<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
MECHANICAL DYNAMICS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
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(3) Filing party:
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(4) Date filed:
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<PAGE> 2
MECHANICAL DYNAMICS, INC.
2301 COMMONWEALTH BLVD.
ANN ARBOR, MICHIGAN 48105
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 13, 1999
To the Shareholders of Mechanical Dynamics, Inc.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of
Mechanical Dynamics, Inc. (the "Company") will be held at the Holiday Inn North
Campus, 3600 Plymouth Road, Ann Arbor, Michigan 48105, at 4:00 p.m. Eastern Time
on Thursday, May 13, 1999, for the following purposes:
1. To elect two directors to serve until the 2002 Annual Meeting of
Shareholders and until their successors are duly elected and
qualified.
2. To ratify and approve the Board of Directors' selection of Arthur
Andersen LLP as the independent auditors of the Company for the
current fiscal year ending December 31, 1999.
3. To approve an increase in the number of shares with respect to
which stock options may be granted or which may be awarded as
restricted stock under the terms of the Company's 1996 Stock
Incentive Plan for Key Employees from 650,000 shares in the
aggregate to 1,050,000 shares in the aggregate.
4. To approve an increase in the number of shares with respect to
which stock options may be granted under the terms of the Company's
Non-Employee Director Stock Option Plan from 100,000 shares in the
aggregate to 200,000 shares in the aggregate.
5. To transact such other business as may properly come before the
meeting and any adjournment thereof.
Only shareholders of record at the close of business on March 26, 1999,
will be entitled to notice of, and to vote at, the meeting or any adjournment
thereof.
All shareholders are cordially invited to attend the meeting. Whether or
not you expect to attend the meeting, please complete, date and sign the
enclosed proxy and return it as promptly as possible to ensure your
representation at the meeting. A return postage-prepaid envelope is enclosed for
that purpose. If you return the proxy, you may withdraw your proxy and vote your
shares in person if you attend the meeting.
Your attention is called to the attached Proxy Statement and the
accompanying proxy. A copy of the Annual Report of the Company for the fiscal
year ended December 31, 1998 accompanies this notice.
By Order of the Board of Directors
Michael E. Korybalski
MICHAEL E. KORYBALSKI
Chief Executive Officer
Ann Arbor, Michigan
April 9, 1999
<PAGE> 3
MECHANICAL DYNAMICS, INC.
2301 COMMONWEALTH BLVD.
ANN ARBOR, MICHIGAN 48105
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
MAY 13, 1999
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Mechanical Dynamics, Inc. (the "Company")
for use at the 1999 Annual Meeting of Shareholders to be held at the Holiday Inn
North Campus, 3600 Plymouth Road, Ann Arbor, Michigan 48105, at 4:00 p.m.
Eastern Time on Thursday, May 13, 1999, and at any adjournment thereof, for the
purposes set forth in the accompanying Notice of Annual Meeting of Shareholders.
The mailing of this Proxy Statement and accompanying proxy will take place on or
about April 9, 1999.
Solicitation
The Company will bear the entire cost of solicitation of proxies in the
enclosed form, including the preparation, assembly, printing and mailing of this
Proxy Statement, the accompanying proxy and any additional information furnished
to shareholders. The solicitation of proxies by mail may be supplemented by
telephone, telegraph or personal solicitation by directors, officers or other
regular employees of the Company; no additional compensation will be paid to
directors, officers or other regular employees for such services. Brokers,
nominees and other similar record holders will be requested to forward
soliciting material and will be reimbursed by the Company upon request for their
out-of-pocket expenses.
VOTING SECURITIES AND PRINCIPAL HOLDERS
Voting Rights and Outstanding Shares
Only shareholders of record at the close of business on March 26, 1999 (the
"Record Date") will be entitled to notice of, and to vote at, the Annual Meeting
or any adjournment of the meeting. As of the close of business on March 26,
1999, the Company had 6,237,097 shares of common stock ("Common Shares" or
"Common Stock") outstanding, the only class of stock outstanding and entitled to
vote.
Each Common Share is entitled to one vote on each matter submitted for a
vote at the meeting. The presence, in person or by proxy, of the holders of
record of a majority of the outstanding Common Shares entitled to vote, or
3,118,549 shares, is necessary to constitute a quorum for the transaction of
business at the meeting or any adjournment thereof.
Revocability of Proxies
A shareholder giving a proxy may revoke it at any time before it is voted
by giving written notice of such revocation to the Secretary of the Company or
by executing and delivering to the Secretary a later dated proxy. Attendance at
the meeting by a shareholder who has given a proxy will not have the effect of
revoking it unless such shareholder gives such written notice of revocation to
the Secretary before the proxy is voted. Any written notice revoking a proxy,
and any later dated proxy, should be sent to Mechanical Dynamics, Inc., 2301
Commonwealth Blvd., Ann Arbor, Michigan 48105, Attention: David Peralta, Chief
Financial Officer.
Valid proxies in the enclosed form which are returned in time for the
meeting and executed and dated in accordance with the instructions on the proxy
will be voted as specified in the proxy. If no specification is made, the
proxies will be voted FOR the election as directors of the nominees listed
below, FOR the selection of Arthur Andersen LLP as independent auditors of the
Company for the current fiscal year ending December 31, 1999, FOR approval of an
increase in the number of shares with respect to which stock options
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<PAGE> 4
may be granted or which may be awarded as restricted stock under the terms of
the Company's 1996 Stock Incentive Plan for Key Employees from 650,000 shares in
the aggregate to 1,050,000 shares in the aggregate, and FOR approval of an
increase in the number of shares with respect to which stock options may be
granted under the terms of the Company's Non-Employee Director Stock Option Plan
from 100,000 shares in the aggregate to 200,000 shares in the aggregate.
Principal Holders of the Company's Voting Securities
As of March 26, 1999, the following five persons were the only persons
known by the Company to beneficially own more than 5% of the Company's Common
Shares:
<TABLE>
<CAPTION>
AMOUNT OF PERCENTAGE OF
COMMON SHARES COMMON SHARES
NAME BENEFICIALLY OWNED OWNED*
---- ------------------ -------------
<S> <C> <C>
Michael E. Korybalski....................................... 873,879 14.0%
Fidelity Management & Research Company...................... 615,500 9.9%
Wellington Management Company LLP........................... 605,000 9.7%
AWM Investment Company, Inc................................. 408,000 6.5%
John C. Angell.............................................. 388,040 6.2%
</TABLE>
- ---------------
* Based on 6,237,097 Common Shares outstanding as of March 26, 1999.
