**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C.20549**

** **

**Form 10-K**

 

| **ý**                                                                                                              |   | **ANNUAL REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|-------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
|                                                                                                                    |
| **For the fiscal year ended December 31, 2002**                                                                         |
|                                                                                                                    |   |                                                                                          |
| **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 incharter)

** **

| **Maryland**                                                                                        |   | **52-1552720**                     |
|-----------------------------------------------------------------------------------------------------|--------|------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                                     |   | (IRS employer  identification No.) |
|                                                                                                |   |                               |
| **5521 Research Park Drive, Baltimore,  Maryland**                                                  |   | **21228**                          |
| (formerly 10480 Little Patuxent Parkway, Columbia, Maryland)(Address of principal executive office) |   | (formerly 21044)(Zip Code)         |
|                                                                                                |   |                               |
| Registrant’s telephone number, including area code:  **(410)  869-1000**                  |
|                                                                                                |
| Securities Registered Pursuant to Section 12(b) of the Act:                                         |
| **None**                                                                                            |

 

Securities Registered Pursuant to Section 12(g) of the Act:

 
|   | **Title of  Class:**                        |   |
|--------|---------------------------------------------|--------|
|   |                                        |   |
|   | **Common Stock, par value $0.10 per share** |   |

 

Indicate bycheck 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  Noo

 

Indicate bycheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof Registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K o.

 

Indicate by acheck mark whether the registrant is an accelerated filer (as defined inExchange Act Rule 12b-2). Yes oNo ý

 

As of June 28,2002, the last business day of the registrant’s most recently completed secondfiscal quarter, the approximate aggregate market value of the voting stock heldby non-affiliates was $11,797,975 (based upon the closing price for shares ofthe registrant’s common stock as reported by The National Market System of theNational Association of Securities Dealers Automated Quotation System as ofthat date.)  Shares of common stockbeneficially held by each executive officer and director and by each person whobeneficially owns 5% or more of the outstanding common stock have been excludedsince such persons may be deemed affiliates. This determination of affiliatestatus is not necessarily a conclusive determination for other purposes.

 

As of March 3,2003, 15,397,588 shares of Common stock were outstanding.

 

**DOCUMENTSINCORPORATED BY REFERENCE - None**

 

 

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**RWD TECHNOLOGIES,INC.**

**FORM 10-K**

**TABLE OF CONTENTS**

 

 
| PART I         |
|----------------|
|           |   |
| ITEM  1.       | *BUSINESS* |
|           |   |
| ITEM 2.        | *PROPERTIES* |
|           |   |
| ITEM 3.        | *LEGAL PROCEEDINGS* |
|           |   |
| ITEM 4.        | *SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS* |
|           |   |
| PART  II       |
|           |   |
| ITEM 5.        | *MARKET FOR THE COMPANY’S COMMON EQUITY AND  RELATED STOCKHOLDER MATTERS* |
|           |   |
| ITEM 6.        | *SELECTED CONSOLIDATED FINANCIAL DATA* |
|           |   |
| ITEM 7.        | *MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS* |
|           |   |
| ITEM 7A.       | *QUANTITATIVE AND QUALITATIVE DISCLOSURE  ABOUT MARKET  RISK* |
|           |   |
| ITEM 8.        | *FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA* |
|           |   |
| ITEM 9.        | *CHANGES IN AND DISAGREEMENTS WITH  ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE* |
|           |   |
| PART  III      |
|           |   |
| ITEM 10.       | *DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT* |
|           |   |
| ITEM 11.       | *EXECUTIVE COMPENSATION* |
|           |   |
| ITEM 12.       | *SECURITY OWNERSHIP OF CERTAIN BENEFICIAL  OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS* |
|           |   |
| ITEM 13.       | *CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS* |
|           |   |
| ITEM 14.       | *CONTROLS AND PROCEDURES* |
|           |   |
| ITEM 16.       | *PRINCIPAL ACCOUNTANT FEES AND SERVICES* |
|           |   |
| PART  IV       |
|           |   |
| ITEM 15.       | *EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K* |
|           |   |
| SIGNATURES     |
|           |
| CERTIFICATIONS |

 

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**PART I**

 

**Item 1. Business**

** **

**Overview**

** **

RWDTechnologies, Inc., (“RWD” or the “Company”) provides a broad range ofintegrated products and solutions designed to improve the productivity andeffectiveness of workers in complex operating environments. As the scope andcomplexity of technology used by businesses increases and the global businessenvironment becomes more competitive, companies are increasingly focused onmaximizing the return on their advanced technology and eCommerce investments.To achieve this goal, companies must ensure their employees receive effectivesupport, including information systems, performance support tools,manufacturing processes, documentation systems and training, to operate theseadvanced systems effectively.

 

Since theCompany’s founding in 1988, it has expanded its services to meet the needs ofits clients and to address market demands. As the business evolves, strategicinitiatives focus on aligning the organization to best serve the customers,emphasizing learning products, expanding strategic partnerships, and pursuingadditional international business. One of the Company’s strategic initiativesin 2000 was a major reorganization into three operating segments:  *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* (formerly Latitude360), which focuses on the design anddelivery of end-user technology solutions as well as Web-based training. Eachsegment leverages the technological capabilities of the other segments andpursues an integrated marketing approach to offer a broad array of solutions toits clients.  RWD’s wide range ofservice offerings include:

 

•                  Blended learning solutions for classroom,Web-based and offline systems

•                  Content management services

•                  Customer Relationship Management (“CRM”) systems

•                  Data warehouse services

•                  eBusiness strategy and transformation

•                  eLearning

•                  End-user learning solutions

•                  Enterprise Resource Planning (“ERP”) services

•                  ERP optimization and post go-live services

•                  Integrated Medical Communication Systems

•                  Lean consulting business transformation

•                  Lean production system implementation

•                  Learning services provided via onlineuniversities

•                  Offline learning and wireless solutions

•                  Organizational change management services

•                  Outsourcing of training and human performanceprograms

•                  Plant and manufacturing line start-up and troubleshootingservices

•                  Product launch support

•                  Project management consulting

•                  Quality engineering

•                  Sales Force Automation (“SFA”) systems

•                  Software development

•                  Systems integration

•                  Web-based solutions for workplace performancesupport

•                  Web-based testing and assessment

•                  Website and portal development

 

The Company’sproducts and services are designed to improve clients’ product quality, workerproductivity, and competitiveness and to ensure clients receive an attractivereturn on their technology investments. RWD’s services integrate comprehensiveexpertise in information technology, ERP software implementation services,performance support, and lean manufacturing consulting in a coordinated manner,with services customized to the individual needs of each client. During 2002,the Company continued its programs for developing products to supportconsulting services and client training

 

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initiatives. The Companybelieves its focus on end-user performance, embedded in all its serviceofferings, differentiates the Company from most of its competitors in theeCommerce planning, performance support, and information technology (“IT”)services marketplaces. The Company’s registered service mark, “We bring peopleand technology together,”® succinctly describes the Company’s unique focus.

 

RWD wasfounded with the objective of applying proven performance support methodologiesto large U.S. industrial companies. RWD’s founder believed that U.S. industrialcompanies were making substantial investments in automation and other advancedoperating technologies but achieving relatively low returns on thoseinvestments. These low returns appeared to result from inadequate training andlack of performance support systems for their end-users. The Company’s firstmajor client was DaimlerChrysler, a company that it continues to serve today.

 

The Company’sclient list represents over 20 industries, including automotive,transportation, food and beverage, petroleum-chemical, financial and banking,telecommunications, consumer products, equipment manufacturing, andpharmaceutical. The Company targets industries where its expertise andexperience can match the unique needs of participants in those industries.

 

# **RWD Products and Services**

 

The Company offers its products and services through three businesssegments: *Enterprise Systems, PerformanceSolutions, and Applied Technology Solutions.* These segments produced45.5, 38.8, and 15.7 percent, respectively, of the Company’s total 2002revenue.  The Company believes itsability to deliver integrated solutions that leverage the full breadth of itsexpertise, in such areas as information technology, end-user support,performance analysis, and documentation, is a significant differentiator andcompetitive advantage.

* *

*Enterprise Systems*. Enterprise Systems’ products and servicesgenerated $46.8 million (or 35.0 percent), $48.0 million (or 40.6 percent), and$53.5 million (or 45.5 percent) of RWD’s total revenue in 2000, 2001, and 2002,respectively. Capitalizing on its end-user focus and performance supportexpertise, RWD has developed a growing service area supporting theimplementation of enterprise-wide software applications, principally softwarefrom SAP, the world’s top selling ERP software, but also PeopleSoft, Oracle,and other custom ERP applications.  TheCompany’s alliance agreement with SAP generated approximately $31.5 million ofrevenue, representing 59.0 percent of revenue for the Enterprise Systemssegment during 2002.

 

RWD providesits services through a wide array of tools and accelerators, both thosesupplied by the applications providers and those developed by the Company.Enterprise Systems has developed and enhanced several versions of its RWD InfoPak® suite of products to extend them beyond English and the major Europeanlanguages to include Japanese, Korean, and Chinese, as well as beyond SAP towork with other enterprise software applications, such as PeopleSoft andOracle. The use of these accelerators and tools substantially enhances theefficiency and effectiveness of the development and deployment of RWD’send-user performance support solutions. The Company uses its unique end-userapproach to support ERP software implementation efforts by Fortune 1000 andmiddle market companies. This approach is designed to ensure that systemend-users have the knowledge, skills, and tools necessary to operateeffectively during and after ERP software implementations.

 

In addition toits end-user performance support solutions, RWD offers a range of consultingservices designed to optimize performance of end-users of enterpriseapplications. These post-implementation optimization services provide clientswith a rapid assessment of performance improvement opportunities in their organizations,user populations, technology applications, and business processes. TheCompany’s services to clients implementing enterprise systems include:

 

•                  *End-user support services*, including context-sensitive online helpsystems, learning management, electronic document management, electronicperformance support systems, eLearning, knowledge management, end-user trainingand support strategies, SAP R/3 Knowledge Warehouse implementations, PeopleSoftEnd-user Training Product implementations, training delivery and evaluation, and Web-based support strategies.

 

•                  *Consulting*services, such as organizational change management, postimplementation optimization and support, business process analysis and mapping,information planning, organization performance assessments, and strategicplanning.

 

•                  *Product*offerings include: RWD Info Pak®, an integratedsuite of software that accelerates development, organization, and distributionof documentation, training materials, and online help to maximize theeffectiveness of learning materials; RWD Performance Pak®, a comprehensive,custom library of business process-related training content for ERP applications; and RWD eLearning Content Titles, a Web-basedtraining library of instructor-less distance learning materials covering selectedERP business processes such as SAPTM 4.6 Navigation and Employee Self Service.

 

In 2002, Enterprise Systems expanded its relationship with SAPworldwide by extending its alliances with SAP America, SAP Canada, SAP Brazil,SAP United Kingdom, and SAP Greece to include SAP BENELUX (Belgium,Netherlands, and Luxembourg), SAP Nordic (Denmark, Sweden, Norway, and Finland)and SAP Mexico. To support this, Enterprise Systems

 

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hasestablished operations in Belgium and begun hiring additional personnel inEurope. Additionally, SAP Learning Solutions (“SAPLS”), a joint venture betweenRWD and SAP Asia that was formed in February 2001, completed its first fullyear of supporting clients in Australia, India, Malaysia, Japan, and Singaporein 2002.

 

*PerformanceSolutions*.Performance Solutions’ services generated $48.6 million (or 36.4 percent),$40.2 million (or 34.1 percent), and $45.6 million (or 38.8 percent) of RWD’stotal revenue in 2000, 2001, and 2002, respectively. Performance Solutions is aworldwide full service provider of manufacturing expertise in leading-edgetechnologies and processes. The activities of this segment are arranged intotwo major categories: Global Lean Solutions and Human Performance Solutions.

 

'The GlobalLean Solutions area specializes in providing lean manufacturing services to itsclients. These services are based upon an integrated operating system that hasbeen developed and refined by the Japanese over many years to address all aspectsof manufacturing operations. Lean manufacturing results in higher qualityproducts, lower cost, and more timely delivery. The system is comprised of anumber of elements that eliminate waste, support the individual operator, andpromote continuous improvement.

 

The majorcomponents of lean manufacturing include high machine reliability, levelproduction, just-in-time material control, “stop-the-line” operatingprocedures, and the human systems that support this manufacturing philosophy.This system combines many elements, many of which are specific,simple-to-understand tools such as error-proofing, standardized workprocedures, and workstation organization techniques. Implementation of theentire process is a complex and lengthy undertaking because all elements mustbe implemented together over time to achieve the full benefits of thisapproach. RWD provides lean manufacturing implementation guidance through ateam of experts who have substantial experience using and deploying thissystems approach to manufacturing.

 

The HumanPerformance Solutions area provides high quality improvement solutions, rangingfrom training to technology-based solutions. Services encompass technicalconsulting, business and work process optimization and integration, new productlaunch support services, plus a range of corporate education design,development, and delivery solutions. Human Performance Solutions’ servicesinclude Technical Operation Performance Support (“TOPS”), a unique approach formaximizing the troubleshooting skills of personnel who operate process plants,such as petroleum refineries and chemical plants.

 

As an exampleof RWD’s work during 2002, Performance Solutions assisted a major railcarmanufacturer in optimizing reliability of its trains by utilizing managementcommunication centers and lean manufacturing solutions.  RWD was able to improve the fleet’s meandistance between failures by 500 percent, while the client simultaneouslyincreased its fleet size from 415 to 680 rail cars in service.

 

*Applied TechnologySolutions*. AppliedTechnology Solutions’ products and services generated $38.3 million (or 28.6percent), $29.8 million (or 25.3 percent), and $18.4 million (or 15.7 percent)of RWD’s total revenue for 2000, 2001, and 2002, respectively. The focus ofthis segment is bringing Internet technologies to businesses and maximizingemployee performance. Services include eLearning and eBusiness solutions, suchas University360TM (a suite of corporate university products),eLearning strategy, courseware development, technology consulting, and systemsdevelopment and integration. Client requirements can be customized to includeonly the components critical to the client’s education and training processes.

 

During 2002, Applied Technology Solutions worked with pharmaceuticalcompanies in an effort to streamline operations and find efficiencies while atthe same time ensuring compliance with regulatory and reporting requirements ofthe pharmaceutical industry.  Throughoutthis process, management focused on packaged service offerings, which offeredtechnology solutions for clients.  RWDwas able to find synergies within the segment and throughout the whole companyto offer clients technology solutions within the pharmaceutical industry.

 

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**Clients**

** **

The Company provided services to clients in the following industriesduring 2002:

 

**Industries**

** **

Aerospace

Automotive Parts Manufacturing

Automotive Manufacturing

Chemical

Computer Hardware and Software

Consumer Products

Education

Electronics

Entertainment and Media

Financial Services

Food and Beverage

Government

Healthcare Delivery

Industrial and Farm Equipment

Other Manufacturing

Petroleum

Pharmaceuticals

Railroad

Telecommunications

Utilities

Wholesale/Retail

 

The following is a list of representative clients served by the Companyduring 2002. These clients generated, in the aggregate, more than 83 percent ofthe Company’s 2002 revenue.

 

**Clients**

 

AgilentTechnologies

Air Products and Chemicals

AMD

American Institute of Certified Public Accountants (AICPA)

Arbitron

Aventis Pharmaceuticals

BASF

BearingPoint (formerly known as KPMGConsulting)

Bombardier Transportation

Bristol-Myers Squibb

Cap Gemini, Ernst & Young

Chevron

Cisco

Clorox

Conagra Foods

DaimlerChrysler

Deere & Co

Delta Air Lines

Dow Chemical

DuPont

Expanets

ExxonMobil

Ford Motor Company

FPL Group (Florida Power & Light)

Gates

GlaxoSmithKline

GrayBar Electric Company

Hampsons Aerospace Machining

Harvard University

Hydro Automotive Structures

Immunex Corporation

Jaguar Cars Limited

Kindred Healthcare

Kraft Foods

Land Rover

Merck & Co.

North Carolina Department of Transportation

Panasonic Consumer Products

Pharmacia

Philip Morris USA

Philips Petroleum Company

Publix Super Markets

SAP America

SAP UK

Sauer-Danfoss

Schering Plough Research Inst.

SimplexGrinnell

TotalFinaElf

W.W. Grainger

 

In 2002, RWDprovided products and services to over 330 companies in more than 20industries. In 2002, product sales accounted for 10.9 percent of totalrevenues.  DaimlerChrysler, theCompany’s largest client, generated 18.6 percent, 17.7 percent, and 19.0percent of total revenue in 2000, 2001, and 2002, respectively. Ford MotorCompany generated 12.0 percent, 7.1 percent, and 2.6 percent of total revenuein 2000, 2001, and 2002, respectively. The Company’s top five clients in 2000, 2001, and 2002 generated anaggregate of 48.5 percent, 39.1 percent, and 39.3 percent, respectively, oftotal revenue in each of these periods. Automotive industry clients generatedan aggregate of 37.0 percent, 32.1 percent, and 24.4 percent of total revenuein 2000, 2001, and 2002, respectively. Petroleum-chemical clients generated anaggregate of 7.8 percent, 9.6 percent, and 15.2 percent of total revenue in2000, 2001, and 2002, respectively. Railroad industry clients generated anaggregate of 8.4 percent of total revenue in 2002.  Pharmaceutical industry clients generated an aggregate of 5.7percent, 7.3 percent, and 8.2 percent of total revenue in 2000, 2001, and 2002,respectively.  Food and beverage industryclients generated an aggregate of 8.3 percent, 7.7 percent, and 3.6 percent ofthe Company’s total revenue in 2000, 2001, and 2002, respectively.

 

The Company’salliance agreement with SAP generated approximately $31.5 million of revenue,or 26.8 percent of total revenues for 2002. The SAP alliance generates revenue related to the Company’s EnterpriseSystems segment.  The SAP alliancerevenue represents 59.0 percent of revenue for this segment.

 

The top fiveclients of Enterprise Systems generated 34.5 percent of 2002 annual segmentrevenue.  The top five clients ofPerformance Solutions generated 84.1 percent of 2002 annual segment revenue,with sales to one client representing 48.9 percent.  The top five clients of Applied Technology Solutions generated43.8 percent of 2002 annual segment revenue.

 

For EnterpriseSystems, petroleum and chemical industry clients were 28.5 percent of segmentrevenue in 2002.  For PerformanceSolutions, automotive industry and railroad industry clients were of 62.4 percentand 21.5 percent of segment

 

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revenue in 2002,respectively.  For Applied TechnologySolutions, pharmaceutical industry clients were 45.8 percent of segment revenuein 2002.

 

# **Sales and Marketing**

 

Historically,RWD’s business was principally developed by senior management and technicalpersonnel who manage client relationships and propose solutions for clients.The Company continues to expand its sales and marketing efforts to focus eachsegment on the activities that best suit its sales channels in order to extendthe reach of the Company’s products and services. In Performance Solutions,continued emphasis was placed on developing professional sales personnel andcreating marketing material to aid with diversification efforts.  Enterprise Systems focused on additionalpersonnel to strengthen the SAP alliance activities.  Applied Technology Solutions continued to leverage the expertiseof senior management and technical personnel to further develop clientrelationships and generate sales leads while also establishing a small team ofsales and marketing professionals and pursing sales alliances andpartnerships.  The Company also believesits industry-focused professionals, who work closely with clients to solvecomplex technical problems, are well suited to understand and communicate theCompany’s skills and services to existing and prospective clients. Thisapproach also contributes to the Company’s ability to establish and maintainlong-term client relationships. In addition to supporting existing clientrelationships, RWD’s senior management and sales personnel market the Company’sproducts and services at industry trade shows and deliver presentations andpapers at conferences. As a result, potential clients in new andcurrently-served industries have an opportunity to learn more about Companyproducts and services. The Company also actively seeks strategic relationshipswith leading software companies whose high-quality products and need for implementationexpertise present significant opportunities for the Company. Currently, RWD’smost significant business alliance is with SAP.

 

**GeographicExpansion**

 

The Companyregularly delivers its solutions outside the U.S. for its domesticmultinational clients. From 1996 through 2002, international revenue expandedfrom 1.7 percent to 18.7 percent of total revenue. During 1998, the Companybegan actively expanding its capabilities in continental Europe and the U.K.,primarily by marketing directly to European companies and opening offices inthe U.K. These efforts to accelerate business overseas entail significant costsin overhead and marketing, as well as high initial costs for expatriatedpersonnel to establish European operations. In 1997, the Company opened itsfirst office in Birmingham, England, primarily to support Ford Motor Company’sEuropean lean manufacturing initiatives. In 1998, RWD opened an office in theLondon area, primarily to support European-based ERP initiatives. In 1999, RWDopened an office in Walldorf, Germany, near SAP’s world headquarters. In 2000,the Company opened an office in Mexico to support SAP initiatives in the LatinAmerican region. After the initial evaluation period for the Mexican office,the Company determined that onsite support for this region was not required andcurrently supports this area from offices in the United States. In 2001, theCompany opened an office in Canada, primarily to support SAP clients withproducts and services.  As part of thealliance arrangement with SAP, the Company also does business in Brazil andGreece.  SAP Learning Solutions, a jointventure between RWD and SAP Asia based in Singapore, was formally establishedin 2001 with subsidiaries in Singapore and Australia.  During 2002, SAPLS opened offices in Malaysia and Japan andprovided services and products in various countries throughout Asia.  During 2002, the Company opened an office inBrussels, Belgium and continued to expand its European presence into Germany,Netherlands, and the Nordic countries. This expansion was driven primarily by the growth of partner channels,particularly SAP. The Company believes the long-term opportunities ininternational markets for its products and services are significant, and itexpects to extend its presence in selected areas of the world in the future.

 

During thefirst quarter of 2003, RWD management and SAP initiated discussions concerningthe future plans for the joint venture in Singapore, SAPLS.  These discussions are expected to result ina dissolution of the joint venture.  RWDwill take direct responsibility for the Australian and Japanese entities andwill have an alliance relationship with the remaining Asian initiatives.

 

# **Competition**

 

The Company’sservice areas are highly competitive and subject to both low barriers to entryand rapid change. The Company faces competition for client assignments from anumber of companies having significantly greater financial, technical, andmarketing resources and greater name recognition than RWD. Principal competitorsfor the Company’s products and services include businesses with consultingpractices formerly affiliated with the largest international accounting firmsand the professional services groups of many large technology and managementconsulting companies. The Company also competes with smaller regional or localservice providers whose specific, more narrowly focused service offerings maybe more attractive to potential clients. The Company also faces competition from software companies, includingits alliance partners’ client services groups. Clients also may elect to use their internal resources to satisfy theirneeds for the type of products and services the Company provides. The Companybelieves that the principal competitive factors in its industry are quality ofservice, breadth of service offerings, reputation of the service provider, andprice. The Company believes it competes effectively with respect to each ofthese factors.

 

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# **Company Organization and Methodologies**

 

*Project Management*. RWD’s Project Management process is critical tothe Company’s ability to satisfy its clients. The Company’s proprietary ProjectManagement process is used throughout all phases of an engagement and includescontrols and review processes designed to ensure each project is delivered in ahigh-quality, cost-effective, and timely manner. The project manager hasprimary responsibility for the success of the engagement, including managingproject costs and staff schedules, service quality, and the clientrelationship. The project director, a designated senior individual withextensive project management experience, supports the project manager in theseefforts. The Company certifies project managers only after they complete arigorous one-year training process that includes classroom and on-the-jobtraining and an oral examination before RWD’s senior management. The ProjectManagement process includes processes for identifying and assessing projectrisks, as well as mechanisms to help the project manager communicate projectchallenges to the project director and senior management before thosechallenges escalate. In addition, the process places significant emphasis onclient feedback through regular client alignment meetings. These meetingsensure agreement on project goals and expectations, leading ultimately toclient satisfaction. Once an engagement is completed, the Company assesses theextent to which the project team met client expectations and evaluates theeffectiveness of RWD’s Project Management process. The Company uses thisanalysis to support its continuous improvement process and market follow-onservices.

* *

*Technical andManagement Skills Training.*The Company’s employees have diverse educational and employment backgrounds,including engineering, advanced manufacturing, advanced Internet technologies,computer systems analysis and design, technical writing and editing, andgraphic arts. Many have advanced degrees in a wide range of technicaldisciplines, such as chemical, computer system, electrical, industrial,mechanical, nuclear, and software engineering; instructional system design; andorganizational development. This breadth of expertise enables the Company’sprofessionals to interact with and understand the performance challengesencountered by client personnel across a broad range of industries.

 

The Company believes its use of internally developed, standardizedtools and methodologies, and its strict adherence to its structured ProjectManagement process, enable the Company to deliver consistent, high-qualityservices. The Company places significant emphasis on training its employees tounderstand and apply the Company’s service methodologies and managementprocesses. The Company uses a combination of more than 200 hours of internallydeveloped courses, as well as externally provided courses, to provide this andother technical training. Employees are trained in the Company’s proprietaryservice methodologies. Employees also participate in internal and externaltraining in specific technologies, such as ERP software systems,object-oriented design, relational database design, software configurationmanagement, software programming languages (e.g., Visual C++, Visual Basic,Java and JavaScript), document management software, and the software systems ofits alliance organizations. Employees are encouraged and provided withfinancial support to enroll in advanced training and degree programs toincrease their technical and management capabilities.

* *

*Recruiting and EmployeeRetention*. RWDplaces significant emphasis on attracting, developing, and retaining a highlyskilled and motivated workforce. The Company recruits personnel through avariety of methods, including on-campus recruiting, Internet recruiting,postings at conferences, an employee referral program, and advertising innewspapers and technical publications. The Company actively recruitsentry-level personnel at selected college campuses and maintains a Websitetargeted in part to potential recruits. The Company has a policy of promotingfrom within whenever appropriate and also actively recruits employees within-depth expertise in technical areas in which the Company currently providesservices or expects to provide services in the future. From time to time, theCompany uses technical recruiters to fill specific staffing needs. The Companyengages a limited number of technical personnel on a consulting basis whenappropriate to support particular client needs.

 

The Company’s culture, its emphasis on training, and its compensationstructure, have been designed to attract, develop, and retain qualified andmotivated professionals. The Company considers its culture, morale, andemployee motivation to be excellent, and key components of its success to date.The Company’s culture is captured and communicated through its Mission, Values,and Guiding Principles. Senior management expends significant effort incommunicating these principles to new employees and incorporating these valuesinto the day-to-day operation of the Company. The Company believes this efforthas played a significant role in maintaining its culture and guiding theactions of its employees. The Company also strives to provide a challengingwork environment and a competitive employee reward system.

