 31, 1998. The Company did not engage in hedging activities prior to
1998.
Other financial instruments which potentially expose the Company to
concentrations of credit risk, as defined by Statement of Financial Accounting
Standards No. 105, consist primarily of accounts receivable. The Company's
accounts receivable are concentrated in global automotive-related companies,
other manufacturers and the
31
<PAGE> 32
Company's international distributor network. The Company generally does not
require collateral upon delivery of its products.
Net Income (Loss) Per Common Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share." All prior period per share
data presented has been restated to conform to this new statement. The following
table reconciles the weighted average number of shares in the basic net income
(loss) per common share calculation to the number of shares in the diluted net
income (loss) per common share calculation:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average common shares used in basic net income (loss) per
common share................................................... 6,186,469 5,805,936 4,990,215
Effect of stock options........................................ -- 61,817 79,813
--------- --------- ---------
Weighted average common and common equivalent shares used in
diluted net income (loss) per common share..................... 6,186,469 5,867,753 5,070,028
========= ========= =========
</TABLE>
For the year ended December 31, 1998, the dilutive effect of stock options
outstanding for the purchase of 95,020 shares was not included in the net income
(loss) per common share calculation because doing so would have been
anti-dilutive.
Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting and display of comprehensive income and its
components in a full set of financial statements. Comprehensive income is the
total of net income and all other non-owner changes in equity. The difference
between net income (loss), as reported in the accompanying consolidated
statements of income, and comprehensive income is the foreign currency
translation adjustment for the respective periods. The accumulated other
comprehensive income (loss) consists solely of the cumulative translation
adjustment as presented in the accompanying consolidated balance sheets.
Stock-Based Compensation
The Company has elected to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of grant over
the amount the employee must pay to acquire the stock in the accompanying
consolidated statements of income. As supplemental information, the Company has
provided pro forma disclosure of the fair value at the date of grant of stock
options granted during 1998 and 1997 in Note 5, in accordance with the
requirements of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123").
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
32
<PAGE> 33
New Accounting Pronouncements
Effective January 1, 1998, the Company adopted Statement of Position 97-2,
"Software Revenue Recognition," which provides guidance on recognizing revenue
on software transactions. The implementation of this statement did not have an
effect upon the Company's consolidated financial statements or its existing
revenue recognition policies.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities. It requires that
an entity record all derivatives as either assets or liabilities at fair value.
Under certain conditions, a derivative may be designated as a hedge of (1)
potential changes in the fair value of an asset or liability or firm commitment,
(2) the foreign currency exposure of a forecasted transaction, or (3) the
foreign currency exposure of the net investment in a foreign operation. The
accounting for changes in the fair value of a derivative instrument depends on
the intended use of the derivative and the resulting designation. The statement
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. The Company's derivative activities are currently limited to entering into
forward contracts to hedge potential changes in the fair value of its
receivables denominated in certain foreign currencies.
Reclassifications
Certain amounts in the 1997 and 1996 consolidated financial statements have
been reclassified to conform with the 1998 presentation.
(2) ACQUISITIONS
In November 1998, the Company formed a strategic partnership with the
University of Iowa in which component-level durability sensitivity analysis
technology developed by the University was acquired and will be integrated with
the Company's ADAMS virtual prototyping software to provide system-level
durability design sensitivity analysis capabilities. In connection with the
transaction, the Company reported a non-recurring charge to operations in 1998
of $400,000, associated with the write-off of in-process research and
development acquired from the University. The purchase price was allocated to
in-process research and development as the software had not reached
technological feasibility and no other tangible or intangible assets were
identified.
In August 1998, the Company acquired the Design Analysis Group and certain
other assets of H.G.E. Inc. ("HGE"), an engineering software and services firm
based in Toronto, Ontario, Canada. The aggregate purchase price of approximately
$2.2 million consisted principally of cash. 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 1998 of
approximately $203,000, associated with the write-off of in-process research and
development acquired in the transaction which had not reached technological
feasibility. The remaining excess of the aggregate purchase price over the fair
value of the net assets acquired has been recognized as goodwill and is being
amortized over a twelve-year period. The operating results of the Design
Analysis Group have been included in the Company's consolidated results of
operations from the date of acquisition.
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 $1.7 million
consisted of $563,000 in cash and 142,540 shares of the Company's common stock
valued at approximately $1.1 million. 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 1998 of approximately
$980,000, associated with the write-off of in-process research and development
acquired in the transaction which had not reached technological feasibility. The
remaining excess of the aggregate purchase price over the fair value of the net
assets acquired has been recognized as goodwill and will be amortized over a
five-year period. The operating results of DTI have been included in the
Company's consolidated results of operations from the date of acquisition.
33
<PAGE> 34
In October 1997, the Company acquired 100% of the outstanding capital stock
of StatDesign, Inc., a company based in Dearborn, Michigan. Since its founding
in 1992, StatDesign, Inc. had worked almost exclusively with the Company's
largest single customer to provide engineering software and services for product
design and development. The aggregate purchase price of approximately $2.2
million consisted of $1.4 million in cash and 170,227 shares of the Company's
common stock valued at approximately $868,000. 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 1997
of approximately $1.7 million, associated with the write-off of in-process
research and development acquired in the transaction which had not reached
technological feasibility. The remaining excess of the aggregate purchase price
over the fair value of the net assets acquired of approximately $530,000 has
been recognized as goodwill and will be amortized over a ten-year period. The
operating results of StatDesign, Inc. have been included in the Company's
consolidated results of operations from the date of acquisition.
(3) FINANCING ARRANGEMENTS
The Company has available an unsecured bank line of credit with a maximum
borrowing capacity of $4.0 million. Borrowings on the line of credit bear
interest at 0.75% below the bank's prime rate of interest. No borrowings were
outstanding at December 31, 1998. The agreement expires on June 30, 2000.
The Company's subsidiaries in Italy, Sweden and France also have line of
credit and overdraft facilities that provide for aggregate borrowing
availability of approximately $260,000, at various fixed and variable interest
rates at December 31, 1998. Borrowings are primarily due on demand and are
collateralized by certain assets of the subsidiaries. Borrowings outstanding
under these agreements were $105,000 and $45,000 at December 31, 1998 and 1997,
respectively.
No borrowings were outstanding under long-term debt arrangements at December
31, 1998 and 1997. Cash paid for interest was $16,000, $12,000 and $22,000 in
1998, 1997 and 1996, respectively.
(4) INCOME TAXES
A summary of income before provision for income taxes and components of the
provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
In thousands 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) before provision for income taxes:
Domestic......................................................... $ 940 $ 1,497 $ 2,874
Foreign.......................................................... (668) 259 165
-------- -------- --------
$ 272 $ 1,756 $ 3,039
======== ======== ========
Domestic provision (benefit) for income taxes:
Current.......................................................... $ 241 $ 859 $ 973
Deferred......................................................... 30 42 (92)
Foreign provision for income taxes:
Current.......................................................... 208 116 87
-------- -------- --------
Provision for income taxes......................................... $ 479 $ 1,017 $ 968
======== ======== ========
</TABLE>
34
<PAGE> 35
The differences between the income tax provision calculated at the United
States federal statutory rate and the consolidated income tax provision are
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
In thousands 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory provision......................................... $ 92 $ 597 $ 1,033
Meals and entertainment.......................................... 33 41 28
Acquisition-related costs and non-recurring charges.............. 402 575 --
Goodwill amortization............................................ 44 35 33
Reduction in valuation reserve................................... -- -- (95)
Foreign losses without tax benefit............................... -- 5 5
Effect of differences between U.S. and foreign tax rates......... 37 (66) 31
Tax-exempt interest income....................................... (121) (106) (34)
Other, net....................................................... (8) (64) (33)
------- ------- -------
Provision for income taxes.......................................... $ 479 $ 1,017 $ 968
======= ======= =======
</TABLE>
Deferred income taxes represent temporary differences in the recognition of
certain items for income tax and financial reporting purposes. The components of
the net deferred income tax asset are summarized as follows:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
In thousands 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Property and equipment............................................................ $ 28 $ 81
Employee benefits................................................................. 131 120
Accounts receivable............................................................... 89 72
Other............................................................................. (5) --
------ ------
Net deferred tax asset.............................................................. $ 243 $ 273
====== ======
</TABLE>
Income taxes have been provided on all undistributed earnings of foreign
subsidiaries. Cash paid for income taxes was $1.2 million, $764,000 and $753,000
in 1998, 1997 and 1996, respectively.