I. ELECTION OF DIRECTORS
The Board of Directors proposes that the persons named below as nominees
for election as directors for a three-year term be elected as directors of the
Company to hold office until the Annual Meeting of Shareholders to be held in
2002, and until their successors are duly elected and qualified.
Herbert S. Amster
Joseph F. Gloudeman
The above nominees, Herbert S. Amster and Joseph F. Gloudeman, are
currently serving as directors of the Company. If a quorum is present, the two
nominees receiving the greatest number of votes cast at the meeting or its
adjournment shall be elected. Withheld votes and broker non-votes will not be
deemed votes cast in determining which nominees receive the greatest number of
votes cast, but will be counted for purposes of determining whether a quorum is
present. The persons named in the accompanying proxy intend to vote all valid
proxies received by them FOR the election of the nominees listed above unless
the giver of the proxy withholds authority to vote for any such nominee. The
nominees listed above have consented to serve if elected. If any nominee is
unable or declines to serve, which is not expected, it is intended that the
proxies be voted in accordance with the best judgment of the proxy holders for
another qualified person.
The following information is furnished as of March 26, 1999 with respect to
the nominees for election as directors, with respect to each person whose term
of office as a director will continue after the meeting, with
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respect to each executive officer named in the Summary Compensation Table below,
and with respect to all directors and executive officers as a group:
<TABLE>
<CAPTION>
AMOUNT AND PERCENTAGE
NATURE OF OF
COMMON SHARES COMMON TERM
DIRECTOR POSITION AND OFFICES BENEFICIALLY SHARES TO
NAME SINCE AGE WITH THE COMPANY OWNED(1) OWNED(2) EXPIRE
---- -------- --- -------------------- ------------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
NOMINEES FOR ELECTION AS DIRECTORS FOR A THREE-YEAR TERM
Herbert S. Amster............. 1990 64 Director 84,930(3) 1.4 2002
Joseph F. Gloudeman........... 1993 63 Director 53,430(4) * 2002
DIRECTORS CONTINUING IN OFFICE
David E. Cole................. 1995 61 Director 30,500(5) * 2001
Michael E. Korybalski......... 1977 52 Chief Executive Officer, 873,879 14.0 2000
Chairman of the Board and
Director
Mitchell I. Quain............. 1996 47 Director 73,592(6) 1.2 2000
Robert R. Ryan................ 1997 41 President, Chief Operating 231,500(7) 3.7 2000
Officer and Director
OTHER CURRENT EXECUTIVE OFFICERS
Michael Hoffmann.............. -- 42 Senior Vice President -- 23,220 *
Worldwide Sales & Service
David Peralta................. -- 31 Vice President, Treasurer 16,051(8) *
and Chief Financial Officer
All directors and executive officers as a group (8 persons)................. 1,387,102(9) 21.9
</TABLE>
- ---------------
* Less than 1%
(1) All directors, nominees and executive officers named in this Proxy Statement
have sole investment and voting power with respect to shares of Common Stock
beneficially owned by them.
(2) Based on 6,237,097 shares outstanding as of March 26, 1999.
(3) Includes 65,930 shares held by a trust of which Mr. Amster holds voting
power as the trustee, 4,000 shares held by a trust of which Mr. Amster's
wife holds voting power as the trustee and 15,000 shares subject to options
exercisable within 60 days of the Record Date.
(4) Includes 38,430 shares held by a trust of which Dr. Gloudeman holds voting
power as the trustee and 15,000 shares subject to options exercisable within
60 days of the Record Date.
(5) Includes 15,000 shares subject to options exercisable within 60 days of the
Record Date.
(6) Includes 58,592 shares held by trusts of which Mr. Quain holds voting power
as the trustee and 15,000 shares subject to options exercisable within 60
days of the Record Date.
(7) Includes 3,000 shares held by Dr. Ryan's wife as custodian for their
children and 31,250 shares subject to options exercisable within 60 days of
the Record Date.
(8) Includes 12,500 shares subject to options exercisable within 60 days of the
Record Date.
(9) Includes 103,750 shares which all executive officers and directors as a
group have the right to acquire within 60 days of the Record Date.
BIOGRAPHICAL INFORMATION
The following is a brief account of the business experience during the past
five years of the nominees for the Board of Directors of the Company and of each
director whose term of office will continue after the meeting:
Herbert S. Amster has served as a director of the Company since 1990. He is
now an independent management consultant. Mr. Amster was Chairman of the Board
and Chief Executive Officer of Irwin Magnetic Systems, Inc., a manufacturer of
minicartridge tape drives, from 1985 through 1989; Senior Vice President
Corporate Development, and a director, of Cipher Data Products Inc., from 1989
through 1990; and
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<PAGE> 6
Senior Vice President Corporate Development, of Archive Corp., since 1990. He is
currently a director of Jacobson Stores Inc., the former Chairman of the Board
and a current director of Industrial Technology Institute, and the Chairman of
the Board of ERIM International, Inc.
Joseph F. Gloudeman has served as a director of the Company since 1993. Dr.
Gloudeman has served as President of Gloudeman Consulting, a high-tech
consulting firm, since 1992; as Chairman of the Board, since 1992, and
President, USA Operations, since 1994, of R.O.S.E. Informatik GmbH, a German
software company. Dr. Gloudeman is the former President and Chief Executive
Officer of The MacNeal Schwendler Corporation, and a former Vice President,
Marketing for CRAY Research-Supercomputer. He is currently a director of
Automatic Intuition, Inc.
David E. Cole has served as a director of the Company since 1995. Dr. Cole
has served as the President of Applied Theory Inc., an automotive consulting
firm since 1979, as Director of the Office for the Study of Automotive
Transportation, The University of Michigan Transportation Research Institute,
since 1978 and as an Associate Professor of Mechanical Engineering and Applied
Mechanics at The University of Michigan since 1971. He is currently a director
of MSX International, Inc., Saturn Electronics & Engineering Corp., Thyssen
Inc., Plastech Inc. and JPE Inc.
Michael E. Korybalski, a co-founder of the Company, is Chief Executive
Officer and Chairman of the Board and a director of the Company. From 1984 to
February 1997, Mr. Korybalski served as President of the Company. From 1977 to
1984, Mr. Korybalski served as Vice President and General Manager of the
Company. From 1973 to 1977, he was employed as a product engineer with Ford
Motor Company. Mr. Korybalski holds B.S.E. and M.S.E. degrees in mechanical
engineering, as well as an M.B.A., from The University of Michigan.