 

The Company'stotal number of employees at year-end was 951 for 2001 and 882 for 2002.  As a result of the downturn in the economiccycle for the information technology sector, the Company reduced its workforceby approximately 100 technical and support personnel during 2001 and 60 in2002.  During the first quarter of 2003,the Company's workforce declined by involuntary reductions in force andvoluntary separations.  As of the dateof the filing, the Company's headcount was approximately 825.

 

# **Intellectual Property and Other ProprietaryRights**

 

The Companyrelies on a combination of confidentiality and other contractual arrangements,trade secret, copyright, and trademark laws to protect its proprietary rights.As a standard practice, the Company enters into confidentiality agreements withits employees, alliance organizations, and clients, thereby seeking to limitdistribution of confidential and proprietary information. A significant numberof the Company’s employees are not bound by RWD’s confidentiality agreementsonce their employment has been terminated, although the Company believes commonlaw principles generally prohibit these employees

 

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from disclosing to thirdparties proprietary information of the Company. However, the Company cannot becertain that these steps will be adequate to deter misappropriation ofproprietary information or that the Company will be able to detect unauthorizeduse of, and take steps to enforce, its intellectual property rights.

 

Ownership ofsoftware developed and other materials prepared by RWD in connection with aclient engagement is usually assigned to the client. The Company retains theright to its general know-how and general applications, such as software diagnosticand development tools.

 

The Company’s most significant trade and service marks are:

 

“360SyncTM”

“CertificationNet®”

“Continuous Improvement by All Employees®,”with graphic

“LeanTrialsTM Consulting Services”

“RWD ConferenceNetTM”

“RWD eLearning®”

“RWD eTrialsTM”

“RWD Info Pak®”

“RWD InfoVision®”

“RWD iVisionTM”

“RWD LeanVision®”

“RWD PBA®”

“RWD PerformanceVision®”

“RWD ProAction Consulting Services®”

“RWD ProVision®”

“RWD Technologies, Inc.®”

“RWD Technologies®”

“RWD TOPSTM”

“RWD User Performance PakTM”

“RWD” logo ®

“RWD.com®”

“Training Support Performance ContinuousLearning for World Class Manufacturing®”, with graphic

“University360TM”

“We bring people and technology together®”

“We bring people and technology together®”with graphic

 

The Companyholds no patents. However, the Company has a patent application pending for its360Sync software product.  The Companymay seek to register copyrights or patents for its internally developedsoftware in the future.

 

# **Risk Management**

 

The Company issubject to potential claims by dissatisfied clients alleging that the Company’sservices did not achieve the results expected by those clients or that errorsor omissions by the Company’s employees contributed to disruptions in theclients’ operations. To mitigate this risk, prior to commencement of eachproject, RWD seeks to clearly articulate, both the scope of services to beprovided and the results to be achieved. The Company’s Project Managementmethodology is designed to minimize this risk by training all projectmanagement personnel on particular ways to avoid the common pitfalls that areevident in all projects. This methodology includes holding regular alignmentmeetings with each client while services are being provided so that anyproblems can be discovered and then corrected as early in the project aspossible. This procedure is intended to allow RWD to regularly ascertain andmeet client expectations during all phases of each project. Additionally, inmost cases, RWD’s standard contract terms limit the Company’s liability to theamount of the fee payable to RWD under the contract. Despite these procedures,it is possible that the Company may become subject to a claim from adissatisfied client, although the Company has never been subject to litigationinitiated by a client.

 

The Companycarries comprehensive general liability, property damage, director and officer,and other insurance in amounts it considers either sufficient or cost-effectiveto cover its insurable risks. In addition, the Company carries a limited amountof professional liability insurance against claims by clients related toservices provided by RWD. The Company is self-insured with respect to clientclaims in excess of the limits on its professional liability coverage.

 

# **Available Information**

 

The Companyfiles annual reports on Form 10-K, quarterly reports on Form 10-Q, and currentreports on Form 8-K electronically with the Securities and Exchange Commission(“SEC”) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of1934. The public may read or copy any materials filed with the SEC at the SEC’sPublic Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The publicmay obtain information on the operation of the Public Reference Room by callingthe SEC at 1-800-SEC-0330. The SEC maintains an Internet site that containsreports, proxy and information statements, and other information regardingissuers that file electronically with the SEC. The address of that site ishttp://www.sec.gov.

 

Free copies ofannual reports on Form 10-K, quarterly reports on Form 10-Q, and currentreports on Form 8-K and amendments to those reports are available on the day offiling with the SEC on the Company’s website on the World Wide

 

7

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Web at http://www.rwd.com, bycontacting Investor Relations at the Company’s corporate offices by calling(410) 719-1898, or by sending an e-mail message to investor.relations@rwd.com.

 

## **Item 2.**           Properties

 

RWD leasesapproximately 110,000 square feet of space in Columbia, Maryland. This leaseexpires on December 31, 2003.  Companymanagement is contemplating several alternatives upon expiration of the leaseterm including renegotiating a new lease for the current office space, movingremaining personnel to the Company’s leased office space at the AppliedTechnology Laboratory (“ATL”), or leasing office space at a new facility.  The Company leases additional officescovering an aggregate of approximately 157,000 square feet in Baltimore,Maryland; Waltham, Massachusetts; Cincinnati, Ohio; Chicago, Illinois; Troy,Michigan; Houston, Texas; Princeton, New Jersey; Sacramento, California; SanRamon, California; Merritt Island, Florida; Atlanta, Georgia; Richmond,Virginia; Walldorf, Germany; Birmingham, England; London, England; Brussels,Belgium; and Toronto, Ontario.  Fromtime to time, the Company uses office space provided at client sites tofacilitate performance of its services and to maximize client contact.

 

During thefourth quarter of 2001, the Applied Technology Solutions operating group movedinto a 63,000 square foot facility on the campus of the University of Maryland,Baltimore County (“UMBC”).  During thefourth quarter of 2002, corporate support personnel were relocated from thecorporate headquarters in Columbia, Maryland to this facility.  This facility also houses RWD’s ATL.  The facility is designed to accommodate upto 300 people, including RWD’s personnel, students from UMBC, and RWD’s clientpersonnel working to develop advanced Internet and information technologysolutions for RWD clients.  The lease forthe facility expires in November 2011.

 

In 2002,aggregate annual rent for the Company’s corporate headquarters and otheroffices was approximately $8.8 million, including approximately $1.9 millionfor vacant space and lease termination expenses.  The charges for vacant space represent the remaining rent expensefrom facilities where the Company has consolidated operations, thereforecreating vacant office space.  Thevacant space charge in 2002 was the total of rent expense from the date theCompany vacated the space until the end of the lease term, less estimatedsublease income amounts.   Vacant spacecharges were recognized for the Columbia, Maryland; San Ramon, California;Houston, Texas; Princeton, New Jersey; Portland, Oregon; and Troy, Michigan facilities.

 

RWD has subletto others approximately 40,000 square feet of office space in Columbia;Maryland; Cincinnati, Ohio; and San Ramon, California.  In 2002, sublease income was approximately$0.7 million.

 

## **Item 3.**           LegalProceedings

 

From time totime, the Company is a party to routine litigation in the ordinary course ofbusiness. The Company is not currently a party to any material litigation.

 

## **Item 4.**           Submission of Matters to a Vote of SecurityHolders

 

No matterswere submitted to a vote of security holders during the fourth quarter of 2002.

 

8

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**PART II.**

 

## **Item 5.**           Market for The Company’s Common Equity andRelated Stockholder Matters

 

The Company’scommon stock is listed on The NASDAQ Stock Market’s National Market under thesymbol “RWDT.” The following table sets forth, for each quarterly periodindicated, the high and low last sale price for the common stock as reported byThe NASDAQ Stock Market.

 

|        |   | **High** |   | **Low** |   |
|-------------|--------|----------|--------|---------|--------|
| **2001**    |   |     |   |    |   |
| 1st Quarter |   | $        | 5.06   |    | $      | 3.06 |   |
| 2nd Quarter |   | 4.80     |   | 2.61    |   |
| 3rd Quarter |   | 3.55     |   | 1.91    |   |
| 4th Quarter |   | 2.85     |   | 1.75    |   |
|        |   |     |   |    |   |
| **2002**    |   |     |   |    |   |
| 1st Quarter |   | 4.03     |   | 2.37    |   |
| 2nd Quarter |   | 4.00     |   | 2.20    |   |
| 3rd Quarter |   | 2.39     |   | 1.95    |   |
| 4th Quarter |   | 2.00     |   | 1.50    |   |
|             |        |          |        |         |        |  |  |

 

No dividendswere declared or paid on the Company’s common stock during the year endedDecember 31, 2002, and the Company does not anticipate paying dividends in theforeseeable future.

 

The number ofshareholders of record as of March 3, 2003 was 1,930.

 

## **Item 6.**           Selected Consolidated Financial Data

 

The followingselected consolidated financial data should be read in conjunction with“Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” the Company’s consolidated financial statements, and related notesthereto, and other financial information included elsewhere in this Form 10-K.These have been derived from the Company’s Financial Statements, which havebeen audited by Arthur Andersen LLP for the years ended December 31, 1998 and1999 and by Ernst & Young LLP for the years ended December 31, 2000, 2001,and 2002.  Certain reclassificationswere made to prior year amounts to conform to the current year presentation.

 

9

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|                                                                                         |   | **Year Ended  December 31,**               |    |
|----------------------------------------------------------------------------------------------|--------|--------------------------------------------|---------|
|                                                                                         |   | **1998**                                   |    | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
|                                                                                         |   |                                       |    |   |   | **(as restated,  see Note 2)** |   | **(as restated,  see Note 2)** |   |   |   |
|                                                                                         |   | **(In  thousands, except per share data)** |    |
| **Operating Statement Data:**                                                                |   |                                       |    |   |   |   |   |   |   |   |   |
| Revenue                                                                                      |   | $                                          | 114,719 |   | $ | 124,433 |   | $ | 133,706 |   | $ | 118,040 |   | $ | 117,485 |   |
| Cost of revenue                                                                              |   | 76,416                                     |    | 95,024 |   | 101,123 |   | 102,025 |   | 101,787 |   |
| Gross profit                                                                                 |   | 38,303                                     |    | 29,409 |   | 32,583 |   | 16,015 |   | 15,698 |   |
| Selling, general and administrative  expenses                                                |   | 18,821                                     |    | 22,749 |   | 26,182 |   | 28,512 |   | 26,277 |   |
| Severance and lease termination expenses                                                     |   | —                                     |    | — |   | 485 |   | 997 |   | 3,180 |   |
| Operating income (loss)                                                                      |   | 19,482                                     |    | 6,660 |   | 5,916 |   | (13,494 | ) | (13,759 | ) |
| Other income (expense), net                                                                  |   | 1,765                                      |    | 1,449 |   | 610 |   | 1,025 |   | (57 | ) |
| Income (loss) before income taxes and  cumulative effect of a change in accounting principle |   | 21,247                                     |    | 8,109 |   | 6,526 |   | (12,469 | ) | (13,816 | ) |
| Provision for (benefit from) income taxes                                                    |   | 8,131                                      |    | 3,041 |   | 2,323 |   | (3,140 | ) | (3,970 | ) |
| Income (loss) before cumulative effect of a  change in accounting principle                  |   | 13,116                                     |    | 5,068 |   | 4,203 |   | (9,329 | ) | (9,846 | ) |
| Cumulative effect on prior years of  changing method of accounting for goodwill              |   | —                                     |    | — |   | — |   | — |   | (12,529 | ) |
| Net income (loss)                                                                            |   | $                                          | 13,116  |   | $ | 5,068 |   | $ | 4,203 |   | $ | (9,329 | ) | $ | (22,375 | ) |
|                                                                                         |   |                                       |    |   |   |   |   |   |   |   |   |
| Basic earnings (loss) per share:                                                             |   |                                       |    |   |   |   |   |   |   |   |   |
| Income (loss) before cumulative effect of a  change in accounting principle                  |   | $                                          | 0.88    |   | $ | 0.34 |   | $ | 0.28 |   | $ | (0.61 | ) | $ | (0.64 | ) |
| Cumulative effect on prior years of  changing method of accounting for goodwill              |   | —                                     |    | — |   | — |   | — |   | (0.82 | ) |
| Net income (loss) per share                                                                  |   | $                                          | 0.88    |   | $ | 0.34 |   | $ | 0.28 |   | $ | (0.61 | ) | $ | (1.46 | ) |
| Diluted earnings (loss) per share:                                                           |   |                                       |    |   |   |   |   |   |   |   |   |
| Income (loss) before cumulative effect of a  change in accounting principle                  |   | $                                          | 0.82    |   | $ | 0.33 |   | $ | 0.27 |   | $ | (0.61 | ) | $ | (0.64 | ) |
| Cumulative effect on prior years of  changing method of accounting for goodwill              |   | —                                     |    | — |   | — |   | — |   | (0.82 | ) |
| Net income (loss) per share                                                                  |   | $                                          | 0.82    |   | $ | 0.33 |   | $ | 0.27 |   | $ | (0.61 | ) | $ | (1.46 | ) |
| Weighted average shares outstanding:                                                         |   |                                       |    |   |   |   |   |   |   |   |   |
| Basic calculation                                                                            |   | 14,895                                     |    | 14,769 |   | 14,943 |   | 15,252 |   | 15,373 |   |
| Diluted calculation                                                                          |   | 16,016                                     |    | 15,503 |   | 15,518 |   | 15,252 |   | 15,373 |   |
|                                                                                         |   |                                       |    |   |   |   |   |   |   |   |   |
| **Balance Sheet Data (end of year):**                                                        |   |                                       |    |   |   |   |   |   |   |   |   |
| Cash and investments (unrestricted)                                                          |   | $                                          | 51,224  |   | $ | 28,214 |   | $ | 27,340 |   | $ | 22,769 |   | $ | 11,312 |   |
| Cash and investments (restricted)                                                            |   | —                                     |    | — |   | — |   | — |   | 13,016 |   |
| Working capital                                                                              |   | 66,399                                     |    | 47,065 |   | 50,838 |   | 40,932 |   | 34,694 |   |
| Total assets                                                                                 |   | 90,394                                     |    | 87,261 |   | 98,041 |   | 90,073 |   | 73,205 |   |
| Total debt                                                                                   |   | 865                                        |    | 1,669 |   | 607 |   | 3,416 |   | 7,984 |   |
| Stockholders’ equity                                                                    |   | 73,961                                     |    | 73,341 |   | 79,516 |   | 69,647 |   | 48,028 |   |

 

10

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## **Item 7.**           Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

 

# **Restatement**

 

The Companyrestated its consolidated financial statements for the years ended December 31,2001 and 2000 to correct (i) foreign currency translation errors and (ii) toproperly classify cash flows related to capitalized software development costsand other long-term assets as investing activities in the consolidatedstatements of cash flows.  The annualimpact on the consolidated financial statements applies to prior periods asfollows:

 

*ConsolidatedStatements of Operations*

 

For fiscal2000, revenue, gross profit, and operating income decreased $0.6 million from$134.3 million to $133.7 million, $33.2 million to $32.6 million, and $6.5million to $5.9 million, respectively. The income tax provision decreased $0.2 million from $2.5 million to$2.3 million.  As a result, there was adecrease in net income of $0.4 million from $4.6 million to $4.2 million.  Basic earnings per share decreased from$0.31 to $0.28 and diluted earnings per share decreased from $0.30 to $0.27.

 

For fiscal2001, revenue and gross profit increased $0.6 million from $117.4 million to$118.0 million and $15.4 million to $16.0 million, respectively.  The operating loss decreased $0.6 millionfrom a loss of $14.1 million to a loss of $13.5 million.  The income tax benefit decreased $0.2million from $3.3 million to $3.1 million. As a result, there was a decrease in the net loss of $0.4 million from aloss of $9.7 million to a loss $9.3 million. Basic and diluted loss per share decreased from a loss of $0.64 to aloss of $0.61.

 

*Consolidated BalanceSheets*

 

For fiscal2000, deferred tax assets, total current assets, and total assets increased$0.2 million from $0.9 million to $1.1 million, $67.3 million to $67.5 million,and $97.8 million to $98.0 million, respectively.  Accumulated other comprehensive loss decreased $0.6 million from$0.6 million to $0.0 million.  Retainedearnings decreased $0.4 million from $29.3 million to $28.9 million.  Total stockholders’ equity and totalliabilities and stockholders’ equity increased $0.2 million from $79.3 millionto $79.5 million and $97.8 million to $98.0 million, respectively.

 

For fiscal2001, costs and estimated earnings in excess of billings on uncompletedcontracts decreased $0.8 million from $7.8 million to $7.0 million.  Billings in excess of costs and estimatedearnings on uncompleted contracts decreased $0.2 million from $2.8 million to$2.6 million.  Accumulated othercomprehensive loss increased $0.6 million from $0.1 million to $0.7 million.

 

*ConsolidatedStatements of Cash Flows*

 

For fiscal2000, net cash provided by operating activities increased from $6.5 million to$8.7 million.  Net cash used byinvesting activities increased from $9.0 million to $11.2 million.

 

For fiscal2001, net cash provided (used) by operating activities increased from a use ofcash of $3.0 million to a provision of cash of $2.1 million.  Net cash provided (used) by investingactivities decreased from a provision of cash of $1.1 million to a use of cashof $4.0 million.

 

11

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The effects of the restatementare as follows:

 
|                                                                         |   | **Year Ended December 31,** |    |
|------------------------------------------------------------------------------|--------|-----------------------------|---------|
|                                                                         |   | **2000**                    |    | **2001** |   |
|                                                                         |   | **Unadjusted**              |    | **As restated** |   | **Unadjusted** |   | **As restated** |   |
| **Operating Statement Data:**                                                |   |                        |    |   |   |   |   |   |   |
| Revenue                                                                      |   | $                           | 134,310 |   | $ | 133,706 |   | $ | 117,436 |   | $ | 118,040 |   |
| Cost of revenue                                                              |   | 101,123                     |    | 101,123 |   | 102,025 |   | 102,025 |   |
| Gross profit                                                                 |   | 33,187                      |    | 32,583 |   | 15,411 |   | 16,015 |   |
| Selling, general and administrative  expenses                                |   | 26,182                      |    | 26,182 |   | 28,512 |   | 28,512 |   |
| Severance and lease termination expenses                                     |   | 485                         |    | 485 |   | 997 |   | 997 |   |
| Operating income (loss)                                                      |   | 6,520                       |    | 5,916 |   | (14,098 | ) | (13,494 | ) |
| Other income (expense), net                                                  |   | 610                         |    | 610 |   | 1,025 |   | 1,025 |   |
| Income (loss) before income taxes                                            |   | 7,130                       |    | 6,526 |   | (13,073 | ) | (12,469 | ) |
| Provision for (benefit from) income taxes                                    |   | 2,538                       |    | 2,323 |   | (3,355 | ) | (3,140 | ) |
| Net income (loss)                                                            |   | $                           | 4,592   |   | $ | 4,203 |   | $ | (9,718 | ) | $ | (9,329 | ) |
|                                                                         |   |                        |    |   |   |   |   |   |   |
| Basic earnings (loss) per share                                              |   | $                           | 0.31    |   | $ | 0.28 |   | $ | (0.64 | ) | $ | (0.61 | ) |
| Diluted earnings (loss) per share                                            |   | $                           | 0.30    |   | $ | 0.27 |   | $ | (0.64 | ) | $ | (0.61 | ) |
|                                                                         |   |                        |    |   |   |   |   |   |   |
| Weighted average shares outstanding – basic                             |   | 14,943                      |    | 14,943 |   | 15,252 |   | 15,252 |   |
| Weighted average shares outstanding –  diluted                          |   | 15,518                      |    | 15,518 |   | 15,252 |   | 15,252 |   |
|                                                                         |   |                        |    |   |   |   |   |   |   |
| **Balance Sheet Data:**                                                      |   |                        |    |   |   |   |   |   |   |
| Costs and estimated earnings in excess of  billings on uncompleted contracts |   | $                           | 10,273  |   | $ | 10,273 |   | $ | 7,753 |   | $ | 7,021 |   |
| Deferred tax assets                                                          |   | 929                         |    | 1,144 |   | 2,635 |   | 2,635 |   |
| Total current assets                                                         |   | 67,251                      |    | 67,466 |   | 57,057 |   | 56,325 |   |
| Total assets                                                                 |   | 97,826                      |    | 98,041 |   | 90,804 |   | 90,073 |   |
| Billings in excess of costs and estimated  earnings on uncompleted contracts |   | 2,902                       |    | 2,902 |   | 2,787 |   | 2,616 |   |
| Total current liabilities                                                    |   | 16,628                      |    | 16,628 |   | 15,564 |   | 15,393 |   |
| Total liabilities                                                            |   | 18,525                      |    | 18,525 |   | 20,597 |   | 20,426 |   |
| Accumulated other comprehensive loss                                         |   | (606                        | )       | (2 | ) | (126 | ) | (686 | ) |
| Retained earnings                                                            |   | 29,298                      |    | 28,909 |   | 21,068 |   | 21,068 |   |
| Total stockholders’ equity                                              |   | 79,301                      |    | 79,516 |   | 70,207 |   | 69,647 |   |
| Total liabilities and stockholders’ equity                              |   | 97,826                      |    | 98,041 |   | 90,804 |   | 90,073 |   |
|                                                                         |   |                        |    |   |   |   |   |   |   |
| **Statement of Cash Flows Data:**                                            |   |                        |    |   |   |   |   |   |   |
| Net cash from operating activities                                           |   | $                           | 6,454   |   | $ | 8,715 |   | $ | (3,004 | ) | $ | 2,141 |   |
| Net cash from investing activities                                           |   | (8,992                      | )       | (11,253 | ) | 1,136 |   | (4,009 | ) |
| Net cash from financing activities                                           |   | 1,389                       |    | 1,389 |   | 2,807 |   | 2,807 |   |
|                                                                              |        |                             |         |  |  |  |  |  |  |  |  |  |  |  |  |

 

# **Overview**

 

RWDTechnologies provides a broad range of integrated solutions designed to improvethe productivity and effectiveness of workers in complex operatingenvironments. The Company’s principal service segments are: *Enterprise Systems*, which providesproducts and services supporting the implementation of enterprise-wide systemsand applications; *Performance Solutions*,which addresses all aspects of manufacturing processes in order to promotecontinuous improvements; and *AppliedTechnology Solutions*, which encompasses the design and delivery ofinformation to end-users of technology including Web-based training.

 

Most of theCompany’s consulting contracts are on a time-and-materials basis, although manyof these contracts contain initial “not-to-exceed” amounts and Companyperformance obligations. However, some of the Company’s significant contracts

 

12

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are on a fixed-price basis,particularly those related to Applied Technology Solutions. Generally, allservice revenue is recognized using the proportional performance method. Since2000, the Company has offered training-based software products. These softwareproducts are sold through arrangements that typically contain multipleelements; the product license, maintenance, and training services.  The fair value of the software is determinedby using the residual method.  Under theresidual method, the fair value of the maintenance and training elements arededucted from the value of the total arrangement fee to determine the impliedfair value of the software. The Company limits its assessment of fair value ofthe maintenance and training elements to the price charged when the same orsimilar element is sold separately. Software license fees are recognized as revenue when four criteria aremet.  These four criteria are (i) asigned contract has been obtained, (ii) delivery of the software has occurred,(iii) the fee is fixed or determinable, and (iv) collection of the fee isprobable.  Revenue from hosting andmaintenance arrangements related to products is recognized over the life of thecontract. The Company typically bills contracts monthly, and senior managementreviews outstanding accounts receivable balances regularly to monitor clientsatisfaction and collections. Historically, a large percentage of the Company’srevenue has come from follow-on business from existing clients. In each of thepast five years, more than 79 percent of the year’s total revenue was generatedfrom clients who had been clients in the previous years.

 

Revenue growthand gross profit margins are substantially dependent on many factors outsidethe Company’s control. Key factors include the timing of new contract awards,the timing of individual project start-ups, and the level of activity withongoing projects. Client engagements are generally terminable with little or nonotice or penalty, and a client’s unanticipated decision to terminate orpostpone a project may result in revenue fluctuations as well as higher thanexpected unassigned Company professionals or severance expenses.

 

Gross profitmargins per project and professional staff utilization rates are critical tothe Company’s financial performance. The Company manages these parameters bycarefully establishing and monitoring project budgets and timetables and byclosely tracking staffing requirements for projects in progress and projectsthat are anticipated. The status of all projects in progress and personnelutilization are reviewed semi-monthly by project managers, first-linesupervisors, and senior management to ensure client satisfaction and to monitorperformance relative to internal financial and operating expectations. Thenumber of professionals assigned to a project varies according to the size,complexity, duration, and demands of the project. Professional staffutilization rates vary from period to period not only because of variations inthe Company’s volume of business, but also because of the timing of employeevacations and holidays, hiring and training, client shut downs, and the amountof time spent by employees on marketing.

 

The principalcomponents of cost of revenue are compensation and benefits for the Company’sprofessional staff.  Cost of revenuealso includes training and travel expenses for the Company’s professionalstaff, fees paid to subcontractors, facilities costs, capitalized softwaredevelopment cost amortization, and depreciation of capital equipment providedto the professional staff. Time devoted to marketing by professional personnelnormally assigned to client work is included in cost of revenue, as are costsassociated with administrative personnel who directly support the Company’sprofessional staff. Selling, general and administrative expenses are comprisedprimarily of salaries for corporate, accounting, dedicated sales and otherheadquarters executive and administrative personnel, as well as other corporateoverhead costs.

