** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-Q**

** **
| **(Mark One)**                            |                                                                                                                                                                                                                                                                                  |
|-------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                      |                                                                                                                                                                                                                                                                                  |
| **ý**                                | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                          |
|                                      |
|                                      | **For the quarterly period ended June 30, 2003**                                                                                                                                                                                                                                 |
|                                      |
| **OR**                                    |
|                                      |
| **o**                                     | **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:  0-22145** |

 

**RWD TECHNOLOGIES, INC.**

(Exact name of Registrant as specified in its Charter)

 

| **Maryland**                                                                         |   | **52-1552720**                        |
|--------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                      |   | (I.R.S. Employer  Identification No.) |
|                                                                                 |   |                                  |
| **5521 Research Park Drive****Baltimore, Maryland**                                  |   | **21228**                             |
| (Address of principal executive offices)                                             |   | (Zip Code)                            |
|                                                                                 |   |                                  |
| **(410) 869-1000**                                                                   |
| (Registrant’s telephone number, including area code)                            |
|                                                                                 |   |                                  |
| **None**                                                                             |
| (Former name, former address and former fiscal year - if changed  since last report) |

 

Indicateby check mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  ý  No  o

 

Indicateby a check mark whether the registrant is an accelerated filer (as defined inExchange Act Rule 12b-2). Yes  o  No  ý

 

Asof August 1, 2003, 15,527,464 shares of common stock, $0.10 par value(“Common Stock”), of the Registrant were outstanding.

 

 

----

 

**RWD TECHNOLOGIES, INC.**

** **

**INDEX**

 

FORM 10-Q

 
| **PART I - FINANCIAL INFORMATION** |
|------------------------------------|
|                               |   |
| Item  1.                           | Financial  Statements |
|                               |   |
|                               | Consolidated  Condensed Balance Sheets as of June 30, 2003 (Unaudited) and  December 31, 2002 |
|                               |   |
|                               | Consolidated  Statements of Operations for the Three Months and Six Months ended  June 30, 2003 and 2002 (Unaudited) |
|                               |   |
|                               | Consolidated  Statements of Cash Flows for the Six Months ended June 30, 2003 and 2002  (Unaudited) |
|                               |   |
|                               | Notes to  Consolidated Condensed Financial Statements (Unaudited) |
|                               |   |
| Item 2.                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                               |   |
| Item 3.                            | Quantitative  and Qualitative Disclosures About Market Risk |
|                               |   |
| Item  4.                           | Controls  and Procedures |
|                               |   |
| **PART II - OTHER INFORMATION**    |
|                               |   |
| Item 1.                            | Legal Proceedings |
|                               |   |
| Item  2.                           | Changes  in Securities |
|                               |   |
| Item  3.                           | Defaults  Upon Senior Securities |
|                               |   |
| Item 4.                            | Submission of  Matters to a Vote of Security Holders |
|                               |   |
| Item  5.                           | Other  Information |
|                               |   |
| Item 6.                            | Exhibits and Reports  on Form 8-K |
|                               |   |
| Signatures                         |

 

i

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**PART I -FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

RWD TECHNOLOGIES, INC.

ConsolidatedCondensed Balance Sheets

(In thousands)

 
|                                                                         |   | **June 30, 2003** |       | **December 31, 2002** |       |
|------------------------------------------------------------------------------|--------|------------------------|------------|----------------------------|------------|
|                                                                         |   | **(Unaudited)**        |       |                       | ** ** |
| **ASSETS**                                                                   |   |                   | ** ** |                       | ** ** |
| CURRENT ASSETS:                                                              |   |                   |       |                       |       |
| Cash                                                                         |   | $                      | 2,542      |                       | $          | 3,694 |   |
| Restricted cash                                                              |   | 78                     |       | 67                         |       |
| Investments, available for sale                                              |   | 5,241                  |       | 7,618                      |       |
| Restricted investments                                                       |   | 10,450                 |       | 10,441                     |       |
| Contract accounts receivable, net                                            |   | 16,358                 |       | 19,053                     |       |
| Costs and estimated earnings in excess of billings  on uncompleted contracts |   | 6,314                  |       | 6,005                      |       |
| Income tax refund receivable                                                 |   | 2,056                  |       | 7,802                      |       |
| Prepaid expenses and other current assets                                    |   | 2,665                  |       | 1,703                      |       |
| Deferred tax assets                                                          |   | 388                    |       | 388                        |       |
| Total Current Assets                                                         |   | 46,092                 |       | 56,771                     |       |
| Fixed assets, net                                                            |   | 8,050                  |       | 9,675                      |       |
| Capitalized software development costs and other  assets, net                |   | 3,548                  |       | 4,251                      |       |
| Restricted investments, net of current portion                               |   | 2,421                  |       | 2,508                      |       |
| Total Assets                                                                 |   | $                      | 60,111     |                       | $          | 73,205 |   |
|                                                                         |   |                   |       |                       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                |   |                   | ** ** |                       | ** ** |
| CURRENT LIABILITIES:                                                         |   |                   |       |                       |       |
| Accounts payable and accrued expenses                                        |   | $                      | 7,403      |                       | $          | 7,330 |   |
| Accrued payroll and related benefits                                         |   | 5,330                  |       | 6,049                      |       |
| Credit lines payable                                                         |   | 6,040                  |       | 4,705                      |       |
| Billings in excess of costs and estimated earnings  on uncompleted contracts |   | 284                    |       | 744                        |       |
| Deferred revenue                                                             |   | 2,514                  |       | 2,682                      |       |
| Current portion of long-term debt                                            |   | 600                    |       | 567                        |       |
| Total Current  Liabilities                                                   |   | 22,171                 |       | 22,077                     |       |
| NONCURRENT  LIABILITIES:                                                     |   |                   |       |                       |       |
| Long-term debt, net of current portion                                       |   | 2,481                  |       | 2,712                      |       |
| Deferred tax liabilities                                                     |   | 388                    |       | 388                        |       |
| Total Liabilities                                                            |   | 25,040                 |       | 25,177                     |       |
| STOCKHOLDERS’ EQUITY:                                                   |   |                   |       |                       |       |
| Common stock                                                                 |   | 1,553                  |       | 1,542                      |       |
| Accumulated other comprehensive income (loss)                                |   | 354                    |       | (117                       | )          |
| Additional paid-in capital                                                   |   | 46,319                 |       | 46,499                     |       |
| (Accumulated deficit) retained earnings                                      |   | (13,155                | )          | 104                        |       |
| Total Stockholders’ Equity                                              |   | 35,071                 |       | 48,028                     |       |
| Total Liabilities and Stockholders’ Equity                              |   | $                      | 60,111     |                       | $          | 73,205 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

1

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RWD TECHNOLOGIES, INC.

ConsolidatedStatements of Operations

(Unaudited) (In thousands, except per share data)