(5) REDEEMABLE COMMON STOCK AND SHAREHOLDERS' EQUITY
On April 23, 1996, the shareholders of the Company approved an amendment and
restatement to the Company's articles of incorporation that effected (1) a
1.5-for-1 stock split of the Company's common stock, (2) an increase in the
authorized shares of common stock to 15,000,000 shares, (3) the conversion of
all classes of common stock to no par common stock, (4) an increase in the
authorized number of preferred shares to 1,000,000, and (5) an amendment of the
privileges of the preferred stock. All references in the consolidated financial
statements and accompanying notes have also been adjusted to reflect the
amendment and restatement of the articles of incorporation.
Common Stock
Holders of shares of common stock are entitled to one vote per share on all
matters submitted to a vote of holders of shares of common stock, and do not
have any cumulative voting rights. In the event of a liquidation, dissolution or
winding-up of the Company, the holders of shares of common stock are entitled to
share equally and ratably in the assets of the Company, if any, remaining after
the payment of debts and liabilities of the Company, subject to prior
liquidation rights of any outstanding shares of preferred stock.
In May 1996, the Company completed an initial public offering of its stock,
which resulted in the issuance of 1,500,000 shares of common stock at a price of
$11.00 per share. In June 1996, an additional 354,750 shares were sold by the
Company at $11.00 per share, pursuant to the underwriters' exercise of their
over-allotment option.
In November 1998, the Board of Directors authorized management of the
Company to repurchase up to 500,000 shares of the Company's common stock. No
shares have been repurchased to date.
35
<PAGE> 36
Preferred Stock
The Board of Directors is authorized to issue up to 1,000,000 shares of
preferred stock in one or more series. Under each issuance of a series of
preferred stock, the Board of Directors is permitted to fix the designations,
preferences, powers and relative rights and restrictions thereof, including
without limitation, the dividend rate, conversion rights, voting rights,
redemption price, and liquidation preference.
Convertible Preferred Stock
On February 8, 1996, the Board of Directors authorized the Company to redeem
all outstanding shares of convertible preferred stock. The holders of
convertible preferred shares had the right to convert such shares into shares of
Class A common stock in lieu of accepting cash redemption payments. As of April
11, 1996, all holders of convertible preferred stock exercised their right to
convert their shares into Class A common stock. Based on a formula in the
agreement, each share of convertible preferred stock was converted into
approximately 1.37 shares of Class A common stock.
Class A and Class B Common Stock
In April 1996, the Company amended and restated its Articles of
Incorporation to automatically convert each share of Class A common stock and
each share of Class B common stock into one share of common stock.
In April 1994, the Company purchased all of the outstanding stock of its
distributors in France, Germany, Sweden, Italy and the United Kingdom. In
connection with this acquisition, the Company issued 107,329 shares of Class A
common stock with redemption privileges at $8 per share. During 1997 and 1996,
the redemption privileges associated with 20,843 and 86,486 of these shares
terminated, respectively.
Class A Common Stock Warrants
In March 1990, April 1991, and September 1992, 124,155, 23,280, and 14,685
nonnegotiable warrants to acquire Class A common stock of the Company,
respectively, were issued and attached to the Company's subordinated debt. The
Company was notified on March 11, 1996, that the holder of one-half of the
warrants would exercise their right to purchase 81,060 shares of the Company's
Class A common stock at a price of $0.75 per share. The remaining warrants were
redeemed by the Company in 1996 for a cash value of $449,000.
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was adopted
by the Company's Board of Directors in March 1996. A total of 300,000 shares of
common stock have been reserved for issuance under the Purchase Plan. The
Purchase Plan provides that the Company will sell shares to employees who elect
to participate in the Purchase Plan at a price equal to 85% of the lesser of the
fair market value of the common stock on the first trading day of an offering
period or the last trading day of such offering period.
Under the Purchase Plan, the Company issued 43,340, 33,899 and 17,213 shares
of common stock in 1998, 1997 and 1996, respectively, to various employees.
These shares were issued with a weighted average price per share of $6.37, $5.97
and $11.79 in 1998, 1997 and 1996, respectively. As of December 31, 1998, there
were 205,548 shares of common stock remaining to be issued under this plan.
1996 Stock Incentive Plan For Key Employees
The Company's 1996 Stock Incentive Plan for Key Employees (the "Stock Option
Plan") was adopted by the Company's Board of Directors in March 1996. Under the
Stock Option Plan, options will be granted or restricted stock will be awarded
for the purpose of attracting and motivating key employees of the Company. The
Stock Option Plan provides for (1) the grant of "incentive stock options" within
the meaning of Section 422 of the Internal
36
<PAGE> 37
Revenue Code, (2) the grant of "nonqualified stock options" (options which do
not meet the requirements of Section 422), and (3) the award of restricted
stock. Subject to certain provisions outlined in the Stock Option Plan, the
Compensation Committee of the Board of Directors will determine which key
employees will be granted options or awarded restricted stock, the number of
options granted or shares awarded, and other terms and conditions applicable to
each award or grant. A total of 650,000 shares of common stock have been
reserved for issuance under the Stock Option Plan.
Stock option activity for this plan is summarized below:
<TABLE>
<CAPTION>
WTD. AVG.
NUMBER PRICE EXERCISE
OF SHARES PER SHARE PRICE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1995 -- -- --
Granted ...................... 182,500 $9.00 - $13.50 $ 11.47
-------- -------------- ---------
Outstanding at December 31, 1996 182,500 $9.00 - $13.50 $ 11.47
Granted ...................... 329,000 $6.50 - $ 9.13 $ 7.75
Canceled ..................... (132,200) $6.50 - $13.50 $ 11.81
-------- -------------- ---------
Outstanding at December 31, 1997 379,300 $6.69 - $ 9.13 $ 8.12
Granted ...................... 564,150 $6.75 - $11.50 $ 7.76
Exercised .................... (6,125) $6.75 - $ 9.00 $ 8.84
Canceled ..................... (347,800) $6.75 - $11.50 $ 9.61
-------- -------------- ---------
Outstanding at December 31, 1998 589,525 $6.69 - $11.50 $ 7.38
======== ============== =========
</TABLE>
There were 68,925 and 82,500 options exercisable under the Stock Option Plan
as of December 31, 1998 and 1997, respectively, with a weighted average exercise
price of $8.21 per share in 1998 and $9.00 per share in 1997. The remaining
options vest over a three or four year period beginning on the date of grant at
33% or 25% per year, respectively, and expire five or ten years from the date
they are granted. As of December 31, 1998, there were 54,350 shares of common
stock remaining to be issued under the Stock Option Plan. Options outstanding
under the Stock Option Plan have a weighted average remaining contractual life
of 7.6 years and 4.1 years as of December 31, 1998 and 1997, respectively.
In November 1998, the Board of Directors approved a one-for-one stock option
exchange that provided non-director employees with the opportunity to exchange
stock options previously granted for new options with a current market price and
a new vesting period. The new options were priced at $6.75 per share based on
the closing price of the Company's common stock as reported on Nasdaq on
November 10, 1998, vest in equal installments over three years from the November
10, 1998 grant date and expire on November 10, 2008. The repriced options can
only be exercised when the closing price of the Company's common stock equals or
exceeds $11.00 per share. A total of 335,950 options with prior exercise prices
ranging from $6.75 to $11.50 per share were exchanged. The weighted average
prior exercise price of options exchanged was $8.81 per share. The exchange of
such options is presented in the table above as cancellations and subsequent
grants.