 

13

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## **Resultsof Operations**

 

The followingtable sets forth, for the periods indicated, operating statement data expressedas a percentage of revenue: 

 
|                                                                                         |   | **Percentage  of Revenue  Year Ended December 31,** |   |
|----------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|--------|
|                                                                                         |   | **2000**                                            |   | **2001** |   | **2002** |   |
|                                                                                         |   | **(as  restated,  see Note 2)**                     |   | **(as  restated,  see Note 2)** |   |   |   |
| Revenue                                                                                      |   | 100.0                                               | %      | 100.0 | % | 100.0 | % |
| Cost of revenue                                                                              |   | 75.6                                                |   | 86.4 |   | 86.6 |   |
| Gross profit                                                                                 |   | 24.4                                                |   | 13.6 |   | 13.4 |   |
| Selling, general and administrative  expenses                                                |   | 19.6                                                |   | 24.2 |   | 22.4 |   |
| Severance and lease termination expenses                                                     |   | 0.4                                                 |   | 0.8 |   | 2.7 |   |
| Operating income (loss)                                                                      |   | 4.4                                                 |   | (11.4 | ) | (11.7 | ) |
| Other income (expense), net                                                                  |   | 0.5                                                 |   | 0.8 |   | (0.1 | ) |
| Income (loss) before income taxes and  cumulative effect of a change in accounting principle |   | 4.9                                                 |   | (10.6 | ) | (11.8 | ) |
| Provision for (benefit from) income taxes                                                    |   | 1.7                                                 |   | (2.7 | ) | (3.4 | ) |
| Income (loss) before cumulative effect of a  change in accounting principle                  |   | 3.2                                                 |   | (7.9 | ) | (8.4 | ) |
| Cumulative effect on prior years of  changing method of accounting for goodwill              |   | —                                              |   | — |   | (10.7 | ) |
| Net income (loss)                                                                            |   | 3.2                                                 | %      | (7.9 | )% | (19.1 | )% |

 

# **Year Ended December 31, 2002, Compared toYear Ended December 31, 2001 (as restated, see Note 2)**

 

*Revenue*.Consolidated revenue decreased by $0.5 million from $118.0 million in 2001 to$117.5 million in 2002.  Performance bysegment was as follows:

 

•                  *Enterprise Systems*. Revenue increased by $5.5 million, or 11.4 percent, from $48.0million in 2001 to $53.5 million in 2002, representing40.6 percent of the Company’s total revenue in 2001 and 45.5 percent in 2002.Product sales increased from $4.7 million in 2001 to $9.7 million in 2002.  The increase in revenues was due to theincreased product sales and expansion of strategic relationships and alliances,primarily with SAP.  Internationalrevenues increased from $3.5 million in 2001 to $6.0 million in 2002.

 

•                  *Performance Solutions.*Revenue increased by $5.4 million, or 13.4percent, from $40.2 million in 2001 to $45.6 million in 2002, representing 34.1percent of the Company’s total revenue in 2001 and 38.8 percent in 2002.  Diversification efforts throughout the yearresulted in the addition of clients in the aerospace, railroad and automotivesupplier industries. Clients in these industries provided 30.3 percent of 2002segment revenue, compared to 6.0 percent for 2001.  International revenues, principally derived from United Kingdomoperations, increased from $9.0 million in 2001 to $15.5 million in 2002.

 

•                  *Applied Technology Solutions.* Revenue decreased by $11.4 million, or 38.2percent, from $29.8 million in 2001 to $18.4 million in 2002, representing 25.3percent of the Company’s revenue in 2001 and 15.7 percent in 2002. Productsales increased from $2.7 million in 2001 to $3.0 million in 2002. The decreasein segment revenue was due to client deferrals of corporate eLearninginitiatives, decreased expenditures for IT projects, longer sales cycles, andslow investment in eLearning products and services by existing and prospectiveclients.

 

*Gross Profit*. Totalgross profit decreased by $0.3 million, or 2.0 percent, from $16.0 million in2001 to $15.7 million in 2002, and decreased from 13.6 percent of revenue in2001 to 13.4 percent of revenue in 2002. Gross profit by segment was as follows:

 

•                  *EnterpriseSystems*. Gross profit increased by $1.9 million, or 19.1 percent,from $9.7 million in 2001 to $11.6 million in 2002, and the gross profit marginincreased from 20.3 percent of segmentrevenue in 2001 to 21.7 percent in 2002. The increase ingross profit and gross profit margin was due to a 107.7percent increase in product sales and a decrease in operating costs as a percentage of revenue from 79.7 percent in 2001to 78.3 percent in 2002, as part of the Company-wide initiative to reduce costsand better align costs with revenues.

 

14

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•                  *PerformanceSolutions.*Gross profitincreased $4.2 million, or 60.7 percent, from $7.0 million in 2001 to $11.2million in 2002, and the gross profit margin increased from 17.4 percent ofsegment revenue in 2001 to 24.7 percent in 2002. The increase in gross profit and gross profit margin was due to a 13.4 percent increase insales and a decrease in operating costs as a percentage of revenue from 82.6 percent in 2001 to75.3 percent in 2002, as part of the Company-wide initiative to reduce andbetter align costs with revenues.

 

•                  *Applied Technology Solutions*. Gross profit decreased by $6.4 million from aloss of $0.7 million in 2001 to a loss of $7.1 million for 2002, and the grossprofit margin decreased from a negative 2.3 percent of segment revenue in 2001to a negative 38.6 percent in 2002.  This decrease primarily resulted from thedecline in revenues of $11.4 million and an increase of $3.4 million of productamortization costs due to write-downs to estimated net realizable value ofunamortized software development costs. In 2002, bad debt expense decreased $2.7 million due to a largewrite-off from one client in 2001. During 2002, management also instituted a restructuring plan to reduceoperating losses.

 

*Selling, General and Administrative Expenses*.Selling, general and administrative expenses decreased by $2.2 million, or 7.8percent, from $28.5 million in 2001 to $26.3 million in 2002, decreasing from24.2 percent of total revenue in 2001 to 22.4 percent of total revenue in 2002.During 2002, the Company implemented Statement of Financial Accounting Standard("SFAS") No. 142, “Goodwill and Other Intangible Assets.”  As a result, the Company no longer amortizesgoodwill, which resulted in an expense reduction of approximately $0.7 millionfor 2002.  During 2002, there werereductions in salaries and other personnel costs of $1.1 million and in traveland conferences of $0.2 million.

* *

*Severance and Lease Termination Expenses.*Severance and lease termination costs increased by $2.2 million from $1.0million in 2001 to $3.2 million in 2002, increasing from 0.8 percent of totalrevenue in 2001 to 2.7 percent of total revenue in 2002.  The increase in severance expenses from $1.0million in 2001 to $1.3 million in 2002 primarily resulted from management’srestructuring plan.  The Company's totalnumber of employees at year-end was 951 for 2001 and 882 for 2002.  In addition, management in 2002 evaluatedits leased facility requirements.  As aresult of this assessment, the Company recorded a non-cash charge for futurerental payments related to vacant office space of $1.9 million in 2002.

* *

*Operating Loss*. As aresult of the foregoing, the Company’s operating loss increased by $0.3 millionfrom a loss of $13.5 million in 2001 to a loss of $13.8 million in 2002 andincreased from a negative 11.4 percent of revenue in 2001 to a negative 11.7percent of revenue in 2002.

* *

*Other Income and Expense.*Other income and expense decreased by $1.1 million from income of $1.0 millionin 2001 to an expense of $0.1 million in 2002. This change primarily resultedfrom a decrease in interest income on investments of $0.5 million and anincrease in interest expense of $0.4 million due to higher Company borrowingspartially offset by a reduction in variable interest rates.

* *

*Income Tax Benefit.*  Income tax benefit increased $0.9 millionfrom $3.1 million in 2001 to $4.0 million in 2002.  The Company’s effective income tax benefit for its loss beforethe cumulative effect of a change in accounting principle was 28.7 percent for2002, or 15.5 percent excluding reversal of a valuation allowance of $1.8million recorded in the first quarter of 2002 as a result of a change in U.S.Federal tax law on March 9, 2002, that expanded the net operating losscarryback period from two to five years. After the cumulative effect of a change in accounting principle, theeffective income tax benefit for the year ended December 31, 2002 was 15.1percent, or 8.2 percent excluding the valuation allowance reversal of $1.8million.  This rate differs from theU.S. statutory income tax rate of 34 percent principally because the Companyincreased its valuation allowance in 2002 for net deferred tax assets by $3.5million due to uncertainties surrounding the ability to generate future taxableincome to realize these deferred tax assets.

* *

*Cumulative effect on prior years of changingmethod of accounting for goodwill.*  As a result of the transitional impairmenttest performed upon the adoption of SFAS No. 142, “Goodwill and OtherIntangible Assets,” effective January 1, 2002, the Company recognized agoodwill impairment loss of $12.5 million in 2002.  The effects of adopting the new standard on 2002 and 2001operating results are discussed in Note 3 of the financial statements.

* *

*Net Loss*. Net lossincreased by $13.1 million from a loss of $9.3 million in 2001 to a loss of$22.4 million in 2002, increasing from a negative 7.9 percent of revenue in2001 to a negative 19.1 percent of revenue in 2002.  The net loss in 2002 was impacted by approximately $12.5 millionrelating to the cumulative effect on prior years of changing the method ofaccounting for goodwill.

 

15

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# **Year Ended December 31, 2001 (as restated,see Note 2), Compared to Year Ended December 31, 2000 (as restated, see Note 2)**

 

*Revenue*. Totalrevenue decreased by $15.7 million, or 11.7 percent, from $133.7 million in2000 to $118.0 million in 2001. Each of the business segments was constrainedby longer sales cycles in the weak economic environment of 2001 and bycancellation or postponement of some contracts.   Performance by segment was as follows:

 

•                  *Enterprise**Systems*. Revenue increased by $1.2 million, or 2.6percent, from $46.8 million in 2000 to $48.0 million in 2001, representing 35.0percent of the Company’s total revenue in 2000 and 40.6 percent in 2001. Thisrevenue growth resulted from sales of products, which increased from $1.4million in 2000 to $4.7 million in 2001, and expansion of key relationshipswith ERP-related companies.  Overallresults were adversely affected by project postponements, slower projectstarts, and decreased levels of client-requested support.

 

•                  *PerformanceSolutions*. Revenue decreased by $8.4 million, or 17.3 percent, from$48.7 million in 2000 to $40.2 million in 2001, representing 36.4 percent ofthe Company’s total revenue in 2000 and34.1 percent in 2001. The significant decline in revenueresulted primarily from the cancellation of a majorcontract by one client in the automotive industry. Diversification efforts throughout the year resulted in theaddition of clients in the aerospace, railroad, and automotive supplierindustries, which provided 6.0 percent of this segment’s 2001 revenue, comparedto 2.3 percent for 2000.

 

•                  *Applied Technology Solutions*. Revenuedecreased by $8.5 million, or 22.1 percent, from $38.3 million in 2000 to $29.8million in 2001, representing 28.6percent of the Company’s revenue in 2000 and 25.3 percent in 2001. Productsales increased from $1.6 million in 2000 to $2.7 million in 2001. Theprincipal reason for the decline in consulting revenue was the postponement oftechnology expenditures by clients and prospective clients in an overall weakeconomy.

 

*Gross Profit*. Totalgross profit decreased by $16.6 million, or 50.8 percent, from $32.6 million in2000 to $16.0 million in 2001, and decreased from 24.4 percent of revenue in2000 to 13.6 percent of revenue in 2001. Gross profit for the individual operating segments was as follows:

 

•                  *Enterprise**Systems*.Gross profit for Enterprise Systems decreased by 23.5 percent from $12.7million in 2000 to $9.7 million in 2001, and the gross profit margin decreased from 27.2 percent of segment revenue in 2000 to20.3 percent in 2001. The decline ingross profit resulted from expenditures related to the launch of SAP LearningSolutions, a decline in European operations, underutilized technical staff, andcosts associated with creating a sales and marketing function.

 

•                  *PerformanceSolutions.*Gross profit decreased by 47.9 percent from $13.4 millionin 2000 to $7.0 million in 2001, and the grossprofit margin decreased from 27.6 percent of this segment’s revenue in 2000 to17.4 percent in 2001. Gross profit was negatively impacted by the cancellationof the major automotive contract and by general pricing pressures in theautomotive business. Other expenses adversely affecting the gross margin wereoffice consolidation expenses and increases in marketing expenses related todiversification efforts.

 

•                  *Applied Technology Solutions*. Gross profit decreased significantly from $6.5million in 2000 to a $0.7 million loss for 2001, and the gross profit margindecreased from 16.9 percent of this segment’s revenue in 2000 to a negative 2.3percent in 2001.  Approximately$2.1 million of the gross profit decline was attributable to bad debt expenserelated to a client that experienced a financial crisis caused by cancellationof a project following the September 11th terrorist attack. Otherexpenses adversely affecting the gross margin were costs associated with anunderutilized technical staff, expenses related to the relocation of thissegment to the ATL, research and development costs, and costs associated withmore extensive sales and marketing efforts.

 

*Selling, General and Administrative Expenses*.Selling, general and administrative expenses increased by $2.3 million, or 8.9percent, from $26.2 million in 2000 to $28.5 million in 2001, increasing from19.6 percent of total revenue in 2000 to 24.2 percent of total revenue in 2001.The increased expense resulted from higher costs of depreciation, professionalservices associated with foreign operations, and optimization of the corporatecomputer system.

* *

*Severance Expenses.*  Severance expenses increased by $0.5 million,or 106 percent, from $0.5 million in 2000 to $1.0 million in 2001.  During the year, the Company continued toretain highly qualified personnel who were not fully utilized while evaluatingthe business cycle. When it became apparent that a protracted downturn wasoccurring, reductions to headcount and other expenses were made, most of whichoccurred near the end of the third quarter. The Company’s total number ofemployees at year-end was 1,101 for 2000 and 951 for 2001.

 

16

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*Operating Income (Loss)*.As a result of the foregoing, the Company’s operating income declined by $19.4million from $5.9 million in 2000 to a $13.5 million loss in 2001 and decreasedfrom 4.4 percent of revenue in 2000 to a negative 11.4 percent of revenue in2001.

* *

*Other Income.* Otherincome increased from $0.6 million in 2000 to $1.0 million in 2001. Reductionsduring the year related to foreign currency expense and interest expensecapitalized and included in costs of developed software.  These reductions were partially offset bydeclines in interest income on investments and the recording of the minorityownership share of SAP Learning Solutions’ loss for the year.

* *

*Income Tax Benefit.*  The Company recorded an income tax benefitof $3.1 million in 2001, or 25.1% of the loss before income taxes.  This amount differs from the U.S. statutoryincome tax rate of 34% due principally to an increase in the valuationallowance for net deferred tax assets of $1.8 million.  The Company increased its valuationallowance due to uncertainties surrounding its ability to generate futuretaxable income sufficient to realize recorded deferred tax assets.

* *

*Net Income (Loss)*.Net income decreased by $13.5 million from $4.2 million in 2000 to a $9.3 millionloss in 2001, decreasing from 3.2 percent of revenue in 2000 to a negative 7.9percent of revenue in 2001.

 

## **SelectedQuarterly Operating Results**

 

The followingtables set forth operating statement data for each of the eight quarters in theperiod beginning January 1, 2001, and ending December 31, 2002. The operatingresults for any quarter are not necessarily indicative of results for anyfuture period.  Certainreclassifications were made to prior quarter and prior year amounts to conformto current year presentation.  

 
|                                                                                  |   | **For  the Quarter Ended**                 |   |
|---------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                                                  |   | **(as  restated, see Note 2)**             |   |   |   |
|                                                                                  |   | **March 31,  2001**                        |   | **June 30,  2001** |   | **Sept. 30,  2001** |   | **Dec. 31,  2001** |   | **March 31,  2002** |   | **June 30,  2002** |   | **Sept. 30,  2002** |   | **Dec. 31,  2002** |   |
|                                                                                  |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                  |   | **(In  thousands, except per share data)** |   |
| **Operating Statement Data:**                                                         |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                                                                               |   | $                                          | 30,253 |   | $ | 30,624 |   | $ | 29,082 |   | $ | 28,081 |   | $ | 29,181 |   | $ | 29,961 |   | $ | 30,372 |   | $ | 27,971 |   |
| Cost of revenue                                                                       |   | 24,841                                     |   | 25,871 |   | 26,053 |   | 25,260 |   | 23,836 |   | 26,146 |   | 27,208 |   | 24,597 |   |
| Gross profit                                                                          |   | 5,412                                      |   | 4,753 |   | 3,029 |   | 2,821 |   | 5,345 |   | 3,815 |   | 3,164 |   | 3,374 |   |
| Selling, general and administrative  expenses                                         |   | 6,455                                      |   | 7,264 |   | 7,663 |   | 7,130 |   | 6,579 |   | 6,430 |   | 6,580 |   | 6,688 |   |
| Severance and lease termination expenses                                              |   | 124                                        |   | 284 |   | 594 |   | (5 | ) | 43 |   | 720 |   | 1,759 |   | 658 |   |
| Operating loss                                                                        |   | (1,167                                     | )      | (2,795 | ) | (5,228 | ) | (4,304 | ) | (1,277 | ) | (3,335 | ) | (5,175 | ) | (3,972 | ) |
| Other income (expense), net                                                           |   | 208                                        |   | 222 |   | 175 |   | 420 |   | (36 | ) | 88 |   | (58 | ) | (51 | ) |
| Loss before income taxes & cumulative  effect of a change in accounting principle |   | (959                                       | )      | (2,573 | ) | (5,053 | ) | (3,884 | ) | (1,313 | ) | (3,247 | ) | (5,233 | ) | (4,023 | ) |
| Benefit from income taxes(1)                                                          |   | (511                                       | )      | (1,103 | ) | (1,526 | ) | — |   | (2,262 | ) | (1,027 | ) | (229 | ) | (452 | ) |
| Income (loss) before cumulative effect of a  change in accounting principle           |   | (448                                       | )      | (1,470 | ) | (3,527 | ) | (3,884 | ) | 949 |   | (2,220 | ) | (5,004 | ) | (3,571 | ) |
| Cumulative effect on prior years of  changing method of accounting for goodwill(2)    |   | —                                     |   | — |   | — |   | — |   | (12,529 | ) | — |   | — |   | — |   |
| Net loss                                                                              |   | $                                          | (448   | ) | $ | (1,470 | ) | $ | (3,527 | ) | $ | (3,884 | ) | $ | (11,580 | ) | $ | (2,220 | ) | $ | (5,004 | ) | $ | (3,571 | ) |
|                                                                                  |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Basic and Diluted Loss per Share:**                                                 |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) before cumulative effect of a  change in accounting principle           |   | $                                          | (0.03  | ) | $ | (0.10 | ) | $ | (0.23 | ) | $ | (0.25 | ) | $ | 0.06 |   | $ | (0.14 | ) | $ | (0.33 | ) | $ | (0.23 | ) |
| Cumulative effect on prior years of  changing method ofaccounting for goodwill        |   | —                                     |   | — |   | — |   | — |   | (0.82 | ) | — |   | — |   | — |   |
| Net income (loss) per share                                                           |   | $                                          | (0.03  | ) | $ | (0.10 | ) | $ | (0.23 | ) | $ | (0.25 | ) | $ | (0.76 | ) | $ | (0.14 | ) | $ | (0.33 | ) | $ | (0.23 | ) |
|                                                                                  |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average shares outstanding – basic  and diluted                         |   | 15,151                                     |   | 15,262 |   | 15,294 |   | 15,301 |   | 15,307 |   | 15,375 |   | 15,395 |   | 15,418 |   |

 

17

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(1)          TheCompany in each quarter made estimates of its estimated effective annual incometax rate, before the effect of changes in income tax regulations, to recordquarterly income tax provisions. Because of changes in circumstances, including the estimated loss forthe year and the amount of the deferred tax asset valuation allowance, theseestimated effective annual income tax rates changed from quarter toquarter.  If the Company had estimatedits effective annual income tax rates in each quarter using the actualeffective annual income tax rate reported for the year, reported quarterlyincome tax expense would have varied as disclosed below:

 

## **Yearended December 31, 2001:**

 
|                                                                                |   | **Quarter ended in 2001**                 |   |
|-------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                                |   | **(as restated, see Note 2)**             |   |
|                                                                                |   | **March 31,**                             |   | **June 30,** |   | **Sept. 30,** |   | **Dec. 31,** |   |
|                                                                                |   | **(In thousands, except per share data)** |   |
|                                                                                |   |                                      |   |   |   |   |   |   |   |
| Net loss, as  restated                                                              |   | $                                         | (448   | ) | $ | (1,470 | ) | $ | (3,527 | ) | $ | (3,884 | ) |
| Adjustment to  adjust income tax benefit to actual effective annual income tax rate |   | (270                                      | )      | (455 | ) | (254 | ) | 979 |   |
|                                                                                |   |                                      |   |   |   |   |   |   |   |
| Net loss, as  adjusted                                                              |   | $                                         | (718   | ) | $ | (1,925 | ) | $ | (3,781 | ) | $ | (2,905 | ) |
|                                                                                |   |                                      |   |   |   |   |   |   |   |
| Adjusted loss  per share                                                            |   | $                                         | (0.05  | ) | $ | (0.13 | ) | $ | (0.25 | ) | $ | (0.19 | ) |

 

## **Yearended December 31, 2002:**

 
|                                                                                |   | **Quarter ended in 2002**                 |    |
|-------------------------------------------------------------------------------------|--------|-------------------------------------------|---------|
|                                                                                |   | **March 31,**                             |    | **June 30,** |   | **Sept. 30,** |   | **Dec. 31,** |   |
|                                                                                |   | **(In thousands, except per share data)** |    |
|                                                                                |   |                                      |    |   |   |   |   |   |   |
| Net loss, as  previously reported                                                   |   | $                                         | (11,580 | ) | $ | (2,220 | ) | $ | (5,004 | ) | $ | (3,571 | ) |
| Adjustment to  adjust income tax benefit to actual effective annual income tax rate |   | (236                                      | )       | (522 | ) | 585 |   | 173 |   |
|                                                                                |   |                                      |    |   |   |   |   |   |   |
| Net loss, as  adjusted                                                              |   | $                                         | (11,816 | ) | $ | (2,742 | ) | $ | (4,419 | ) | $ | (3,398 | ) |
|                                                                                |   |                                      |    |   |   |   |   |   |   |
| Adjusted loss  per share                                                            |   | $                                         | (0.77   | ) | $ | (0.18 | ) | $ | (0.29 | ) | $ | (0.22 | ) |

 

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(2)          TheCompany reported in the second quarter of 2002 that the cumulative effect ofadopting Statement of Financial Accounting Standards No. 142, *Goodwill and Other Intangible Assets*,effective January 1, 2002 was a charge of $11.8 million, net of an income taxbenefit of $0.7 million. This amount has been reflected in the operatingresults for the first quarter of 2002 in the table.  In the third quarter of 2002, the Company changed its estimate ofthe income tax benefit allocated to loss before cumulative effect of change inaccounting principle, as described more fully in Note (1) above.

 

## **Liquidityand Capital Resources**

 

The Company’scash and investments were $24.3 million as of December 31, 2002, of which $13.0million was restricted and designated as collateral for borrowed amounts.  Cash and investments were $22.8 million asof December 31, 2001.  As of December31, 2002, RWD also had a $7.8 million tax receivable from the IRS and othertaxing authorities.  Working capital was$34.7 million as of December 31, 2002 and $40.9 million as of December 31,2001.

 

The Company’soperating activities provided cash of $0.7 million in 2002, compared to providingcash of $2.1 million for 2001.  Thedecrease in cash provided from operating activities was due to a decrease inearnings before non-cash items, which consist primarily of depreciation andamortization, the change in deferred income taxes, and a goodwill impairmentcharge.  For 2002, the loss beforedepreciation and amortization and non-cash charges was $1.0 million, comparedto earnings of $1.0 million for 2001. This decrease was partially offset by an increase in cash from workingcapital sources of $0.5 million.

 

Investingactivities used cash of $5.7 million in 2002, compared to a use of cash of $4.0million in 2001.  Cash used forinvesting activities for 2002 consisted primarily of purchases of fixed assets,net purchases of investments, and payments for capitalized software developmentcosts.  For 2001, cash used by investingactivities consisted primarily of payments for capitalized software developmentcosts and the purchase of fixed assets offset by the net sale of investments.

 

18

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Financingactivities provided cash of $4.7 million in 2002, compared to a provision ofcash of $2.8 million in 2001.  Duringthe first quarter of 2002, the Company obtained a $0.5 million interest-freeloan from the Baltimore County, Maryland Economic Development Revolving LoanFund to provide additional funding for the Company’s leased ATL facility.  The loan is fully secured by a $0.5 millionletter of credit issued by a commercial bank. The letter of credit from the commercial bank is collateralized by a$0.5 million certificate of deposit. Monthly principal repayments began in March 2002 and are due ratablyover a ten-year period.  Additionally,the Company obtained a $0.5 million loan from a commercial bank for funding ofoperating equipment needs at the ATL. This loan is fully secured by a $0.5 million certificate ofdeposit.  Monthly principal and interestrepayments began in April 2002 and are due ratably over a five-yearperiod.  During the fourth quarter of 2001,the Company obtained a $2.0 million loan from a commercial bank.  During 2002, the loan covenants associatedwith this loan were eliminated when the loan was fully secured by Companyinvestments which are now held in a restricted investment account. Principalrepayments are due monthly over five years, and began in April 2002.

 

Financingactivities in 2002 also consisted of stock repurchases under RWD’s Common StockRepurchase Program. During 2002, the Company repurchased and retiredapproximately 0.1 million shares of its common stock, at a total cost ofapproximately $0.3 million. In February 2001, the Board of Directors authorizedpurchases of up to 1.0 million shares of the Company’s common stock, 0.3million of which have been repurchased through the end of 2002.

 

The Companyhas a revolving line of credit agreement with a commercial bank intended forworking capital purposes. The line of credit is for $10.0 million with asub-limit of up to $3.0 million for standby letters of credit, and expires May31, 2004.  Interest is payable monthlyin arrears at a rate equivalent to the bank’s 30-day LIBOR rate plus 90 basispoints.  During 2001, the Company drewon the credit line in each month and the highest outstanding balance was $4.1million. The weighted average interest rate for 2001 was 4.8 percent. There wasno outstanding balance on this credit line as of December 31, 2001.  During 2002, the Company drew on the line ineach month and the highest balance outstanding was $5.8 million.  The weighted average interest rate for 2002was 2.9 percent.  The outstandingbalance on this credit line as of December 31, 2002 was $3.1 million.

 

The Company’smajority-owed subsidiary, SAPLS, has a 5.0 million Singapore dollar (SGD)(approx. $2.8 million) revolving credit facility with a major bank for workingcapital purposes.  The loan is securedby a SGD3.0 million (approx. $1.7 million) standby letter of credit provided bythe Company and a SGD2.0 (approx. $1.1 million) corporate guaranty provided bythe Company’s joint venture partner.  Asof December 31, 2001 and 2002, $0.7 million and $1.6 million, respectively,were outstanding under this line of credit.

 

Including theletter of credit securing the loan for SAPLS described above, the Company hasapproximately $2.9 million in outstanding letters of credit as of December 31,2002.