 
|                                                                                |   | **Three Months Ended June 30,** |   | **Six Months Ended June 30,** |       |
|-------------------------------------------------------------------------------------|--------|--------------------------------------|--------|------------------------------------|------------|
|                                                                                |   | **2003**                             |   | **2002**                           | ** ** | **2003** | ** ** | **2002** | ** ** |
| Revenue:                                                                            |   |                                 |   |                               |       |   |   |   |   |
| Consulting services                                                                 |   | $                                    | 21,678 |                               | $          | 26,075 |   | $ | 41,570 |   | $ | 52,791 |   |
| Products and product services                                                       |   | 2,976                                |   | 3,886                              |       | 6,539 |   | 6,351 |   |
| Total revenue                                                                       |   | 24,654                               |   | 29,961                             |       | 48,109 |   | 59,142 |   |
| Cost of revenue:                                                                    |   |                                 |   |                               |       |   |   |   |   |
| Consulting services                                                                 |   | 19,945                               |   | 21,859                             |       | 39,699 |   | 43,528 |   |
| Products and product services                                                       |   | 3,247                                |   | 4,287                              |       | 6,281 |   | 6,454 |   |
| Total cost of revenue                                                               |   | 23,192                               |   | 26,146                             |       | 45,980 |   | 49,982 |   |
| Gross profit                                                                        |   | 1,462                                |   | 3,815                              |       | 2,129 |   | 9,160 |   |
| Selling, general and administrative expenses                                        |   | 5,812                                |   | 6,430                              |       | 12,233 |   | 13,009 |   |
| Severance and lease termination expenses                                            |   | 1,605                                |   | 720                                |       | 2,187 |   | 763 |   |
| Operating loss                                                                      |   | (5,955                               | )      | (3,335                             | )          | (12,291 | ) | (4,612 | ) |
| Privatization transaction expenses                                                  |   | 1,273                                |   | —                             |       | 1,273 |   | — |   |
| Other (expense) income, net                                                         |   | (128                                 | )      | 88                                 |       | 152 |   | 52 |   |
| Loss before income taxes and cumulative effect of  a change in accounting principle |   | (7,356                               | )      | (3,247                             | )          | (13,412 | ) | (4,560 | ) |
| Provision for (benefit from) income taxes                                           |   | 67                                   |   | (1,027                             | )          | 102 |   | (3,289 | ) |
| Loss before cumulative effect of a change in  accounting principle                  |   | (7,423                               | )      | (2,220                             | )          | (13,514 | ) | (1,271 | ) |
| Cumulative effect on prior years of changing  method of accounting for goodwill     |   | —                               |   | —                             |       | — |   | (12,529 | ) |
| Net loss                                                                            |   | $                                    | (7,423 | )                                  | $          | (2,220 | ) | $ | (13,514 | ) | $ | (13,800 | ) |
|                                                                                |   |                                 |   |                               |       |   |   |   |   |
| Basic and diluted loss per share:                                                   |   |                                 |   |                               |       |   |   |   |   |
| Loss before cumulative effect of a change in  accounting principle                  |   | $                                    | (0.48  | )                                  | $          | (0.14 | ) | $ | (0.87 | ) | $ | (0.08 | ) |
| Cumulative effect on prior years of changing  method of accounting for goodwill     |   | —                               |   | —                             |       | — |   | (0.82 | ) |
| Net loss per share                                                                  |   | $                                    | (0.48  | )                                  | $          | (0.14 | ) | $ | (0.87 | ) | $ | (0.90 | ) |
|                                                                                |   |                                 |   |                               |       |   |   |   |   |
| Weighted average shares outstanding – basic and  diluted                       |   | 15,482                               |   | 15,375                             |       | 15,445 |   | 15,339 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

2

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RWDTECHNOLOGIES, INC.

Consolidated Statements ofCash Flows

(Unaudited)(In thousands)

 
|                                                                                       |   | **Six Months Ended June 30,** |    |
|--------------------------------------------------------------------------------------------|--------|------------------------------------|---------|
|                                                                                       |   | **2003**                           |    | **2002** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                      |   |                               |    |   |   |
| Net loss                                                                                   |   | $                                  | (13,514 | ) | $ | (13,800 | ) |
| Adjustments to reconcile net loss to net cash  (used in) provided by operating activities: |   |                               |    |   |   |
| Depreciation and amortization                                                              |   | 3,249                              |    | 5,031 |   |
| (Gain) loss on disposal of fixed assets                                                    |   | (73                                | )       | 26 |   |
| Cumulative effect on prior years of changing  method of accounting for goodwill            |   | —                             |    | 12,529 |   |
| Deferred income taxes                                                                      |   | —                             |    | (2,442 | ) |
| Net change in current assets and liabilities                                               |   | 5,897                              |    | (760 | ) |
| Net cash (used in) provided by operating  activities                                       |   | (4,441                             | )       | 584 |   |
|                                                                                       |   |                               |    |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                      |   |                               |    |   |   |
| Increase in capitalized software development costs  and other assets                       |   | (439                               | )       | (1,160 | ) |
| Purchases of investments                                                                   |   | (19,110                            | )       | (25,915 | ) |
| Proceeds from sales of investments                                                         |   | 21,549                             |    | 25,984 |   |
| Purchases of fixed assets                                                                  |   | (461                               | )       | (1,623 | ) |
| Proceeds from sales of fixed assets                                                        |   | 134                                |    | — |   |
| Net cash provided by (used in) investing  activities                                       |   | 1,673                              |    | (2,714 | ) |
|                                                                                       |   |                               |    |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                      |   |                               |    |   |   |
| Principal portion paid on long-term debt                                                   |   | (251                               | )       | (163 | ) |
| Borrowings on long-term debt                                                               |   | —                             |    | 990 |   |
| Borrowings under lines of credit                                                           |   | 30,994                             |    | 7,941 |   |
| Payments on lines of credit                                                                |   | (29,635                            | )       | (7,469 | ) |
| Issuance of common stock                                                                   |   | 106                                |    | 258 |   |
| Repurchase of common stock                                                                 |   | (33                                | )       | (65 | ) |
| Net cash provided by financing activities                                                  |   | 1,181                              |    | 1,492 |   |
|                                                                                       |   |                               |    |   |   |
| NET DECREASE IN CASH                                                                       |   | (1,587                             | )       | (638 | ) |
| Effect of exchange rate changes on cash                                                    |   | 435                                |    | 167 |   |
| CASH, beginning of period                                                                  |   | 3,694                              |    | 3,676 |   |
| CASH, end of period                                                                        |   | $                                  | 2,542   |   | $ | 3,205 |   |
| Supplemental cash flow disclosures:                                                        |   |                               |    |   |   |
| Income taxes paid                                                                          |   | $                                  | 136     |   | $ | 323 |   |
| Interest paid                                                                              |   | $                                  | 178     |   | $ | 114 |   |

 

See accompanying notes to consolidated financial statements.

 

3

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RWD TECHNOLOGIES, INC.

# Notes to Consolidated Condensed FinancialStatements

# (Dollars in thousands)

(Unaudited)

 

**1.****                                     ****Summary of SignificantAccounting Policies:**

 

*Organization and Business*

 

RWDTechnologies, Inc. (the ‘‘Company’’) was incorporated on January 22, 1988,in the State of Maryland. The Company provides a broad range of integratedsolutions and products designed to improve the productivity and effectivenessof workers in complex operating environments.

 

*Basis of Presentation*

 

Theaccompanying unaudited consolidated condensed financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States for interim financial information and in accordance with theinstructions to Form 10-Q. Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements. In the opinion ofmanagement, all adjustments, consisting of normal recurring adjustmentsconsidered necessary for a fair presentation, have been included. Thesefinancial statements should be read in conjunction with the auditedconsolidated financial statements of the Company for the fiscal year endedDecember 31, 2002, included in the Company’s Annual Report on Form 10-K.

 

*Principles of Consolidation*

 

Theconsolidated financial statements include the accounts of the Company and itsgreater than 50% owned subsidiaries. Investments in 20%- through 50%-owned affiliated companies in which theCompany exercises significant influence over operating and financial affairsare included under the equity method of accounting.  Otherwise, investments are included at cost.  All significant intercompany accounts andtransactions have been eliminated.

 

*Recent Accounting Pronouncements*

 

InJune 2002, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 146, “Accounting forCosts Associated with Exit or Disposal Activities,” which addresses accountingfor restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principallyEmerging Issues Task Force (“EITF”) Issue No. 94-3.  SFAS No. 146 requires that the liability for costs associatedwith an exit or disposal activity be recognized when the liability isincurred.  Under EITF No. 94-3, aliability for exit costs was recognized at the date of a company’s commitmentto an exit plan.  SFAS No. 146 alsoestablishes that the liability should initially be measured and recorded atfair value.  Accordingly, SFAS No. 146will affect the timing of recognizing exit and restructuring costs as well asthe amount recognized.  The Company hasadopted SFAS No. 146 for exit or disposal activities initiated afterDecember 31, 2002 (see Note 7).

 

*Reclassifications*

 

Certainreclassifications were made to prior quarters’ and prior year’s amounts toconform to current quarter presentation.

 

4

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**2.****                                     ****Basic and Diluted Net Lossper Share:**

 

Basicloss per share has been computed using the weighted-average number of shares ofcommon stock outstanding during the period. Diluted net loss per share is computed based on the combinedweighted-average number of shares and share equivalents outstanding.  For all periods presented, potentiallydilutive stock options have been excluded from the computation of diluted netloss per share, as their inclusion would be anti-dilutive.  No reconciling items exist between the netloss used for basic and diluted net loss per share.