Non-Employee Director Stock Option Plan
The Company's Non-Employee Director Stock Option Plan (the "Director Stock
Option Plan") was adopted by the Company's Board of Directors in March 1996. The
Director Stock Option Plan provides for the grant of "nonqualified stock
options" to purchase shares of common stock. Upon appointment to the Board of
Directors, each newly appointed non-employee director will receive an option to
purchase 5,000 shares of common stock of the Company. Furthermore, immediately
following each annual meeting of shareholders of the Company, each non-employee
director who has served as a director for at least six months will automatically
be granted an option to purchase 5,000 shares of common stock of the Company.
The exercise price of any option will be equal to the market price of the common
stock at the time of grant. Each option, if not terminated sooner as provided in
the Director Stock Option Plan, will have a five-year term from the date of
grant and will vest and become exercisable in full on the first anniversary of
the date of grant. A total of 100,000 shares of common stock have been reserved
for issuance under the Director Stock Option Plan.
37
<PAGE> 38
Stock option activity for this plan is summarized below:
<TABLE>
<CAPTION>
WTD. AVG.
NUMBER PRICE EXERCISE
OF SHARES PER SHARE PRICE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1995..................................... -- -- --
Granted............................................................ 20,000 $ 11.00 $11.00
------ ------- ------
Outstanding at December 31, 1996..................................... 20,000 $ 11.00 $11.00
Granted............................................................ 20,000 $ 9.13 $ 9.13
------ ------- ------
Outstanding at December 31, 1997..................................... 40,000 $ 9.13 - $11.00 $10.07
Granted............................................................ 20,000 $ 13.00 $13.00
------ ------- ------
Outstanding at December 31, 1998..................................... 60,000 $ 9.13 - $13.00 $11.04
====== =============== ======
</TABLE>
There were 40,000 and 20,000 options exercisable under the Director Stock
Option Plan as of December 31, 1998 and 1997, respectively, with a weighted
average exercise price of $10.07 per share in 1998 and $11.00 per share in 1997.
Options outstanding under the Director Stock Option Plan have a weighted average
remaining contractual life of 3.4 years and 3.8 years as of December 31, 1998
and 1997, respectively.
1993 Stock Option Plan
In March 1996, the Company's 1993 Stock Option Plan (the "1993 Plan") was
terminated by the Board of Directors. Under the 1993 Plan, the Board was
permitted to grant options to purchase shares of Class A common stock to certain
key employees. The price of such options was determined by the Board when the
options were granted, but could not be less than the book value of the stock.
Management determined that all options granted under the 1993 Plan were at
exercise prices equal to or in excess of fair market value. Stock option
activity for this plan is summarized below:
<TABLE>
<CAPTION>
NUMBER PRICE
OF SHARES PER SHARE
- -------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1995 and 1996 61,671 $ 0.93
Exercised ............................. (19,500) $ 0.93
------- --------
Outstanding at December 31, 1997 ........ 42,171 $ 0.93
Exercised ............................. (42,171) $ 0.93
------- --------
Outstanding at December 31, 1998 ........ --
=======
</TABLE>
For various price ranges, information for options outstanding and
exercisable for all option plans at December 31, 1998 was as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
--------------------------------------------------- -----------------------------
RANGE OF WTD. AVG. REMAINING WTD. AVG. WTD. AVG.
EXERCISE PRICES SHARES LIFE (YEARS) EXERCISE PRICE SHARES EXERCISE PRICE
- ----------------------------------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C>
$6.69 - $7.00 356,075 9.56 $ 6.75 5,050 $ 6.72
$ 7.01 - $8.00 148,500 3.19 $ 7.86 37,125 $ 7.86
$ 8.01 - $9.00 32,250 2.82 $ 8.90 26,750 $ 8.97
$ 9.01 - $11.00 91,700 6.38 $ 9.63 40,000 $ 10.07
$ 11.01 - $13.00 21,000 4.61 $ 12.93 -- --
</TABLE>
38
<PAGE> 39
Stock-Based Compensation
Using the intrinsic value method of accounting for the value of stock
options granted during 1998 and 1997, no compensation cost was recorded in the
accompanying consolidated statements of income. Had compensation cost been
determined based on the fair value at the date of grant for awards in 1998 and
1997 consistent with the provisions of SFAS 123, net income and net income per
share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
In thousands, except per share data 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss) - as reported.................................................. $(217) $ 744
Net income (loss) - pro forma.................................................... $(963) $ 406
Diluted net income (loss) per share - as reported................................ $(0.04) $ 0.13
Diluted net income (loss) per share - pro forma.................................. $(0.16) $ 0.07
</TABLE>
The weighted average estimated fair value of stock options granted during
1998 and 1997 was $4.69 and $3.98, respectively. The fair value of each option
grant was estimated on the date of grant using the Black-Scholes option-pricing
model. The following weighted average assumptions were used in valuing the
option grants:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Expected life (years)............................................................. 5.0 5.0
Interest rate..................................................................... 5.2% 6.0%
Volatility........................................................................ 0.7 0.8
Dividend yield.................................................................... 0.0% 0.0%
</TABLE>
(6) COMMITMENTS AND CONTINGENCIES
Employee Benefit Plans
The Company maintains a 401(k) plan covering substantially all of its
employees. During 1998, 1997 and 1996, the Company matched 40% of qualified
employee contributions, up to a maximum of 2.4% of eligible compensation. In
1998, 1997 and 1996, the Company contributed $244,000, $180,000 and $150,000,
respectively, to the plan.
Lease Commitments
The Company and its subsidiaries lease office space and certain equipment
under noncancelable operating lease agreements. Future minimum lease payments at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
In thousands
- --------------------------------------------------------------------------
<S> <C>
1999.................................................... $ 1,653
2000.................................................... 866
2001.................................................... 196
2002.................................................... 135
2003.................................................... 15
Thereafter.............................................. 13
--------
$ 2,878
========
</TABLE>
Total lease expense amounted to approximately $2.0 million in each of the
years ending 1998, 1997 and 1996.
Royalty Agreements
The Company has entered into various agreements which generally provide for
royalty payments by the Company based on a percentage of revenue derived through
the licensing of certain software products. Royalty expense under these
agreements amounted to approximately $2.2 million, $612,000 and $480,000 in
1998, 1997 and 1996, respectively.
39
<PAGE> 40
(7) LITIGATION
The Company is party to routine litigation arising in the normal course of
business. In the opinion of management, the liabilities resulting from these
proceedings, if any, will not be material to the Company's consolidated
financial position or results of operations.
(8) GEOGRAPHIC OPERATIONS AND SEGMENT INFORMATION
Effective December 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 introduces a new model for segment
reporting called the "management approach." The management approach is based on
the way that the chief operating decision-maker organizes segments within a
company for making operating decisions and assessing performance.
The Company operates in one segment - the development, marketing and support
of software products and services for the mechanical segment of the
computer-aided engineering industry. The Company licenses products to customers
on a worldwide basis. Sales and marketing operations outside the United States
are conducted principally through the Company's foreign subsidiaries and
international distributors. Intercompany sales and transfers between geographic
areas are accounted for at prices which are designed to be representative of
third party transactions.