 

During 2002,the Company made $2.5 million in capital expenditures, primarily for officefurniture, computer/office equipment, and leasehold improvements to support itsprofessional and administrative staff, the majority of which were installed atthe Company’s leased ATL facility. These capital expenditures were primarilyfunded from borrowings from a commercial bank and available cash.

 

During thefirst quarter of 2003, the Company's workforce declined by involuntaryreductions in force and voluntary separations. As of the date of the filing, the Company's headcount was approximately825.

 

During 2003,the Company anticipates the level of capital and product developmentexpenditures will decrease 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. The Companybelieves its existing cash balances, cash provided by future operations, andits line of credit will be sufficient to meet the Company’s working capital andother cash needs at least through 2004.

 

19

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## **ContractualCash Obligations and Other Commercial Commitments**

 

The followingtables reflect a summary of the Company’s contractual cash obligations andother commercial commitments as of December 31, 2002:

 
| **Contractual  Cash Obligations****(in thousands)** |   | **Total** |   | **Due in less  than 1 year** |   | **Due in  1-3 years** |   | **Due in  4-5 years** |   | **Due after  5 years** |   |
|-----------------------------------------------------|--------|-----------|--------|------------------------------|--------|-----------------------|--------|-----------------------|--------|------------------------|--------|
|                                                |   |      |   |                         |   |                  |   |                  |   |                   |   |
| Long-term debt(1)                                   |   | $         | 3,255  |                         | $      | 556                   |   | $                     | 1,936  |                   | $      | 417 |   | $ | 346 |   |
| Capital lease obligations                           |   | 24        |   | 11                           |   | 13                    |   | —                |   | —                 |   |
| Operating leases                                    |   | 18,616    |   | 6,196                        |   | 6,252                 |   | 2,526                 |   | 3,642                  |   |
|                                                |   |      |   |                         |   |                  |   |                  |   |                   |   |
| Total Contractual Cash Obligations                  |   | $         | 21,895 |                         | $      | 6,763                 |   | $                     | 8,201  |                   | $      | 2,943 |   | $ | 3,988 |   |

 

 
| **Other Commercial Commitments  (in thousands)** |   | **Total** |   | **Due in  less  than 1 year** |   | **Due in  1-3 years** |   | **Due in  4-5 years** |   | **Due after  5 years** |   |
|--------------------------------------------------|--------|-----------|--------|-------------------------------|--------|-----------------------|--------|-----------------------|--------|------------------------|--------|
|                                             |   |      |   |                          |   |                  |   |                  |   |                   |   |
| Lines of credit(1)(2)(3)                         |   | $         | 4,705  |                          | $      | 4,705                 |   | $                     | — |                   | $      | — |   | $ | — |   |
| Standby letters of credit(4)(5)                  |   | 2,922     |   | 2,922                         |   | —                |   | —                |   | —                 |   |
|                                             |   |      |   |                          |   |                  |   |                  |   |                   |   |
| Total Commercial Commitments                     |   | $         | 7,627  |                          | $      | 7,627                 |   | $                     | — |                   | $      | — |   | $ | — |   |

 

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(1)          During2002, the Company’s covenants associated with outstanding debts were eliminatedin exchange for fully securing the loan commitments.  Approximately $13.0 million of the Company’s cash investmentswere pledged as collateral for outstanding debts.

 

(2)          TheCompany’s majority-owned subsidiary, SAPLS, has a SGD5.0 million (approx. $2.8million) credit facility with a major bank intended for general working capitalrequirements.  As of December 31, 2002,$1.6 million was outstanding under this line of credit.

 

(3)          TheCompany has a secured revolving line of credit agreement with a commercial bankthat is intended for working capital purposes. The secured line is for $10.0million with a sub-limit of up to $3.0 million for the issuance of standbyletters of credit, and expires May 31, 2004. There was no outstanding balance on this credit line as of December 31,2001.  The outstanding balance of thecredit line was $3.1 million as of December 31, 2002.

 

(4)          TheSAPLS revolving credit facility is secured by a SGD3.0 million (approx. $1.7million) standby letter of credit provided by the Company and a SGD2.0 million(approx. $1.1 million) corporate guarantee by the Company’s joint venturepartner.

 

(5)          TheCompany has issued $1.2 million in standby letters of credit as securitydeposits for its leased ATL facility located on the campus of the UMBC.

 

# **Effects of Inflation**

 

Inflation hasnot had a significant effect on the Company’s business during the past threeyears. The Company cannot predict what effect, if any, inflation may have onits future results of operations.

 

# **Business Risks**

 

Certainstatements contained herein, including statements regarding development of theCompany’s products, services, markets, and future demand for the Company’sproducts and services, and other statements regarding matters that are not historicalfacts, are forward-looking statements (as defined in the Private SecuritiesLitigation Reform Act of 1995). These forward-looking statements include risksand uncertainties. Consequently, actual results may differ materially fromthose expressed or implied by these forward-looking statements. The followingare some of the factors that may cause the Company’s future results ofoperations to differ materially from management’s expectations and historictrends.

 

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•                  *GeneralEconomic Environment*. Over the past several years, demand for theCompany’s products and services, particularly those relating to the IT industryand the automotive industries, decreased as a result of the general slowdown inthe business environment. Sales cycles were lengthened, pricing pressuresincreased, and clients deferred and/or cancelled certain projects. Although theCompany has strengthened its business alliances, expanded its productofferings, and continued diversification efforts into other industries, thefuture demand for RWD’s products and services remains difficult to forecast.

 

•                  *StrategicAlliances*. The Company’s relationships, formal and informal, withits strategic allies, particularly SAP, Siebel, and Documentum, have been, orare anticipated to be, important sources of revenue. The Company also facespotential competition from software companies, including its strategic allieswho, through their client services groups, may choose to compete with theCompany. Many of these alliances are terminable by either party with minimalnotice. The termination of, or any adverse change in any of these alliances,particularly SAP, could adversely affect the Company’s ability to achieve itsfinancial goals.

 

•                  *Customer andIndustry Revenue Concentration*. The Company continues to derive asubstantial amount of its revenue from a limited number of key clients. In2002, the Company’s top five clients and ten clients represented 39.0 percentand 50.1 percent of total revenue, respectively, with clients in theautomotive, petroleum-chemical, railroad, and pharmaceutical industriesgenerating 24.4 percent, 15.2 percent, 8.4 percent, and 8.2 percent of totalrevenue, respectively. As of December 31, 2002, the Company’s top 5 and 10 accountsreceivable represented 60.2 percent and 65.7 percent of total 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 operate in cyclical industries, such as automotive,petroleum-chemical, and railroad, which are subject to economic factors thataffect the clients’ revenue and profitability. Performance Solutions has successfully obtained business in otherindustries and expects to continue diversification efforts, which may partiallyoffset the decline in revenue from clients in the automotive manufacturingindustry. If any of the Company’s major clients discontinue doing business withthe Company or significantly reduce the amount of products and services theypurchase from the Company, the Company’s ability to achieve its financial goalsare likely to be adversely affected.

 

•                  *SoftwareProduct Development*. RWD has invested in research and softwareproduct development and believes that timely development of new softwareproducts and enhancements to existing software products will expand itscompetitive position in the marketplace.RWD anticipates continuing to invest in expanded functionality across itsproduct offerings, including global product requirements and industry specificrequirements.  There can be no assurancethat such development efforts will result in new or enhanced products,features, or functionality, or that the products, features, or functionalitythat are developed will be accepted by the market.

 

•                  *GeographicExpansion*. The Company intends to continue to expand its operationsand marketing efforts in Europe, Canada, and Asia, including establishing offices and expatriating employees,thereby incurring significant operating costs. If these efforts fail to produce revenue at expected levels or withinthe timeframe predicted by management, operating margins will be adverselyaffected. International operations present a number of risks, such as adversecurrency exchange rate fluctuations, trade barriers, cultural differences, andpossible changes in taxes, laws, andpolicies governing the operations of foreign-based companies. The Company hasno control over these factors, any of which could adversely affect theCompany’s results of operations and demand for its services abroad.

 

•                  *RapidlyChanging Information Technology Sector*. The IT industry is subjectto significant and rapid changes in technology and the demand for particular products and services.  If the Company fails to identify shiftingdemand for particular IT services or does not develop the expertise necessaryto provide services for which there is new demand, the Company’s results ofoperations are likely to be adversely affected.

 

•                  *Competition*.In recent years, the Company has experienced increasing competition,particularly in the ERP, eSolutions, and eLearning areas of its business.Recent general economic conditions have created significant competitor-drivenpricing pressures and other industry-relatedpressures.  If competition continues tointensify, the Company may find it more difficult to resume revenue growth atrates comparable to its historic growth rates and to improve its profit marginsonce general economic conditions improve.

 

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•                  *Attractingand Retaining Personnel*. As is the case with most technologycompanies, the Company experiences turnover in its technical staff. TheCompany’s ability to expand its business will depend on its ability to attract,develop, and retain a sufficient number of skilled professional employees.Also, the Company will need to ensure that its technical personnel stay abreastof rapid changes in technology.The Company’s operating costs may be higher than management expects ifcompetition for qualified people increases or the Company experiences higherturnover levels.

 

•                  *Operating**and Net Losses.* In 2001 and 2002, the Company incurred operating and net losses largelyas the result of declines in revenue due to a decreased demand for RWD’sproducts and services in the current stagnant economic environment.  The Company may continue to incur operatingand net losses in all or a portion of 2003. The losses over the past two years have caused the Company’s cash,working capital, total assets and stockholders’ equity to decline while itsindebtedness has increased.  If theCompany continues to incur losses over a longer period of time, it may haveinsufficient liquidity and capital resources to take advantage of opportunitiesthat may arise or possibly to finance its operations at current levels.

 

## **RecentAccounting Pronouncements**

 

In June 2002,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 146, “Accounting for Costs Associated withExit or Disposal Activities,” which addresses accounting for restructuring andsimilar costs.  SFAS No. 146 supersedesprevious accounting guidance, principally Emerging Issues Task Force (“EITF”)Issue No. 94-3.  SFAS No. 146 requiresthat the liability for costs associated with an exit or disposal activity berecognized when the liability is incurred. Under EITF No. 94-3, a liability for exit costs was recognized at thedate of a company’s commitment to an exit plan.  SFAS No. 146 also establishes that the liability should initiallybe measured and recorded at fair value. Accordingly, SFAS No. 146 will affect the timing of recognizing exit andrestructuring costs as well as the amount recognized.  The Company will adopt this guidance prospectively for exit ordisposal activities initiated after December 31, 2002, and does not expect thatadoption will have a material effect on reported results of operations.

 

In December2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation –Transition and Disclosure – an amendment of FASB Statement No. 123.”  This Statement amends SFAS No. 123 toprovide alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation.  In addition, this Statement amends thedisclosure requirements of SFAS No. 123 to require prominent disclosures inboth annual and interim financial statements about the method of accounting forstock-based employee compensation and the effect of the method used on reportedresults.  SFAS No. 148’s amendment ofthe transition and annual disclosure requirements of SFAS No. 123 are effectivefor years ending after December 15, 2002. SFAS No. 148’s amendment of the interim reporting disclosurerequirements of Opinion 28 is effective for financial reports containingcondensed consolidated financial statements for interim periods beginning afterDecember 15, 2002.  The Company adoptedthe disclosure requirements of the standard for its December 31, 2002 reportingperiod.

 

In November2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees andIndebtedness of Others.”  TheInterpretation elaborates on the disclosures to be made by a guarantor in itsinterim and annual financial statements about its obligations under certainguarantees that it has issued.  TheInterpretation also clarifies that a guarantor is required to recognize, at theinception of a guarantee, a liability for the fair value of the obligationundertaken in issuing the guarantee. The initial recognition and initial measurement provisions of theInterpretation are applicable on a prospective basis to guarantees issued ormodified after December 31, 2002.  Thedisclosure requirements in this Interpretation are effective for financialstatements of interim or annual periods ending after December 15, 2002.  The Company is exempt from the provisionsrelated to recognizing the liability for SAPLS at inception for the fair valueof the guarantor’s obligation due to the fact that the entity is fullyconsolidated on the Company’s balance sheet. The Company adopted the disclosure requirements of the standard for itsDecember 31, 2002 reporting period.

 

In January2003, the FASB issued Interpretation No. 46, “Consolidation of VariableInterest Entities.”  The objective ofInterpretation No. 46 is to improve financial reporting by companies involvedwith variable interest entities.  TheInterpretation requires variable interest entities to be consolidated by acompany if that company is subject to a majority of the risk of loss from thevariable interest entity’s activities or is entitled to receive a majority of theentity’s residual returns or both.  Thecompany currently does not have any variable interest entities and, therefore,will apply the provisions of the Interpretation prospectively.

 

The EITF IssueNo. 00-21, “Accounting for Revenue Arrangement with Multiple Deliverables,”addresses solutions which may involve the delivery or performance of multipleproducts, services, and/or rights to use assets, and for which performance mayoccur at different points in time or over different periods of time.  The issue also addresses whether thedifferent revenue-generating activities, or deliverables, are sufficientlyseparable, and whether sufficient evidence exists of their fair values toseparately account for some or all of the deliverables.  The issue applies to all contractualarrangements under which a vendor

 

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will perform multiplerevenue-generating activities.  Issue00-21 is effective for all revenue arrangements entered into in fiscal periodsbeginning after June 15, 2003, with early adoption permitted.  The Company will adopt this guidanceprospectively for all revenue arrangements entered into after January 1, 2003,and does not expect that adoption will have a material effect on reportedresults of operations.

 

# **Critical Accounting Policies**

 

The Company’saccounting policies are summarized in Note 1 of the financial statements inItem 8. The financial statements are prepared in conformity with accountingprinciples generally accepted in the United States, which requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosures of contingent assets and liabilities at thedate of the financial statements and the reported amounts of revenues and expensesduring the year. Actual results could differ from those estimates. Thefollowing policies are considered to be most critical in understanding thejudgments that are involved in preparing the financial statements and theuncertainties that are considered that could impact the results of operations,financial condition, and cash flows.

 

*Goodwill:*

 

In 2002, theCompany adopted the provisions of Statement of Financial Accounting StandardsNo. 142, “Goodwill and Other Intangible Assets,” (SFAS No. 142).  SFAS No. 142 required the Company, uponadoption, to determine the implied fair value of its reported goodwill of $12.5million at January 1, 2002.  The impliedfair value of goodwill is the amount determined by deducting the estimated fairvalue of all tangible and identifiable intangible net assets of a reportingunit from the estimated fair value of the reporting unit. If the recorded valueof goodwill exceeds its implied value, an impairment charge is recorded for theexcess.  The estimation of fair valuerequired the Company to make judgments concerning future cash flows of thereporting unit with recorded goodwill, and appropriate discount rates. TheCompany determined with the assistance of an independent appraiser that theimplied fair value of its goodwill at January 1, 2002 was zero, and recorded animpairment charge for $12.5 million. The Company has no remaining goodwill at December 31, 2002.

 

*Capitalized Software Development Costs:*

 

The Companydevelops and markets software products designed principally for clients ofEnterprise Systems and Applied Technology Solutions.  Development costs are capitalized when the technologicalfeasibility of a product or product enhancement is established, and expensed asresearch and development costs prior to such a determination.  Amortization of capitalized costs isrecognized on a product-by-product basis over expected useful lives when theproduct is available for general release. For each product with unamortized capitalized costs, the Companyperiodically evaluates capitalized software development costs for impairment byestimating future cash flows for each product. To the extent that the unamortized costs exceed these estimated futurecash flows, additional amortization expense is recorded.

 

At December 31,2002, the Company had unamortized capitalized software development costs ofapproximately $3.3 million.  During2002, the Company capitalized $2.3 million of software development costs andrecorded amortization of $5.5 million, including $2.9 million of acceleratedamortization caused by revisions to estimates of likely future cash flows fromspecific products in the Applied Technology Solutions and Enterprise Systemssegments.  Because the process ofcapitalizing software costs requires the Company to ascertain the date thattechnological feasibility was established, and the amortization of softwarecosts requires the Company to estimate product lives and future cash flows,reported results of operations are sensitive to these estimates.  If the Company revises estimates of productlives or the estimated future cash flows from sales of its software products,the amount of future amortization could be materially affected.

 

*Revenue Recognition:*

* *

The majorityof the Company’s revenue is generated from consulting fees. The majority of theCompany’s consulting contracts are on a time-and-materials basis, although manyof the contracts contain initial “not-to-exceed” amounts and Companyperformance obligations. The Company’s remaining consulting contracts are on afixed-price basis. Revenue is recognized using the proportional performancemethod.  Consulting contracts generallyvary in length from 1 to 36 months.

 

Earned revenueis based on the percentage that direct labor and other contract costs incurredto date bear to total estimated costs, after giving effect to the most recentestimates of total cost. The cumulative impact of revisions in total costestimates during the progress of work is reflected in the period in which thesechanges become known. Earned revenue reflects the original contract priceadjusted for agreed-upon claim and change order revenue, if any.  Losses expected to be incurred on jobs inprocess, after consideration of estimated minimum recoveries from claims andchange orders, are charged to income as soon as such losses are known.  See Note 5 of the financial statements fordisclosures related to costs and estimated earnings on contracts in process.

 

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Revenue fromthe 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 ispersuasive evidence of an agreement. Under the residual method, the Companydefers revenue on any undelivered element, as indicated by vendor-specificobjective evidence of the fair market value of the undelivered element, andrecognizes the residual amount in the period in which delivery takes place.  Any modifications to vendor-specificobjective evidence established by the Company would affect the timing ofrevenue recognition.  The Companygenerally does not grant its customers a right of return for a full or partialrefund on its products. Revenue from all maintenance, hosting, and customersupport agreements is recognized ratably over the term of the agreement,generally one year, with the unrecognized portion at the balance sheet datebeing recorded as deferred revenue. Revenue from professional services and trainingrelating to products is recognized as the services are performed.

 

*Income Taxes:*

* *

The Companyincurred a net operating loss for the year ended December 31, 2002.  As of December 31, 2002, a portion of thenet operating loss could be carried back to obtain refunds of prior incometaxes paid with the remaining net operating loss of approximately $0.9 millionbeing carried forward.  As of December31, 2002, the realization of the net operating loss to be carried forward wasnot assured beyond a reasonable doubt, and therefore, a valuation allowance of$3.5 million was recorded against the net deferred tax assets from thecarryforward.

 

## **Item 7A.  Quantitative and Qualitative DisclosureAbout Market Risk**

 

The Companydoes not have significant interest rate risk related to its line of credit,which has an interest rate equivalent to the 30-day LIBOR rate (1.382 percenton December 31, 2002), plus 90 basis points. The Company does not havesignificant foreign currency risk related to foreign sales because of theminimal amount of funds maintained in foreign payroll and operating accounts.The Company does not have any derivative commodity instruments or otherfinancial instruments such as interest swaps, foreign currency forwards,futures and options, or foreign currency denominated debt, except for creditline debt of its majority-owned subsidiary, SAPLS. The Company does not havecommodity price risk or other relevant market risks.

 

## **Item 8.**           Financial Statements and Supplementary Data

 

Theconsolidated financial statements of the Company are included on pages 44through 63.

 

## **Item 9.**           Changes in and Disagreements withAccountants on Accounting and Financial Disclosure

 

The AuditCommittee of the Board of Directors of RWD Technologies, Inc. recommended thedismissal of RWD’s independent auditors, Arthur Andersen LLP (“Andersen”), andthe engagement of Ernst & Young LLP (“Ernst & Young”) as RWD’s newindependent auditors, effective May 31, 2002. The Audit Committee’s recommendation was approved by RWD’s Board of Directors.  The change in auditors followed RWD’smanagement decision to seek proposals from independent accountants to auditRWD’s financial statements.  As a resultof the restatements identified in Note 2 to the consolidated financialstatements, Ernst & Young audited the consolidated financial statements forthe year ended December 31, 2002, and the consolidated financial statements forthe years ended December 31, 2001 and 2000, as restated.

 

Andersen’sreports on RWD’s financial statements for the years ended December 31, 2001,and 2000, did not contain an adverse opinion or disclaimer of opinion, nor werethey qualified or modified as to uncertainty, audit scope or accountingprinciples.

 

During the twomost recent fiscal years audited by Andersen, there were no disagreements onany matter of accounting principles or practices, financial statementdisclosure, or auditing scope or procedure which, if not resolved to Andersen’ssatisfaction, would have caused them to make reference to the subject matter inconnection with its reports on RWD’s consolidated financial statements for suchyears; and there were no reportable events, as listed in item 304(a)(l)(v) ofRegulation S-K.

 

RWD providedAndersen with a copy of the disclosures above.

 

During RWD’stwo most recent years audited by Andersen, RWD did not consult Ernst &Young with respect to the application of accounting principles to a specifiedtransaction, either completed or proposed, or the type of audit opinion thatmight be rendered on the financial statements, or any other matters orreportable events listed in Item 304(a)(l)(v) of Regulation S-K.

 

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**PART III.**

## **Item 10.  Directors and Executive Officers**

 

The followingtable sets forth information regarding RWD’s directors, executive officers, andother significant employees:

 
| **Executive  Officers and Directors** |   | **Age** |   | **Position**                                                                          |
|---------------------------------------|--------|---------|--------|---------------------------------------------------------------------------------------|
| Dr. Robert  W. Deutsch                |   | 79      |   | Chairman of  the Board of Directors, Chief Executive Officer, and President, Director |
| Kenneth J.  Rebeck                    |   | 51      |   | Senior Vice  President and Chief Knowledge Officer, Director                          |
| Dana M. Sohr                          |   | 43      |   | President—Enterprise  Systems Group, Director                                    |
| Daniel J.  Slater                     |   | 47      |   | President—Performance  Solutions Group, Director                                 |
| Jeffrey W.  Wendel                    |   | 48      |   | President—Applied  Technology Solutions Group, Director                          |
| Dudley R.  Beagle                     |   | 43      |   | Vice  President—Global Lean Solutions                                            |
| Michael Bray                          |   | 49      |   | Senior Vice  President—Enterprise Systems                                        |
| Beth Marie  Buck                      |   | 48      |   | Vice  President and Chief Financial Officer                                           |
| Jane C.  Brown                        |   | 52      |   | Director                                                                              |
| James R.  Kinney                      |   | 64      |   | Director                                                                              |
| Jerry P.  Malec                       |   | 60      |   | Director                                                                              |
| Robert T.  O’Connell             |   | 64      |   | Director                                                                              |
| Robert M.  Rubin                      |   | 61      |   | Director                                                                              |
| Henry Z  Shelton, Jr                  |   | 59      |   | Director                                                                              |
| Dr. David  Yager                      |   | 54      |   | Director                                                                              |
|                                  |   |    |   |                                                                                  |
| **Key Employees**                     |   |    |   |                                                                                  |
| Daniel A.  Cantwell                   |   | 50      |   | Vice  President—Human Performance Solutions                                      |
| Richard M.  Contel                    |   | 54      |   | Vice  President—Enterprise eLearning                                             |
| Robert B.  Gosline, Jr                |   | 60      |   | Vice  President and Chief Information Officer                                         |
| Laurens  MacLure, Jr                  |   | 46      |   | Vice  President, General Counsel and Corporate Secretary                              |
| Mary M.  Shafer                       |   | 42      |   | Vice President—Enterprise  Systems, Europe                                       |

 
| **Name and Age**                      |   | **Principal occupation, directorships with public  companies, and other information**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|---------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Dr. Robert W. Deutsch**Age: 79 |   | *Dr. Robert W. Deutsch* founded RWD  Technologies, Inc. in January 1988 and has been Chairman of the Board and  Chief Executive Officer since that time, and has served as President of RWD  since January 1, 2002. Dr. Deutsch founded General Physics Corporation in  1966 and was its Chairman, President, and Chief Executive Officer until 1987.  From 1963 to 1971, Dr. Deutsch was Chairman and Professor of Nuclear Science  and Engineering at The Catholic University of America. Dr. Deutsch has a  Ph.D. in physics from the University of California, is a member of the  National Academy of Engineering and is a registered Professional Engineer. He  received his bachelor’s degree in physics from the Massachusetts Institute of  Technology. |
|                                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **Kenneth J. Rebeck**Age: 51          |   | *Kenneth J. Rebeck* joined the Company in 1988  and has been a director since 1991. He currently serves as Senior Vice  President and Chief Knowledge Officer of RWD. From 1978 until 1988, Mr.  Rebeck was employed by General Physics Corporation in a variety of  professional and management capacities, including Project Director for a  major NASA Pressure Vessel Recertification Program and Chief Engineer and  Director of High Technology Activities. Mr. Rebeck received his M.S. in  nuclear science and engineering from Carnegie Mellon University and his  bachelor’s degree in nuclear engineering from the State University of New  York at Buffalo. He has Professional Engineering licenses in Maryland,  Michigan and Pennsylvania.   |

 