 

**3.****                                     ****Comprehensive Loss:**

 

Comprehensiveloss includes all changes in stockholders’ equity during a period except thoseresulting from investments by or distributions to stockholders.  The Company’s non-owner changes instockholders’ equity consist of foreign currency translation adjustments andunrealized gains and losses on available-for-sale investments.  The Company’s comprehensive loss for theperiods presented is listed below:

 
|                                                                     |   | **Three Months Ended  June 30,** |   | **Six Months Ended  June 30,** |       |
|--------------------------------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------|------------|
|                                                                     |   | **(in thousands)**                    |   |
|                                                                     |   | **2003**                              |   | **2002**                            | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net loss                                                                 |   | $                                     | (7,423 | )                                   | $          | (2,220 | ) | $ | (13,514 | ) | $ | (13,800 | ) |
| Effect of unrealized gain on investments  available-for-sale, net of tax |   | 5                                     |   | 7                                   |       | 6 |   | 4 |   |
| Effect of unrealized gain on foreign currency  translation, net of tax   |   | 321                                   |   | 158                                 |       | 464 |   | 211 |   |
|                                                                     |   |                                  |   |                                |       |   |   |   |   |
| Comprehensive loss                                                       |   | $                                     | (7,097 | )                                   | $          | (2,055 | ) | $ | (13,044 | ) | $ | (13,585 | ) |

 

**4.****                                     ****Stock-Based Compensation:**

 

TheCompany has computed pro forma net loss and loss per share assuming that thefair value method of accounting for its employee and director stock optiongrants was adopted.  These computationsare based on the Black-Scholes option-pricing model. The Black-Scholes optionpricing model and other models were developed for use in estimating the fairvalue of traded options that have no vesting restrictions and are fullytransferable. In addition, option valuation models require the input of highlysubjective assumptions, including the expected stock price volatility. Becausethe Company’s stock options have characteristics significantly different fromthose of traded options and because changes in the subjective input assumptionscan materially affect the fair value estimate, in management’s opinion, theexisting models do not necessarily provide a reliable single measure of thefair value of its stock options.

 

5

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Proforma net loss and loss per share are summarized as follows:

 
|                                                                                      |   | **Three Months Ended  June 30,** |       | **Six Months Ended  June 30,** |       |
|-------------------------------------------------------------------------------------------|--------|---------------------------------------|------------|-------------------------------------|------------|
|                                                                                      |   | **(in thousands)**                    | ** ** |
|                                                                                      |   | **2003**                              |       | **2002**                            | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net loss:                                                                                 |   |                                  |       |                                |       |   |   |   |   |
| As reported                                                                               |   | $                                     | (7,423     | )                                   | $          | (2,220 | ) | $ | (13,514 | ) | $ | (13,800 | ) |
| Stock based compensation as determined under APB  No. 25                             |   | —                                |       | —                              |       | — |   | — |   |
| Stock based compensation expense determined under  fair value based method for all awards |   | (745                                  | )          | (929                                | )          | (1,768 | ) | (1,853 | ) |
| Pro forma                                                                                 |   | $                                     | (8,168     | )                                   | $          | (3,149 | ) | $ | (15,282 | ) | $ | (15,653 | ) |
|                                                                                      |   |                                  |       |                                |       |   |   |   |   |   |   |   |   |
| Basic and diluted loss per share:                                                         |   |                                  |       |                                |       |   |   |   |   |
| As reported                                                                               |   | $                                     | (0.48      | )                                   | $          | (0.14 | ) | $ | (0.87 | ) | $ | (0.90 | ) |
| Pro forma                                                                                 |   | $                                     | (0.53      | )                                   | $          | (0.20 | ) | $ | (0.99 | ) | $ | (1.02 | ) |

 

**5.****                                     ****Business Segments:**

 

TheCompany determines operating segments using the management approach.  The management approach designates theinternal organization that is used by management for making operating decisionsand assessing performance as the source of the Company’s reportablesegments.  The Company has identifiedthree operating segments:  EnterpriseSystems, which provides products and services supporting the implementation ofenterprise-wide systems and applications; Performance Solutions, whichaddresses all aspects of manufacturing processes in order to promote continuousimprovements; and Applied Technology Solutions, which encompasses the designand delivery of information systems to end-users of technology as well asWeb-based training.

 

Theaccounting policies for these segments are the same as those described in thesummary of significant accounting policies. Depreciation and amortizationexpense is reported in each operating segment. However, the Company’s tangibleassets are not managed as distinct asset groups. All tangible assets notspecifically identified to a segment are recorded at the corporate level withdepreciation expense allocated to operating segments based on headcount.Interest expense, interest income, and income taxes are reported at thecorporate level only and are not disclosed below.

 

6

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|                                                              |   | **Three Months Ended  June 30,** |       | **Six Months Ended  June 30,** |       |
|-------------------------------------------------------------------|--------|---------------------------------------|------------|-------------------------------------|------------|
|                                                              |   | **(in thousands)**                    |       | **(in thousands)**                  | ** ** |
|                                                              |   | **2003**                              |       | **2002**                            | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Revenue (all external):**                                       |   |                                  |       |                                |       |   |   |   |   |
| Enterprise Systems                                                |   |                                  |       |                                |       |   |   |   |   |
| Consulting services                                               |   | $                                     | 6,056      |                                | $          | 10,671 |   | $ | 13,498 |   | $ | 21,771 |   |
| Products and product services                                     |   | 2,401                                 |       | 3,036                               |       | 5,318 |   | 4,697 |   |
|                                                              |   | 8,457                                 |       | 13,707                              |       | 18,816 |   | 26,468 |   |
| Performance Solutions                                             |   |                                  |       |                                |       |   |   |   |   |
| Consulting services                                               |   | 12,875                                |       | 11,465                              |       | 22,788 |   | 21,868 |   |
| Products and product services                                     |   | —                                |       | —                              |       | — |   | — |   |
|                                                              |   | 12,875                                |       | 11,465                              |       | 22,788 |   | 21,868 |   |
| Applied Technology Solutions                                      |   |                                  |       |                                |       |   |   |   |   |
| Consulting services                                               |   | 2,747                                 |       | 3,939                               |       | 5,284 |   | 9,152 |   |
| Products and product services                                     |   | 575                                   |       | 850                                 |       | 1,221 |   | 1,654 |   |
|                                                              |   | 3,322                                 |       | 4,789                               |       | 6,505 |   | 10,806 |   |
|                                                              |   |                                  |       |                                |       |   |   |   |   |
| **Total Revenue**                                                 |   | $                                     | 24,654     |                                | $          | 29,961 |   | $ | 48,109 |   | $ | 59,142 |   |
|                                                              |   |                                  |       |                                |       |   |   |   |   |
| **Gross Profit (Loss):**                                          |   |                                  | ** ** |                                | ** ** |   | ** ** |   | ** ** |
| Enterprise Systems                                                |   | $                                     | (1,806     | )                                   | $          | 3,157 |   | $ | (2,147 | ) | $ | 6,574 |   |
| Performance Solutions                                             |   | 3,790                                 |       | 2,684                               |       | 5,510 |   | 5,370 |   |
| Applied Technology Solutions                                      |   | (522                                  | )          | (2,026                              | )          | (1,234 | ) | (2,784 | ) |
|                                                              |   |                                  |       |                                |       |   |   |   |   |
| **Total Gross Profit**                                            |   | $                                     | 1,462      |                                | $          | 3,815 |   | $ | 2,129 |   | $ | 9,160 |   |
|                                                              |   |                                  | ** ** |                                | ** ** |   | ** ** |   | ** ** |
| **Depreciation and Amortization  Expense Allocated To Segments:** |   |                                  |       |                                |       |   |   |   |   |
| Enterprise Systems                                                |   | $                                     | 786        |                                | $          | 711 |   | $ | 1,545 |   | $ | 1,534 |   |
| Performance Solutions                                             |   | 121                                   |       | 208                                 |       | 258 |   | 409 |   |
| Applied Technology Solutions                                      |   | 268                                   |       | 1,188                               |       | 546 |   | 2,001 |   |
| **Total Allocated to Segments**                                   |   | 1,175                                 |       | 2,107                               |       | 2,349 |   | 3,944 |   |
|                                                              |   |                                  |       |                                |       |   |   |   |   |
| **Amount not Allocated to Segments**                              |   | 439                                   |       | 540                                 |       | 900 |   | 1,087 |   |
|                                                              |   |                                  |       |                                |       |   |   |   |   |
| **Total Depreciation and  Amortization Expense**                  |   | $                                     | 1,614      |                                | $          | 2,647 |   | $ | 3,249 |   | $ | 5,031 |   |
|                                                              |   |                                  |       |                                |       |   |   |   |   |
| **Revenue (by geography):**                                       |   |                                  |       |                                |       |   |   |   |   |
| United States                                                     |   | $                                     | 17,890     |                                | $          | 24,963 |   | $ | 37,462 |   | $ | 48,964 |   |
| United Kingdom                                                    |   | 5,879                                 |       | 4,390                               |       | 9,418 |   | 8,881 |   |
| Other                                                             |   | 885                                   |       | 608                                 |       | 1,229 |   | 1,297 |   |
| **Total Revenue**                                                 |   | $                                     | 24,654     |                                | $          | 29,961 |   | $ | 48,109 |   | $ | 59,142 |   |