40
<PAGE> 41
The following table summarizes selected financial information of the
Company's operations by geographic location:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
In thousands 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
North America
United States ................................ $ 12,223 $ 10,340 $ 8,250
Canada and Mexico ............................ 1,514 153 128
Europe
Germany ...................................... 5,108 4,380 4,217
Other European countries ..................... 7,769 5,653 5,535
Asia/Pacific
Japan ........................................ 7,819 7,324 5,424
Other Asian countries ........................ 2,142 2,341 1,829
-------- -------- --------
Total revenue ........................... $ 36,575 $ 30,191 $ 25,383
======== ======== ========
Operating contribution:
North America
United States ................................ $ 3,827 $ 3,229 $ 2,940
Canada and Mexico ............................ 186 89 87
Europe
Germany ...................................... 1,805 1,377 1,315
Other European Countries ..................... 2,672 1,836 1,686
Asia/Pacific
Japan ........................................ 1,204 2,020 1,953
Other Asian countries ........................ 250 623 658
-------- -------- --------
Total operating contribution ............ 9,944 9,174 8,639
Unallocated expenses, net ....................... (9,672) (7,418) (5,600)
-------- -------- --------
Income before taxes and minority interest $ 272 $ 1,756 $ 3,039
======== ======== ========
Identifiable assets:
North America
United States ................................ $ 23,882 $ 26,115 $ 24,744
Canada ....................................... 1,698 -- --
Europe
Germany ...................................... 1,942 1,124 1,199
Other European countries ..................... 3,430 3,580 2,797
Asia/Pacific
Japan ........................................ 1,362 1,788 --
Other Asian countries ........................ 114 42 --
-------- -------- --------
Total identifiable assets ............... 32,428 32,649 28,740
Goodwill ........................................ 3,819 1,498 1,072
-------- -------- --------
Total assets ............................ $ 36,247 $ 34,147 $ 29,812
======== ======== ========
</TABLE>
No customer accounted for greater than 10% of total revenue in 1998. One
customer accounted for approximately 10.6% and 11.8% of total revenue in 1997
and 1996, respectively.
Unallocated expenses, net consist of general corporate expenses, internal
research and product development expenses, interest expense and interest income.
In 1998 and 1997, these expenses also include acquisition and related costs of
approximately $1.7 million.
41
<PAGE> 42
(9) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes selected unaudited quarterly financial
information for 1998 and 1997. The Company believes all adjustments, consisting
of normal recurring adjustments considered necessary for a fair presentation,
have been included in the selected quarterly information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
------------------------------------------------------------- ------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
In thousands, except per share data 1998 1998 1998 1998 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue ..................... $ 8,735 $ 8,905 $ 8,180 $ 10,755 $ 36,575
Gross profit ................ 6,027 6,327 5,077 7,084 24,515
Operating income (loss) ..... (554) 847 (939) 90 (556)
Net income (loss) ........... (613) 733 (586) 249 (217)
Basic net income (loss) per
common share ............. $ (0.10) $ 0.12 $ (0.09) $ 0.04 $ (0.04)
Diluted net income (loss) per
common share ............. $ (0.10) $ 0.12 $ (0.09) $ 0.04 $ (0.04)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
-------------------------------------------------------- ------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
In thousands, except per share data 1997 1997 1997 1997 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue ..................... $ 6,701 $ 7,205 $ 7,679 $ 8,606 $30,191
Gross profit ................ 4,994 5,358 5,802 6,180 22,334
Operating income (loss) ..... 514 628 693 (870) 965
Net income (loss) ........... 477 589 649 (971) 744
Basic net income (loss) per
common share ............. $ 0.08 $ 0.10 $ 0.11 $ (0.16) $ 0.13
Diluted net income (loss) per
common share ............. $ 0.08 $ 0.10 $ 0.11 $ (0.16) $ 0.13
</TABLE>
42
<PAGE> 43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Certain information required by Part III is omitted from this report in that
the Registrant will file a definitive proxy statement pursuant to Regulation 14A
(the "Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this report and certain information included therein is incorporated
herein by reference. Only those sections of the Proxy Statement that
specifically address the items set forth herein are incorporated by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the directors of the Company is incorporated by
reference to the Company's Proxy Statement for the 1999 Annual Meeting of
Shareholders scheduled to be held on May 13, 1999.
The executive officers of the Company as of March 1, 1999 are listed below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <S>
Michael E. Korybalski........................... 52 Chief Executive Officer, Chairman of the Board and
Director
Robert R. Ryan.................................. 41 President, Chief Operating Officer and Director
Michael Hoffmann................................ 42 Senior Vice President -- Worldwide Sales & Service
David Peralta................................... 31 Vice President, Chief Financial Officer and Treasurer
</TABLE>
Michael E. Korybalski, a co-founder of MDI, is currently Chief Executive
Officer, Chairman of the Board and a director of the Company. From 1984 to
February 1997, Mr. Korybalski served as President of the Company. From 1977 to
1984, Mr. Korybalski served as Vice President and General Manager of the
Company. From 1973 to 1977, he was employed as a product engineer with Ford
Motor Company. Mr. Korybalski holds B.S.E. and M.S.E. degrees in mechanical
engineering, as well as an M.B.A., from the University of Michigan.
Robert R. Ryan became the President of the Company in February 1997 and
since 1991 has served as the Chief Operating Officer of the Company. Dr. Ryan
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. Dr. Ryan holds
a B.S. degree from the University of Cincinnati and M.S. and Ph.D. degrees in
applied mechanics from Stanford University.
Michael Hoffmann became the Company's Senior Vice President -- Worldwide
Sales and Service in November 1997. Dr. Hoffmann served as the Company's Vice
President -- European Operations from November 1996 to November 1997. Dr.
Hoffmann served as the Company's Managing Director -- European Operations from
1994 through February 1997. From 1993 through 1994, Dr. Hoffmann served as
Managing Director of TEDAS Mechanical Systems GmbH, a shareholder of the
Company. From 1991 through 1992, he served as Technical Director of TEDAS GmbH.
Dr. Hoffmann holds masters and doctorate degrees in civil engineering from the
Technological University of Darmstadt.
David Peralta became the Company's Vice President, Chief Financial Officer
and Treasurer in February 1997, and served as Controller of the Company from
1993 to February 1997. From 1992 to 1993, Mr. Peralta served as Assistant
Corporate Controller at OVAKO Ajax, Inc. From 1989 through 1992, he served as an
auditor at Coopers & Lybrand. Mr. Peralta is a licensed Certified Public
Accountant in the State of Michigan. Mr. Peralta holds a bachelors degree in
accounting from the University of Michigan.
43
<PAGE> 44
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement for the 1999 Annual Meeting of Shareholders scheduled
to be held on May 13, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement for the 1999 Annual Meeting of Shareholders scheduled
to be held on May 13, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
44
<PAGE> 45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
ITEM 14(a)1. FINANCIAL STATEMENTS
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the Years Ended December 31, 1998,
1997 and 1996
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
ITEM 14(a)2. FINANCIAL STATEMENT SCHEDULES
None.
45
<PAGE> 46
ITEM 14(a)3. EXHIBITS
<TABLE>
<CAPTION>
NUMBER EXHIBIT
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
(2) Joint Venture Agreement between Mechanical Dynamics, Inc. and Information Services
International-Dentsu, Ltd., incorporated herein by reference to Exhibit 2 to the Company's
previously filed Form 10-Q for the quarter ended March 31, 1997
(3.1) Restated Articles of Incorporation, incorporated herein by reference to Exhibit 3.2 to the
Company's previously filed Registration Statement on Form S-1, Registration No. 333-2900
(3.2) Restated Bylaws, incorporated herein by reference to Exhibit 3.4 to the Company's previously
filed Registration Statement on Form S-1, Registration No. 333-2900
(4.2) Line of Credit Demand Note between KeyBank National Association and the Company dated December 4, 1998
(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, as amended
(11) Statement Re Computation Of Per Share Earnings Per Share
(21) Subsidiaries Of The Registrant
(23.1) Consent Of Independent Public Accountants
(27) - 1998 Financial Data Schedule - 1998
(27) - 1996 Financial Data Schedule - 1996 (Amended for SFAS 128)
(27) - 1997-Q3 Financial Data Schedule - 1997 - 3rd Quarter (Amended for SFAS 128)
(27) - 1996-Q3 Financial Data Schedule - 1996 - 3rd Quarter (Amended for SFAS 128)
</TABLE>
ITEM 14(b). REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the year ended
December 31, 1998.
46
<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 26, 1999 MECHANICAL DYNAMICS, INC.