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| **Name and Age**                 |   | **Principal occupation, directorships with public  companies, and other information**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|----------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Dana M. Sohr**Age: 43          |   | *Dana M. Sohr* joined the Company in 1993 and  currently serves as President of the Enterprise Systems Group. He was elected  to the Board of Directors in January 2002. Mr. Sohr has 21 years of  experience supporting implementation of large information systems and for the  past 13 years has concentrated his activities on SAP software  implementations. He has been responsible for delivering high-quality training  and support solutions to customers such as Dow Chemical, Goodyear, Polaroid  and Tenneco Automotive. Mr. Sohr received his bachelor’s degree in general  studies, with concentrations in computer science and economics, from the  University of Maryland.                                                                                                                                                                                                                                                                                                                             |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Daniel J. Slater**Age: 47      |   | *Daniel J. Slater* joined the Company in 1999  and currently serves as President of the Performance Solutions Group. Mr.  Slater was elected to the Board of Directors in July 2000. Mr. Slater has  over 25 years of overall manufacturing experience, 16 of which are in lean  manufacturing environments. Prior to joining the Company, Mr. Slater was  the plant manager of body welding manufacturing and engineering with BMW  Manufacturing Corporation from 1993 to 1999. From 1987 to 1993, he served as  a production engineering manager with Toyota Motor Manufacturing. From 1977  to 1987, Mr. Slater held various positions with Volkswagen of America.                                                                                                                                                                                                                                                                                                                                            |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Jeffrey W. Wendel**Age: 48     |   | *Jeffrey W. Wendel* joined the Company in 1994  and currently serves as President of Applied Technology Solutions Group.  He was elected to the Board of Directors  in 1996. Prior to joining the Company, Mr. Wendel was the Director of Process  Simulation for S3 Technologies, Inc. from 1990 to 1994, where he managed an  international business unit that focused on software solutions for the  petrochemical, natural gas and nuclear power industries. From 1989 to 1990,  he was Director of Simulation Technology for the Company. In his prior career  assignments, Mr. Wendel was a technical manager for the Singer Company-Link  SSD division and served in the U.S. Navy as a nuclear-trained submarine  officer. Mr. Wendel received his M.B.A. in management from Loyola College and  his bachelor’s degree in systems engineering from the U.S. Naval Academy. He  currently is a member of technical advisory boards at Towson University and  the University of Maryland, Baltimore County. |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Dudley R. Beagle**Age: 43      |   | *Dudley R. Beagle* joined the Company in 1996  and currently serves as Vice President of Global Lean Solutions. Mr. Beagle  moved to Europe in 1997 to help the Company grow its business there, and  became Manager of European Operations in 1998. He has more than 22 years of  automotive experience and has served in a variety of management roles. Prior  to joining RWD, Mr. Beagle served as Operations Manager for Lobdel Emery from  1995 to 1996, and as Production Superintendent for Johnson Controls from 1990  to 1995. Mr. Beagle holds associate degrees in business management and  marketing from the Kentucky College of Business.                                                                                                                                                                                                                                                                                                                                                                     |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Michael Bray**Age:  49    |   | *Michael Bray* joined RWD in 1995 and  currently serves as Senior Vice President of Enterprise Systems. In this  capacity, Mr. Bray leads the organization in providing a wide range of human  performance consulting services, including business strategy, change  management, process reengineering, training and electronic performance  support. Prior to joining the Company, Mr. Bray served as Director of  Training for the U.S. Coast Guard. Mr. Bray received his M.S. in  instructional systems design from Indiana University, his M.A.L.S. in physics  from Wesleyan University and his bachelor’s degree in marine science from the  U. S. Coast Guard Academy.                                                                                                                                                                                                                                                                                                                                         |
|                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Beth Marie Buck**Age:  48 |   | *Beth Marie Buck* joined the Company in 2000  and currently serves as Vice President and Chief Financial Officer. She is  responsible for the executive oversight of financial activities, including  public reporting, international operations, finance, and investor relations.  Prior to joining the Company, Ms. Buck served for eight years as a senior  finance and operations officer in a privately held services business and for  one year as CFO and investment advisor at Greater Washington Investors.  Earlier in her career, she worked at Coopers & Lybrand and H.J. Heinz  Company. Ms. Buck received her masters degree from Carnegie Mellon University  with distinguished honors in finance and graduated summa cum laude in  accounting from Robert Morris College. She is a Certified Public Accountant.                                                                                                                                                                                         |

 

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| **Name and Age**                    |   | **Principal occupation, directorships with public  companies, and other information**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|-------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Jane C. Brown**Age: 52            |   | *Jane C. Brown* was elected to the Board of  Directors on March 1, 2001. She also serves on the Board of Directors of Legg  Mason Trust, which provides investment services nationwide to high net worth  individuals and families, and chairs its Investment and Trust Committee.  Since 1995, Ms Brown has served as Executive Vice President and a member of  the Board of Directors of The Robert W. Deutsch Foundation, Inc., a private  philanthropic enterprise. She also serves on the Board of Directors of the  University of Maryland College Park Foundation, the University of Maryland  Foundation, the University of Baltimore Educational Foundation and the  University of Baltimore. In addition, Ms. Brown is a member of the Boards of  Trustees of Goucher College, The Park School of Baltimore and the Association  of Baltimore Area Grantmakers. She serves on the City of Baltimore Workforce  Investment Board and the Executive Steering Committee for the Digital Harbor  High School, a project of the Baltimore City Public School System. Ms. Brown  has an M.A. degree in English from the State University of New York at Stony  Brook and a bachelor’s degree in English and philosophy from the University  of Maryland, College Park. Ms. Brown is the daughter of Dr. Robert W.  Deutsch. |
|                                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **James R. Kinney**Age: 64          |   | *James R. Kinney* was elected to the Board of  Directors in March 2000 and is the Chairman of the Board’s Compensation  Committee and a member of the Board’s Audit Committee. Mr. Kinney has been  President of Mariner Consulting Incorporated since 2000. In February 2000,  Mr. Kinney retired from Kraft Foods North America as Senior Vice President  and Chief Information Officer, where he was responsible for the strategic  planning, development and deployment of business information systems. From  1996 to 1998, Mr. Kinney served as the Chairman of the IS Committee for the  Grocery Manufacturers’ Association, the trade association representing food  manufacturers. He also chaired the Efficient Consumer Response sub-committee  on IT. From 1996 to 1997, Mr. Kinney served as President of the Society for  Information Management, an international organization dedicated to the issues  of managing IT. He is on the advisory boards of several technology start-up  firms and also serves in the same capacity for SHARE, a society for IT  professionals. He has an M.B.A. from Northwestern University and a bachelor’s  degree from the U.S. Naval Academy.                                                                                                                   |
|                                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **Jerry P. Malec**Age: 61           |   | *Jerry P. Malec* was elected to the Board of  Directors following completion of the Company’s 1997 initial public offering  and currently serves on the Board’s Audit Committee.  Mr. Malec has been Chairman of the Board  of Servigistics, a provider of eBusiness applications for Supply Chain  Planning Systems, since 1997.  From  1994 to 1997, Mr. Malec was President and Chief Executive Officer of  Checkmate Electronics, Inc., a developer and manufacturer of systems and  software for the retail and financial services industry.  For six years prior to that, Mr. Malec was  employed by Apple Computer, Inc., as Vice President and General Manager of  its Enterprise Markets division.  Mr.  Malec received his bachelor’s degree in economics from Wayne State  University.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **Robert T. O’Connell**Age: 64 |   | *Robert T. O’Connell* was elected to the Board  of Directors following completion of the Company’s 1997 initial public  offering. He joined the company in August 1997 as Senior Vice President of  Strategic Business Planning.  From  August 2000 to June 2001, he served as Chief Financial Officer and Senior  Vice President of Strategic Business Planning.  From 1995 to 1997, Mr. O’Connell served as Senior Vice  President and Chief Staff Officer of EMC Corporation, a leading provider of  intelligent enterprise storage and retrieval technology.  Between 1965 and 1994, Mr. O’Connell held  several positions in General Motors Corporation, including Chairman and Chief  Executive Officer of General Motors Acceptance Corporation Financial Services  and Chief Financial Officer of General Motors Corporation.  Mr. O’Connell received his M.B.A in  finance from the Harvard Graduate School of Business Administration and his  bachelor’s degree in economics from Yale University.                                                                                                                                                                                                                                                                      |

 

27

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| **Name and Age**                  |   | **Principal occupation, directorships with public  companies, and other information**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|-----------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Robert M. Rubin**Age: 61        |   | *Robert M. Rubin* was elected to the Board of  Directors on March 1, 2001, and is a member of the Board’s Compensation  Committee. He currently serves as CEO of Valley Management Consultants (VMC),  a firm that specializes in information technology strategy, organizational  design and evaluation. Prior to forming VMC in 2000, Mr. Rubin was Senior  Vice President and Chief Information Officer for Elf Atochem North America, a  diversified chemical company, where he was responsible for all information  technology, re-engineering and various administrative functions. Mr. Rubin  has served on information technology advisory boards for various  organizations, including the School District of Philadelphia, the City of  Philadelphia, the American Management Association, The Wharton School of the  University of Pennsylvania and CIO magazine. Mr. Rubin currently serves on  the IT Advisory Council to the Commonwealth of Pennsylvania and the advisory  board of Information Week. He has an M.A. degree in physics from Temple  University and a bachelor’s degree in physics from Drexel University. |
|                              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **Henry Z Shelton, Jr.**Age: 59   |   | *Henry Z Shelton*, Jr. was elected to the  Board of Directors on May 1, 2001 and is Chairman of the Board’s Audit  Committee. Mr. Shelton currently serves as Senior Vice President and  Chief Financial Officer of USEC Inc., a supplier of enriched uranium fuel for  commercial nuclear power plants. Prior to joining USEC, Mr. Shelton  worked at Sunoco, Inc. where he held numerous senior financial management and  inside board positions in Exploration and Production, Refining and Marketing,  Shipbuilding and the corporate office. Mr. Shelton has an M.B.A. from the  University of Chicago and a bachelor’s degree from Carnegie Mellon  University. He also has an Honors Diploma from the University of Vienna,  Austria.                                                                                                                                                                                                                                                                                                                                                                              |
|                              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **Dr. David Yager**Age: 54        |   | *Dr. David Yager* has served on the Board of  Directors since April 2000. Dr. Yager held a number of management positions  with RWD from July 1999 to August 2002, including President of the  Latitude360 Group (now know as the Applied Technology Solutions Group) and  Director of the Applied Technology Laboratory. Dr. Yager is currently a  Distinguished Professor at the University of Maryland Baltimore County  (UMBC).  Prior to joining RWD, he was  a Distinguished Professor and Chair of UMBC’s Visual Arts Department and  founding Director of the Imaging Research Center for over 13 years. Dr. Yager  received his H.D.D. from De Montfort University in the U.K., his M.F.A. from  Florida State University and his bachelor’s degree from the University of  Connecticut.                                                                                                                                                                                                                                                                                                                                   |
|                              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **Daniel A. Cantwell**Age: 50     |   | *Daniel A. Cantwell* joined the Company in  1991 and serves as Vice President of Human Performance Solutions. Prior to  joining the Company, Mr. Cantwell was employed by The Chrysler Corporation  from 1984 to 1991 as a Senior Technical Training Specialist. Mr. Cantwell  received his B.A.S. in robotics and flexible automation from Sienna Heights  College.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **Richard M. Contel**Age: 54      |   | *Richard M. Contel*joined the Company in 1991  and serves as Vice President of Enterprise eLearning. During his career with  RWD, Mr. Contel has been a director in the ERP, Electronic Document  Management and Information Technology service areas. Before joining RWD, Mr.  Contel worked for the B.F. Goodrich Company for 16 years, where he had broad  management responsibilities in production and maintenance involving  operations management, organizational development, productivity improvement,  waste reduction and systems development. Mr. Contel has a bachelor’s degree  in mechanical engineering from Lafayette College.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **Robert B. Gosline, Jr.**Age: 60 |   | *Robert B. Gosline, Jr.,* joined the Company  in 1988 and serves as Vice President and Chief Information Officer, where he  directs activities in strategic information system planning and  implementation. Prior to joining the Company, Mr. Gosline was employed by  General Physics Corporation from 1975 to 1988, and prior thereto served as a  nuclear submarine officer in the U.S. Navy. Mr. Gosline received his M.S. in  computer science from The Johns Hopkins University and his bachelor’s degree  from the U.S. Naval Academy.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

 

28

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| **Name and Age**                        |   | **Principal occupation, directorships with public  companies, and other information**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|-----------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Laurens MacLure, Jr.**  Age:  46 |   | *Laurens MacLure, Jr.* joined the Company in  1999 and currently serves as Vice President, General Counsel and Corporate  Secretary. Prior to joining the Company, Mr. MacLure was employed as General  Counsel by Pioneer EyeCare, Inc. from 1997 to 1999, and prior thereto served  in a variety of legal positions with PHH Corporation from 1984 to 1997, most  recently as Senior Vice President and General Counsel of PHH Vehicle  Management Services. From 1981 to 1984, Mr. MacLure was in private legal  practice. Mr. MacLure received his bachelor’s degree in economics from  Bucknell University and his J.D. from the University of Maryland School of  Law. |
|                                    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **Mary  M. Shafer**  Age:  42      |   | *Mary  M. Shafer* joined the Company in 1995 and currently serves  as Vice President, Enterprise Systems, Europe, where she is responsible for  developing new business for Enterprise Systems and cultivating relationships  with SAP subsidiaries and partners in Europe. Prior to joining RWD, Ms.  Shafer provided a full range of publication services to government and  private-industry clients as a technical writer and publications manager from  1986 to 1995.  She was employed by  Heldref Publications, Inc., as managing editor of various academic journals  from 1982 to 1986.  Ms. Shafer has a  B.A. in English from James Madison University.      |

 

## **Item 11.  Executive Compensation**

**EXECUTIVE COMPENSATION**

 

The followingtable sets forth information about the annual and long-term compensation forthe last three fiscal years of the Chief Executive Officer and the five otherhighest paid executive officers of RWD during fiscal year 2002 (collectively,the “Named Executive Officers”). All numbers are rounded to the nearest dollar.

 

29

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# **Summary Compensation Table**

** **
|                             |   | **Annual  Compensation** |   | **Long-Term  Compensation  Awards** |    |
|----------------------------------|--------|--------------------------|--------|-------------------------------------|---------|
| **Name and Principal  Position** |   | **Year**                 |   | **Salary**                          |    | **Bonus** |   | **Group  Insurance(2)** |   | **401K  Match** |   | **Other(1)** |   | **Securities  Underlying  Options** |   |
| Dr. Robert W. Deutsch            |   | 2002                     |   | $                                   | 150,000 |   | $ | — |   | — |   | 4,200 |   | $ | — |   | — |   |
| Chairman, Chief                  |   | 2001                     |   | 150,000                             |    | — |   |   |   |   |   | — |   | — |   |
| Executive Officer and            |   | 2000                     |   | 150,000                             |    | — |   |   |   |   |   | — |   | — |   |
| President                        |   |                     |   |                                |    |   |   |   |   |   |   |   |   |   |   |
|                             |   |                     |   |                                |    |   |   |   |   |   |   |   |   |   |   |
| Kenneth J. Rebeck                |   | 2002                     |   | $                                   | 228,125 |   | $ | — |   | 1,254 |   | 4,400 |   | — |   | 12,000 |   |
| Senior Vice President            |   | 2001                     |   | 300,000                             |    | — |   |   |   |   |   | — |   | 30,000 |   |
| and Chief Knowledge              |   | 2000                     |   | 225,000                             |    | — |   |   |   |   |   | — |   | 15,000 |   |
| Officer                          |   |                     |   |                                |    |   |   |   |   |   |   |   |   |   |   |
|                             |   |                     |   |                                |    |   |   |   |   |   |   |   |   |   |   |
| Daniel J. Slater                 |   | 2002                     |   | $                                   | 300,000 |   | $ | — |   | 818 |   | 4,400 |   | — |   | 30,000 |   |
| President – Performance     |   | 2001                     |   | 300,000                             |    | — |   |   |   |   |   | — |   | 30,000 |   |
| Solutions Group                  |   | 2000                     |   | 271,000                             |    | — |   |   |   |   |   | — |   | 18,000 |   |
|                             |   |                     |   |                                |    |   |   |   |   |   |   |   |   |   |   |
| Dana M. Sohr(3)                  |   | 2002                     |   | $                                   | 295,417 |   | $ | — |   | 545 |   | 4,400 |   | — |   | 30,000 |   |
| President – Enterprise      |   | 2001                     |   | 190,000                             |    | — |   |   |   |   |   | — |   | 18,000 |   |
| Systems Group                    |   | 2000                     |   | N/A                                 |    | N/A |   |   |   |   |   | N/A |   | N/A |   |
|                             |   |                     |   |                                |    |   |   |   |   |   |   |   |   |   |   |
| Jeffrey W. Wendel(5)             |   | 2002                     |   | $                                   | 219,938 |   | $ | — |   | 818 |   | 4,400 |   | — |   | 10,000 |   |
| President – Applied         |   | 2001                     |   | 211,500                             |    | — |   |   |   |   |   | — |   | 16,500 |   |
| Technology Solutions             |   | 2000                     |   | 235,000                             |    | — |   |   |   |   |   | — |   | 15,000 |   |
| Group                            |   |                     |   |                                |    |   |   |   |   |   |   |   |   |   |   |
|                             |   |                     |   |                                |    |   |   |   |   |   |   |   |   |   |   |
| Dr. David Yager                  |   | 2002                     |   | 288,750                             |    | $ | — |   | 1,254 |   | 4,400 |   | 22,081 | (4) | 20,000 |   |
| President – Latitude360     |   | 2001                     |   | 295,000                             |    | — |   |   |   |   |   | — |   | 33,000 |   |
| Group                            |   | 2000                     |   | 250,000                             |    | — |   |   |   |   |   | — |   | 38,000 |   |
|                                  |        |                          |        |                                     |         |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)                                  The Company alsoprovides certain perquisites and other personal benefits. The aggregate dollarcost to the Company of such perquisites and other benefits in each of the yearsrepresented did not exceed the lesser of $50,000 or 10 percent of the amountreflected in the Salary and Bonus columns for any of the Named ExecutiveOfficers other than Dr. David Yager (see footnote 4 below). 

(2)                                  Amounts disclosed inthis column represent the imputed income derived from group life insurance andsplit dollar life insurance provided for the Named Executives.   

(3)                                  Mr. Sohr becamePresident of the Enterprise Systems Group on January 1, 2002. 

(4)                                  This amount reflectscertain severance and other benefits that Dr. Yager received pursuant to theterms of his employment agreement when he resigned from the Company asPresident of the Applied Technology Solutions Group (formerly Latitude360) onAugust 30, 2002. Dr. Yager will continue to serve on the Board of Directorsuntil his term expires at the 2005 Annual Meeting, but will not receivecompensation for his services as a director.

(5)                                  Mr. Wendel becameActing President of Applied Technology Solutions when Dr. David Yager resignedas President of this operating group in September 2002.  Prior to assuming this position, Mr. Wendelserved as the Company’s Senior Vice President and Operations Officer forApplied Technology Solutions.  Mr.Wendel’s compensation did not change when he assumed this position. In December2002, the Board approved Mr. Wendel’s promotion to President of the AppliedTechnology Solutions Group (formerly Latitude360) effective December 31,2002.  

 

# **Compliance with Section 16(A) with of theExchange Act**

 

Section 16(a)of the Securities Exchange Act of 1934, as amended, requires the Company’sexecutive officers and directors and persons who beneficially own 10 percent ormore of the Company’s Common Stock (the “Reporting Persons”) to file reportsregarding their RWD Common Stock ownership and changes in that ownership withthe SEC. Based solely on a

 

30

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review of the copies of suchforms furnished to RWD and written representations from the Reporting Persons,the Company believes that during 2002, each of the Reporting Persons compliedwith all Section 16(a) reporting requirements applicable to them, withexception of one late report for each of Ms. Buck and Mr. Bray.  As a result of an administrative error, Ms.Buck’s initial Form 3 was inadvertently not filed when due.  Mr. Bray’s Form 3 was filed one daylate.  Other than these late filings,Ms. Buck and Mr. Bray have timely filed Form 4 reports with the SEC.  In making these statements, RWD has reliedupon examination of the copies of Forms 3, 4 and 5 provided to the Companyand the written representations of its directors and officers.

# ** **

# **Option Grants In The Last Fiscal Year**

 

The following table sets forth information regardingoptions to purchase shares of RWD Common Stock granted to the Named ExecutiveOfficers during the last fiscal year.

 
|                  |   | **Individual Grants**                                   |   |                                                                 |   |                              |   |
|-----------------------|--------|---------------------------------------------------------|--------|----------------------------------------------------------------------|--------|-----------------------------------|--------|
| **Name**              |   | **Number of  Securities  Underlying  Options  Granted** |   | **Percent of  Total Options  Granted to  Employees in  Fiscal Year** |   | **Exercise  Price Per  Share(1)** |   | **Expiration  Date** |   | **Potential Realized  Value at Assumed  Annual Rates of Stock  Price Appreciation for  Option Term(2)** |   |
|                  |   |                                                    |   |                                                                 |   |                              |   |   |   | **5%** |   | **10****%** |   |
| Dr. Robert W. Deutsch |   | —                                                  |   | —                                                               |   | —                            |   | — |   | — |   | — |   |
|                  |   |                                                    |   |                                                                 |   |                              |   |   |   |   |   |   |   |
| Kenneth J. Rebeck     |   | 12,000                                                  |   | 1.0                                                                  |   | $                                 | 2.20   |   | 06/27/2012 |   | 16,603 |   | 42,075 |   |
|                  |   |                                                    |   |                                                                 |   |                              |   |   |   |   |   |   |   |
| Daniel J. Slater      |   | 30,000                                                  |   | 2.5                                                                  |   | 2.20                              |   | 06/27/2012 |   | 41,507 |   | 105,187 |   |
|                  |   |                                                    |   |                                                                 |   |                              |   |   |   |   |   |   |   |
| Dana M. Sohr          |   | 30,000                                                  |   | 2.5                                                                  |   | 2.20                              |   | 06/27/2012 |   | 41,507 |   | 105,187 |   |
|                  |   |                                                    |   |                                                                 |   |                              |   |   |   |   |   |   |   |
| Jeffrey W. Wendel     |   | 10,000                                                  |   | 0.8                                                                  |   | 2.20                              |   | 6/27/2012 |   | 13,836 |   | 35,062 |   |
|                  |   |                                                    |   |                                                                 |   |                              |   |   |   |   |   |   |   |
| Dr. David Yager       |   | 20,000                                                  |   | 1.7                                                                  |   | 2.20                              |   | 06/27/2012 |   | 27,671 |   | 70,125 |   |
|                       |        |                                                         |        |                                                                      |        |                                   |        |  |  |  |  |  |  |  |

 

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(1)                                  The exercise priceequaled the fair market value of RWD Common Stock as determined by theCompensation Committee of the Board of Directors on the grant date. Theexercise price is payable in cash or by delivery of shares of RWD Common Stockhaving a fair market value equal to the exercise price of options exercised.

(2)                                  The 5 percent and 10percent assumed annual rates of stock price appreciation used to calculatepotential gains to optionees are mandated by the rules of the SEC. Thepotential realizable value does not represent the Company’s prediction of itsstock price performance. There can be no assurance that the stock price willactually appreciate over the 10-year option term at the assumed 5 percent and10 percent levels or at any other level. 

 

# **Aggregate Option Exercises In The Last FiscalYear And Year-End Option Values**

 

The followingtable sets forth information concerning the number and exercise price of theoptions to purchase RWD Common Stock exercised by the Named Executive Officersduring the last fiscal year and the number and value of unexercised options topurchase RWD Common Stock held at the end of the fiscal year by the NamedExecutive Officers. Value is considered to be, in the case of exercisedoptions, the difference between exercise price and market price on the date ofexercise, and, in the case of unexercised options and exercisable options, thedifference between exercise price and $1.55, the closing price on December 31,2002 for RWD Common Stock as reported by Nasdaq. 

 

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| **Name**              |   | **Shares  Acquired On  Exercise** |   | **Value  Realized** |   | **Number of  Securities  Underlying Options at  Year-End Exercisable/  Unexercisable(1)** |   | **Value of  Unexercised  In-the-Money Options at  Year-End  Exercisable/Unexercisable(1)** |   |
|-----------------------|--------|-----------------------------------|--------|---------------------|--------|-------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------|--------|
|                  |   |                              |   |                |   | **Exercisable**                                                                           |   | **Unexercisable**                                                                          |   | **Exercisable** |   | **Unexercisable** |   |
| Dr. Robert W. Deutsch |   | —                            |   | —              |   | —                                                                                    |   | —                                                                                     |   | — |   | — |   |
| Kenneth J. Rebeck     |   | —                            |   | —              |   | 90,000                                                                                    |   | —                                                                                     |   | $ | 64,500 |   | — |   |
| Daniel J. Slater      |   | —                            |   | —              |   | —                                                                                    |   | —                                                                                     |   | — |   | — |   |
| Dana M. Sohr          |   | —                            |   | —              |   | 6,000                                                                                     |   | —                                                                                     |   | 3,300 |   | — |   |
| Jeffrey W. Wendel     |   | —                            |   | —              |   | 6,200                                                                                     |   | —                                                                                     |   | 3,410 |   | — |   |
| Dr. David Yager       |   | —                            |   | —              |   | —                                                                                    |   | —                                                                                     |   | — |   | — |   |
|                       |        |                                   |        |                     |        |                                                                                           |        |                                                                                            |        |  |  |  |  |  |

 

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(1)                                  Includes only thevalue of exercisable and unexercisable in-the-money options. 

 

# **Equity Compensation Plans**

 

The following table sets forth information regarding outstandingoptions and shares reserved for future issuance under the Company’s Amended andRestated Equity Participation Plan and its Amended and Restated Omnibus StockIncentive Plan, the Company’s only equity-based compensation plans, as ofDecember 31, 2002. There are no outstanding warrants or rights other thanoptions under these plans.  These equitycompensation plans have been approved by RWD’s stockholders.

 
| **Plan Category**                                                  |   | **Number of Securities  to be Issued Upon  Exercise of  Outstanding Options** |   | **Weighted - Average  Exercise Price of  Outstanding Options** |   | **Number of Securities  Remaining Available for  Future Issuance Under Equity  Compensation Plans** |      |
|--------------------------------------------------------------------|--------|-------------------------------------------------------------------------------|--------|----------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------|-----------|
| Equity compensation plans  approved by RWD’s security holders |   | 5,908,125                                                                     |   | $                                                              | 5.72   |                                                                                                | 3,115,740 | (1) |
|                                                                    |        |                                                                               |        |                                                                |        |                                                                                                     |           |  |

 

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(1)                                  Includes 225,688shares authorized and available for issuance in connection with the RWDTechnologies, Inc. Amended and Restated Employee Stock Purchase Plan (the“423(b) Plan”).   

 

# **Non-employee Director Compensation**

 

During 2002,directors who are not employees or former employees of RWD received a totalannual compensation package as follows: (a) an annual board retainer of$20,000, one-half in the form of shares of RWD Common Stock having a fairmarket value of $10,000 on the date of issuance, and the other $10,000 paid incash; (b) an annual committee retainer of $1,000 in cash for membership on eachBoard Committee (or $2,000 in cash where the director serves as the chairpersonof the Board Committee); (c) a fee of $1,000 in cash for each Board and BoardCommittee meeting attended; and (d) cash reimbursement for actual travel andout-of-pocket expenses incurred in connection with their service as directors.

 

In addition,upon their first election and upon each re-election to the Board of Directors,each director who is not an employee of the Company is granted an option topurchase 4,000 shares of RWD Common Stock under the Company’s stock option planfor each year remaining in the then current term of the class of directors to whichthe director is first elected. Each option vests ratably over a three-yearperiod beginning one year after the date of grant and has an exercise priceequal to the fair market value of RWD Common Stock on the date of grant.Non-employee directors are also eligible to receive additional options at theend of each calendar year at the discretion of the Board.