Mitchell I. Quain has served as a director of the Company since 1996. He
has served as Executive Vice President at ING Barings, an investment banking
company, since 1997. From 1975 to 1997, Mr. Quain was employed at Schroder
Wertheim & Company, where he most recently served as Managing Director, Head of
Equity Capital Markets. Mr. Quain is a director of Allied Products Corp.,
Strategic Distribution, and Titan International, Inc.
Robert R. Ryan became the President of the Company in February 1997 and
since 1991 has served as its Chief Operating Officer. Dr. Ryan was elected a
director of the Company in May 1997. He served as the Company's Executive Vice
President from 1991 to February 1997, and as the Company's Vice President of
Product Development from 1988 through 1991. Before joining the Company, Dr. Ryan
held various positions in sales and engineering services at Structural Dynamics
Research Corporation, and served on the engineering faculty at The University of
Michigan. He holds a B.S. from the University of Cincinnati and an M.S. and
Ph.D. in applied mechanics from Stanford University.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During the fiscal year ended December 31, 1998, the Board of Directors held
six meetings and took action by written consent on seven occasions.
Audit Committee
The Board of Directors has an Audit Committee which consists of three
directors. Mr. Amster, Dr. Cole and Mr. Quain are the current members of this
committee. The Audit Committee makes recommendations to the Board of Directors
concerning the appointment of independent auditors and reviews the Company's
accounting principles, policies and reporting practices, aids management in the
establishment and supervision of the Company's financial controls, discusses the
Company's financial controls with the independent auditors and reviews the scope
and results of audits and other accounting-related services and fees. During the
fiscal year ended December 31, 1998, the Audit Committee held three meetings and
took no action by written consent.
4
<PAGE> 7
Compensation Committee
The Board of Directors has a Compensation Committee which consists of two
directors. Mr. Amster and Dr. Gloudeman are the current members of this
committee. The Compensation Committee makes recommendations to the Board of
Directors concerning salaries and incentive compensation for the Company's
officers and employees and administers the Company's Employee Stock Purchase
Plan and the Company's 1996 Stock Incentive Plan for Key Employees. During the
fiscal year ended December 31, 1998, the Compensation Committee held two
meetings and took no action by written consent.
The Company does not have a nominating committee.
COMPENSATION COMMITTEE REPORT
The Compensation Committee's overall compensation policy applicable to the
Company's executive officers is to provide a compensation package that is
intended to attract and retain qualified executives for the Company and to
provide them with incentives to achieve the Company's goals and increase
shareholder value. The Compensation Committee applies this philosophy in
determining compensation for Company executive officers in three areas: salary,
bonuses and stock options. The Compensation Committee believes that the
compensation of the Chief Executive Officer and the Company's other executive
officers should be influenced by the Company's performance. Consistent with this
philosophy, the Compensation Committee approves performance goals for each
executive officer (after receiving the recommendations of Michael E. Korybalski,
Chairman of the Board and Chief Executive Officer, for all executives other than
himself) near the beginning of each year. For 1998, these performance goals
included objective targets for revenue growth and earnings per share, both of
which required improvements over 1997 levels, and specific tasks to be performed
by some of the executives relating to their areas of responsibility (the
"Performance Goals").
SALARY
The Compensation Committee's policy is to offer salaries to its executive
officers that are competitive in its industry for similar positions requiring
similar qualifications. The Compensation Committee also adjusts salaries to
reflect its subjective assessment of the executive's performance of his or her
Performance Goals, the amount of salary change appropriate for such performance
and the Company's financial condition (after receiving the performance
evaluations and recommendations of Mr. Korybalski). In determining executive
officers' salaries, the Compensation Committee considers information provided by
the Chief Executive Officer, whose recommendations are based upon salary surveys
specific to the Company's industry, size and geographic location (the
"Surveys"). Such Surveys are prepared by an independent organization using
information provided from approximately 200 companies. These Surveys summarize
information from companies deemed comparable by the Compensation Committee in
terms of such things as product or industry, geography and/or revenue levels. In
addition to their base salaries, the Company's executive officers, including the
Chief Executive Officer, are each eligible to receive a cash bonus and are
entitled to participate in the 1996 Stock Incentive Plan for Key Employees. The
bonus for the Chief Executive Officer and for other executives is based
primarily on Company performance.
The foregoing information was presented to the Compensation Committee in
January 1998. The Compensation Committee reviewed the recommendations and
performance and market data outlined above and established a base salary level
to be effective January 1, 1998 for each executive officer, including the Chief
Executive Officer. In addition to considering the results of the performance
evaluations and information concerning competitive salaries, the Compensation
Committee and Chief Executive Officer place significant weight on the financial
condition of the Company in considering salary adjustments.
BONUSES
The Compensation Committee's policy is to pay bonuses to executives that
compensate them for achieving the Company's revenue growth and earnings per
share targets set near the beginning of the year and for achieving individual
goals based on their areas of responsibility. These bonuses are intended to make
a significant portion of each executives' compensation dependent on the
Company's performance and to provide
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<PAGE> 8
executives with incentives to achieve Company goals, increase shareholder value
and work as a team. They are also intended to recognize the executives'
individual contributions to the Company.
The Compensation Committee determines annually the total amount of cash
bonuses available for executive officers. The individual target amounts are
determined based on the Compensation Committee's judgment of the value of the
individual executive's achievement of his or her Performance Goals. In all
cases, the relative target amounts for individual officers are based upon the
total dollars available for bonuses, and historical and expected future
contributions by the individual executive. For 1998, the objectives used by the
Company as the basis for incentive compensation were based primarily on Company
performance. Executives earn a percentage of the target amounts under the bonus
plan relating to the achievement of the Performance Goals, as determined by the
Compensation Committee annually in its discretion. Awards are weighted so that
proportionately higher awards are received when the Company's performance
exceeds targets and proportionately smaller or no awards are made when the
Company does not meet targets.
STOCK OPTIONS
The Compensation Committee's policy is to grant stock options to the
Company's executives in amounts reflecting the Compensation Committee's
subjective evaluation of the executive's position, responsibilities, ability to
influence, and expected contributions to, the Company's overall performance.
Other factors considered by the Compensation Committee include consistency in
numbers of options granted to executives at similar levels in the Company, past
performance, the Surveys and the recommendations of Mr. Korybalski, without any
specific weight given to any of the factors listed above. In determining the
size of the individual grants, the Compensation Committee also considers the
amounts of options outstanding and previously granted both in the aggregate and
with respect to the optionee, the amount of options remaining available for
grant under the 1996 Stock Incentive Plan for Key Employees and the aggregate
amount of current awards, and for new officers, the amount necessary to attract
other executives to the Company. The Compensation Committee believes that
employee equity ownership provides significant additional motivation to
executives to maximize value for the Company's shareholders. Under the terms of
the 1996 Stock Incentive Plan for Key Employees, the Compensation Committee
grants stock options with an exercise price equal to the prevailing market
price. Such options will have value only if the Company's stock price increases.