(Registrant)
By: /s/ Michael E. Korybalski
------------------------------
Michael E. Korybalski
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
<S> <C> <C>
/s/ Michael E. Korybalski Chairman of the Board, March 26, 1999
- ---------------------------------- Chief Executive Officer,
Michael E. Korybalski and Director
(Principal Executive Officer)
/s/ Robert R. Ryan President, Chief Operating Officer March 26, 1999
- ---------------------------------- and Director
Robert R. Ryan
/s/ David Peralta Chief Financial Officer March 26, 1999
- ---------------------------------- (Principal Financial and
David Peralta Accounting Officer)
/s/ Herbert S. Amster Director March 26, 1999
- ----------------------------------
Herbert S. Amster
/s/ David E. Cole Director March 26, 1999
- ----------------------------------
David E. Cole
/s/ Joseph F. Gloudeman Director March 26, 1999
- ----------------------------------
Joseph F. Gloudeman
/s/ Mitchell I. Quain Director March 26, 1999
- ----------------------------------
Mitchell I. Quain
</TABLE>
47
<PAGE> 48
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER EXHIBIT TITLE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
(2) Joint Venture Agreement between Mechanical Dynamics, Inc. and Information Services
International-Dentsu, Ltd., incorporated herein by reference to Exhibit 2 to the Company's
previously filed Form 10-Q for the quarter ended March 31, 1997
(3.1) Restated Articles of Incorporation, incorporated herein by reference to Exhibit 3.2 to the
Company's previously filed Registration Statement on Form S-1, Registration No. 333-2900
(3.2) Restated Bylaws, incorporated herein by reference to Exhibit 3.4 to the Company's previously
filed Registration Statement on Form S-1, Registration No. 333-2900
(4.2) Line of Credit Demand Note between KeyBank National Association and the Company dated December 4, 1998
(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, as amended
(11) Statement Re Computation Of Per Share Earnings
(21) Subsidiaries Of The Registrant
(23.1) Consent Of Independent Public Accountants
(27) - 1998 Financial Data Schedule - 1998
(27) - 1996 Financial Data Schedule - 1996 (Amended for SFAS 128)
(27) - 1997-Q3 Financial Data Schedule - 1997 - 3rd Quarter (Amended for SFAS 128)
(27) - 1996-Q3 Financial Data Schedule - 1996 - 3rd Quarter (Amended for SFAS 128)
</TABLE>
48
<PAGE> 1
EXHIBIT 4.2
PROMISSORY NOTE
<TABLE>
<S><C>
Principal Amount: $4,000,000.00 Initial Rate: 7.000% Date of Note: December 4, 1998
</TABLE>
PROMISE TO PAY. Mechanical Dynamics, Inc. ("Borrower") promises to pay to
KeyBank National Association ("Lender"), or order, in lawful money of the
United States of America, on demand, the principal amount of Four Million &
00/100 Dollars ($4,000,000.00) or so much as may be outstanding, together with
interest on the unpaid outstanding principal balance of each advance. Interest
shall be calculated from the date of each advance until repayment of each
advance.
PAYMENT. BORROWER WILL PAY THIS LOAN IMMEDIATELY UPON LENDER'S DEMAND. IN
ADDITION, BORROWER WILL PAY REGULAR MONTHLY PAYMENTS OF ALL ACCRUED UNPAID
INTEREST DUE AS OF EACH PAYMENT DATE, BEGINNING JANUARY 4, 1999, WITH ALL
SUBSEQUENT INTEREST PAYMENTS TO BE DUE ON THE SAME DAY OF EACH MONTH AFTER THAT.
Interest on this Note is computed on a 365/360 simple interest basis; that is,
by applying the ratio of the annual interest rate over a year of 360 days, times
the outstanding principal balance, times the actual number of days the principal
balance is outstanding. Borrower will pay Lender at Lender's address shown
above or at such other place as Lender may designate in writing. Unless
otherwise agreed or required by applicable law, payments will be applied first
to accrued unpaid interest, then to principal, and any remaining amount to any
unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an index which is the KeyBank Prime (the
"Index"). The interest rate will change on the date of each announced change of
the Index within KeyBank. The Index is not necessarily the lowest rate charged
by Lender on its loans and is set by Lender in its sole discretion. If the
Index becomes unavailable during the term of this loan, the Lender may designate
a substitute index after notifying Borrower. Lender will tell Borrower the
current Index rate upon Borrower's request. Borrower understands that Lender
may make loans based on other rates as well. The Interest rate change will not
occur more often than each day that the rate changes. THE INDEX CURRENTLY IS
7.750% PER ANNUM. THE INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL
BALANCE OF THIS NOTE WILL BE AT A RATE OF 0.750 PERCENTAGE POINTS UNDER THE
INDEX, RESULTING IN AN INITIAL RATE OF 7.000% PER ANNUM. NOTICE: Under no
circumstances will the interest rate on this Note be more than the maximum rate
allowed by applicable law.
PREPAYMENT. Borrower may pay without penalty all or a portion of the amount
owed earlier than it is due. Early payments will not, unless agreed to by
Lender in writing, relieve Borrower of Borrower's obligation to continue to
make payments of accrued unpaid interest. Rather, they will reduce the
principal balance due.
LATE CHARGE. If a regularly scheduled interest payment is 10 DAYS OR MORE
LATE, Borrower will be charged 5.000% of the unpaid portion of the REGULARLY
SCHEDULED PAYMENT OR $50.00, WHICHEVER IS GREATER. If Lender demands payment
of this loan, and Borrower does not pay the loan WITHIN 10 DAYS AFTER LENDER'S
DEMAND, BORROWER ALSO WILL BE CHARGED EITHER 5.000% OF THE UNPAID PORTION OF
THE SUM OF THE UNPAID PRINCIPAL PLUS ACCRUED UNPAID INTEREST OR $50.00,
WHICHEVER IS GREATER.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to lender, or Borrower fails to comply with or to perform
when due any other term, obligation, covenant, or condition contained in this
Note or any agreement related to this Note, or in any other agreement or loan
Borrower has with Lender. (c) Borrower defaults under any loan, extension of
credit, security agreement, purchase or sales agreement, or any other
agreement, in favor of any other creditor or person that may materially affect
any of Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor
tries to take any of Borrower's property on or in which Lender has a lien or
security interest. This includes a garnishment of any of Borrower's accounts
with Lender. (g) Any guarantor dies or any of the other events described in
this default section occurs with respect to any guarantor of this Note. (h) A
material adverse change occurs in Borrower's financial condition, or Lender
believes the prospect of payment or performance of the Indebtedness is
impaired. (i) Lender in good faith deems itself insecure.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon default, including
failure to pay upon final maturity, Lender, at its option, may also, if
permitted under applicable law, increase the variable interest rate on this
Note 3.000 percentage points. The interest rate will not exceed the maximum
rate permitted by applicable law. Lender may hire or pay someone else to help
collect this Note if Borrower does not pay. Borrower also will pay Lender that
amount. This includes, subject to any limits under applicable law, Lender's
reasonable attorneys' fees and Lender's legal expenses whether or not there is
a lawsuit, including reasonable attorneys' fees and legal expenses for
bankruptcy proceedings (including efforts to modify or vacate any automatic
stay or injunction), appeals, and any anticipated post-judgment collection
services. If not prohibited by applicable law, Borrower also will pay any
court costs, in addition to all other sums provided by law. THIS NOTE HAS BEEN
DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF MICHIGAN. IF THERE
IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE
JURISDICTION OF THE COURTS OF WASHTENAW COUNTY, THE STATE OF MICHIGAN. LENDER
AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION,
PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE
OTHER. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF MICHIGAN.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances
under this Note may be requested orally by Borrower or by an authorized
person. Lender may, but need not, require that all oral requests be confirmed
in writing. All communications, instructions, or directions by telephone or
otherwise to Lender are to be directed to Lender's office shown above.