 

On April 26,2002, upon their re-election to the Board, the Company granted Ms. Jane C.Brown and Mr. Robert M. Rubin, each, an option to purchase 12,000 shares of RWDCommon Stock at an exercise price of $3.50 per share (the fair market value onthe date of grant).

 

Directors whoare employees or former employees of RWD do not receive any compensation fortheir service as directors.

 

32

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# **Employment Agreements**

 

The Companyhas entered into Employment Agreements with Dr. Robert W. Deutsch, Mr. KennethJ. Rebeck, and Mr. Jeffrey W. Wendel. Each of these Employment Agreements hasan initial term of three years and is automatically renewed thereafter forsuccessive one-year terms until terminated by either the Company or theexecutive officer.

 

The Companyalso entered into an Employment Agreement with Mr. Daniel J. Slater and Dr.David Yager in order to secure their services with the Company as President ofthe Performance Solutions Group and President of the Applied TechnologySolutions Group, respectively. Each Employment Agreement has an initial term ofone year and automatically renews thereafter for successive one-year termsuntil terminated by either the Company or the executive officer.  All Employment Agreements entered into bythe Company with the Named Executive Officers provide for initial annualsalaries, subject to annual adjustment at the discretion of the Chief ExecutiveOfficer and the Company’s Compensation Committee, and provide for discretionaryannual cash bonuses in amounts determined by the Company’s CompensationCommittee. The Employment Agreements contain confidentiality provisions andone-year covenants-not-to-compete and a non-solicitation of employeesrestriction following termination or expiration of employment (as defined inthe Employment Agreements).  When Dr.Yager resigned from the Company on August 30, 2002, he received certainseverance and other benefits as provided for in his Employment Agreement.

 

With regard toexecutive officers who are not directors, RWD entered into EmploymentAgreements with Ms. Beth Marie Buck and Mr. Dudley R. Beagle. Each EmploymentAgreement provides that in the event of termination of employment for anyreason other than death, disability, retirement or for cause, the executiveofficer will receive certain severance benefits. These Employment Agreementsalso contains confidentiality provisions, a covenant-not-to-compete and anon-solicitation of employees restriction following termination or expirationof their employment with the Company.

 

# **Compensation Committee Interlocks and InsiderParticipation in Compensation Decisions**

 

None of thedirectors serving on the Compensation Committee is an employee of RWD, andneither the Chief Executive Officer nor any of the Named Executive Officers (asdefined above) has served on the Compensation Committee. None of the members ofthe Compensation Committee, or any other director or executive officer of RWD,entered into (or agreed to enter into) any transaction or series oftransactions with the Company or any of its subsidiaries in which the amountinvolved exceeds $60,000. Dr. Robert W. Deutsch, Chairman, Chief ExecutiveOfficer and President of RWD, and Ms. Jane C. Brown, Dr. Deutsch’s daughter anda director of RWD, serve as directors and executive officers of The Robert W.Deutsch Foundation, Inc. The Robert W. Deutsch Foundation compensates Ms. Brownfor her services as its Executive Vice President. No other director orexecutive officer of RWD is a director or executive officer of any othercorporation that has a director or executive officer who is also a director orBoard Committee member of RWD.

 

# **Compensation Committee Report on ExecutiveCompensation**

* *

*Compensation Committee Overview*.  The function of the Compensation Committeeis to advise the Board of Directors regarding overall compensation policies andrecommend specific compensation for the Company’s senior executive officers.The Compensation Committee is responsible for providing guidance to the Boardregarding broad compensation issues, including salaries, bonuses, optiongrants, benefits and other remuneration for officers and employees of the Company.The Compensation Committee’s responsibilities also include administering theCompany’s stock option plans, employee stock purchase plan and 401(k) plan. TheCompensation Committee is composed only of independent directors who have neverbeen officers or employees of the Company and have no other interlockingrelationships with RWD that are subject to disclosure under SEC rules relatingto proxy statements.

 

At itsmeetings in 2002, the Committee discussed the full range of compensation issuesfacing the Company, the various recommendations of management, the generalmarketplace for talented employees and compensation market conditions.

* *

*Compensation Philosophy.*TheCompany applies a consistent philosophy to compensation for all employees,including senior management. This philosophy is based upon the premise that thesuccess of the Company results from the efforts of each employee and that acooperative, team-oriented environment is an essential part of the Company’sculture and success. The Company believes strongly in the importance ofrewarding employees for the common success of the organization. Consequently,the Company places particular emphasis on (a) broad employee equityparticipation through the use of stock options with long-term vesting, and (b)annual cash bonuses linked to overall Company profitability as integral partsof its compensation structure. However, in light of the current environmentconcerning the broad distribution of stock options and the significant declinein the Company’s stock price over the last year, the Committee is working withthe Company’s management to evaluate the effectiveness of granting stockoptions as part of its overall compensation program.

* *

*Compensation of the Named Executive Officers.*The principal elements of the Company’s executivecompensation program consist of both annual compensation (primarily basesalary) and long-term incentive compensation in the form of

 

33

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stock options with extendedvesting periods. Base salary, annual cash bonuses and stock option grants aredetermined on the basis of the performance of the Company, the operating groupand the individual executive officer. Recommendations regarding the base salaryof, and the annual cash bonuses to be paid to, the Named Executive Officers,other than the Chief Executive Officer, are made to the Compensation Committeeby the Chief Executive Officer and either approved or modified by theCompensation Committee. The recommendation as to annual cash bonuses paid toeach Named Executive Officer is based upon a review of the performance of theseofficers during the prior year by the Chief Executive Officer and theirrespective group’s performance relative to the Company’s business plan. TheCompensation Committee concurred with the recommendations made by the ChiefExecutive Officer with respect to the base salary of the Named ExecutiveOfficers and the recommendation that no cash bonuses be paid to any of theNamed Executive Officers in 2002.

 

In addition tobase salaries, officers of the Company are eligible to receive annual cashbonuses at the discretion of the Compensation Committee. Cash bonuses forofficers are determined at year-end on the basis of the performance of theCompany, the operating group and the individual executive officer. In additionto these objectives, the Chief Executive Officer’s bonus is also linked to theannual increase in the Company’s profitability.

 

*Compensation of the Chief Executive Officer.*Dr.Robert W. Deutsch is the founder of the Company and serves as its Chairman andChief Executive Officer. To determine the appropriate base salary for theCompany’s Chief Executive Officer, the Committee retained a nationalcompensation consulting firm to advise the Committee based on data resourcesthat include publicly available proxy materials, industry survey data, and theconsultants’ experience in assisting public companies in establishingmanagement compensation plans.  Theresults of the compensation consultant’s review determined that the Company’sChief Executive Officer’s compensation is below the norm for ChiefExecutiveOfficers of peer group companies. However, Dr. Deutsch recommendedthat his base salary remain at the level he received in 2001. Consequently, theCommittee considered and approved a continuing base salary of $150,000 for Dr.Deutsch, effective January 1, 2003.

* *

*Long-Term Incentive Compensation*.During 2002, the Company granted stock options for 1,387,990 shares to 820directors, officers and employees of the Company*.*Dr. Deutsch owns a significant percentage of the Company’sCommon Stock, and, therefore, he participates proportionately in any increasein stockholder value. The Compensation Committee believes that Dr. Deutsch’sexisting equity ownership sufficiently links his interests to the financialsuccess of the Company. Therefore, during 2002, as in prior years, Dr. Deutschwas not granted options under the Company’s stock option plan.

 
|   | James R.  Kinney, Chairman |
|--------|----------------------------|
|   | Robert M.  Rubin           |

 

**StockPerformance Graph**

 

RWD isrequired by the SEC to provide a five-year comparison of the cumulative totalstockholder return on RWD Common Stock compared with that of a broad equitymarket index and either a published industry index or a RWD-constructed peergroup index.

 

The followingchart compares the cumulative total stockholder return on RWD Common Stock forthe period beginning June 19, 1997, (the date of RWD’s initial public offering)and ending December 31, 2002, with the cumulative total return on the NasdaqComposite (U.S.) and Nasdaq Computer and Data Processing indices. Thecomparison assumes $100 was invested on June 19, 1997, in RWD Common Stock andin each of the foregoing indices. It also assumes reinvestment of anydividends.

 

RWD does notmake, nor does it endorse, any predictions as to future stock performance.

 

34

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## **Item 12.**      SecurityOwnership of Certain Beneficial Owners and Management

 

# **Stock Ownership of Certain Beneficial Owners**

 

The followingtable sets forth information as of December 31, 2002, with respect to thosepersons, in addition to Dr. Robert W. Deutsch, known to the Company to be thebeneficial owners of more than five percent of the issued and outstandingCommon Stock of the Company.

 

| **Name and Address of  Beneficial Owner**                             |   | **Number of  Shares  Beneficially Owned** |   | **Percentage  of Class** |   |
|-----------------------------------------------------------------------|--------|-------------------------------------------|--------|--------------------------|--------|
| FMR Corp.(1)  82 Devonshire Street  Boston, Massachussets  02109 |   | 1,338,101                                 | (2)    | 8.719                    | %      |

 

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(1)                                  Theinformation set forth above was provided to the Company in the beneficialowner’s Schedule 13G dated February 14, 2003. Reporting as a parent holdingcompany in accordance with Section 240.13d-1(b)(ii)(G).

(2)                                  Solepower to dispose or direct the disposition of 1,338,101 shares and investmentpower in respect of all shares.

 

# **Stock Ownership of Directors and Management**

 

The followingtable sets forth information as of March 3, 2003, with respect to thebeneficial ownership of RWD Common Stock (including shares issuable upon theexercise of outstanding options that are exercisable on or before May 2, 2003),by (a) each of the directors of the Company; (b) each of the other executiveofficers who are not directors; and (c) all directors and executive officers asa group. Unless otherwise indicated, each named person exercises sole votingand investment power, or shares such powers with his or her spouse, withrespect to the shares set forth in the following table.

 

35

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|                                                |   | **Shares Beneficially Owned** |   |
|-----------------------------------------------------|--------|-------------------------------|--------|
| **Name(1)**                                         |   | **Number**                    |   | **Nature(2)** |   | **Percent** |   |
| Dr. Robert W. Deutsch                               |   | 8,905,500                     |   | Direct |   | 60.8 | % |
|                                                |   | 450,000                       |   | Indirect(3) |   |   |   |
|                                                |   |                          |   |   |   |   |   |
| Dudley R. Beagle                                    |   | 8,841                         |   | Direct |   | * |   |
|                                                |   | 22,300                        |   | Vested  Options |   |   |   |
|                                                |   |                          |   |   |   |   |   |
| Michael Bray                                        |   | 4,032                         |   | Direct |   | * |   |
|                                                |   | 26,266                        |   | Vested  Options |   |   |   |
|                                                |   |                          |   |   |   |   |   |
| Jane C. Brown                                       |   | 170,097                       |   | Direct |   | 4.1 | % |
|                                                |   | 450,000                       |   | Indirect(4) |   |   |   |
|                                                |   | 12,000                        |   | Vested  Options |   |   |   |
|                                                |   |                          |   |   |   |   |   |
| Beth Marie Buck                                     |   | 4,269                         |   | Direct |   | * |   |
|                                                |   | 5,000                         |   | Vested  Options |   |   |   |
|                                                |   |                          |   |   |   |   |   |
| Robert B. Gosline, Jr.                              |   | 4,032                         |   | Direct |   | * |   |
|                                                |   | 44,900                        |   | Vested  Options |   |   |   |
|                                                |   |                          |   |   |   |   |   |
| James R. Kinney                                     |   | 7,008                         |   | Direct |   | * |   |
|                                                |   | 15,333                        |   | Vested  Options |   |   |   |
|                                                |   |                          |   |   |   |   |   |
| Jerry P. Malec                                      |   | 9,278                         |   | Direct |   | * |   |
|                                                |   | 25,333                        |   | Vested  Options |   |   |   |
|                                                |   |                          |   |   |   |   |   |
| Robert T. O’Connell                            |   | 25,000                        |   | Direct |   | * |   |
|                                                |   | 80,000                        |   | Vested  Options |   |   |   |
|                                                |   |                          |   |   |   |   |   |
| Kenneth J. Rebeck                                   |   | 2,037                         |   | Direct |   | 1.1 | % |
|                                                |   | 166,800                       |   | Vested  Options |   |   |   |
|                                                |   |                          |   |   |   |   |   |
| Robert M. Rubin                                     |   | 6,097                         |   | Direct |   | * |   |
|                                                |   | 12,000                        |   | Vested  Options |   |   |   |
|                                                |   |                          |   |   |   |   |   |
| Henry Z Shelton, Jr.                                |   | 7,481                         |   | Direct |   | * |   |
|                                                |   | 8,000                         |   | Vested  Options |   |   |   |
|                                                |   |                          |   |   |   |   |   |
| Daniel J. Slater                                    |   | 25,600                        |   | Vested Options |   | * |   |
|                                                |   |                          |   |   |   |   |   |
| Dana M. Sohr                                        |   | 10,338                        |   | Direct |   | * |   |
|                                                |   | 42,600                        |   | Vested  Options |   |   |   |
|                                                |   |                          |   |   |   |   |   |
| Dr. David Yager                                     |   | 11,284                        |   | Direct |   | * |   |
|                                                |   | 36,200                        |   | Vested  Options |   |   |   |
|                                                |   |                          |   |   |   |   |   |
| Jeffrey W. Wendel                                   |   | 5,712                         |   | Direct |   | * |   |
|                                                |   | 500                           |   | Indirect(5) |   |   |   |
|                                                |   | 98,500                        |   | Vested  Options |   |   |   |
|                                                |   |                          |   |   |   |   |   |
| All directors and officers as a group (16  persons) |   |                          |   |   |   | 69.6 | % |

 

36

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*                 Lessthan 1%. 

(1)          Theaddress of each stockholder listed in the table is c/o RWD Technologies, Inc.,5521 Research Park Drive, Baltimore, Maryland, 21228, Attention: ChiefFinancial Officer. 

(2)          “VestedOptions” are options that may be exercised as of March 3, 2003, or May 2, 2003,60 days thereafter. “Direct Shares” include shares held by the named person,including shares subject to vesting, forfeiture risk or other restrictions. 

(3)          Consistsof 450,000 shares owned by Mrs. Florence Deutsch, Dr. Robert W. Deutsch’s wife,as to which Dr. Deutsch disclaims beneficial ownership. 

(4)          Consistsof 450,000 shares held in trust for the benefit of Ms. Brown’s minor child andnieces and nephews, for which Ms. Brown serves as co-trustee and as to whichMs. Brown disclaims beneficial ownership. 

(5)          Consistsof 500 shares held in the Fred W. Wendel Trust B account, for which Mr. Wendelserves as a co-trustee and as to which Mr. Wendel disclaims beneficialownership. 

 

## **Item 13.**      CertainRelationships and Related Transactions

 

# **Relocation-Related Loan to Executive Officer**

 

In July 2000,RWD made a relocation loan to Mr. Daniel J. Slater, President of thePerformance Solutions Group, as part of a relocation package required to induceMr. Slater to accept the position of President of the PerformanceSolutions Group and move from Greenville, North Carolina to the Detroit,Michigan area. In place of a standard relocation bonus, RWD provided a loan of$60,000 to be used by Mr. Slater for the purchase of a home in Michigan. Theloan will be repaid over a 5-year period with interest at 3% per year.  However, in the event that Mr. Slater (1)defaults in his payment obligation; (2) becomes insolvent; or (3) terminateshis employment with RWD, the loan will become immediately due and payable. Inaccordance with the Sarbanes-Oxley Act, RWD will not materially modify or renewthis loan and, in the future, will not provide any new loans to its executiveofficers as required under the Sarbanes-Oxley Act.

 

## **Item 14.**      Controlsand Procedures

 

*(a)**                               Evaluation of disclosure controls andprocedures.*  During the90-day period prior to the filing date of this report, management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, evaluatedthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures.  Based upon,and as of the date of that evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that the disclosure controls and procedures wereeffective, in all material respects, to ensure that information required to bedisclosed in the report the Company files and submits under Rules 13 and 15d ofthe Securities and Exchange Act of 1934, as amended, is recorded, processed,summarized and reported as and when required.

 

*(b)**                               Changes in internal controls.*  Since the evaluation date, there were no significant changes inthe Company’s internal controls or in other factors that could significantlyaffect those controls subsequent to the evaluation date, and no correctiveactions with regard to significant deficiencies and material weaknesses.

 

## **Item 16.**      PrincipalAccountant Fees and Services

 

In 2002, Ernst& Young performed various professional services for RWD.  These services included the annual audit,review work associated with required filings with the Securities and ExchangeCommission, preparation of corporate tax returns and other consultation withthe Company’s personnel on accounting, tax and related matters.  Prior to Ernst & Young’s appointment asthe Company’s independent auditors on May 31, 2002, the former independentaudit firm, Arthur Andersen LLP, provided certain audit and non-audit services.

 

37

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|                                                                       |   | **Ernst & Young LLP  (05/31/02 to 12/31/02)** |       | ***Arthur Andersen  LLP(Prior to 05/31/02)** |       |
|----------------------------------------------------------------------------|--------|---------------------------------------------------|------------|----------------------------------------------|------------|
| Audit Fees:                                                                |   | $                                                 | 107,608    |                                         | $          | 72,218 |   |
| Non-Audit Fees:                                                            |   |                                              | ** ** |                                         | ** ** |
| •  Financial Information Systems  Design and Implementation Fees |   | **—**                                        | ** ** | **—**                                   | ** ** |
| •  Attestation Fees                                              |   | 54,511                                            |       | 23,000                                       |       |
| •  Tax Fees:                                                     |   | 4,500                                             |       | 108,612                                      |       |
| •  All Other Fees:                                               |   | 6,068                                             |       | 46,492                                       |       |
| Total Fees:                                                                |   | $                                                 | 172,687    |                                         | $          | 250,322 |   |

 

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*                 Includes$64,717 in audit fees and $9,000 in attestation fees for 2001, which wereinvoiced and paid in 2002. Such fees were not included in the Company’s AuditCommittee Report or Proxy Statement issued in 2002.

 

**PARTIV.**

 

## **Item 15.**      Exhibits, Financial Statement Schedules, AndReports On Form 8-K

 
| (a)    |   | The  following documents are filed as a part of this report: |                                                                                                                                                                                   |
|--------|--------|--------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |
|   |   | 1.                                                           | Financial  Statements                                                                                                                                                                  |
|   |   |                                                         |                                                                                                                                                                                   |
|   |   |                                                         | The  financial statements of the Company are included on pages 44 through 63.                                                                                                          |
|   |   |                                                         |                                                                                                                                                                                   |
|   |   | 2.                                                           | Financial  Statement Schedules                                                                                                                                                         |
|   |   |                                                         |                                                                                                                                                                                   |
|   |   |                                                         | Schedule II  – Valuation and Qualifying Accounts                                                                                                                                  |
|   |   |                                                         |                                                                                                                                                                                   |
|   |   |                                                         | All other  schedules for which provision is made in the applicable accounting regulation  of the Securities and Exchange Commission are inapplicable and therefore have  been omitted. |
|   |   |                                                         |                                                                                                                                                                                   |
|   |   | 3.                                                           | Exhibits                                                                                                                                                                               |
|   |   |                                                         |                                                                                                                                                                                   |
|   |   |                                                         | (a).                                                                                                                                                                                   | Exhibits |
|        |        |                                                              |                                                                                                                                                                                        |  |  |  |

 

38

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| **Exhibit No.** |   | **Description**                                                                                                                                                                           |
|-----------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                      |
| 3.01            |   | Articles of  Amendment and Restatement of the Charter(B)                                                                                                                                  |
| 3.02            |   | Amended and  Restated Bylaws(E)                                                                                                                                                           |
| 4.01            |   | Specimen  Common Stock Certificate(B)                                                                                                                                                     |
| 10.01           |   | Maryland Full-Service Office Lease between  the Company and Columbia Management, Inc., dated as of January 1, 1994, as  amended(B)                                                        |
| 10.02           |   | Amended and  Restated Equity Participation Plan(B)                                                                                                                                        |
| 10.03           |   | Employee  Stock Purchase Plan(B)                                                                                                                                                          |
| 10.04           |   | Chrysler Corporation General Terms &  Conditions/Clause Manual-Facilities and Material Purchasing-General Terms and  Conditions(B)                                                    |
| 10.05           |   | Letter Agreement from First National Bank  of Maryland to the Company, dated February 27, 1996, regarding $7.5 million  unsecured line of credit(B)                                       |
| 10.06           |   | Form of  Executive Employment Agreement(B)                                                                                                                                                |
| 10.07           |   | 1998 Omnibus  Stock Incentive Plan(C)                                                                                                                                                     |
| 10.08           |   | Amendment,  dated February 24, 2000, to 1998 Omnibus Stock Incentive Plan(D)                                                                                                              |
| 10.09           |   | Education  Services Alliance Agreement between RWD and SAP America, Inc.(E)                                                                                                               |
| 10.10           |   | Employment  Agreement between RWD and Daniel J. Slater(E)                                                                                                                                 |
| 10.11           |   | Employment  Agreement between RWD and Beth Marie Buck(E)                                                                                                                                  |
| 10.12           |   | Amended  & Restated Employee Stock Purchase Plan(E)                                                                                                                                   |
| 10.13           |   | Employment  Agreement between RWD and David Yager(F)                                                                                                                                      |
| 16.01           |   | Letter from  Arthur Andersen LLP to the Securities and Exchange Commission dated May 30,  2002(G)                                                                                         |
| 21.01           |   | Subsidiaries  of the Registrant(A)                                                                                                                                                        |
| 23.01           |   | Consent of  Ernst & Young LLP(A)                                                                                                                                                      |
| 24.01           |   | Powers of  Attorney(A)                                                                                                                                                                    |
| 99.01           |   | 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)(A) |
| 99.02           |   | 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)(A)     |

 

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A                            Filedherewith.

B                              Incorporated by referenceto the Exhibits to the Company’s Registration Statement on Form S-1 datedFebruary 14, 1997 (No. 333-21779), as amended.

C                              Incorporated by referenceto the Exhibits to the Company’s 1997 Form 10-K, dated March 25, 1998 (No.000-22145).

D                             Incorporated by referenceto the Exhibits to the Company’s 2nd quarter 2000 Form 10-Q, dated August 11,2000 (No. 000-22145).

E                             Incorporated by referenceto the Exhibits to the Company’s 2001 Annual Report on Form 10-K, dated April1, 2002 (No. 000-22145).

F                             Incorporated by referenceto the Exhibits to the Company’s 2nd quarter 2002 Form 10-Q, dated August 14,2002 (No. 000-22145).

G                            Incorporated by reference tothe Exhibits to the Company’s Current Report on Form 8-K, dated May 31, 2002(No. 000-22145).

 

(b)   Current Reports on Form 8-K.

 

On October 11,2002, the Company filed a Current Report on Form 8-K disclosing under Item 5 –Other Events, the appointment of Jeffrey W. Wendel as acting President ofApplied Technology Solutions, the Company’s eLearning and eBusiness integrationdivision.

 

39

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**SIGNATURES**

 

Pursuant tothe requirements of Section 13 of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf of theundersigned, thereunto duly authorized on March 31, 2003.

 
|   | RWD  TECHNOLOGIES, INC. |
|--------|-------------------------|
|   | (Registrant)            |
|   |                    |   |   |
|   |                    |   |   |
|   | 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) |
|        |                         |  |  |  |

 

40

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**CERTIFICATIONS**

 

I, Robert W. Deutsch, certifythat:

 

1.               I have reviewed this annual report onForm 10-K of RWD Technologies, Inc;

 

2.               Based on my knowledge, this annualreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3.               Based on my knowledge, the financialstatements, and other financial information included in this annual report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this annual report;

 

4.               The registrant’s other certifyingofficer and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and have:

 

a.               Designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this annual report isbeing prepared;

 

b.              Evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing of this annual report (the “Evaluation Date”); and

 

c.               Presented in this annual report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifyingofficer and I have disclosed, based on our most recent evaluation, to the registrant’sauditor and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a.               All significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b.              Any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls;

 

6.               The registrant’s other certifyingofficer and I have indicated in this annual report whether there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
|   | Dated:  March 31, 2003 |   |                                                                                                    |
|--------|-----------------------------|--------|---------------------------------------------------------------------------------------------------------|
|   |                        |   |                                                                                                    |
|   |                        | By:    | /s/ Robert  W. Deutsch                                                                                  |   |
|   |                        |   | Robert W.  Deutsch, Ph.D.                                                                               |
|   |                        |   | Chairman of  the Board, Chief Executive Officer, President,  and Director (Principal Executive Officer) |

 

41

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**CERTIFICATIONS**

 

 

I, Beth Marie Buck, certifythat:

 

1.               I have reviewed this annual report onForm 10-K of RWD Technologies, Inc;

 

2.               Based on my knowledge, this annualreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3.               Based on my knowledge, the financialstatements, and other financial information included in this annual report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this annual report;

 

4.               The registrant’s other certifyingofficer and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and have:

 

a.               Designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this annual report isbeing prepared;

 

b.              Evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 days priorto the filing of this annual report (the “Evaluation Date”); and

 

c.               Presented in this annual report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifyingofficer and I have disclosed, based on our most recent evaluation, to theregistrant’s auditor and the audit committee of registrant’s board of directors(or persons performing the equivalent function):

 

d.              All significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

e.               Any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls;

 

6.               The registrant’s other certifyingofficer and I have indicated in this annual report whether there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
|   | Dated:  March 31, 2003 |   |                                                                                      |
|--------|-----------------------------|--------|-------------------------------------------------------------------------------------------|
|   |                        |   |                                                                                      |
|   |                        | By:    | /s/ Beth  Marie Buck                                                                      |   |
|   |                        |   | Beth Marie  Buck, CPA                                                                     |
|   |                        |   | Vice  President and Chief Financial Officer  (Principal Financial and Accounting Officer) |

 

42

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**REPORT OF INDEPENDENT AUDITORS**

 

The Board of Directors andShareholders of

RWD Technologies, Inc.:

 

We haveaudited the accompanying consolidated balance sheets of RWD Technologies, Inc.as of December 31, 2002 and 2001, and the related consolidated statements of operations,changes in stockholders’ equity, and cash flows for each of the three years inthe period ended December 31, 2002.  Ouraudits also included the financial statement schedule listed in the Index atItem 15(a). These financial statements and schedule are the responsibility ofthe Company’s management.  Ourresponsibility is to express an opinion on these financial statements andschedule based on our audits.