Therefore, the Compensation Committee believes that stock options serve to align
the interest of executive officers closely with other shareholders because of
the direct benefit executives receive to improve stock performance.
Under the 1996 Stock Incentive Plan for Key Employees, the Compensation
Committee may grant options with a term of up to 10 years to provide a long-term
incentive, and to grant options that vest over a specified period to provide the
executive with an incentive to remain at the Company. The Compensation
Committee's policy is that certain new executives with the Company may be
provided with options to attract them to the Company. The Compensation
Committee's policy is to grant stock options when the executive first joins the
Company, in connection with a significant change in responsibilities, and,
occasionally, to achieve equity within a peer group. The Compensation Committee
in its discretion may, however, grant additional stock options to executives for
other reasons. In 1998, the Compensation Committee considered these factors, as
well as the number of options held by such executive officers as of the date of
grant that remained unvested. Option grants to executive officers in 1998 are
set forth in the table below entitled "Option Grants in Last Fiscal Year."
1998 CHIEF EXECUTIVE OFFICER COMPENSATION
In February 1998, the Committee established a base salary for Mr.
Korybalski for 1998. This base salary was equal to Mr. Korybalski's 1997 base
salary. The Compensation Committee also established a target bonus for Mr.
Korybalski under the 1998 bonus plan payable based on the Company's achievement
of objective measures of revenue growth and earnings per share (both of which
targets required improvement from 1997). The 1998 base salary level and target
bonus were based upon a number of factors, including (a) the Compensation
Committee's assessment of the 1997 performance of the Company and Mr.
Korybalski, (b) 1998 Company performance objectives and individual performance
objectives and responsibilities for Mr. Korybalski established in February 1998,
and (c) the market compensation data for similar companies
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<PAGE> 9
listed in the Surveys. The performance objectives for 1998 included
satisfactorily managing the Company's overall corporate business plan, such as
meeting the Company's profitability projections and the Company's sales targets,
and strengthening the Company's financial position.
The Compensation Committee has concluded that Mr. Korybalski's performance
in 1998 warrants the compensation for 1998 as reflected in the Summary
Compensation Table.
COMPLIANCE WITH SECTION 162(M) OF THE INTERNAL REVENUE CODE OF 1986.
The Company intends to comply with the requirements of Section 162(m) of
the Internal Revenue Code of 1986, as amended, for 1999.
COMPENSATION COMMITTEE
Herbert S. Amster
Joseph F. Gloudeman
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information for each of the fiscal years
ended December 31, 1998, 1997 and 1996 concerning compensation of (i) all
individuals serving as the Company's Chief Executive Officer during the fiscal
year ended December 31, 1998, and (ii) all other executive officers of the
Company whose total annual salary and bonus exceeded $100,000 in fiscal 1998:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
NAME AND --------------------- UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) ($)(1)
------------------ ---- --------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Michael E. Korybalski..................... 1998 190,000 -- -- 6,144
Chief Executive Officer 1997 190,000 16,477 -- 4,112
1996 170,000 27,968 -- 3,888
Robert R. Ryan............................ 1998 185,000 -- 25,000 4,656
President and Chief 1997 175,000 15,176 50,000 4,012
Operating Officer 1996 150,000 18,330 -- 3,808
Michael Hoffmann.......................... 1998 145,000 -- 50,000(2) --
Senior Vice President - 1997 105,000 44,532 25,000 --
Worldwide Sales & Service 1996 103,000 26,984 10,000 --
David Peralta............................. 1998 100,000 -- 10,000 2,818
Vice President, Treasurer 1997 90,000 3,902 10,000 2,259
and Chief Financial Officer 1996(3) N/A N/A N/A N/A
</TABLE>
- ---------------
(1) The amounts shown for fiscal 1998 include (i) $3,840, $3,840 and $2,494 for
Messrs. Korybalski, Ryan and Peralta, respectively, representing the
Company's contribution to the executive officer in 1998 under the Company's
401(k) Plan, and (ii) $2,304, $816 and $324 for Messrs. Korybalski, Ryan and
Peralta, respectively, representing life insurance premiums paid by the
Company in 1998 for life insurance policies.
(2) Includes 35,000 options that replaced options with higher exercise prices
granted to Dr. Hoffmann in prior years. None of Dr. Hoffmann's options may
be exercised unless the closing price of the Company's
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<PAGE> 10
Common Shares is $11.00 per share or more on the most recent business day
during which the Common Shares were traded. See "Report on Repricing of
Options" for a description of the repricing of stock options effective
November 10, 1998, in exchange for the cancellation of outstanding stock
options.
(3) Mr. Peralta became an executive officer of the Company in February 1997.
Option Grants Table
The following table sets forth information concerning individual grants of
stock options made during the fiscal year ended December 31, 1998 to each of the
executive officers of the Company named in the Summary Compensation Table above:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION -----------------------
NAME GRANTED(#) YEAR ($/SH) DATE 5% ($) 10% ($)
---- ---------- ---------- -------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Michael E. Korybalski........... -- -- -- -- -- --
Robert R. Ryan.................. 25,000(1) 4.4 9.13 2/6/08 143,545 363,772
Michael Hoffmann................ 50,000(2) 8.9 6.75 11/10/08 -- 537,888
David Peralta................... 10,000(3) 1.8 9.13 2/6/08 57,418 145,509
</TABLE>
- ---------------
(1) These options were granted on February 6, 1998 and all 25,000 options become
exercisable over a period of four years, at a rate of 25% on each
anniversary date after the date of grant. In the event Dr. Ryan's employment
with the Company is terminated for any reason other than death or
disability, the Compensation Committee may, in its discretion, permit the
exercise of his unexercised options for a period not to exceed three months
after such termination.
(2) On February 6, 1998, Dr. Hoffmann was granted 15,000 options at an exercise
price of $9.13 per share, exercisable over a period of four years, at a rate
of 25% on each anniversary date after the date of grant. In conjunction with
an option repricing offered to the Company's non-director employees on
November 10, 1998, Dr. Hoffmann elected to exchange these 15,000 options and
35,000 options previously granted to him for 50,000 newly issued options
with an exercise price of $6.75 per share. All 50,000 options become
exercisable over a period of three years, at a rate of 33.33% on each
anniversary date after the date of grant. None of Dr. Hoffmann's options may
be exercised unless the closing price of the Company's Common Shares is
$11.00 per share or more on the most recent business day during which the
Common Shares were traded. See "Report on Repricing of Options" for a
description of the repricing of stock options effective November 10, 1998,
in exchange for the cancellation of outstanding stock options. In the event
Dr. Hoffmann's employment with the Company is terminated for any reason
other than death or disability, the Compensation Committee may, in its
discretion, permit the exercise of his unexercised options for a period not
to exceed three months after such termination.