 

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**6.****                                     ****Privatization TransactionExpenses:**

 

OnApril 29, 2003, the Company announced that it signed a definitive mergeragreement with Research Park Acquisition, Inc. (“RPA”), an entity owned by Dr.Robert W. Deutsch, Chairman, CEO and President of the Company, and some of hisfamily members.  Dr. Deutsch and membersof his family have contributed their shares of common stock in the Company toRPA, which shares represent approximately 66 percent of the Company’soutstanding common stock on April 28, 2003.  The merger agreement provides that, at the closing of the merger,each outstanding share of the Company’s common stock (other than Company commonstock owned by RPA) will convert into the right to receive $2.10 in cash.  The proposed transaction price represents a144 percent premium over the average closing price during the 30 trading days precedingthe date the merger agreement was signed.

 

TheCompany’s board of directors, with Dr. Deutsch and Jane C. Brown, his daughter,abstaining, unanimously approved the transaction following the unanimousrecommendation of a special committee of the board of directors.  The merger agreement contains customaryfiduciary termination rights.  Theclosing of the merger is subject to various conditions, including stockholderapproval by the holders of a majority of the Company’s common stock not held byRPA at a special meeting of the stockholders. The Company has prepared proxy material for a meeting of itsstockholders of record as of July 3, 2003, to vote on the proposedtransaction.  The proxy mailing processis currently underway and the special meeting of the shareholders is scheduledfor September 12, 2003.

 

Asa result of the merger, the Company will become a privately held company.  Accordingly, upon closing, the registrationof the Company’s common stock under the Securities Exchange Act of 1934, asamended, will terminate.

 

Duringthe three months ended June 30, 2003, the Company incurred approximately$1.3 million for legal, professional, and director fees relating to the pendingrepurchase of its outstanding common stock. The Company expects that the total consideration to be paid tostockholders to redeem the stock will be approximately $11.5 million, includingapproximately $0.4 million to be paid to employees who hold options that willbe fully vested and exercisable on the date of the merger.

 

Thereare no financing contingencies to the merger and the Company intends to pay themerger consideration from working capital, which will require restructuring ofbank lending arrangements to remove the restrictions on cash.  In the event that these restructurings arenot completed, other financing arrangements are provided for which arediscussed more fully in the Liquidity and Capital Resources section on page 15.

 

**7.****                                     ****Exit Activities:**

 

Duringthe three months ended June 30, 2003, Company management approved arestructuring plan that downsized its Enterprise Systems operating segment aswell as its corporate support organization. This plan includes changes in management and management structure aswell as a fundamental reorganization of the operating segment and corporatesupport organization.  As a result ofthis restructuring, the Company recorded approximately $1.4 million inseverance charges for the three months ended June 30, 2003 and $2.0million for the six months ended June 30, 2003.  Restructuring charges included the Company’s estimate of employeeseverance and related costs for employees terminated as a result of the revisedbusiness plan.  The expenses associatedwith employee severance are included as a component of loss from continuing operations.

 

Duringthe three months ended June 30, 2003, the Company transferredapproximately forty operating and corporate support personnel from itsColumbia, Maryland office to its Applied Technology Laboratory on the campus ofthe University of Maryland, Baltimore County. Accordingly, the Company

 

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updated its assessment of its availablevacant space in Columbia and determined that a charge for the remaining rentalpayments for the vacated space should be recorded due to uncertaintiessurrounding its sublease.  As a result,the Company recorded an expense of $0.2 million in the second quarter of2003.  In connection with the remainingrelocation of employees to the ATL in July 2003, the Company will continueto incur costs related to vacant leased space at the Columbia, Marylandfacility.  As the sublease market forthe leased facility is depressed and only six months remain under the leaseterm, the Company does not expect to sublease the vacant space between themoving date and the termination of the lease on December 31, 2003.  Therefore, the Company expects to take acharge of approximately $0.3 million for the remaining rental expense of thevacant space during the third quarter of 2003. No additional significant costs are expected to be incurred with respectto the relocation.  The expensesassociated with vacant space charges and moving costs are included as acomponent of loss from continuing operations.

 

Thefollowing is a summary of the costs of exit activities recorded in 2003:

 
|                    |   | **Three months ended  June 30, 2003** |   | **Six months ended  June 30, 2003** |   |
|-------------------------|--------|--------------------------------------------|--------|------------------------------------------|--------|
|                    |   | **(in thousands)**                         |   | **(in thousands)**                       |   |
| Employee severance      |   | $                                          | 1,426  |                                     | $      | 2,008 |   |
| Lease termination costs |   | 179                                        |   | 179                                      |   |
|                    |   |                                       |   |                                     |   |
| Total                   |   | $                                          | 1,605  |                                     | $      | 2,187 |   |

 

**8.****                                     ****Other Information:**

 

Discussionsinitiated during the first quarter between RWD and SAP Asia concerning thefuture plans for the joint venture in Singapore, SAP Learning Solutions Pte Ltd(“SAPLS”), are ongoing.  Thesediscussions are expected to result in dissolution of the joint venture.  At that time, RWD will take directresponsibility for the joint venture’s Australian and Japanese operations andexpects to enter into software reseller arrangements for the remaining Asianterritories.

 

**Item 2.****          ****Management’s Discussion andAnalysis of****Financial Condition and Results of Operations.**

 

*Certain statements contained herein, includingstatements regarding anticipated future results, development of the Company’sservices, products, markets and future demands for the Company’s services,products, and other statements regarding matters that are not historical facts,are “forward-looking statements,” as defined in the Private SecuritiesLitigation Reform Act of 1995.  Such forward-lookingstatements include risks and uncertainties, particularly those described in theCompany’s filings with the Securities and Exchange Commission, including thosedescribed in this Quarterly Report under the caption “Business Risks.”  Consequently, actual results may differmaterially from those expressed or implied by these forward-looking statements.*

 

**Overview**

 

RWDTechnologies, Inc. (the “Company”) provides a broad range of integratedproducts and solutions designed to improve the productivity and effectivenessof workers in complex operating environments. As the scope and complexity of technology used by businesses increasesand the global business environment becomes more competitive, companies areincreasingly focused on maximizing

 

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their return on their advanced technology andeCommerce investments.  As the Company’sbusiness evolves, strategic initiatives focus on aligning the organization tobest serve the customers, emphasizing learning products, expanding strategicpartnerships, and pursuing additional international business.

 

TheCompany’s principal service segments are: *EnterpriseSystems*, which provides products and services supporting theimplementation of enterprise-wide systems and applications; *Performance Solutions*, which addresses allaspects of manufacturing processes in order to promote continuous improvementsand eliminate waste; and *Applied TechnologySolutions*, which encompasses the design and delivery of informationto end-users of technology as well as Web-based training.

 

**Critical Accounting Policies**

 

Theconsolidated financial statements are prepared in conformity with accountingprinciples generally accepted in the United States, which require estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during the year.Actual results could differ from those estimates. The following policies are consideredto be the most critical to understanding the judgments that are involved inpreparing the financial statements and the uncertainties that could impact theresults of operations, financial condition, and cash flows.

 

*Capitalized Software Development Costs:*

 

TheCompany develops and markets software products designed principally for clientsof the Enterprise Systems and Applied Technology Solutions segments.  Development costs are capitalized when thetechnological feasibility of a product or product enhancement is establishedand expensed as research and development costs prior to such adetermination.  Amortization ofcapitalized costs is recognized on a product-by-product basis over the expecteduseful life when the product is available for general release.  For each product with unamortizedcapitalized costs, the Company periodically evaluates capitalized softwaredevelopment costs for impairment by estimating future cash flows for eachproduct.  To the extent that theunamortized costs exceed these estimated future cash flows, additionalamortization expense is recorded.