Borrower agrees to be liable for all sums either: (a) advanced in accordance
with the instructions of an authorized person or (b) credited to any of
Borrower's accounts with Lender. The unpaid principal balance owing on this
<PAGE> 2
12-04-1998 PROMISSORY NOTE PAGE 2
(CONTINUED)
Note at any time may be evidenced by endorsements on this Note or by Lender's
internal records, including daily computer print-outs. Lender will have no
obligation to advance funds under this Note if: (a) Borrower or any guarantor
is in default under the terms of this Note or any agreement that Borrower or
any guarantor has with Lender, including any agreement made in connection with
the signing of this Note; (b) Borrower or any guarantor ceases doing business
or is insolvent; (c) any guarantor seeks, claims or otherwise attempts to
limit, modify or revoke such guarantor's guarantee of this Note or any other
loan with Lender; (d) Borrower has applied funds provided pursuant to this Note
for purposes other than those authorized by Lender; or (e) Lender in good faith
deems itself insecure under this Note or any other agreement between Lender
and Borrower.
PRIOR NOTE. This Note is a renewal of that Promissory Note from Borrower to
Lender dated June 27, 1997 in the amount of $4,000,000.00.
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific
default provisions or rights of Lender shall not preclude Lender's right to
declare payment of this Note on its demand. Lender may delay or forgo enforcing
any of its rights or remedies under this Note without losing them. Borrower and
any other person who signs, guarantees or endorses this Note, to the extent
allowed by law, waive presentment, demand for payment, protest and notice of
dishonor. Upon any change in the terms of this Note, and unless otherwise
expressly stated in writing, no party who signs this Note, whether as maker,
guarantor, accommodation maker or endorser, shall be released from liability.
All such parties agree that Lender may renew or extend (repeatedly and for any
length of time) this loan, or release any party or guarantor or collateral; or
impair, fail to realize upon or perfect Lender's security interest in the
collateral; and take any other action deemed necessary by Lender without the
consent of or notice to anyone. All such parties also agree that Lender may
modify this loan without the consent of or notice to anyone other than the party
with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
MECHANICAL DYNAMICS, INC.
BY: /s/ David Peralta
-----------------------------------
DAVID PERALTA, VICE PRESIDENT/CFO
<PAGE> 1
EXHIBIT 10.1
FIFTH AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIFTH AMENDMENT, made as of the 1st day of March, 1999, 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, as of March 1, 1997, and as of March 1, 1998 (collectively,
the "Employment Agreement").
WITNESSETH:
WHEREAS, the Company and Employee desire to extend the Employment
Agreement and to confirm certain modifications to the terms of said Agreement
herein.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants 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, 2002.
B. Section 6 of the Employment Agreement is hereby deleted in its
entirety and there is substituted therefor a new Section 6 as follows:
"6. CHANGE OF DUTIES; RELOCATION. In the event that during the
term of this Agreement, the Company's Board of Directors chooses to
change the Employee's title as Chairman and Chief Executive Officer of
the Company and/or his duties hereunder, or directs Employee to
relocate away from Ann Arbor, Michigan, then Employee shall be entitled
to resign and to receive as severance compensation, his entire base
salary, bonus (calculated as provided in Section 7.4 hereof), vacation
and fringe benefits in the amounts and payable as provided herein for a
period equal to the then remaining term of this Agreement. Further, if
the remaining term of this Agreement is less than one (1) year from the
date of Employee's resignation, then the term of this Agreement shall
be automatically extended through a date one (1) year from the date of
such resignation."
C. Section 7.4 of the Employment Agreement is hereby deleted in its
entirety and there is substituted therefor a new Section 7.4 as follows:
"7.4 Change of Control. In the event of a change in control
(as hereinafter defined) of the Company, then the term of this
Agreement shall be automatically extended through a date three (3)
years from the effective date of such change in
- 1 -
<PAGE> 2
control. Further, if, after the effective date of the change in
control, Employee resigns for any reason or is terminated with or
without "Cause", then, in any such event, the Company shall (a)
continue to pay Employee's base salary on a monthly basis and provide
all fringe benefits, in each case as in effect at the date of
Employee's resignation or termination, for a period (the "Contract
Period") equal to the greater of the remaining term of this Agreement
or one (1) year from the date of resignation or termination and (b) pay
Employee a bonus for the Contract Period equal to the highest bonus
paid to Employee during the last three (3) calendar years preceding his
resignation or termination multiplied by the number of months from the
beginning of the calendar year in which resignation or termination
occurs to the end of the Contract Period divided by twelve (12), said
bonus to be paid in equal monthly installments during the Contract
Period. 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. For purposes of this Section 7.4, the term "change of
control" shall mean the sale of fifty percent (50%) or more of (i) the
Company's outstanding capital stock or (ii) the assets of the Company."
D. 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 Fifth
Amendment as of the day and year first above written.
WITNESS: COMPANY
MECHANICAL DYNAMICS, INC.
/s/ Linda K. Moore /s/ Robert R. Ryan
_________________________ By:_________________________________
Robert R. Ryan, President
EMPLOYEE
/s/ Linda K. Moore /s/ Michael E. Korybalski
_________________________ ____________________________________
Michael E. Korybalski
- 2 -
<PAGE> 1
EXHIBIT 10.2
FIFTH AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIFTH AMENDMENT, made as of the 1st day of March, 1999, 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, as of March 1, 1997, and as of March 1, 1998 (collectively,
the "Employment Agreement").
WITNESSETH:
WHEREAS, the Company and Employee desire to extend the Employment
Agreement and to confirm modifications to the terms of said Agreement herein.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants 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. Section 6 of the Employment Agreement is hereby deleted in its
entirety and there is substituted therefor a new Section 6 as follows:
"6. CHANGE OF DUTIES; RELOCATION. In the event that during the
term of this Agreement, the Company's Board of Directors chooses to
change the Employee's title as President and Chief Operating Officer of
the Company and/or his duties hereunder, or directs Employee to
relocate away from Ann Arbor, Michigan, then Employee shall be entitled
to resign and to receive as severance compensation, his entire base
salary, bonus (calculated as provided in Section 7.4 hereof), vacation
and fringe benefits in the amounts and payable as provided herein for a
period equal to the then remaining term of this Agreement. Further, if
the remaining term of this Agreement is less than one (1) year from the
date of Employee's resignation, then the term of this Agreement shall
be automatically extended through a date one (1) year from the date of
such resignation."
C. Section 7.4 of the Employment Agreement is hereby deleted in its
entirety and there is substituted therefor a new Section 7.4 as follows:
"7.4 Change of Control. In the event of a change in control
(as hereinafter defined) of the Company, then the term of this
Agreement shall be automatically extended through a date two (2) years
from the effective date of such change in
- 1 -
<PAGE> 2
control. Further, if, after the effective date of the change in
control, Employee resigns for any reason or is terminated with or
without "Cause", then, in any such event, the Company shall (a)
continue to pay Employee's base salary on a monthly basis and provide
all fringe benefits, in each case as in effect at the date of
Employee's resignation or termination, for a period (the "Contract
Period") equal to the greater of the remaining term of this Agreement
or one (1) year from the date of resignation or termination and (b) pay
Employee a bonus for the Contract Period equal to the highest bonus
paid to Employee during the last three (3) calendar years preceding his
resignation or termination multiplied by the number of months from the
beginning of the calendar year in which resignation or termination
occurs to the end of the Contract Period divided by twelve (12), said
bonus to be paid in equal monthly installments during the Contract
Period. 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. For purposes of this Section 7.4, the term "change of
control" shall mean the sale of fifty percent (50%) or more of (i) the
Company's outstanding capital stock or (ii) the assets of the Company."
D. 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 Fifth
Amendment as of the day and year 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 /s/ Robert R. Ryan
_________________________ ____________________________________
Robert R. Ryan
- 2 -
<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
- 1 -
<PAGE> 2
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.