(3) These options were granted on February 6, 1998 and all 10,000 options become
exercisable over a period of four years, at a rate of 25% on each
anniversary date after the date of grant. In the event Mr. Peralta's
employment with the Company is terminated for any reason other than death or
disability, the Compensation Committee may, in its discretion, permit the
exercise of his unexercised options for a period not to exceed three months
after such termination.
8
<PAGE> 11
Aggregated Option Exercises and Fiscal Year-End Option Value Table
The following table sets forth information concerning each exercise of
stock options during the fiscal year ended December 31, 1998 by each of the
executive officers named in the Summary Compensation Table above and the value
of unexercised options held by such persons as of December 31, 1998:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FY-END AT FY-END
SHARES (#) ($)
ACQUIRED ON VALUE ------------------------------ ----------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
---- ----------- ----------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Michael E. Korybalski... 0 0 0/0 --/--
Robert R. Ryan.......... 0 0 12,500/62,500 3,125/9,375
Michael Hoffmann........ 0 0 0/50,000 --/75,000
David Peralta........... 0 0 7,500/17,500 625/1,875
</TABLE>
- ---------------
(1) Calculated on the basis of the fair market value of the underlying
securities at December 31, 1998 of $8.25, minus the aggregate exercise
price.
Compensation of Directors
Each non-employee member of the Company's Board of Directors is paid $1,000
per month and reimbursed for out-of-pocket expenses incurred in attending Board
meetings. Each non-employee director is also eligible to receive annual stock
option awards for 5,000 shares of the Company's Common Stock under the Company's
Non-Employee Director Stock Option Plan (the "Director Stock Option Plan").
The Company's Board of Directors adopted the Director Stock Option Plan in
March 1996. The Director Stock Option Plan provides for the grant of
"nonqualified" options to purchase shares of Common Stock. In May 1998, all four
non-employee directors on the Company's Board of Directors were each granted an
option to purchase 5,000 shares of Common Stock of the Company at an exercise
price of $13.00 per share. These options become fully exercisable one year from
the date of grant, May 1999, and expire in May 2003. Immediately following each
annual meeting of shareholders of the Company, each non-employee director who
has served as a director for at least six months will automatically be granted
an option to purchase 5,000 shares of Common Stock of the Company. Upon
appointment to the Board of Directors, each newly-appointed non-employee
director will receive an option to purchase 5,000 shares of Common Stock of the
Company. A total of 100,000 shares of Common Stock are currently reserved for
issuance under the Director Stock Option Plan. At the Company's 1999 Annual
Meeting of Shareholders, the Company's shareholders are being asked to approve
an increase in the number of shares with respect to which stock options may be
granted under the terms of the Director Stock Option Plan from 100,000 shares in
the aggregate to 200,000 shares in the aggregate.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
Michael E. Korybalski entered into an employment agreement with the Company
dated as of April 1, 1994, and amended as of March 1, 1995, March 1, 1996, March
1, 1997, March 1, 1998 and March 1, 1999. The agreement provides that Mr.
Korybalski will serve as the Company's Chief Executive Officer until March 31,
2002, at which point the employment agreement can be extended at the option of
the Company for an additional three-year term. Mr. Korybalski's base salary
under the agreement for 1999 is $195,000. Mr. Korybalski's employment may be
terminated by the Company with or without cause. Mr. Korybalski's base salary is
determined by the Board of Directors on an annual basis. In the event the Board
chooses to change his duties or directs him to relocate and he resigns as a
result, or if he is terminated without cause, Mr. Korybalski would then be
entitled to his base salary, bonus and benefits for a period equal to the longer
of the remaining term of the agreement or one year from the date of his
resignation or termination. In the event
9
<PAGE> 12
he is terminated with cause, then he would be entitled to receive only such
payments and/or benefits as would be provided to other employees of the Company
in accordance with the Company's employee policies and procedures. In the event
of a change of control, the agreement is automatically extended through a date
three years from the effective date of such change in control. In the event Mr.
Korybalski resigns or is terminated in connection with a change in control, then
the Company will pay severance benefits under the same formula as in the event
of termination without cause. During the term of the agreement, and for a period
of two years thereafter, Mr. Korybalski will be subject to noncompetition and
nonsolicitation restrictions.
The Company's President and Chief Operating Officer, Robert R. Ryan,
entered into an employment agreement with the Company dated as of April 1, 1994,
as amended March 1, 1995, March 1, 1996, March 1, 1997 March 1, 1998 and March
1, 1999, pursuant to which he will serve in such capacities until March 31,
2001, at which point the employment agreement can be extended at the option of
the Company for an additional two-year term. Dr. Ryan's base salary under the
agreement for 1999 is $190,000. Dr. Ryan's base salary is determined by the
Board of Directors on an annual basis. Dr. Ryan's employment may be terminated
by the Company with or without cause. In the event the Board chooses to change
his duties or directs him to relocate and he resigns as a result, or if he is
terminated without cause, Dr. Ryan would then be entitled to his base salary,
bonus and benefits for a period equal to the longer of the remaining term of the
agreement or one year from the date of his resignation or termination. In the
event he is terminated with cause, then he would be entitled to receive only
such payments and/or benefits as would be provided to other employees of the
Company in accordance with the Company's employee policies and procedures. In
the event of a change of control, the agreement is automatically extended
through a date two years from the effective date of such change in control. In
the event Dr. Ryan resigns or is terminated in connection with a change in
control, then the Company will pay severance benefits under the same formula as
in the event of termination without cause. During the term of the agreement, and
for a period of two years thereafter, Dr. Ryan will be subject to noncompetition
and nonsolicitation restrictions.