 

Asof June 30, 2003, the Company had unamortized capitalized softwaredevelopment costs of approximately $2.5 million.  During the second quarter of 2003, the Company did not capitalizeany software development costs and recorded amortization of $0.6 million.  Because the process of capitalizing softwarecosts requires the Company to ascertain the date that technological feasibilitywas established, and the amortization of software costs requires the Company toestimate product lives and future cash flows, reported results of operationsare sensitive to these estimates.  Ifthe Company revises estimates of product lives or the estimated future cashflows from sales of its software products, the amount of future amortizationcould be materially affected.

 

*Revenue Recognition:*

 

Themajority of the Company’s revenue is generated from consulting fees. Themajority of the Company’s consulting contracts are on a time-and-materialsbasis, although many of the contracts contain initial “not-to-exceed” amountsand Company performance obligations. The Company’s remaining consultingcontracts are on a fixed-price basis. Revenue is recognized using theproportional performance method. Consulting contracts generally vary in length from 1 to 36 months.

 

Earnedrevenue is based on the percentage that direct labor and other contract costsincurred to date bear to total estimated costs, after giving effect to the mostrecent estimates of total cost. The cumulative impact of revisions in totalcost estimates during the progress of work is reflected in the period in whichthese changes become known. Earned revenue reflects the original contract priceadjusted for agreed-

 

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upon claim and change order revenue, ifany.  Losses expected to be incurred onjobs in process, after consideration of estimated minimum recoveries fromclaims and change orders, are charged to income as soon as such losses areknown.

 

Revenuefrom the sale of multiple-element software license agreements is generallyrecognized under the residual method at the time of delivery of softwareproducts to the customer and when collectibility is probable and there iswritten, persuasive evidence of an agreement. Under the residual method, theCompany defers revenue on any undelivered element, as indicated byvendor-specific objective evidence of the fair market value of the undeliveredelement, and recognizes the residual amount in the period in which deliverytakes place.  Any modifications tovendor-specific objective evidence established by the Company would affect thetiming of revenue recognition.  TheCompany generally does not grant its customers a right of return for a full orpartial refund on its products. Revenue from all maintenance, hosting, andcustomer support agreements is recognized ratably over the term of theagreement, generally one year, with the unrecognized portion at the balancesheet date being recorded as deferred revenue. Revenue from professionalservices and training relating to products is recognized as the services areperformed.

 

**Results of Operations**

 

***Quarter Ended June 30, 2003,Compared to Quarter Ended June 30, 2002***

 

*Revenue.*  Consolidated revenue decreasedby $5.3 million, or 17.7 percent, from $30.0 million for the quarter endedJune 30, 2002 to $24.7 million for the quarter ended June 30,2003.  Consulting service revenuedecreased $4.4 million, or 16.9 percent, from $26.1 million for the quarterended June 30, 2002 to $21.7 million for the 2003 period.  Product and product service revenuedecreased $0.9 million, or 23.4 percent, from $3.9 million for the quarterended June 30, 2002 to $3.0 million for the 2003 period.  Included in the results for the secondquarter of 2003 was $1.8 million of revenue that had been deferred from thefirst quarter until the Company received executed contracts for consultingservices.  Performance by segment was asfollows:

 

•                  *Enterprise Systems. *Revenue decreased by $5.3 million, or 38.3 percent, from $13.7 millionfor the quarter ended June 30, 2002 to $8.5 million for the 2003 period,representing 45.7 percent of the Company’s total revenue for the second quarterof 2002 and 34.3 percent of the Company’s total revenue for the 2003period.  Consulting service revenuedecreased by $4.6 million to $6.1 million for the second quarter of 2003.  Additionally, product and product servicerevenue decreased from $3.0 million for the first quarter of 2002 to $2.4million for the comparable period of 2003, or a decrease of 20.9 percent.  The decrease in consulting revenue was dueto slow starts on foreign and domestic projects and continued weak demand.  The decline in product and product servicerevenue resulted from deferred customer commitments.

 

•                  *Performance Solutions*. Revenue increased by $1.4 million, or 12.3 percent, from $11.5 millionfor the quarter ended June 30, 2002, to $12.9 million for the quarterended June 30, 2003.  This revenuerepresented 38.3 percent of the Company’s total revenue for the second quarterof 2002 and 52.2 percent of the Company’s total revenue for the 2003period.  Included in revenue for thesecond quarter of 2003 was approximately $1.6 million relating to work performedduring the first quarter of 2003, but for which contracts were executed afterMarch 31, 2003.

 

•                  *Applied Technology Solutions*. Revenue decreased by $1.5 million, or 30.6 percent, from $4.8 millionfor the quarter ended June 30, 2002, to $3.3 million for the quarter endedJune 30, 2003, representing 16.0 percent of the Company’s total revenuefor the second quarter of 2002 and 13.5

 

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percent of the Company’s total revenue for the 2003 period.  The decrease in revenue was due to longer salescycles, lower levels of spending by the pharmaceutical industry, and continuedpricing pressures.

 

*Gross Profit.*  Gross profit for the Company decreased $2.4million, or 61.7 percent, from $3.8 million for the quarter ended June 30,2002, to $1.5 million for the quarter ended June 30, 2003, and decreasedfrom 12.7 percent of revenue for the second quarter of 2002 to 5.9 percent ofrevenue for the 2003 period.  Includedin the second quarter of 2003 was gross profit of $1.1 million that waspreviously deferred until the Company received executed contracts forconsulting services rendered during the first quarter of 2003.  Performance by segment was as follows:

 

•                  *Enterprise Systems.*Gross profit decreased by $5.0 million from$3.2 million for the quarter ended June 30, 2002, to a loss of $1.8million for the quarter ended June 30, 2003. Gross profit margin decreasedfrom 23.0 percent of the segment’s revenue for the second quarter of 2002 to anegative 21.4 percent for the second quarter of 2003.  This decline in gross profit resulted primarily from the declinein revenue, decreased professional staff utilization, and increasedinternational expansion costs.

 

•                  *Performance Solutions*. Gross profit increased by $1.1 million, or41.2 percent, from $2.7 million for the quarter ended June 30, 2002, to$3.8 million for the quarter ended June 30, 2003. Gross profit marginincreased from 23.4 percent of the segment’s revenue for the second quarter of2002 to 29.4 percent for the second quarter of 2003.  The increase in gross profit for the second quarter of 2003resulted primarily from the addition of $1.0 million previously deferred untilcontracts were executed.

 

•                  *Applied Technology Solutions.*Losses decreased $1.5 million, or 74.3percent, from a loss of $2.0 million for the second quarter of 2002, to a lossof $0.5 million for the 2003 period. The gross margin increased from a negative 42.3 percent of the segment’srevenue for the second quarter of 2002 to a negative 15.7 percent for thesecond quarter of 2003.  The reductionin the gross loss reflects improved staff utilization and significant costreduction efforts in the midst of a decline in revenue.

 

*Selling, General and Administrative Expenses*. Selling, general and administrativeexpenses decreased $0.6 million, from $6.4 million for the second quarter of2002 to $5.8 million for the second quarter of 2003, representing 21.5 percentof total revenue for the second quarter of 2002 and 23.6 percent of totalrevenue for the 2003 period.  Facilitiesand equipment costs decreased approximately $0.6 million primarily due to lowerrent expense in 2003.  Additionally,salaries and related benefits increased by $0.3 million over 2002 due to theaddition of business development staff. This increase was offset by an equal reduction in lower travel,conferences, and professional services expenses.

 

*Severance and Lease Termination Expenses*. Severance and lease termination expenses increased $0.9 million to $1.6million for the second quarter of 2003, representing 6.5 percent of totalrevenue for the 2003 period.  Severanceexpenses increased by $1.1 million to $1.4 million for the second quarter of2003, while lease termination expenses declined by $0.2 million from $0.4million for the second quarter of 2002. During the second quarter of 2003, the Company’s workforce decreased asa result of both involuntary reductions and voluntary separations.  The Company’s total number of employees was882 and 770 at December 31, 2002 and June 30, 2003, respectively,compared to 951 and 917 at December 31, 2001 and June 30, 2002respectively.

 

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*Operating Loss*. As a result of the preceding activity, theCompany’s operating loss increased by $2.6 million, from an operating loss of $3.3 million for the secondquarter of 2002 to an operating loss of $5.9 million for the second quarter of2003.

 

*Privatization Transaction Expenses*. During the second quarter of 2003, the Company incurred approximately$1.3 million for legal, professional, and director fees relating to theCompany’s pending transaction in which it intends to become a privately heldcompany.