- 2 -
<PAGE> 3
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
- 3 -
<PAGE> 4
term of this Agreement. Except as provided above, all bonus accruals, vacation
accruals and other fringe benefits shall cease at the end of said six (6) month
period. Notwithstanding the foregoing, Employee's salary, bonus, vacation and
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
- 4 -
<PAGE> 5
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 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
- 5 -
<PAGE> 6
(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
(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 term of this Agreement shall be automatically
extended through a date one (1) year from such
- 6 -
<PAGE> 7
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 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
- 7 -
<PAGE> 8
analysis"). Employee further agrees that the Company's remedy at law for any
breach of this restrictive covenant 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 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.
- 8 -
<PAGE> 9
/s/ Linda K. Moore By: /s/ Robert R. Ryan, President
- ----------------------------- ----------------------------------------
Robert R. Ryan, President
EMPLOYEE
/s/ Linda K. Moore /s/ David Peralta
- ----------------------------- ----------------------------------------
David Peralta
- 9 -
<PAGE> 10
COMPENSATION COMMITTEE REPORT
ATTACHMENT I
1997 COMPENSATION
DAVID PERALTA
VICE PRESIDENT FINANCE
CHIEF FINANCIAL OFFICER
================================================================================
Base Salary: $90,000
Car allowance: $3,600/year
Life Insurance: $200,000
Bonus: 20% of Base at plan
Plan: 25% revenue growth
$.50 Earnings per share
Options: 10,000, four year vesting period
Employment agreement: Contract expiring 3/31/98
Under this plan you are ineligible for MDI's company profit sharing plan
The bonus matrix is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
GROWTH EARNINGS PER SHARE
- --------------------------------------------------------------------------------
<$0.40 $0.40 $0.50 $0.60 $0.70
- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
<15% $0 $0 $0 $0 $0
- --------- --------- --------- --------- --------- ---------
20% $0 $4,500 $9,000 $13,500 $18,000
- --------- --------- --------- --------- --------- ---------
25% $0 $9,000 $18,000 $27,000 $36,000
- --------- --------- --------- --------- --------- ---------
30% $0 $13,500 $27,000 $40,500 $54,000
- --------- --------- --------- --------- --------- ---------
35% $0 $18,000 $36,000 $54,000 $72,000
- --------------------------------------------------------------------------------
</TABLE>
- - Revenue growth between 0% and 35% will be linearly interpolated. Revenue
growth beyond 35% will linearly extrapolated.
- - Earnings per Share between $.40 and $.70 will be linearly interpolated.
Earnings per Share beyond $.70 will be limited to $.70
-42-
<PAGE> 11
ATTACHMENT II
FULL AND FINAL RELEASE
In consideration of the termination benefits provided to me by
MECHANICAL DYNAMICS, INC., a Michigan corporation ("MDI"), as set out in Section
7 of the attached Employment Agreement, as amended (Attachment A), I hereby
agree as follows:
1. MECHANICAL DYNAMICS, INC. When used herein, "MDI" includes any
parent, subsidiary, associated and affiliated companies of Mechanical Dynamics,
Inc., and its and their successors, assigns, officers, directors, agents,
employees and attorneys, past, present or future, jointly and individually.
2. RELEASE OF CLAIMS. I release and forever discharge MDI, from any and
all claims, disputes, causes of action, administrative proceedings, legal
actions, whether arising out of statutory law, common law or equity, and
damages, known or unknown, which I have or may have against MDI, however
denominated, including, but not limited to, claims related to my employment, the
conduct of MDI during my employment, any claims of discrimination under any
federal, state or local law, rule or regulation (including claims under the Age
Discrimination in Employment Act (ADEA)), any claims under ERISA, any claim for
violation of any other federal, state or local law, rule or regulation, any
claim for wrongful termination of employment, wrongful layoff, failure to recall
to work, breach of contract, violation of any policy, practice or procedure of
MDI, denial of any employment benefit, constructive discharge, retaliatory
discharge, breach of the covenant of good faith and fair dealing, detrimental
reliance, termination in violation of public policy, violation of any
whistleblower statute, negligent supervision, negligent conducting of
performance appraisals, libel, slander, defamation, fraud, misrepresentation,
sexual or any other type of harassment, intentional or negligent infliction of
emotional distress, tortious interference with business relations or prospective
employers, providing false references, any claim to reinstatement or future
employment, any claim for damages, attorney fees or costs and any claims
occurring or existing through the date of this Release. I understand and agree
that I waived my right in the preceding sentence to file a lawsuit or to
commence an administrative action against MDI. If I later file a lawsuit or
administrative action, I shall be liable for the actual attorney fees and costs
incurred by MDI in defending any such legal action.
3. SCOPE OF RELEASE. This Release covers all issues arising from or in
connection with my employment with MDI as well as any issues, disputes or claims
occurring or existing through the date of this Release.
<PAGE> 12
4. PRIOR CLAIMS. I have not filed any claim, administrative proceeding
or legal action against MDI.
5. SUBSEQUENT LEGAL ACTION. I will not initiate, assist or cooperate in
any charge, claim, complaint or legal action against MDI with any federal, state
or local administrative agency or court, or with any other person (the term
"person" shall mean and include an individual, a partnership, a joint venture, a
corporation, a limited liability, a trust, an unincorporated organization, and a
government or any department or agency thereof), unless so ordered by a duly
authorized court, legislative committee or grand jury.
6. DEROGATORY COMMENTS. I shall not make any negative or derogatory
statements of any kind about MDI, MDI's products and services, or MDI's
employee's, past, present or future.
7. RESIGNATION AS OFFICER. Effective with the date of my separation
from employment with MDI, I resign any corporate office I hold.
8. RETURN OF PROPERTY. I have returned all MDI property as defined in
and required by the Confidentiality Agreement signed by me in favor of MDI
(hereinafter the "Confidentiality Agreement").
9. INJUNCTIVE RELIEF. In the event of a breach or threatened breach by
me of this Release, it is agreed that money damages would not adequately
compensate MDI and that injunctive relief would be essential for its protection.
Such relief shall be without prejudice to any other remedy which MDI may have or
be entitled to receive at law or in equity.
10. NON-ADMISSION. Nothing contained herein shall be construed as an
admission of liability by MDI in connection with my employment with and
separation from MDI as well as through the date of this Release.
11. FINALITY OF RELEASE. I recognize that I may be mistaken as to the
facts and/or law upon which I may be relying in executing this Release or that
additional facts may exist of which I am not presently aware. Nonetheless, I
have been fully advised and understand the finality of this Release and intend
to be bound by it.
12. REVIEW OF DOCUMENT. I have had the opportunity to read and discuss
this Release with MDI, and I have had an opportunity to review this Release with
outside legal counsel.
13. REVIEW AND REVOCATION PERIODS. I have been given twenty-one (21)
days within which to consider this Release before executing it, I have been
advised that I may revoke this Release for a period of seven (7) calendar days
following the execution of
- 2 -
<PAGE> 13
this Release and that the Release is not effective until the revocation period
has expired and I have notified MDI in writing that I did not revoke the
Release. Notice of revocation and/or non-revocation should be provided in
writing by me to MDI at 2301 Commonwealth Blvd., Ann Arbor, Michigan 48105,
Attn: Michael E. Korybalski, CEO.
Section 13 is applicable only if the undersigned is 40 years of age or older on
date of termination.
14. AUTHORITY TO RELEASE. I have the authority to release the claims
which are released herein and no claims have been previously assigned to or are
owned by any other person or entity.
15. ENTIRE AGREEMENT. No other written or oral promises, inducements or
agreements have been made by MDI to me. I understand that this Release may not
be modified, altered or changed in any respect except upon the express prior
written consent by me and MDI.
16. SEVERABILITY. If after the date of execution of this Release, any
provision of this Release is held to be illegal, invalid, or unenforceable, such
provision shall be fully severable. In lieu thereof, there shall be added a
provision as similar in terms to such illegal, invalid or unenforceable
provision as may be possible and be legal, valid and enforceable.
17. GOVERNING LAW. This Release shall be construed in accordance with
and shall be governed by the laws of the State of Michigan.
18. HEADINGS. All headings in this Release are inserted for convenience
of reference only and shall not be deemed to affect the meaning or
interpretation of this Release.