The Company's Vice President, Treasurer and Chief Financial Officer, David
Peralta, entered into an employment agreement with the Company dated as of March
1, 1997, as amended March 1, 1998 and March 1, 1999, pursuant to which he will
serve in such capacities until March 31, 2000, at which point the employment
agreement can be extended at the option of the Company for an additional
one-year term. Mr. Peralta's base salary under the agreement for 1999 is
$110,000. Mr. Peralta's base salary is determined by the Board of Directors on
an annual basis. Mr. Peralta's employment may be terminated by the Company with
or without cause. In the event the Board directs him to relocate and he resigns
as a result, or if he is terminated without cause, Mr. Peralta would then be
entitled to his base salary, bonus and benefits for a period equal to the longer
of the remaining term of the agreement or six months from the date of his
resignation or termination. In the event he is terminated with cause, then he
would be entitled to receive only such payments and/or benefits as would be
provided to other employees of the Company in accordance with the Company's
employee policies and procedures. In the event of a change of control, the
agreement is automatically extended through a date one year from the effective
date of such change in control. In the event Mr. Peralta is terminated in
connection with a change in control, then the Company will pay severance
benefits under the same formula as in the event of termination without cause.
During the term of the agreement, and for a period of two years thereafter, Mr.
Peralta will be subject to noncompetition and nonsolicitation restrictions.
Report on Repricing of Options
Effective November 10, 1998, the Compensation Committee of the Company's
Board of Directors offered stock options to all then current non-director
employees of the Company who held stock options granted under the Company's 1996
Stock Incentive Plan for Key Employees (the "Stock Option Plan"), in exchange
for the cancellation of outstanding stock options. The new options cover the
same number of shares as the previously granted options, and are subject to the
following terms and conditions: (i) the exercise price of the new options is
$6.75 per share, the closing price of the Company's Common Shares on November
10, 1998, the date of grant, (ii) the new options become exercisable over a
period of three years, at a rate of 33.33% on each anniversary date after the
date of grant, (iii) none of the new options may be exercised unless the closing
price of the Company's Common Shares is $11.00 per share or more on the most
recent business
10
<PAGE> 13
day during which the Common Shares were traded, and (iv) the new options expire
on November 10, 2008, the tenth anniversary of the date of grant. The new
options were effective only when the non-director employee cancelled a similar
amount of options previously granted to him or her under the Stock Option Plan.
The Compensation Committee determined that options with exercise prices
equal to the then current market price of the Company's Common Shares would
provide better incentives to the Company's non-director employees. Such options
would better motivate the Company's non-director employees and give them
increased incentive to remain with the Company and make significant and
extraordinary contributions to the long-term performance and growth of the
Company.
The Compensation Committee decided that the new options will become
exercisable over a three year period beginning on November 10, 1998, and that
none of the new options may be exercised unless the closing price of the
Company's Common Shares is $11.00 per share or more on the most recent business
day during which the Common Shares were traded. The Compensation Committee
determined that these restrictions on the exercise of the new options would more
closely join the interests of the option holders with the interests of the
shareholders of the Company.
Finally, the Compensation Committee determined that the options previously
granted to the Company's non-director employees appropriately reflected the
employees' positions and ability to influence the Company's overall performance.
The Compensation Committee made this determination based on its subjective
judgement, after reviewing the number of options previously granted to each
non-director employee and the employee's position and responsibilities within
the Company.
COMPENSATION COMMITTEE
Herbert S. Amster
Joseph F. Gloudeman
The following table sets forth information concerning all repricings of
stock options held by any executive officer of the Company that was effected at
any time from May 14, 1996 (the date the Company became a reporting Company
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934)
through December 31, 1998:
TEN-YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
NUMBER OF MARKET LENGTH OF
SECURITIES PRICE OF EXERCISE ORIGINAL
UNDERLYING STOCK AT PRICE AT OPTION TERM
OPTIONS TIME OF TIME OF NEW REMAINING
REPRICED OR REPRICING OR PRICING OR EXERCISE AT DATE OF
AMENDED AMENDMENT AMENDMENT PRICE REPRICING OR
NAME DATE (#) ($) ($) ($) AMENDMENT
---- ---- ----------- ------------ ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Michael Hoffmann............... 11/10/98 15,000 $6.75 $9.13 $6.75 9.2 years
Senior Vice President -- 11/10/98 25,000 $6.75 $8.00 $6.75 3.2 years
Worldwide Sales & Service 11/10/98 10,000 $6.75 $9.00 $6.75 2.5 years
</TABLE>
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 1998, Mr. Amster and Dr.
Gloudeman served as the members of the Company's Compensation Committee. None of
the members of the Company's Compensation Committee was, during the fiscal year
ended December 31, 1998, an officer or employee of the Company.
11
<PAGE> 14
PERFORMANCE GRAPH
The following line graph compares for the period since the Company became a
reporting company pursuant to the Securities Exchange Act of 1934, as amended,
on May 14, 1996, through the fiscal year ended December 31, 1998: (i) the
quarterly cumulative total shareholder return (i.e., the change in share price
plus the cumulative amount of dividends, divided by the initial share price,
expressed as a percentage) on the Company's Common Shares, with (ii) the
cumulative total return of an industry peer group index of companies selected by
the Company, (iii) the cumulative total return of the Hambrecht & Quist
Technology Index, and (iv) the cumulative total return of the Nasdaq Stock
Market -- U.S. Index. Each index assumes dividend reinvestment and is weighted
based on market capitalization.
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
5/14/96 Jun-96 Sep-96 Dec-96 Mar-97 Jun-97 Sep-97 Dec-97 Mar-98 Jun-98 Sep-98
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mechanical Dynamics, Inc. 100.00 137.50 160.23 126.14 65.91 65.91 71.02 60.80 94.32 100.00 65.91
- --------------------------------------------------------------------------------------------------------------------------------
Industry Peer Group 100.00 89.50 99.91 105.00 103.59 113.05 116.06 112.95 148.30 137.95 75.26
- --------------------------------------------------------------------------------------------------------------------------------
H&Q Technology 100.00 91.16 96.77 103.77 98.91 119.06 144.29 121.66 147.31 150.81 134.06
- --------------------------------------------------------------------------------------------------------------------------------
Nasdaq Stock Market -- U.S 100.00 96.25 99.67 104.57 98.90 117.03 136.83 128.32 149.89 154.23 139.62
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------- ----------
Dec-98
- ----------------------------- ----------
<S> <C>
Mechanical Dynamics, Inc. 75.00
- -----------------------------
Industry Peer Group 112.39
- -----------------------------
H&Q Technology 189.24
- -----------------------------
Nasdaq Stock Market -- U.S 180.08
- -----------------------------
</TABLE>
- ---------------
Stock and index prices scaled to 100
An industry peer group index of companies selected by the Company has been
reflected in the above Performance Graph, in order to provide a better
comparative index of market performance for companies in fields similar to that
of the Company. The industry peer group is comprised solely of companies
operating in the CAD/CAM/CAE market, which are as follows: Analogy, Inc., Ansoft
Corporation, ANSYS, Inc., Autodesk, Inc., Dassault Systemes S.A., The
MacNeal-Schwendler Corp., Parametric Technology Corporation, Structural Dynamics
Research Corporation, Tecnomatix Technologies Ltd., and Unigraphics Solutions
Inc.