 

*Other Income (Expense).* Other income was $0.1 million for the secondquarter of 2002 compared to an expense of $0.1 million for the second quarterof 2003.  This difference resultedprimarily from interest expense on higher lines of credit balances and fromlower interest income on investments during the 2003 period.

 

*Provision for (Benefit from) Income Taxes*. Income tax expense was less than $0.1 million for the second quarter of2003 compared to a benefit of $1.0 million in the second quarter of 2002.  The 2003 expense consists of certain stateand foreign income taxes.  The incometax benefit from net operating losses incurred during 2003 has not beenrecorded due to uncertainties surrounding the ability to generate futuretaxable income.

 

*Cumulative Effect on Prior Years of Changing Methodof Accounting for Goodwill*.  As a result of theimplementation of SFAS No. 142 in 2002, the Company recognized an impairmentloss of $12.5 million on goodwill effective January 1, 2002.  There were no changes in accountingprinciple in the current period.

 

*Net Loss.*  Net loss increased $5.2million from a loss of $2.2 million for the second quarter of 2002 to a loss of$7.4 million for the second quarter of 2003 as a result of the factorsdiscussed above.

 

***Six Months Ended June 30, 2003,Compared to Six Months Ended June 30, 2002***

 

*Revenue*.  Consolidated revenuedecreased by $11.0 million, or 18.7 percent, from $59.1 million for the sixmonths ended June 30, 2002 to $48.1 million for the six months endedJune 30, 2003.  Performance bysegment was as follows:

 

•                  *Enterprise Systems. *Revenue decreased by$7.7 million, or 28.9 percent, from $26.5 million for the six months endedJune 30, 2002 to $18.8 million for the 2003 period, representing 44.8percent of the Company’s total revenue for the six months ended June 30,2002 and 39.1 percent of the Company’s total revenue for the 2003 period.  Consulting revenue declined by $8.3 millionover the 2002 period due to slow starts on foreign and domestic projects,continued weak demand, and an unstable geopolitical environment. This declinewas slightly offset by a $0.6 million increase in product and product servicerevenue during the 2003 period.

 

•                  *Performance Solutions*. Revenue increased by $0.9 million, or 4.2 percent, from $21.9 millionfor the six months ended June 30, 2002, to $22.8 million for the sixmonths ended June 30, 2003, representing 37.0 percent of the Company’stotal revenue for the six months ended June 30, 2002 and 47.4 percent ofthe Company’s total revenue for the 2003 period.  The increase in revenue was due to diversification into therailroad and automotive supply industries offset by declines in automotiveconsulting services.

 

•                  *Applied Technology Solutions*. Revenue decreased by $4.3 million, or 39.8 percent, from $10.8 millionfor the six months ended June 30, 2002, to $6.5 million for the six monthsended June 30, 2003, representing 18.3 percent of the Company’s totalrevenue for the six months ended June 30, 2002 and 13.5 percent of theCompany’s total revenue for the 2003 period. The decrease in revenue was due tolonger sales cycles, slow investment in eLearning by the business

 

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community,and generally weak economic conditions.

 

*Gross Profit*.  Gross profit for the Companydecreased by $7.0 million, or 76.8 percent, from $9.1 million for the sixmonths ended June 30, 2002, to $2.1 million for the six months endedJune 30, 2003, and decreased from 15.5 percent of revenue for the sixmonths ended June 30, 2002 to 4.4 percent of revenue for the 2003period.  Performance by segment was asfollows:

 

•                  *Enterprise Systems.*Gross profit decreased by $8.7 million, from$6.6 million for the six months ended June 30, 2002, to a loss of $2.1million for the six months ended June 30, 2003. This decrease in grossprofit resulted primarily from the decline in revenue year over year and decreasedprofessional staff utilization*.*

 

•                  *Performance Solutions*. Gross profit increased by $0.1 million, or2.6 percent, from $5.4 million for the six months ended June 30, 2002, to$5.5 million for the six months ended June 30, 2003. Gross profit margindecreased from 24.6 percent of the segment’s revenue for the six months endedJune 30, 2002 to 24.2 percent for the 2003 period. The increase in grossprofit primarily resulted from additional revenues during 2003 partially offsetby declines in professional staff utilization*.*

 

•                  *Applied Technology Solutions.*Gross loss decreased $1.6 million, from aloss of $2.8 million for the six months ended June 30, 2002, to a loss of$1.2 million for the six months ended June 30, 2003.  The reduction in the gross loss reflects improvedstaff utilization and significant cost reduction efforts in the midst of adecline in revenue.

 

*Selling, General and Administrative Expenses*. Selling, general and administrativeexpenses decreased $0.8 million, from $13.0 million for the six months endedJune 30, 2002 to $12.2 million for the six months ended June 30,2003, increasing from 22.0 percent of total revenue for the six months endedJune 30, 2002 to 25.4 percent of total revenue for the 2003 period.  Facilities and equipment costs decreasedapproximately $1.3 million primarily due to lower rent expense in 2003.  Additionally, salaries and related benefitsincreased by $0.8 million over 2002 due to the addition of business developmentstaff while travel, conferences, materials, and professional services decreasedby $0.3 million.

 

*Severance and Lease Termination Expenses*. Severance and lease termination expenses increased $1.4 million to $2.2million for the six months ended June 30, 2003, increasing to 4.5 percentof total revenue for the 2003 period. During the six months ended June 30, 2003, the Company’s workforcedecreased as a result of both involuntary reductions and voluntaryseparations.  The Company’s total numberof employees was 882 and 770 at December 31, 2002 and June 30, 2003,respectively, compared to 951 and 917 at December 31, 2001 andJune 30, 2002 respectively.

 

*Operating Loss*. As a result of the preceding activity, theCompany’s operating loss increased by $7.7 million, from an operating loss of$4.6 million for the six months ended June 30, 2002 to an operating lossof $12.3 million for the six months ended June 30, 2003.

 

*Privatization Transaction Expenses*. During the six months ended June 30, 2003, the Company incurredapproximately $1.3 million for legal, professional, and director fees relatingto the Company’s pending transaction in which it intends to become a privatelyheld company.

 

*Other Income (Expense)*. Other income increased $0.1 million from$0.1 million for the six months ended June 30, 2002 to $0.2 million forthe six months ended June 30, 2003. This resulted from additional interest income relating to federal incometax refunds offset by an increase in interest expense.

 

*Provision for (Benefit from) Income Taxes.* Income tax expense was $0.1 million for the six months endedJune 30, 2003 compared to a benefit of $3.3 million for the 2002period.  The 2003 expense

 

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consistsof certain state and foreign income taxes. The income tax benefit from net operating losses incurred during 2003has not been recorded due to uncertainties surrounding the ability to generatefuture taxable income.

 

*Cumulative Effect on Prior Years of Changing Methodof Accounting for Goodwill.*  As a result of theimplementation of SFAS No. 142 in 2002, the Company recognized an impairmentloss of $12.5 million on goodwill effective January 1, 2002.  There were no changes in accountingprinciple in the 2003 period.

 

*Net Loss.*  Net loss decreased $0.3million, from a net loss of $13.8 million for the six months endedJune 30, 2002 to a net loss of $13.5 million for the six months endedJune 30, 2003 as a result of the factors discussed above.

 

**Liquidity and Capital Resources**

 

TheCompany’s cash and investments were $20.7 million as of June 30, 2003, ofwhich  $12.9 million was restricted anddesignated as collateral for borrowed amounts. Cash and investments were $24.3 million as of December 31, 2002 ofwhich $13.0 million was restricted and designated as collateral for borrowedamounts.  The Company’s working capitalwas $23.9 million as of June 30, 2003, compared to $34.7 million as ofDecember 31, 2002.  Additionally,as of June 30, 2003, there was a $2.1 million tax receivable outstandingfrom the IRS and several local and foreign taxing authorities. The Company’soperating losses during the first two quarters of 2003 have negatively impactedits working capital. If revenues for the third and fourth quarters of the yearremain at current levels, the Company should have sufficient working capital tofund operations through December 31, 2003. The Company intends to renegotiatethe terms of its borrowing arrangements with its lenders to remove therestrictions on cash and investments; however, discussions are just beginningto take place. Since the renegotiation of the terms of these arrangements isnot certain, the Company may not have sufficient liquidity or working capitalto finance operations beyond 2003.