 

We conductedour audits in accordance with auditing standards generally accepted in the UnitedStates. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of RWD Technologies,Inc. at December 31, 2002 and 2001, and the consolidated results of itsoperations and its cash flows for each of the three years in the period endedDecember 31, 2002, in conformity with accounting principles generally acceptedin the United States. Also, in our opinion, the related financial statementschedule, when considered in relation to the basic financial statements takenas a whole, presents fairly in all material respects the information set forththerein.

 

As discussedin Note 3 to the financial statements, effective January 1, 2002, the Companychanged its method of accounting for goodwill.

 
|                 | /s/ Ernst  & Young LLP |   |
|----------------------|----------------------------|--------|
|                 |                       |
| Baltimore,  Maryland |                       |
| March 14,  2003      |                       |

 

43

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**RWD Technologies, Inc.**

**Consolidated BalanceSheets**

**(In thousands, exceptper share data)**

** **
|                                                                                                                          |   | **As of  December 31,**        |       |
|-------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|------------|
|                                                                                                                          |   | **2001**                       |       | **2002** |   |
|                                                                                                                          |   | **(as restated,  see Note 2)** |       |   |   |
| **Assets**                                                                                                                    |   |                           | ** ** |   | ** ** |
| Current Assets:                                                                                                               |   |                           |       |   |   |
| Cash                                                                                                                          |   | $                              | 3,676      |   | $ | 3,694 |   |
| Restricted cash and investments                                                                                               |   | —                         |       | 10,508 |   |
| Investments, available-for-sale                                                                                               |   | 19,093                         |       | 7,618 |   |
| Contract accounts receivable, net of  allowance for doubtful accounts  of  $753 and $953, respectively                   |   | 18,973                         |       | 19,053 |   |
| Costs and estimated earnings in excess of  billings on uncompleted contracts                                                  |   | 7,021                          |       | 6,005 |   |
| Income tax refund receivable                                                                                                  |   | 2,755                          |       | 7,802 |   |
| Prepaid expenses and other current assets                                                                                     |   | 2,172                          |       | 1,703 |   |
| Deferred tax assets                                                                                                           |   | 2,635                          |       | 388 |   |
| Total Current  Assets                                                                                                         |   | 56,325                         |       | 56,771 |   |
| Fixed Assets:                                                                                                                 |   |                           |       |   |   |
| Furniture and fixtures                                                                                                        |   | 9,145                          |       | 9,210 |   |
| Office equipment                                                                                                              |   | 3,091                          |       | 3,130 |   |
| Computer equipment                                                                                                            |   | 18,414                         |       | 18,002 |   |
| Leasehold improvements                                                                                                        |   | 4,233                          |       | 4,586 |   |
| Total Fixed Assets                                                                                                            |   | 34,883                         |       | 34,928 |   |
| Less accumulated depreciation and  amortization                                                                               |   | 21,536                         |       | 25,253 |   |
| Net Fixed Assets                                                                                                              |   | 13,347                         |       | 9,675 |   |
| Goodwill                                                                                                                      |   | 12,529                         |       | — |   |
| Capitalized software development costs and  other assets                                                                      |   | 7,872                          |       | 4,251 |   |
| Restricted investments                                                                                                        |   | —                         |       | 2,508 |   |
|                                                                                                                          |   |                           |       |   |   |
| Total Assets                                                                                                                  |   | $                              | 90,073     |   | $ | 73,205 |   |
|                                                                                                                          |   |                           |       |   |   |
| **Liabilities and Stockholders’ Equity**                                                                                 |   |                           |       |   |   |
| Current Liabilities:                                                                                                          |   |                           |       |   |   |
| Accounts payable and accrued expenses                                                                                         |   | $                              | 3,918      |   | $ | 7,330 |   |
| Accrued payroll and related benefits                                                                                          |   | 6,510                          |       | 6,049 |   |
| Credit lines payable                                                                                                          |   | 717                            |       | 4,705 |   |
| Billings in excess of costs and estimated  earnings on uncompleted contracts                                                  |   | 2,616                          |       | 744 |   |
| Deferred revenue                                                                                                              |   | 1,332                          |       | 2,682 |   |
| Current portion of long-term debt                                                                                             |   | 300                            |       | 567 |   |
| Total Current Liabilities                                                                                                     |   | 15,393                         |       | 22,077 |   |
| Noncurrent Liabilities:                                                                                                       |   |                           |       |   |   |
| Long-term debt, net of current portion                                                                                        |   | 2,399                          |       | 2,712 |   |
| Deferred tax liabilities                                                                                                      |   | 2,634                          |       | 388 |   |
| Total Liabilities                                                                                                             |   | 20,426                         |       | 25,177 |   |
| Commitments and Contingencies:                                                                                                |   |                           |       |   |   |
| Stockholders’ Equity:                                                                                                    |   |                           |       |   |   |
| Common stock, $0.10 par value:  authorized-50,000,000 shares; issued and outstanding-15,302,645 and  15,418,938, respectively |   | 1,530                          |       | 1,542 |   |
| Accumulated  other comprehensive loss                                                                                         |   | (686                           | )          | (117 | ) |
| Additional paid-in capital                                                                                                    |   | 47,735                         |       | 46,499 |   |
| Retained earnings                                                                                                             |   | 21,068                         |       | 104 |   |
| Total Stockholders’ Equity                                                                                               |   | 69,647                         |       | 48,028 |   |
|                                                                                                                          |   |                           |       |   |   |
| Total Liabilities and Stockholders’ Equity                                                                               |   | $                              | 90,073     |   | $ | 73,205 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

44

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**RWD Technologies,Inc.**

**ConsolidatedStatements of Operations**

**(In thousands, exceptper share data)**

** **
|                                                                                        |   | **Year Ended  December 31,**    |    |
|---------------------------------------------------------------------------------------------|--------|---------------------------------|---------|
|                                                                                        |   | **2000**                        |    | **2001** |   | **2002** |   |
|                                                                                        |   | **(as  restated,  see Note 2)** |    | **(as  restated,  see Note 2)** |   |   |   |
| Revenue:                                                                                    |   |                            |    |   |   |   |   |
| Consulting services                                                                         |   | $                               | 130,714 |   | $ | 110,641 |   | $ | 104,702 |   |
| Products and product services                                                               |   | 2,992                           |    | 7,399 |   | 12,783 |   |
| Total revenue                                                                               |   | 133,706                         |    | 118,040 |   | 117,485 |   |
| Cost of revenue:                                                                            |   |                            |    |   |   |   |   |
| Consulting services                                                                         |   | 99,800                          |    | 97,359 |   | 86,867 |   |
| Products and product services                                                               |   | 1,323                           |    | 4,666 |   | 14,920 |   |
| Total cost of revenue                                                                       |   | 101,123                         |    | 102,025 |   | 101,787 |   |
| Gross profit                                                                                |   | 32,583                          |    | 16,015 |   | 15,698 |   |
| Selling, general and administrative  expenses                                               |   | 26,182                          |    | 28,512 |   | 26,277 |   |
| Severance and lease termination expenses                                                    |   | 485                             |    | 997 |   | 3,180 |   |
| Operating income (loss)                                                                     |   | 5,916                           |    | (13,494 | ) | (13,759 | ) |
| Interest expense                                                                            |   | 285                             |    | — |   | 384 |   |
| Other income, net                                                                           |   | 895                             |    | 1,025 |   | 327 |   |
| Income (loss) before income taxes and  cumulative effect of achange in accounting principle |   | 6,526                           |    | (12,469 | ) | (13,816 | ) |
| Provision for (benefit from) income taxes                                                   |   | 2,323                           |    | (3,140 | ) | (3,970 | ) |
| Income (loss) before cumulative effect of a  change in accounting principle                 |   | 4,203                           |    | (9,329 | ) | (9,846 | ) |
| Cumulative effect on prior years of changing  method of accounting for goodwill             |   | —                          |    | — |   | (12,529 | ) |
| Net income  (loss)                                                                          |   | $                               | 4,203   |   | $ | (9,329 | ) | $ | (22,375 | ) |
|                                                                                        |   |                            |    |   |   |   |   |
| Basic earnings  (loss) per share:                                                           |   |                            |    |   |   |   |   |
| Income (loss) before cumulative effect of a  change in accounting principle                 |   | $                               | 0.28    |   | $ | (0.61 | ) | $ | (0.64 | ) |
| Cumulative effect on prior years of  changing method of accounting for goodwill             |   | —                          |    | — |   | (0.82 | ) |
| Net income (loss) per share                                                                 |   | $                               | 0.28    |   | $ | (0.61 | ) | $ | (1.46 | ) |
|                                                                                        |   |                            |    |   |   |   |   |
| Diluted earnings (loss) per share:                                                          |   |                            |    |   |   |   |   |
| Income (loss) before cumulative effect of a  change in accounting principle                 |   | $                               | 0.27    |   | $ | (0.61 | ) | $ | (0.64 | ) |
| Cumulative effect on prior years of  changing method of accounting for goodwill             |   | —                          |    | — |   | (0.82 | ) |
| Net income (loss) per share                                                                 |   | $                               | 0.27    |   | $ | (0.61 | ) | $ | (1.46 | ) |
|                                                                                        |   |                            |    |   |   |   |   |
| Weighted average shares outstanding:                                                        |   |                            |    |   |   |   |   |
| Basic calculation                                                                           |   | 14,943                          |    | 15,252 |   | 15,373 |   |
| Diluted calculation                                                                         |   | 15,518                          |    | 15,252 |   | 15,373 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

45

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**RWD Technologies,Inc.**

**ConsolidatedStatements of Changes in Stockholders’ Equity**

**Years Ended December31, 2000, 2001, and 2002**

**(In thousands)**

 
|                                                  |   | **Common  Stock** |   | **Comprehensive  Income (Loss)** |    | **Accumulated  Other  Comprehensive  Income (Loss)** |   | **Additional  Paid-In  Capital** |   | **Retained  Earnings** |         |
|-------------------------------------------------------|--------|-------------------|--------|----------------------------------|---------|------------------------------------------------------|--------|----------------------------------|--------|------------------------|--------------|
|                                                  |   |              |   |                             |    |                                                 |   |                             |   |                   |         |
| BALANCE, JANUARY 1, 2000                              |   | $                 | 1,470  |                             |    |                                                 | $      |  (45                        | )      | $                      |  47,210 |   | $ | 24,706 |   |
| Comprehensive income:                                 |   |              |   |                             |    |                                                 |   |                             |   |                   |         |
| Net income, as restated (see Note 2)                  |   | —            |   | $                                | 4,203   |                                                 | — |                             | — |                   | 4,203        |   |
| Unrealized gain  on securities                        |   | —            |   | 90                               |    | 90                                                   |   | —                           |   | —                 |         |
| Foreign currency translation adjustments              |   | —            |   | (47                              | )       | (47                                                  | )      | —                           |   | —                 |         |
| Comprehensive income                                  |   | —            |   | $                                | 4,246   |                                                 | — |                             | — |                   | —       |   |
| Stock options exercised                               |   | 29                |   |                             |    | —                                               |   | 464                              |   | —                 |         |
| Stock grants to directors                             |   | —            |   |                             |    | —                                               |   | 40                               |   | —                 |         |
| Tax effect of  non-qualified stock option exercises   |   | —            |   |                             |    | —                                               |   | 614                              |   | —                 |         |
| Employee stock  purchase plan purchases               |   | 13                |   |                             |    | —                                               |   | 834                              |   | —                 |         |
| Accelerated vesting of stock options                  |   | —            |   |                             |    | —                                               |   | (65                              | )      | —                 |         |
|                                                  |   |              |   |                             |    |                                                 |   |                             |   |                   |         |
| BALANCE, DECEMBER 31, 2000, as restated  (see Note 2) |   | 1,512             |   |                             |    | (2                                                   | )      | 49,097                           |   | 28,909                 |         |
| Comprehensive loss:                                   |   |              |   |                             |    |                                                 |   |                             |   |                   |         |
| Net loss, as restated (see Note 2)                    |   | —            |   | $                                | (9,329  | )                                                    | — |                             | — |                   | (9,329       | ) |
| Unrealized gain on securities                         |   | —            |   | 5                                |    | 5                                                    |   | —                           |   | —                 |         |
| Foreign currency translation adjustments              |   | —            |   | (689                             | )       | (689                                                 | )      | —                           |   | —                 |         |
| Comprehensive loss                                    |   | —            |   | $                                | (10,013 | )                                                    | — |                             | — |                   | —       |   |
| Stock options exercised                               |   | 14                |   |                             |    | —                                               |   | 103                              |   | —                 |         |
| Stock grants to directors                             |   | 1                 |   |                             |    | —                                               |   | 48                               |   | —                 |         |
| Common stock repurchased                              |   | (15               | )      |                             |    | —                                               |   | (1,941                           | )      | 1,488                  |         |
| Employee stock purchase plan purchases                |   | 18                |   |                             |    | —                                               |   | 428                              |   | —                 |         |
|                                                  |   |              |   |                             |    |                                                 |   |                             |   |                   |         |
| BALANCE,  DECEMBER 31, 2001, as restated (see Note 2) |   | 1,530             |   |                             |    | (686                                                 | )      | 47,735                           |   | 21,068                 |         |
| Comprehensive loss:                                   |   |              |   |                             |    |                                                 |   |                             |   |                   |         |
| Net loss                                              |   | —            |   | $                                | (22,375 | )                                                    | — |                             | — |                   | (22,375      | ) |
| Unrealized loss  on securities                        |   | —            |   | (22                              | )       | (22                                                  | )      | —                           |   | —                 |         |
| Foreign currency translation adjustments              |   | —            |   | 591                              |    | 591                                                  |   | —                           |   | 8                      |         |
| Comprehensive loss                                    |   | —            |   | $                                | (21,806 | )                                                    | — |                             | — |                   | —       |   |
| Stock options exercised                               |   | 6                 |   |                             |    | —                                               |   | 52                               |   | —                 |         |
| Stock grants to directors                             |   | 1                 |   |                             |    | —                                               |   | 49                               |   | —                 |         |
| Common stock  repurchased                             |   | (13               | )      |                             |    | —                                               |   | (1,662                           | )      | 1,403                  |         |
| Tax effect of  non-qualified stock option exercises   |   | —            |   |                             |    | —                                               |   | 27                               |   | —                 |         |
| Employee stock purchase plan purchases                |   | 18                |   |                             |    | —                                               |   | 298                              |   | —                 |         |
|                                                  |   |              |   |                             |    |                                                 |   |                             |   |                   |         |
| BALANCE, DECEMBER 31, 2002                            |   | $                 | 1,542  |                             |    |                                                 | $      | (117                             | )      | $                      | 46,499       |   | $ | 104 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

46

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**RWD Technologies,Inc.**

**ConsolidatedStatements of Cash Flows**

**(In thousands)**

 
|                                                                               |   | **Year Ended  December 31,**   |   |
|------------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                               |   | **2000**                       |   | **2001** |   | **2002** |   |
|                                                                               |   | **(as restated,  see Note 2)** |   | **(as  restated,  see Note 2)** |   |   |   |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                          |   |                           |   |   |   |   |   |
| Net income (loss)                                                                  |   | $                              | 4,203  |   | $ | (9,329 | ) | $ | (22,375 | ) |
| Adjustments to reconcile net income (loss)  to net cash from operating activities: |   |                           |   |   |   |   |   |
| Depreciation and amortization                                                      |   | 6,669                          |   | 8,849 |   | 11,249 |   |
| (Gain) loss on  disposal of fixed assets                                           |   | (13                            | )      | 215 |   | 67 |   |
| Cumulative effect on prior years of  changing method of accounting for goodwill    |   | —                         |   | — |   | 12,529 |   |
| Deferred income taxes                                                              |   | (315                           | )      | 1,227 |   | (2,436 | ) |
| Effect of changes in:                                                              |   |                           |   |   |   |   |   |
| Contract accounts receivable                                                       |   | (4,890                         | )      | 2,507 |   | 111 |   |
| Costs and estimated earnings in excess of  billings on  uncompleted contracts |   | (2,986                         | )      | 4,442 |   | 1,203 |   |
| Income tax refund receivable                                                       |   | —                         |   | (125 | ) | (1,905 | ) |
| Prepaid expenses and other current assets                                          |   | 1,216                          |   | (477 | ) | 502 |   |
| Accounts payable and accrued expenses                                              |   | 5,949                          |   | (4,890 | ) | 3,481 |   |
| Billings in excess of costs and estimated  earnings on  uncompleted contracts |   | (1,058                         | )      | (279 | ) | (1,741 | ) |
| Other liabilities                                                                  |   | (60                            | )      | 1 |   | — |   |
|                                                                               |   |                           |   |   |   |   |   |
| Net cash provided by operating activities                                          |   | 8,715                          |   | 2,141 |   | 685 |   |
|                                                                               |   |                           |   |   |   |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                          |   |                           |   |   |   |   |   |
| Increase in capitalized software  development costs and other assets               |   | (2,261                         | )      | (5,145 | ) | (1,778 | ) |
| Purchases of investments                                                           |   | (90,204                        | )      | (49,539 | ) | (76,455 | ) |
| Proceeds from sales of investments                                                 |   | 90,004                         |   | 55,233 |   | 74,926 |   |
| Purchase of fixed assets                                                           |   | (7,495                         | )      | (4,870 | ) | (2,497 | ) |
| Proceeds from sale of fixed assets                                                 |   | 83                             |   | 312 |   | 77 |   |
| Payments related to acquisition                                                    |   | (1,380                         | )      | — |   | — |   |
|                                                                               |   |                           |   |   |   |   |   |
| Net cash used by investing activities                                              |   | (11,253                        | )      | (4,009 | ) | (5,727 | ) |
|                                                                               |   |                           |   |   |   |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                          |   |                           |   |   |   |   |   |
| Borrowings on long-term debt                                                       |   | —                         |   | 2,022 |   | 990 |   |
| Principal  portion paid on long-term debt                                          |   | —                         |   | (54 | ) | (408 | ) |
| Borrowings under lines of credit                                                   |   | 44,206                         |   | 43,459 |   | 36,663 |   |
| Payments on lines of credit                                                        |   | (44,206                        | )      | (42,715 | ) | (32,716 | ) |
| Issuance of common stock                                                           |   | 1,389                          |   | 563 |   | 424 |   |
| Repurchase of  common stock                                                        |   | —                         |   | (468 | ) | (272 | ) |
|                                                                               |   |                           |   |   |   |   |   |
| Net cash provided by financing activities                                          |   | 1,389                          |   | 2,807 |   | 4,681 |   |
|                                                                               |   |                           |   |   |   |   |   |
| **NET (DECREASE) INCREASE IN CASH**                                                |   | (1,149                         | )      | 939 |   | (361 | ) |
| **Effect Of Exchange Rate Changes On Cash**                                        |   | (15                            | )      | 141 |   | 379 |   |
| **CASH, beginning of year**                                                        |   | 3,760                          |   | 2,596 |   | 3,676 |   |
|                                                                               |   |                           |   |   |   |   |   |
| **CASH, end of year**                                                              |   | $                              | 2,596  |   | $ | 3,676 |   | $ | 3,694 |   |
|                                                                               |   |                           |   |   |   |   |   |
| Supplemental Cash Flow Disclosures:                                                |   |                           |   |   |   |   |   |
| Income taxes paid                                                                  |   | $                              | 2,326  |   | $ | 767 |   | $ | 473 |   |
| Interest paid                                                                      |   | $                              | 224    |   | $ | 94 |   | $ | 309 |   |
| Change in designation from unrestricted  investments to restricted investments     |   | $                              | — |   | $ | — |   | $ | 13,016 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

47

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**RWD Technologies, Inc.**

**Notesto Consolidated Financial Statements**

**(Dollarsin thousands)**

 

**1.             Summaryof Significant Accounting Policies:**

 

*Organization andBusiness*

 

RWD Technologies, Inc. (the “Company”) was incorporated on January 22,1988, in the State of Maryland. The Company provides a broad range ofintegrated solutions designed to improve the productivity and effectiveness ofworkers in complex operating environments.

 

*Basis ofPresentation*

 

The accompanying consolidated financial statements are prepared inaccordance with accounting principles generally accepted in the United States.These principles require management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities as of the date of the consolidated financialstatements and the reported amounts of total revenue and expenses during thereporting period. Actual results could differ from those estimates.

 

*Principles ofConsolidation*

 

The consolidated financial statements include the accounts of theCompany and its greater than 50% owned subsidiaries.  Investments in 20%- through 50%-owned affiliated companies inwhich the Company exercises significant influence over operating and financialaffairs are accounted for using the equity method of accounting.  Otherwise, investments are accounted for atcost.  All significant intercompanyaccounts and transactions have been eliminated.

 

*Foreign CurrencyTranslation*

 

The financial statements of the Company’sforeign subsidiaries are measured in local functional currencies prior totranslation into U.S. dollars using the current rate method. All balance sheetaccounts are translated using the exchange rates at the balance sheet date.Income statement amounts have been translated using the average exchange ratesfor the year. Translation gains or losses are reported in other comprehensiveincome.

 

*Cash Equivalents andInvestments*

 

Cash equivalents are included in cash and consist of instruments withremaining maturities when purchased of 30 days or less.  All of the Company’s investments areclassified as available-for-sale and carried at fair value.  Unrealized gains and losses are included inother comprehensive income.

 

The amortized cost of available-for-sale debt securities is adjustedfor amortization of premiums and accretion of discounts to maturity.  This amortization is included in interestand other income.  Realized gains andlosses, and declines in value judged to be other than temporary onavailable-for-sale securities are included in interest and other income.  The cost of securities sold is based on thespecific identification method. Interest and dividends on securities classified as available-for-saleare included in interest income.

 

*Restricted Cash andInvestments*

 

The Company maintains restricted cash and investments at December 31,2002 as collateral for outstanding bank borrowings.

 

*Comprehensive Income(Loss)*

 

Comprehensive income (loss) includes all changes in stockholders’equity during a period except those resulting from investments by ordistributions to shareholders.  TheCompany’s non-owner changes in stockholders’ equity consist of foreign currencytranslation adjustments and unrealized gains and losses on available-for-saleinvestments. The Company reports comprehensive income (loss) in the statementof stockholders’ equity.

 

48

----

 

*Fixed Assets*

 

Fixed assetsare stated at cost. Depreciation is computed using the straight-line methodbased on the estimated useful lives as follows:

 
| Furniture and fixtures |   | 7 years    |
|------------------------|--------|------------|
| Office equipment       |   | 5 years    |
| Computer equipment     |   | 3 years    |
| Leasehold improvements |   | 4-10 years |

 

Depreciationexpense for 2000, 2001, and 2002 was $5,841, $6,189, and $5,794, respectively.

 

The Companyrecords impairment losses on long-lived assets used in operations wheneverevents or circumstances indicate that the carrying amount of an asset may notbe recoverable.  An impairment isrecognized to the extent that the sum of undiscounted estimated future cashflows expected to result from the use of the assets is less than the carryingvalue.  As of December 31, 2002,management evaluated the Company’s asset base and determined that no impairmentoccurred.     

 

*Software DevelopmentCosts*

 

Costs ofdeveloping software products incurred prior to completion of a working modelconfirming technological feasibility are accounted for as research anddevelopment expense. These costs are incurred to enhance existing softwareproducts as well as to create new software products, and primarily includepersonnel costs and costs of third party resources. Research and developmentcosts are expensed as incurred, and totaled $0, $31, and $934 in 2000, 2001,and 2002, respectively.

 

Costs incurredfor the development of computer software that will be sold, leased, orotherwise marketed are capitalized when technological feasibility has beenestablished. Costs that are capitalized include direct labor, related overhead,and other direct costs. These capitalized costs are subject to an ongoingassessment of recoverability based upon anticipated future revenue and changesin hardware and software technologies. Unamortized capitalized softwaredevelopment costs determined to be in excess of net realizable value of theproduct are expensed immediately.

 

Amortizationof capitalized software development costs begins when the product is availablefor general release. Amortization is computed on a product-by-product basisusing the straight-line method over the product’s estimated useful life, whichis not to exceed four years. Amortization is also computed using the ratio thatcurrent revenue for the product bears to the total of current and anticipatedfuture revenue for that product. If this revenue curve method results inamortization greater than the amount computed using the straight-line method,amortization is recorded at that greater amount.

 

*Revenue Recognition*

 

The majorityof the Company’s revenue is generated from consulting fees. The majority of theCompany’s consulting contracts are on a time-and-materials basis, although manyof the contracts contain initial “not-to-exceed” amounts and Companyperformance obligations. The Company’s remaining consulting contracts are on afixed-price basis. Revenue is recognized using the proportional performancemethod. Consulting contracts generally vary in length from 1 to 36 months.

 

Earned revenueis based on the percentage that direct labor and other contract costs incurredto date bear to total estimated costs, after giving effect to the most recentestimates of total cost. The cumulative impact of revisions in total cost estimatesduring the progress of work is reflected in the period in which these changesbecome known. Earned revenue reflects the original contract price adjusted foragreed-upon claim and change order revenue, if any. Losses expected to beincurred on jobs in process, after consideration of estimated minimumrecoveries from claims and change orders, are charged to income as soon as suchlosses are known.

 

Revenue fromthe 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 ispersuasive evidence of an agreement. Under the residual method, the Companydefers revenue on any undelivered element, as indicated by vendor-specificobjective evidence of the fair market value of the undelivered element, andrecognizes the residual amount in the period in which delivery takesplace.  The Company generally does notgrant its customers a right of return for a full or partial refund on itsproducts. Revenue from all maintenance, hosting, and customer supportagreements is recognized ratably over the term of the agreement, generally oneyear, with the unrecognized portion at the balance sheet date being recorded asdeferred revenue. Revenue from professional services and training relating toproducts are recognized as the services are performed.

 

49

----

 

*Shipping and Handling Costs*

 

The Companyaccounts for shipping and handling costs as a component of cost of sales.

* *

*Advertising Costs*

 

Marketing andadvertising costs are expensed as incurred. The Company incurred $151, $304 and $609 of advertising and marketingexpenses in 2000, 2001 and 2002, respectively.

 

*Income Taxes*

 

The Companyrecords provisions for income taxes using the liability method.  Under the liability method, deferred taxassets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities aremeasured using enacted rates expected to apply to taxable income in the yearsthat those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets andliabilities of a change in tax rates is recognized in income in the period thatincludes the enactment date.  Avaluation allowance is recognized to the extent that realization of deferredtax assets are uncertain.