In future Performance Graphs, the Company intends to replace the Hambrecht
& Quist Technology Index with the industry peer group index, as described above.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Executive officers, directors and greater than ten-percent
shareholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) reports they file.
12
<PAGE> 15
Based solely on review of the copies of such reports furnished to the
Company during or with respect to fiscal 1998, or written representations that
no Forms 5 were required, the Company believes that during the fiscal year ended
December 31, 1998 all applicable Section 16(a) filing requirements were complied
with by each of its executive officers, directors and greater than ten-percent
beneficial owners.
II. APPOINTMENT OF COMPANY'S
INDEPENDENT AUDITORS
INDEPENDENT ACCOUNTANTS
Arthur Andersen LLP are the independent auditors for the Company and have
reported on the Company's financial statements in the Company's 1998 Annual
Report to Shareholders which accompanies this Proxy Statement.
The shareholders are being asked to ratify and approve the Board of
Directors' selection of Arthur Andersen LLP as the independent auditors of the
Company for the current fiscal year ending on December 31, 1999. The Board of
Directors recommends a vote FOR approval of the selection of Arthur Andersen LLP
as the independent auditors of the Company.
A representative of Arthur Andersen LLP is expected to be present at the
Annual Meeting of Shareholders and will be available to respond to appropriate
questions.
III. INCREASE IN NUMBER OF SHARES UNDER THE
COMPANY'S 1996 STOCK INCENTIVE PLAN FOR KEY EMPLOYEES
The Board of Directors believes that it would be in the best interests of
the Company and its shareholders to increase the number of shares of common
stock of the Company that is available to be granted as options or restricted
stock under the Company's 1996 Stock Incentive Plan For Key Employees and,
subject to shareholder approval, has approved an increase in the number of
shares available under the Stock Option Plan from 650,000 in the aggregate to
1,050,000 in the aggregate.
As of March 26, 1999, there were 589,525 shares subject to outstanding
options under the Stock Option Plan.
1996 STOCK INCENTIVE PLAN FOR KEY EMPLOYEES
The Company's Board of Directors adopted the Stock Option Plan in March
1996. Under the Stock Option Plan, options will be granted or restricted stock
will be awarded for the purpose of attracting and motivating key employees of
the Company. The Stock Option Plan will be administered by the Compensation
Committee of the Board of Directors. The Stock Option Plan currently provides
for a total of 650,000 shares of Common Stock which are reserved for issuance
under the Stock Option Plan. The Stock Option Plan provides for (i) the grant of
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, (ii) the grant of "nonqualified stock options"
(options which do not meet the requirements of Section 422), and (iii) the award
of restricted stock. The Stock Option Plan also contains certain restrictions
against transfer and other terms and conditions which are to be determined by
the Compensation Committee. The Compensation Committee will determine which
individuals will be granted options or awarded restricted stock, the number of
options granted or shares awarded and other terms and conditions applicable to
each grant or award.
The Board of Directors may amend or revise the terms of the Stock Option
Plan; provided, however, without the approval or ratification of the
shareholders the Board of Directors may not (i) increase the maximum number of
shares subject to the Stock Option Plan, (ii) increase the maximum number of
shares for which any participant may be granted options or awards under the
Stock Option Plan, (iii) change the class of persons eligible to be
participants, (iv) materially increase the benefits of any participant or (v)
alter or impair any option or award previously granted or awarded under the
Stock Option Plan.
13
<PAGE> 16
Under the terms of the Stock Option Plan, the exercise price of an
incentive stock option will be not less than the fair market value of the Common
Stock at the time of the grant (or not less than 110% of the fair market value
if the optionee owns more than 10% of the total combined voting stock of the
Company at the time of grant). The exercise price of nonqualified options will
not be less than 75% of the fair market value of the stock on the date the
option is granted. If an optionholder ceases to be an employee for any reason
other than death or disability, the Compensation Committee may, in its
discretion, permit the exercise of such options for a period not to exceed three
months following the termination of employment. The Compensation Committee may,
in its discretion, permit the exercise of nonqualified options held by a
terminated optionholder for a period not to extend beyond the expiration date of
such nonqualified option. No option under the Stock Option Plan may be exercised
more than ten years after its date of grant. In the case of an incentive option
granted to a participant who, at the time of grant, owns more than 10% of the
total combined voting stock of the Company, such option will expire not more
than five years after its date of grant.
Shares awarded under the Stock Option Plan typically will be subject to
vesting and unvested shares awarded to a participant will be forfeited and
transferred back to the Company if the participant ceases to be employed by the
Company for any reason other than death or permanent disability. If the
participant is terminated by action of the Company without cause or by agreement
of the Company and the participant, the Compensation Committee may, at its
discretion, release some or all of the shares from the restrictions. If a
participant ceases to be an employee of the Company because of death or
permanent disability, the restrictions will lapse with respect to such shares,
unless otherwise determined by the Compensation Committee.
The full text of the Stock Option Plan is set forth as Exhibit 10.9 to the
Company's Registration Statement on Form S-1, Registration No. 333-2900. The
discussion above is qualified in its entirety by reference to the actual text of
the Stock Option Plan.
This proposed increase in the number of shares under the Stock Option Plan
requires the affirmative vote of a majority of the votes present in person or by
proxy at the Annual Meeting. The Board of Directors recommends a vote FOR
approval of the increase in the number of shares under the Stock Option Plan.
IV. INCREASE IN NUMBER OF SHARES UNDER THE
COMPANY'S NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The Board of Directors believes that it would be in the best interests of
the Company and its shareholders to increase the number of shares of common
stock of the Company that is available to be granted as options under the
Company's Non-Employee Director Stock Option Plan and, subject to shareholder
approval, has approved an increase in the number of shares available under the
Director Stock Option Plan from 100,000 in the aggregate to 200,000 in the
aggregate.
As of March 26, 1999, there were 60,000 shares subject to outstanding
options under the Director Stock Option Plan.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The Company's Board of Directors adopted the Director Stock Option Plan in
March 1996. The Director Stock Option Plan provides for the grant of
"nonqualified" options to purchase shares of Common Stock. Immediately following
each annual meeting of shareholders of the Company, each non-employee director
who has served as a director for at least six months will automatically be
granted an option to purchase 5,000 shares of Common Stock of the Company. Upon
appointment to the Board of Directors, each newly-appointed non-employee
director will receive an option to purchase 5,000 shares of Common Stock of the
Company. A total of 100,000 shares of Common Stock are currently reserved for
issuance under the Director Stock Option Plan.