 

Forthe first six months of 2003, the Company’s operating activities used cash ofapproximately $4.4 million that included the receipt of approximately $5.7million in federal income tax refunds. During the first six months of 2002, operating activities provided cashof $0.6 million.  The change in cashused for operating activities was primarily due to the higher level ofoperating losses before non-cash charges incurred during 2003, offset primarilyby the income tax refund received in 2003. Non-cash items consisted primarily of depreciation and amortization forthe six months ended June 30, 2003 and 2002, and a goodwill impairmentcharge during 2002.

 

Investingactivities provided cash of approximately $1.7 million for the six months endedJune 30, 2003, compared to a use of cash of $2.7 million for the sixmonths ended June 30, 2002. Cash provided by investing activities for 2003consisted primarily of net sales of investments, partially offset by purchasesof fixed assets and other long-term assets. For the 2002 period, investing activities consisted of purchases offixed assets and payments for software development, as well as the purchase ofinvestments used for collateral for on loans obtained to fund a portion of theCompany’s leased ATL facility.  This useof cash in 2002 was nearly offset by the sale of investments.

 

Financingactivities provided cash of approximately $1.2 million for the six months endedJune 30, 2003, compared to providing $1.5 million for the six months endedJune 30, 2002.  For the currentperiod, net cash provided by financing activities consisted primarily of drawsand repayments under credit lines and principal payments on long-termdebt.  Net cash provided for the 2002period consisted of borrowings of long-term debt and draws and repayments onthe Company’s lines of credit.

 

TheCompany has a revolving line of credit agreement with a commercial bankintended for working capital purposes. The credit line, which expires on May 31, 2004, is for $10.0 millionwith a sub-limit of up to $3.0 million for standby letters of credit, and issecured by $10.0 million in restricted cash and investments referred topreviously.  Interest is payable monthlyin arrears at a rate equivalent to the bank’s 30-day LIBOR rate (1.12 percenton June 30, 2003) plus 90 basis points. The outstanding balance on this credit line was $3.1 million as ofDecember 31, 2002 and $4.4 million as of June 30, 2003.  The highest borrowing level was $6.5 millionduring the six months ended June 30, 2003 and $1.9 million during the 2002period.

 

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TheCompany’s majority-owned subsidiary, SAP Learning Solutions Pte Ltd (“SAPLS”),a joint venture with SAP Asia, has a 5.0 million Singapore dollar (“SGD”)(approx. $2.9 million) revolving credit facility with a major bank intended forworking capital purposes.  The loan issecured by a SGD3.0 million (approx. $1.7 million) standby letter of creditprovided by the Company and a SGD2.0 million (approx. $1.2 million) corporateguarantee by the Company’s joint venture partner.  Interest is payable monthly in arrears at a rate equivalent tothe bank’s prime rate (5.5 percent on June 30, 2003).  As of December 31, 2002 andJune 30, 2003, there was $1.6 million and $1.7 million, respectively,outstanding under this line of credit. Negotiations are currently in progress whereby the joint venture will bedissolved.  It is anticipated that RWDwill take direct responsibility for the venture’s Australian and Japaneseoperations, and expects to enter into software reseller arrangements for theremaining Asian Territories.  Proceedsreceived from the buyer are expected to be sufficient to repay the majority ofthe outstanding credit line balance.

 

Duringthe six months ended June 30, 2003, the Company made $0.5 million incapital expenditures, compared to $1.6 million in capital expenditures for the2002 period.  Capital expenditures inthe current period consisted primarily of upgrades of computer equipment forcorporate support and operations.  Thesecapital expenditures were primarily funded from borrowings from a commercialbank and available cash.  During theremainder of 2003, the Company anticipates the level of capital and productdevelopment expenditures will decrease significantly from 2002 levels.  The Company expects to fund thoseexpenditures from a combination of available cash and alternative financingmethods, such as equipment leases or asset-based borrowings.

 

TheCompany is beginning negotiations with its lending institutions in order toremove the restrictions on its cash and investments so that the Company canutilize those funds to finance operations and the pending acquisition of itscommon stock.  In the event that thesenegotiations are not completed or alternative bank financing is not in place,Dr. Deutsch, Chairman of the Company, intends to draw on a personal line ofcredit that he is in the process of establishing, which will be sufficient torepay all outstanding amounts owed under the Company’s existing bankloans.  These funds would be loaned to theCompany and secured by corporate assets. The Company would then repay outstanding amounts under the existingloans, thereby lifting the restrictions.

 

**Contractual Cash Obligations and Other Commercial Commitments**

 

Thefollowing tables summarize the Company’s contractual cash obligations and othercommercial commitments as of June 30, 2003:

 
| **Contractual Cash Obligations**   |   | **Total** |       | **Due in less  than 1 year** |       | **Due in  1-3 years** |       | **Due in  4-5 years** |       | **Due after  5 years** |       |
|------------------------------------|--------|-----------|------------|------------------------------|------------|-----------------------|------------|-----------------------|------------|------------------------|------------|
| **(dollars in thousands)**         |   |      | ** ** |                         | ** ** |                  | ** ** |                  | ** ** |                   | ** ** |
| Long-term debt (1)                 |   | $         | 2,976      |                         | $          | 576                   |       | $                     | 1,855      |                   | $          | 259 |   | $ | 286 |   |
| Capital lease obligations          |   | 105       |       | 24                           |       | 72                    |       | 9                     |       | —                 |       |
| Operating leases                   |   | 15,442    |       | 4,122                        |       | 5,803                 |       | 2,505                 |       | 3,012                  |       |
|                               |   |      |       |                         |       |                  |       |                  |       |                   |       |
| Total contractual cash obligations |   | $         | 18,523     |                         | $          | 4,722                 |       | $                     | 7,730      |                   | $          | 2,773 |   | $ | 3,298 |   |

 

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| **Other Commercial Commitments** |   | **Total** |       | **Due in less  than 1 year** |       | **Due in  1-3 years** |       | **Due in  4-5 years** |       | **Due after  5 years** |       |
|----------------------------------|--------|-----------|------------|------------------------------|------------|-----------------------|------------|-----------------------|------------|------------------------|------------|
| **(dollars in thousands)**       |   |      | ** ** |                         | ** ** |                  | ** ** |                  | ** ** |                   | ** ** |
| Lines of credit (1)(2)(5)        |   | $         | 6,040      |                         | $          | 6,040                 |       | $                     | —     |                   | $          | — |   | $ | — |   |
| Standby letters of credit (3)(4) |   | 2,789     |       | 2,789                        |       | —                |       | —                |       | —                 |       |
|                             |   |      |       |                         |       |                  |       |                  |       |                   |       |
| Total commercial commitments     |   | $         | 8,829      |                         | $          | 8,829                 |       | $                     | —     |                   | $          | — |   | $ | — |   |

 

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(1) Approximately $12.9 million of the Company’s cash and investmentswere pledged as collateral for outstanding debts.

 

(2) The Company’s majority-owned subsidiary, SAPLS, has a SGD5.0million (approx. $2.9 million) revolving credit facility with a major bankintended for general working capital requirements. As of June 30, 2003,approximately $1.7 million was outstanding under this line of credit.

 

(3) The SAPLS revolving credit facility is secured by a SGD3.0 million(approx. $1.7 million) standby letter of credit provided by the Company and aSGD2.0 million (approx. $1.2 million) corporate guarantee by the Company’sjoint venture partner.

 

(4) The Company has approximately $1.1 million in standby letters ofcredit outstanding as security deposits for its leased ATL facility located onthe campus of the University of Maryland, Baltimore County.

 

(5) The Company has a secured revolving line of credit agreement with acommercial bank that is intended for working capital purposes. The secured lineis for $10.0 million with a sub-limit of up to $3.0 million for the issuance ofstandby letters of credit, and expires May 31, 2004.  The outstanding balance on this credit linewas $3.1 million and $4.4 million as of December 31, 2002 andJune 30, 2003, respectively.  Duringthe year ended December 31, 2002, the covenants associated withoutstanding debts were eliminated in exchange for fully securing the loancommitments.

 

**Effects of Inflation**

 

Inflationhas not had a significant effect on the Company’s business during the pastthree years. The Company cannot predict what effect, if any, inflation may haveon its future results of operations.

 

**Business Risks**

 

Thefollowing are some of the factors that may cause the Company’s future resultsof operations to differ materially from management’s expectations and historictrends.