19. USAGE. Wherever applicable, the masculine gender, when used herein
shall include the feminine gender, and the singular shall include the plural.
IN WITNESS WHEREOF, I have executed this Release as of the date noted
below.
/s/ Linda K. Moore /s/ David Peralta
- -------------------------------- ------------------------------------
Witness [name]
DATE: 6-23-97 DATE: 6-23-97
--------------------------- -------------------------------
- 3 -
<PAGE> 14
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST 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
covenants 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 First
Amendment as of the day and date first above written.
WITNESS: COMPANY
MECHANICAL DYNAMICS, INC.
/s/ Linda Moore By: /s/ Robert R. Ryan, President
- ----------------------------- ----------------------------------------
Robert R. Ryan, President
EMPLOYEE
/s/ Linda Moore /s/ David Peralta
- ----------------------------- ------------------------------------------
David Peralta
<PAGE> 15
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
THIS SECOND AMENDMENT, made as of the 1st day of March, 1999, 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, and amended by agreement dated as of March 1, 1998
(collectively, the "Employment Agreement").
WITNESSETH:
WHEREAS, the Company and Employee desire to extend the Employment
Agreement and to confirm a modification of said Agreement herein.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants 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, 2000.
B. Section 7.4 of the Employment Agreement is hereby deleted in its
entirety and there is substituted therefor a new Section 7.4 as follows:
"7.4 Change of Control. In the event of a change in control
(as hereinafter defined) of the Company, if the remaining term of this
Agreement is less than one (1) year from the effective date of such
change of control, then the term of this Agreement shall be
automatically extended through a date one (1) year from such effective
date. For purposes of this Section 7.4, the term "change of control"
shall mean the sale of fifty percent (50%) or more of (i) the Company's
outstanding capital stock or (ii) the assets of the Company."
C. 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 Second
Amendment as of the day and year first above written.
WITNESS: COMPANY
MECHANICAL DYNAMICS, INC.
/s/ Linda K. Moore By: /s/ Robert R. Ryan
_________________________ ____________________________
Robert R. Ryan, President
EMPLOYEE
- 1 -
<PAGE> 16
/s/ Linda K. Moore /s/ David Peralta
- --------------------------- -----------------------------
David Peralta
- 2 -
<PAGE> 1
EXHIBIT 11
MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
in thousands, except share and per share data 1998 1997 1996
- --------------------------------------------------------------------- ----------- ---------- ----------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income (loss) ................................................ $ (217) $ 744 $ 2,071
=========== ========== ==========
Weighted average common shares outstanding ....................... 6,186,469 5,805,936 4,990,215
=========== ========== ==========
Basic net income (loss) per common share ......................... $ (0.04) $ 0.13 $ 0.42
=========== ========== ==========
DILUTED EARNINGS PER SHARE:
Net income (loss) ................................................ $ (217) $ 744 $ 2,071
=========== ========== ==========
Weighted average common shares outstanding ....................... 6,186,469 5,805,936 4,990,215
Effect of stock options and warrants ............................. -- 61,817 79,813
----------- ---------- ----------
Weighted average common and common equivalent shares outstanding
6,186,469 5,867,753 5,070,028
=========== ========== ==========
Diluted net income (loss) per common share ....................... $ (0.04) $ 0.13 $ 0.41
=========== ========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 21
MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
LEGAL ENTITY INCORPORATION OWNERSHIP
- ----------------------------------------- ----------------- ---------------------------------------
<S> <C> <C>
Mechanical Dynamics, Inc. Michigan, USA
MDI International, Inc. Michigan, USA 100% owned by Mechanical Dynamics, Inc.
Mechanical Dynamics Ltd. Canada 100% owned by Mechanical Dynamics, Inc.
Mechanical Dynamics FSC, Inc. Barbados 100% owned by Mechanical Dynamics, Inc.
Mechanical Dynamics GmbH Germany 100% owned by Mechanical Dynamics, Inc.
Mechanical Dynamics SarL France 100% owned by Mechanical Dynamics, Inc.
Mechanical Dynamics International, Ltd. United Kingdom 100% owned by Mechanical Dynamics, Inc.
Mechanical Dynamics Sweden AB Sweden 100% owned by Mechanical Dynamics, Inc.
Mechanical Dynamics Italy srl Italy 100% owned by Mechanical Dynamics, Inc.
DTI Asia Pte. Ltd. Singapore 100% owned by Mechanical Dynamics, Inc.
MEC.Design srl Italy 99% owned by Mechanical Dynamics Italy srl
Mechanical Dynamics Japan K.K. Japan 66% owned by Mechanical Dynamics, Inc.
</TABLE>
<PAGE> 1
EXHIBIT 23.1
MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 333-17957.
ARTHUR ANDERSEN LLP
March 26, 1999,
Detroit, Michigan.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001011451
<NAME> MECHANICAL DYNAMICS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 16,843
<SECURITIES> 0
<RECEIVABLES> 10,154
<ALLOWANCES> 261
<INVENTORY> 0
<CURRENT-ASSETS> 28,609
<PP&E> 7,225
<DEPRECIATION> 3,551
<TOTAL-ASSETS> 36,247
<CURRENT-LIABILITIES> 10,175
<BONDS> 0
0
0
<COMMON> 22,332
<OTHER-SE> 3,268
<TOTAL-LIABILITY-AND-EQUITY> 36,247
<SALES> 0
<TOTAL-REVENUES> 36,575
<CGS> 0
<TOTAL-COSTS> 37,131
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 272
<INCOME-TAX> 479
<INCOME-CONTINUING> (217)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (217)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0001011451
<NAME> MECHANICAL DYNAMICS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 20,570
<SECURITIES> 0
<RECEIVABLES> 5,019
<ALLOWANCES> 175
<INVENTORY> 0
<CURRENT-ASSETS> 26,663
<PP&E> 3,286
<DEPRECIATION> 1,643
<TOTAL-ASSETS> 29,812
<CURRENT-LIABILITIES> 7,460
<BONDS> 0
167
0
<COMMON> 19,583
<OTHER-SE> 2,602
<TOTAL-LIABILITY-AND-EQUITY> 29,812
<SALES> 0
<TOTAL-REVENUES> 25,383
<CGS> 0
<TOTAL-COSTS> 22,880
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,039
<INCOME-TAX> 968
<INCOME-CONTINUING> 2,071
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,071
<EPS-PRIMARY> .42
<EPS-DILUTED> .41
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0001011451
<NAME> MECHANICAL DYNAMICS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 21,038
<SECURITIES> 0
<RECEIVABLES> 6,408
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 28,384
<PP&E> 2,037
<DEPRECIATION> 0
<TOTAL-ASSETS> 31,964
<CURRENT-LIABILITIES> 7,351
<BONDS> 0
0
0
<COMMON> 19,952
<OTHER-SE> 4,213
<TOTAL-LIABILITY-AND-EQUITY> 31,964
<SALES> 0
<TOTAL-REVENUES> 21,585
<CGS> 0
<TOTAL-COSTS> 19,750
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,427
<INCOME-TAX> 731
<INCOME-CONTINUING> 1,715
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,715
<EPS-PRIMARY> .30
<EPS-DILUTED> .29
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0001011451
<NAME> MECHANICAL DYNAMICS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 20,778
<SECURITIES> 0
<RECEIVABLES> 4,490
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 26,170
<PP&E> 3,018
<DEPRECIATION> 1,605
<TOTAL-ASSETS> 29,115
<CURRENT-LIABILITIES> 7,406
<BONDS> 0
167
0
<COMMON> 19,380
<OTHER-SE> 2,162
<TOTAL-LIABILITY-AND-EQUITY> 29,115
<SALES> 0
<TOTAL-REVENUES> 18,952
<CGS> 0
<TOTAL-COSTS> 16,823
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,440
<INCOME-TAX> 795
<INCOME-CONTINUING> 1,645
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,645
<EPS-PRIMARY> .35
<EPS-DILUTED> .34
</TABLE>