The exercise price of any option will be equal to the market price of the
Common Stock at the time of grant. Each option, if not sooner terminated as
provided in the Director Stock Option Plan, will have a five-year term from the
date of grant and will vest and become exercisable in full on the first
anniversary of the date of grant. Options granted under the Director Stock
Option Plan are generally not transferable during the holder's lifetime, but are
transferable at death by will or by the laws of descent and distribution. Upon
the
14
<PAGE> 17
death of an optionholder, all options granted to such optionholder will
immediately vest and will terminate twelve months thereafter. If an optionholder
ceases his or her service as a director of the Company due to disability, all
options granted to such optionholder will immediately vest and will terminate 90
days thereafter. Upon an optionholder ceasing his or her service as a director
for any other reason, such options will terminate 90 days thereafter.
The Director Stock Option Plan provides that in the event of a change in
control of the Company (defined as any person or other entity which becomes the
beneficial owner, directly or indirectly, of more than 50% of the total combined
voting power of all classes of capital stock of the Company entitled to vote for
the election of directors of the Company), all outstanding options under the
Director Stock Option Plan will become immediately vested and exercisable.
The full text of the Director Stock Option Plan is set forth as Exhibit
10.10 to the Company's Registration Statement on Form S-1, Registration No.
333-2900. The discussion above is qualified in its entirety by reference to the
actual text of the Director Stock Option Plan.
This proposed increase in the number of shares under the Director Stock
Option Plan requires the affirmative vote of a majority of the votes present in
person or by proxy at the Annual Meeting. The Board of Directors recommends a
vote FOR approval of the increase in the number of shares under the Director
Stock Option Plan.
V. OTHER MATTERS
SHAREHOLDER PROPOSALS
Proposals of shareholders that are intended to be presented at the
Company's 2000 Annual Meeting of Shareholders must be received by the Company's
Secretary no later than December 31, 1999 to be considered for inclusion in the
Proxy Statement and Proxy relating to that meeting. Such proposals should be
sent by certified mail, return receipt requested and addressed to Mechanical
Dynamics, Inc., 2301 Commonwealth Blvd., Ann Arbor, Michigan 48105, Attention:
David Peralta, Chief Financial Officer.
The Company must receive notice of any proposals of shareholders that are
intended to be presented at the Company's 2000 Annual Meeting of Shareholders,
but that are not intended to be considered for inclusion in the Company's Proxy
Statement and Proxy related to that meeting, no later than February 24, 2000 to
be considered timely. Such proposals should be sent by certified mail, return
receipt requested and addressed to Mechanical Dynamics, Inc., 2301 Commonwealth
Blvd., Ann Arbor, Michigan 48105, Attention: David Peralta, Chief Financial
Officer. If the Company does not have notice of the matter by that date, the
Company's form of proxy in connection with that meeting may confer discretionary
authority to vote on that matter, and the persons named in the Company's form of
proxy will vote the shares represented by such proxies in accordance with their
best judgement.
OTHER BUSINESS
Neither the Company nor the members of its Board of Directors intend to
bring before the Annual Meeting any matters other than those set forth in the
Notice of Annual Meeting of Shareholders, and they have no present knowledge
that other matters will be presented for action at the Annual Meeting by others.
However, if other matters are properly presented to the meeting, the persons
named in the enclosed proxy intend to vote the shares represented thereby in
accordance with their best judgment.
15
<PAGE> 18
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The audited financial statements and the Company's "Management's Discussion
and Analysis of Financial Condition and Results of Operations" contained in the
Company's Annual Report to Shareholders for the fiscal year ended December 31,
1998 are hereby specifically incorporated by reference into this Proxy
Statement.
By Order of the Board of Directors
Michael E. Korybalski
MICHAEL E. KORYBALSKI
Chief Executive Officer
Ann Arbor, Michigan
April 9, 1999
16
<PAGE> 19
PROXY MECHANICAL DYNAMICS, INC. PROXY
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS OF MECHANICAL DYNAMICS, INC. TO BE HELD
MAY 13, 1999
The undersigned hereby appoints Michael E. Korybalski and Robert R. Ryan,
and each of them, with full power of substitution, as attorneys and proxies of
the undersigned, to vote all shares of Mechanical Dynamics, Inc. (the "Company")
which the undersigned is entitled to vote at the Annual Meeting of Shareholders
of the Company to be held on Thursday, May 13, 1999, at 4:00 p.m., Eastern Time,
at the Holiday Inn North Campus, 3600 Plymouth Road, Ann Arbor, Michigan 48105
(or at any adjournment(s) thereof), as follows:
1. Election of Directors -- Nominees: Herbert S. Amster, Joseph F. Gloudeman
<TABLE>
<S> <C>
[ ] FOR all nominees listed above [ ] WITHHOLD AUTHORITY
(except as marked below to to vote for the
the contrary) nominees listed above
</TABLE>
[ ] ABSTAIN
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, WRITE
THAT NOMINEE'S NAME ON THE SPACE PROVIDED BELOW.)
2. Proposal to ratify and approve Arthur Andersen LLP as the independent
auditors of the Company for the fiscal year ending December 31, 1999:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Proposal to increase the number of shares available under the Company's 1996
Stock Incentive Plan for Key Employees from 650,000 shares to 1,050,000
shares:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. Proposal to increase the number of shares available under the Company's
Non-Employee Director Stock Option Plan from 100,000 shares to 200,000
shares:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. In their discretion with regard to such other business as may properly come
before the Annual Meeting (or any adjournment(s) thereof).
<PAGE> 20
This Proxy is solicited on behalf of the Board of Directors.
This Proxy, when properly executed, will be voted in the manner directed herein
by the undersigned. If no direction is made, the shares represented by this
Proxy will be voted in favor of the nominees named in Proposal 1 and in favor of
Proposals 2, 3 and 4.
Dated: , 1999
-----------------------------------------
Shareholder should sign here
NOTE: PLEASE DATE THIS PROXY AND SIGN EXACTLY AS YOUR NAME APPEARS ON YOUR STOCK
CERTIFICATE. IF THE SHARES ARE REGISTERED IN MORE THAN ONE NAME, EACH JOINT
OWNER SHOULD SIGN. WHEN SIGNING AS ATTORNEY, ADMINISTRATOR, PERSONAL
REPRESENTATIVE, EXECUTOR, GUARDIAN OR TRUSTEE, ADD YOUR TITLE TO THE SIGNATURE.
PLEASE PROMPTLY DATE, SIGN AND MAIL THIS PROXY TO THE COMPANY.