 

•                  *General Economic Environment.* Over the past several years, demand for theCompany’s products and services, particularly those relating to the IT andautomotive industries, decreased as a result of the general slowdown in thebusiness environment. Sales cycles were lengthened, pricing pressures increased,and clients deferred and/or cancelled certain projects. Although the Companyhas strengthened its business alliances, expanded its product offerings, andstarted diversification efforts into other industries, the future demand forRWD’s products and services remains difficult to forecast.

 

•                  *Operating and Net Losses.*** **In the pasttwo years and continuing into the second quarter of 2003, the Company incurredoperating and net losses largely as the result of declines in revenue due to

 

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adecreased demand for RWD’s products and services in the current stagnanteconomic environment.  The Company maycontinue to incur operating and net losses in all or a portion of 2003.  The losses over the past two years havecaused the Company’s cash, working capital, total assets, and stockholders’equity to decline while its indebtedness has increased.  If the Company continues to incur lossesover a longer period of time, it may have insufficient liquidity and capitalresources to take advantage of opportunities that may arise or possibly tofinance its operations at current levels.

 

•                  *Strategic Alliances.* The Company’s relationships, formal andinformal, with its strategic allies, particularly SAP, Siebel, and Documentum,have been, or are anticipated to be, important sources of revenue. The Companyalso faces potential competition from software companies, including itsstrategic allies who, through their client services groups, may choose tocompete with the Company.  Many of thesealliances are terminable by either party with minimal notice. The terminationof, or any adverse change in any of these alliances, particularly SAP, couldadversely affect the Company’s ability to achieve its financial goals.

 

•                  *Customer and Industry Concentration.* The Company continues to derive asubstantial amount of its revenue from a limited number of key clients. For thesecond quarter of 2003, the Company’s top five and ten clients represented 48.1percent and 59.6 percent of total revenue, respectively, with clients in theautomotive, railroad, and computer software industries generating 31.3 percent,12.6 percent, and 10.1 percent, respectively. The Company’s top five and ten revenue clients for the quarter endedJune 30, 2003 represented 62.3 percent and 68.2 percent of net accountsreceivable outstanding, respectively. Most of the Company’s engagements have no minimum purchase requirementsand may be terminated by the client with little or no notice to the Company.Many of these clients, such as automotive, petroleum-chemical, pharmaceutical,and railroad operate in cyclical industries that are subject to economicfactors that affect the clients’ revenue and profitability.  Performance Solutions has successfullydiversified operations into other industries and expects to continuediversification efforts.  If any of theCompany’s other major clients discontinue doing business with the Company orsignificantly reduce the amount of products and services they purchase from theCompany, the Company’s ability to achieve its financial goals are likely to beadversely affected.

 

•                  *Software Product Development.* The Company has invested in research andsoftware product development and believes that timely development of newsoftware products and enhancements to existing software products are necessaryto expand its competitive position in the marketplace. The Company anticipatescontinuing to invest in expanded functionality for some of its productofferings, including global product requirements and industry specificrequirements. There can be no assurance that such development efforts willresult in products, features, or functionality, or that the products, features,or functionality that are developed will be accepted by the market.

 

•                  *Geographic Expansion.* The Company continues to expand itsoperations and marketing efforts in Europe, Canada, and Asia, includingestablishing offices and expatriating employees, thereby incurring significantoperating costs.  If these efforts failto produce revenue at expected levels or within the timeframe predicted bymanagement, operating margins will be adversely affected. Internationaloperations present a number of risks, such as adverse currency exchange ratefluctuations, trade barriers, cultural differences, and possible changes intaxes, laws, and policies governing the operations of foreign-based companies.The Company has no control over these factors, any of which could adverselyaffect the Company’s results of operations and demand for its services abroad.

 

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•                  *Rapidly Changing Information Technology Sector.* The IT industry is subject to significantand rapid changes in technology and the demand for particular products andservices. If the Company fails to identify shifting demand for particular ITservices or products or does not develop the expertise necessary to provideservices for which there is new demand, the Company’s revenue growth andprofitability are likely to be adversely affected.

 

•                  *Competition.* The Company has experienced substantial competition, particularly inthe enterprise resource planning (“ERP”), eSolutions, and eLearning areas ofits business.  Recent general economicconditions have created significant competitor-driven pricing pressures andother industry-related pressures.  Ifcompetition continues to intensify, the Company may find it increasinglydifficult to resume revenue growth at rates comparable to its historic growthrates and to improve its profit margins once general economic conditionsimprove.

 

**Item 3.  Quantitative and QualitativeDisclosures About Market Risk**

 

TheCompany does not have significant interest rate risk related to its line ofcredit, which has an interest rate equivalent to the 30-day LIBOR rate (1.12%on June 30, 2003), plus 90 basis points. The Company does not have significant foreign currency risk related toforeign sales because of the amount of funds maintained in foreign payroll andoperating accounts.  The Company doesnot have any derivative commodity instruments or other financial instrumentssuch as interest swaps, foreign currency forwards, futures and options, orforeign currency denominated debt, except for credit line debt of itsmajority-owned subsidiary, SAPLS, which is denominated in Singaporedollars.  The Company does not havecommodity price risk or other relevant market risks.

 

**Item 4.  Controls and Procedures**

 

As of the end of the period covered by this report, management,including the Company’s Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of the design and operation of the Company’sdisclosure controls and procedures. Based upon, and as of the date of thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat the disclosure controls and procedures were effective, in all materialrespects, to ensure that information required to be disclosed in the reportsthe Company files and submits under the rules of the Securities and ExchangeAct of 1934, as amended, is recorded, processed, summarized, and reported asand when required.

 

No change in the Company’s internal controls over financial reportingoccurred during its second quarter of 2003 that has materially affected, or isreasonably likely to materially affect, the Company’s internal controls overfinancial reporting.

 

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**PART II - OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

Fromtime of time, the Company is party to routine litigation in the ordinary courseof business.  The Company is notcurrently party to any material litigation.

 

**Item 4.  Submission of Matters to a Vote ofSecurity Holders**

 

Nomatters were submitted to a vote of security holders during the second quarterof 2003.

 

**Item 6.  Exhibits and Reports on Form 8-K.**

 

(a)                                  Exhibits

 
| **Exhibit  No.** |   | **Description**                                                                                                                                                                           |
|------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.01            |   | Certification  of the Chief Executive Officer, Robert W. Deutsch, Ph.D., of RWD  Technologies, Inc. pursuant to Rule 13a-14(a)/15d-14(a) (Section 302 of the  Sarbanes-Oxley Act of 2002) |
|             |   |                                                                                                                                                                                      |
| 31.02            |   | Certification  of the Chief Financial Officer, Beth Marie Buck, CPA, of RWD Technologies,  Inc. pursuant to Rule 13a-14(a)/15d-14(a) (Section 302 of the Sarbanes-Oxley  Act of 2002)     |
|             |   |                                                                                                                                                                                      |
| 32.01            |   | Certification  of the Chief Executive Officer, Robert W. Deutsch, Ph.D., of RWD  Technologies, Inc. pursuant to 18 U.S.C. Section 1350 (Section 906 of the  Sarbanes-Oxley Act of 2002)   |
|             |   |                                                                                                                                                                                      |
| 32.02            |   | Certification  of the Chief Financial Officer, Beth Marie Buck, CPA, of RWD Technologies,  Inc. pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley  Act of 2002)       |

 

(b)                     Current Reports on Form 8-K

 

OnJuly 11, 2003, the Company filed a Current Report on Form 8-K (Item 5)disclosing the appointment of Mr. Michael Bray as president of the Company’sEnterprise Systems group operating segment and the resignation of Mr. DanaSohr.

 

OnAugust 6, 2003, the Company filed a Current Report on Form 8-K (Items 9and 12) which included Regulation FD disclosure in connection with theCompany’s announcement of financial results for the three months endedJune 30, 2003.

 

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**SIGNATURES**

 

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this Report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                         | **RWD TECHNOLOGIES, INC.** |
|------------------------------|----------------------------|
|                         |                       |   |
|                         | By:                        | /s/  Robert W. Deutsch |   |
|                         |                       | Robert  W. Deutsch, Ph.D. |   |
|                         |                       | Chairman  of the Board, Chief Executive  Officer, President, and Director (Principal  Executive Officer) |
|                         |                       |   |   |
|                         | By:                        | /s/  Beth Marie Buck |   |
|                         |                       | Beth  Marie Buck, CPA |
|                         |                       | Vice  President and Chief Financial Officer  (Principal Financial and Accounting  Officer) |
|                         |                       |   |
| Dated:  August 12, 2003 |                       |   |

 

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