 

*Stock-Based Compensation*

 

The Companyuses the intrinsic value method to account for its employee and director stockoption plans.  Under the intrinsic valuemethod, compensation expense is calculated as the difference between the fairvalue of the underlying common stock and the exercise price of the option atthe date of grant for fixed stock option awards.  Any resulting compensation expense is recognized pro rata overthe vesting period.  For all yearspresented, the Company did not recognize any expense resulting from employee ordirector stock option grants.

 

The Companyrecords compensation expense for stock options granted to consultants at thefair value of the services received or the fair value of the stock optionsissued, whichever is more reliably measurable. For option grants for which the fair value of the stock options is morereliably measurable than the fair value of the services received, the fairvalue of the stock options is measured at the measurement date using theBlack-Scholes option valuation model. The measurement date is the date at which a commitment for performanceto earn the equity instruments is reached or the date at which the performanceis complete, whichever is earlier.

 

The Companyhas computed pro forma net income and earnings per share assuming that the fairvalue method of accounting for its employee and director stock option grantswas adopted.  These computations arebased 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.

 

The following assumptions were used in calculating pro forma stockcompensation expense:

 
|                            |   | **Year Ended December 31,** |   |
|---------------------------------|--------|-----------------------------|--------|
|                            |   | **2000**                    |   | **2001** |   | **2002** |   |
|                            |   |                        |   |   |   |   |   |
| Risk-free interest rate (range) |   | 5.0-6.7%                    |   | 4.5-5.4% |   | 2.9-4.5% |   |
| Expected dividend yield         |   | 0.0%                        |   | 0.0% |   | 0.0% |   |
| Expected lives                  |   | 3-5 years                   |   | 3-5 years |   | 3-5 years |   |
| Expected volatility             |   | 74.0%                       |   | 78.9% |   | 75.1% |   |

 

Pro forma net income (loss) and earnings (loss) per share aresummarized as follows:

 

50

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|                               |   | **Year Ended December 31,** |   |
|------------------------------------|--------|-----------------------------|--------|
|                               |   | **2000**                    |   | **2001** |   | **2002** |   |
|                               |   | (as restated see Note 2)    |   | (as restated see Note 2) |   |   |   |
| Net Income (Loss):                 |   |                        |   |   |   |   |   |
| As reported                        |   | $                           | 4,203  |   | $ | (9,329 | ) | $ | (22,375 | ) |
| Pro forma                          |   | 1,668                       |   | (13,318 | ) | (26,249 | ) |
|                               |   |                        |   |   |   |   |   |
| Basic Earnings (Loss) Per Share:   |   |                        |   |   |   |   |   |
| As reported                        |   | $                           | 0.28   |   | $ | (0.61 | ) | $ | (1.46 | ) |
| Pro forma                          |   | 0.11                        |   | (0.87 | ) | (1.71 | ) |
|                               |   |                        |   |   |   |   |   |
| Diluted Earnings (Loss) Per Share: |   |                        |   |   |   |   |   |
| As reported                        |   | $                           | 0.27   |   | $ | (0.61 | ) | $ | (1.46 | ) |
| Pro forma                          |   | 0.11                        |   | (0.87 | ) | (1.71 | ) |

 

*Basic and Diluted Earnings (Loss) per Share*

 

Basic earnings(loss) per share has been computed using the weighted-average number of sharesof common stock outstanding during the period, less shares that may berepurchased.  Diluted net loss per shareis computed based on the combined weighted-average number of shares and theeffect of potentially dilutive securities outstanding.

 
|                                                       |   | **Years Ended December 31,** |   |
|------------------------------------------------------------|--------|------------------------------|--------|
|                                                       |   | **2000**                     |   | **2001** |   | **2002** |   |
|                                                       |   |                         |   |   |   |   |   |
| Weighted average shares outstanding - basic                |   | 14,943                       |   | 15,252 |   | 15,373 |   |
| Plus:   Common share equivalents – stock options |   | 575                          |   | 274 |   | 304 |   |
|                                                       |   |                         |   |   |   |   |   |
| Weighted average shares outstanding -  diluted             |   | 15,518                       |   | 15,526 |   | 15,677 |   |

 

For the yearsended December 31, 2002 and 2001, potentially dilutive stock options have beenexcluded from the computation of diluted net loss per share as their inclusionwould be anti-dilutive.  No reconcilingitems exist between the net loss used for basic and diluted net loss per share.

 

*New Accounting Standards*

 

In June 2002,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards ("SFAS") No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities,” which addresses accounting forrestructuring and similar costs.  SFASNo. 146 supersedes previous accounting guidance, principally Emerging IssuesTask Force (“EITF”) Issue No. 94-3. SFAS No. 146 requires that the liability for costs associated with anexit or disposal activity be recognized when the liability is incurred.  Under EITF No. 94-3, a liability for exitcosts was recognized at the date of a company’s commitment to an exit plan.  SFAS No. 146 also establishes that theliability should initially be measured and recorded at fair value.  Accordingly, SFAS No. 146 will affect thetiming of recognizing exit and restructuring costs as well as the amountrecognized.  The Company will adopt thisguidance prospectively for exit or disposal activities after January 1, 2003,and does not expect that adoption will have a material effect on reportedresults of operations.

 

In November2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees andIndebtedness of Others.”  TheInterpretation elaborates on the disclosures to be made by a guarantor in itsinterim and annual financial statements about its obligations under certainguarantees that it has issued.  TheInterpretation also clarifies that a guarantor is required to recognize, at theinception of a guarantee, a liability for the fair value of the obligationundertaken in issuing the guarantee. The initial recognition and initial measurement provisions of theInterpretation are applicable on a prospective basis to guarantees issued ormodified after December 31, 2002.  Thedisclosure requirements in this Interpretation are effective for financialstatements of interim or annual periods ending after December 15, 2002.  The Company has made no guarantees subjectto the liability recognition provisions of the Interpretation.  The Company adopted the disclosurerequirements of the standard for its December 31, 2002 reporting period.

 

In January2003, the FASB issued Interpretation No. 46, “Consolidation of VariableInterest Entities.”  The objective ofInterpretation No. 46 is to improve financial reporting by companies involvedwith variable interest entities.  TheInterpretation requires variable interest entities to be consolidated by acompany if that company is subject to a majority of the risk of loss

 

51

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 from the variable interest entity’s activities or is entitled toreceive a majority of the entity’s residual returns or both.  The Company currently does not have anyvariable interest entities and, therefore, will apply the provisions of theInterpretation prospectively.

 

The EITF IssueNo. 00-21, “Accounting for Revenue Arrangement with Multiple Deliverables,”addresses solutions which may involve the delivery or performance of multipleproducts, services, and/or rights to use assets, and for which performance mayoccur at different points in time or over different periods of time.  The issue also addresses whether the differentrevenue-generating activities, or deliverables, are sufficiently separable, andthere exists sufficient evidence of their fair values to separately account forsome or all of the deliverables.  Theissue applies to all contractual arrangements under which a vendor will performmultiple revenue-generating activities. Issue 00-21 is effective for all revenue arrangements entered into infiscal periods beginning after June 15, 2003, with early adoption permitted.  The Company will adopt this guidance prospectivelyfor all revenue arrangements entered into after January 1, 2003.  The Company does not believe that the impactof adoption will be material to reported operating results.

 

*Reclassifications*

 

Certainreclassifications were made to prior year amounts to conform to the currentyear presentation.

** **

**2.****                                                         Restatement of Financial Statements**

 

The Companyrestated its consolidated financial statements for the years ended December 31,2001 and 2000 to correct (i) foreign currency translation errors and (ii) toproperly classify cash flows related to capitalized software development costsand other long-term assets as investing activities in the consolidatedstatements of cash flows.  The annualimpact on the consolidated financial statements applies to prior periods asfollows:

 

*Consolidated Statements of Operations*

 

For fiscal2000, revenue, gross profit, and operating income decreased $0.6 million from$134.3 million to $133.7 million, $33.2 million to $32.6 million, and $6.5million to $5.9 million, respectively. The income tax provision decreased $0.2 million from $2.5 million to$2.3 million.  As a result, there was adecrease in net income of $0.4 million from $4.6 million to $4.2 million.  Basic earnings per share decreased from$0.31 to $0.28 and diluted earnings per share decreased from $0.30 to $0.27.

 

For fiscal2001, revenue and gross profit increased $0.6 million from $117.4 million to$118.0 million and $15.4 million to $16.0 million, respectively.  The operating loss decreased $0.6 millionfrom a loss of $14.1 million to a loss of $13.5 million.  The income tax benefit decreased $0.2million from $3.3 million to $3.1 million. As a result, there was a decrease in the net loss of $0.4 million from aloss of $9.7 million to a loss $9.3 million. Basic and diluted loss per share decreased from a loss of $0.64 to aloss of $0.61.

 

*Consolidated Balance Sheets*

 

For fiscal2000, deferred tax assets, total current assets, and total assets increased$0.2 million from $0.9 million to $1.1 million, $67.3 million to $67.5 million,and $97.8 million to $98.0 million, respectively.  Accumulated other comprehensive loss decreased $0.6 million from$0.6 million to $0.0 million.  Retainedearnings decreased $0.4 million from $29.3 million to $28.9 million.  Total stockholders’ equity and totalliabilities and stockholders’ equity increased $0.2 million from $79.3 millionto $79.5 million and $97.8 million to $98.0 million, respectively.

 

For fiscal2001, costs and estimated earnings in excess of billings on uncompletedcontracts decreased $0.8 million from $7.8 million to $7.0 million.  Billings in excess of costs and estimatedearnings on uncompleted contracts decreased $0.2 million from $2.8 million to$2.6 million.  Accumulated othercomprehensive loss increased $0.6 million from $0.1 million to $0.7 million.

 

*Consolidated Statements of Cash Flows*

 

For fiscal2000, net cash provided by operating activities increased from $6.5 million to$8.7 million.  Net cash used byinvesting activities increased from $9.0 million to $11.2 million.

 

For fiscal2001, net cash provided (used) by operating activities increased from a use ofcash of $3.0 million to a provision of cash of $2.1 million.  Net cash provided (used) by investingactivities decreased from a provision of cash of $1.1 million to a use of cashof $4.0 million.

 

52

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The effects ofthe restatement are as follows:

 
|                                                                         |   | **Year Ended December 31,** |    |
|------------------------------------------------------------------------------|--------|-----------------------------|---------|
|                                                                         |   | **2000**                    |    | **2001** |   |
|                                                                         |   | **Unadjusted**              |    | **As restated** |   | **Unadjusted** |   | **As restated** |   |
| **Operating Statement  Data:**                                               |   |                        |    |   |   |   |   |   |   |
| Revenue                                                                      |   | $                           | 134,310 |   | $ | 133,706 |   | $ | 117,436 |   | $ | 118,040 |   |
| Cost of revenue                                                              |   | 101,123                     |    | 101,123 |   | 102,025 |   | 102,025 |   |
| Gross profit                                                                 |   | 33,187                      |    | 32,583 |   | 15,411 |   | 16,015 |   |
| Selling, general and administrative  expenses                                |   | 26,182                      |    | 26,182 |   | 28,512 |   | 28,512 |   |
| Severance and lease termination expenses                                     |   | 485                         |    | 485 |   | 997 |   | 997 |   |
| Operating income (loss)                                                      |   | 6,520                       |    | 5,916 |   | (14,098 | ) | (13,494 | ) |
| Other income (expense), net                                                  |   | 610                         |    | 610 |   | 1,025 |   | 1,025 |   |
| Income (loss) before income taxes                                            |   | 7,130                       |    | 6,526 |   | (13,073 | ) | (12,469 | ) |
| Provision for (benefit from) income taxes                                    |   | 2,538                       |    | 2,323 |   | (3,355 | ) | (3,140 | ) |
| Net income (loss)                                                            |   | $                           | 4,592   |   | $ | 4,203 |   | $ | (9,718 | ) | $ | (9,329 | ) |
|                                                                         |   |                        |    |   |   |   |   |   |   |
| Basic earnings (loss) per share                                              |   | $                           | 0.31    |   | $ | 0.28 |   | $ | (0.64 | ) | $ | (0.61 | ) |
| Diluted earnings (loss) per share                                            |   | $                           | 0.30    |   | $ | 0.27 |   | $ | (0.64 | ) | $ | (0.61 | ) |
|                                                                         |   |                        |    |   |   |   |   |   |   |
| Weighted average shares outstanding – basic                             |   | 14,943                      |    | 14,943 |   | 15,252 |   | 15,252 |   |
| Weighted average shares outstanding –  diluted                          |   | 15,518                      |    | 15,518 |   | 15,252 |   | 15,252 |   |
|                                                                         |   |                        |    |   |   |   |   |   |   |
| **Balance Sheet Data:**                                                      |   |                        |    |   |   |   |   |   |   |
| Costs and estimated earnings in excess of  billings on uncompleted contracts |   | $                           | 10,273  |   | $ | 10,273 |   | $ | 7,753 |   | $ | 7,021 |   |
| Deferred tax assets                                                          |   | 929                         |    | 1,144 |   | 2,635 |   | 2,635 |   |
| Total current assets                                                         |   | 67,251                      |    | 67,466 |   | 57,057 |   | 56,325 |   |
| Total assets                                                                 |   | 97,826                      |    | 98,041 |   | 90,804 |   | 90,073 |   |
| Billings in excess of costs and estimated  earnings on uncompleted contracts |   | 2,902                       |    | 2,902 |   | 2,787 |   | 2,616 |   |
| Total current liabilities                                                    |   | 16,628                      |    | 16,628 |   | 15,564 |   | 15,393 |   |
| Total liabilities                                                            |   | 18,525                      |    | 18,525 |   | 20,597 |   | 20,426 |   |
| Accumulated other comprehensive loss                                         |   | (606                        | )       | (2 | ) | (126 | ) | (686 | ) |
| Retained earnings                                                            |   | 29,298                      |    | 28,909 |   | 21,068 |   | 21,068 |   |
| Total stockholders’ equity                                              |   | 79,301                      |    | 79,516 |   | 70,207 |   | 69,647 |   |
| Total liabilities and stockholders’ equity                              |   | 97,826                      |    | 98,041 |   | 90,804 |   | 90,073 |   |
|                                                                         |   |                        |    |   |   |   |   |   |   |
| **Statement of Cash Flows Data:**                                            |   |                        |    |   |   |   |   |   |   |
| Net cash from operating activities                                           |   | $                           | 6,454   |   | $ | 8,715 |   | $ | (3,004 | ) | $ | 2,141 |   |
| Net cash from investing activities                                           |   | (8,992                      | )       | (11,253 | ) | 1,136 |   | (4,009 | ) |
| Net cash from financing activities                                           |   | 1,389                       |    | 1,389 |   | 2,807 |   | 2,807 |   |

 

**3.****                                                         Accounting Change - Goodwill:**

 

In accordancewith Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwilland Other Intangible Assets,” goodwill and intangible assets deemed to haveindefinite lives will no longer be amortized, but instead will be subject toperiodic impairment testing under a fair value approach.  The Company applied these new rulesbeginning January 1, 2002 and ceased amortizing goodwill.  Goodwill, net of accumulated amortization, asof December 31, 2001 was $12,529.

 

53

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Under SFAS No.142, the Company was required to test all existing goodwill for impairment asof January 1, 2002, on a “reporting unit” basis.  A reporting unit is an operating segment, or one level below anoperating segment, the “component” level. The component level is used if it constitutes a business for whichdiscrete financial information is available and segment management regularlyreviews the operating results of that component.  All goodwill at January 1, 2002 related to the 1999 acquisitionof Merrimac Interactive Media Corporation, a component of the AppliedTechnology Solutions segment.

 

Under SFAS No.142, an impairment is recognized for the amount, if any, by which the carryingamount of goodwill exceeds its implied fair value.  The fair value of the reporting unit and the related implied fairvalue of its respective goodwill was established using estimated futurediscounted cash flows with the assistance of an independent appraiser.  As appropriate, comparative market multipleswere used to corroborate results of the discounted cash flows.

 

As a result oftesting goodwill for impairment in accordance with SFAS No. 142 as of January1, 2002, the Company recorded a non-cash transitional impairment charge of$12,529, or $0.82 per share.  Thisamount is reported in the 2002 Statement of Operations as a cumulative effecton prior years of changing the method of accounting for goodwill

 

Periods priorto 2002 include goodwill amortization. If the Company had adopted the non-amortization provisions of SFAS No.142 on January 1, 2000, the historical net income (loss), basic and diluted netincome (loss) per common share would have changed to the “as adjusted” amountsindicated below.

 
|                       |   | **Year Ended December 31,** |   |
|----------------------------|--------|-----------------------------|--------|
|                       |   | **2000**                    |   | **2001** |   |
|                       |   | **Net  income**             |   | **Net income  per common  share - basic** |   | **Net income  per common  share -  diluted** |   | **Net loss** |   | **Net loss per  common  share - basic  and diluted** |   |
| As restated, see Note 2    |   | $                           | 4,203  |   | $ | 0.28 |   | $ | 0.27 |   | $ | (9,329 | ) | $ | (0.61 | ) |
| Add: Goodwill amortization |   | 705                         |   | 0.05 |   | 0.05 |   | 715 |   | 0.05 |   |
| Income tax effect          |   | (251                        | )      | (0.02 | ) | (0.02 | ) | (180 | ) | (0.01 | ) |
|                       |   |                        |   |   |   |   |   |   |   |   |   |
| As adjusted                |   | $                           | 4,657  |   | $ | 0.31 |   | $ | 0.30 |   | $ | (8,794 | ) | $ | (0.57 | ) |

 

**4.****                                                         Investments:**

 

The followingtable summarizes the Company’s investments:

 
|                     |   | **December 31, 2001** |   |
|--------------------------|--------|-----------------------|--------|
|                     |   | **Amortized Cost**    |   | **Gross  Unrealized Holding  Gains** |   | **Gross  Unrealized Holding  Losses** |   | **Estimated  Fair Market  Value** |   |
| Investments:             |   |                  |   |   |   |   |   |   |   |
| U.S. Government agencies |   | $                     | 19,064 |   | $ | 41 |   | $ | (12 | ) | $ | 19,093 |   |
|                          |        |                       |        |  |  |  |  |  |  |  |  |  |  |

 
|                                 |   | **December 31, 2002** |   |
|--------------------------------------|--------|-----------------------|--------|
|                                 |   | **Amortized  Cost**   |   | **Gross  Unrealized  Holding  Gains** |   | **Gross  Unrealized  Holding  Losses** |   | **Estimated  Fair Market  Value** |   |
| Unrestricted short-term investments: |   |                  |   |   |   |   |   |   |   |
| U.S. Government agencies             |   | $                     | 6,567  |   | $ | 16 |   | $ | — |   | $ | 6,583 |   |
| Corporate bonds                      |   | 1,025                 |   | 10 |   | — |   | 1,035 |   |
| Restricted short-term investments:   |   |                  |   |   |   |   |   |   |   |
| U.S. Government agencies             |   | 11,937                |   | 2 |   | — |   | 11,939 |   |
| Certificates of Deposits             |   | 1,010                 |   | — |   | — |   | 1,010 |   |
| Restricted cash:                     |   | 67                    |   | — |   | — |   | 67 |   |
|                                 |   |                  |   |   |   |   |   |   |   |
|                                 |   | $                     | 20,606 |   | $ | 28 |   | $ | — |   | $ | 20,634 |   |

 

54

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Thecontractual maturities of investments in debt securities are shown below.  Expected maturities may differ fromcontractual maturities because issuers of the securities may have the right toprepay obligations.

 
|                       |   | **December 31,** |   |
|----------------------------|--------|------------------|--------|
|                       |   | **2001**         |   | **2002** |   |
|                       |   |             |   |   |   |
| Due in one year or less    |   | $                | 9,836  |   | $ | 12,848 |   |
| Due in one to two years    |   | 9,257            |   | 6,709 |   |
| Due in three to five years |   | —           |   | 499 |   |
| Due in six to ten years    |   | —           |   | 511 |   |
|                            |        |                  |        |  |  |  |  |

 

**5.****                                                         Costsand Estimated Earnings on Contracts in Process:**

 
|                                                                                    |   | **December 31,**               |       |
|-----------------------------------------------------------------------------------------|--------|--------------------------------|------------|
|                                                                                    |   | **2001**                       |       | **2002** |   |
|                                                                                    |   | **(as restated,  see Note 2)** | ** ** |   | ** ** |
|                                                                                    |   |                           |       |   |   |
| Cost incurred and estimated earnings on  uncompleted contracts                          |   | $                              | 68,442     |   | $ | 64,712 |   |
| Less billings to date on uncompleted  contracts                                         |   | 64,037                         |       | 59,451 |   |
| Net unbilled revenues                                                                   |   | $                              | 4,405      |   | $ | 5,261 |   |
| Included in the accompanying consolidated  balance sheets under the following captions: |   |                           |       |   |   |
| Costs and estimated earnings in excess of  billings on uncompleted contracts            |   | $                              | 7,021      |   | $ | 6,005 |   |
| Billings in excess of costs and estimated  earnings on uncompleted contracts            |   | 2,616                          |       | 744 |   |
| Net unbilled revenues                                                                   |   | $                              | 4,405      |   | $ | 5,261 |   |

 

Generally,contracts provide for the billing of costs incurred and estimated fees on amonthly basis. Amounts recorded in “costs and estimated earnings in excess ofbillings on uncompleted contracts” in the accompanying consolidated financialstatements will be billed within twelve months of the balance sheet date.

 

**6.****                                                         CapitalizedSoftware Development Costs:**

 

Capitalizedsoftware development costs included in the accompanying balance sheets aresummarized as follows:

 
|                          |   | **December 31,** |   |
|-------------------------------|--------|------------------|--------|
|                          |   | **2001**         |   | **2002** |   |
|                          |   |             |   |   |   |
| Software development costs    |   | $                | 8,508  |   | $ | 10,777 |   |
| Less accumulated amortization |   | 2,067            |   | 7,523 |   |
|                          |   |             |   |   |   |
|                          |   | $                | 6,441  |   | $ | 3,254 |   |

 

Amortizationexpense of capitalized software development costs for 2000, 2001, and 2002 was$123, $1,945, and $5,455 respectively. During 2002, $2,916 of product amortization expenses resulted fromwrite-downs of capitalized costs to estimated net realizable value.

 

55

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Theanticipated amortization expense related to capitalized software developmentcosts for the next five fiscal years is as follows:
| **Year Ended December 31,** |   |
|-----------------------------|--------|
| 2003                        |   | $ | 1,929 |   |
| 2004                        |   | 1,135 |   |
| 2005                        |   | 190 |   |
| 2006                        |   | — |   |
| 2007                        |   | — |   |
|                        |   | $ | 3,254 |   |

 

**7.****                                                         Linesof Credit:**

 

The Companyhas a revolving line of credit agreement with a commercial bank that isavailable for working capital purposes. The line of credit is for $10,000 witha sub-limit of up to $3,000 for the issuance of standby letters of credit, andexpires May 31, 2004.  Interest ispayable monthly in arrears at a rate equivalent to the bank’s 30-day LIBOR rateplus 90 basis points.  During 2001, theCompany drew on the credit line in each month and the highest outstandingbalance was $4,078. The weighted-average interest rate for 2001 was 4.8percent. There was no outstanding balance on this credit line as of December31, 2001.  During 2002, the Company drewon the line in each month and the highest balance outstanding was $5,768.  The weighted-average interest rate for 2002was 2.9 percent.  The outstandingbalance on this credit line as of December 31, 2002 was $3,081.  At December 31, 2002, the line of credit wasfully secured by $10,000 of investments held in a restricted account.

 

In addition,the Company’s majority-owned subsidiary, SAPLS, has a 5,000 Singapore dollar(SGD) (approximately $2,821) revolving credit facility with a major bankavailable for general working capital requirements. The loan is secured by aSGD3,000 (approximately $1,693) standby letter of credit provided by theCompany and a SGD2,000 (approximately $1,128) corporate guaranty provided bythe minority owner.  As of December 31,2001 and 2002, $717 and $1,624, respectively, was outstanding under this lineof credit.

 

Including theletter of credit securing the loan for SAPLS described above, the Company hasapproximately $2,922 in outstanding letters of credit as of December 31, 2002.

** **

**8.****                                                         Long-TermDebt:**

 

The componentsof long-term debt as of December 31, 2001 and 2002 are as follows:

 
|                 |   | **December 31,   2002****Interest Rates** |   | **Maturities** |   | **2001** |   | **2002** |   |
|----------------------|--------|-------------------------------------------|--------|----------------|--------|----------|--------|----------|--------|
| Note payable         |   | 5.00                                      | %      | Jan 2011       |   | $        | 660    |     | $      | 601 |   |
| Note payable         |   | 7.25                                      | %      | Apr 2007       |   | 2,000    |   | 1,776    |   |
| Note payable         |   | 5.07                                      | %      | Mar 2007       |   | —   |   | 424      |   |
| Note payable         |   | 0.00                                      | %      | Feb 2012       |   | —   |   | 454      |   |
| Capital leases       |   | 7.00-7.50                                 | %      | 2003 - 2006    |   | 39       |   | 24       |   |
|                 |   |                                      |   |           |   | 2,699    |   | 3,279    |   |
| Less current portion |   |                                      |   |           |   | 300      |   | 567      |   |
|                 |   |                                      |   |           |   | $        | 2,399  |     | $      | 2,712 |   |

 

In September1997, the Maryland Department of Business and Economic Development made aconditional loan to the Company to assist in the expansion of its worldheadquarters in Columbia, Maryland.  Thenote is payable over nine years and matures on January 1, 2011.  Payments of principal, and interest at afixed rate of 5 percent, are due quarterly beginning April 1, 2002.

 

56

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In October2001, the Company signed a promissory note and loan agreement in the amount of$2,000 with a local bank.  During thefirst six months of the loan, interest-only payments were due monthly.Beginning May 11, 2002, monthly payments of $40 are payable over 60 months. Theinterest rate on this loan as of December 31, 2002 was fixed at 7.25percent.  At December 31, 2002, the loanwas fully secured by $2,000 of investments which are held in a restrictedaccount.

 

In March 2002,the Company obtained a $490 loan from a commercial bank for funding ofoperating equipment needs at the Company’s leased facility, the AppliedTechnology Laboratory (“ATL”), at the University of Maryland, Baltimore County(“UMBC”).  The loan is fully secured bya $490 certificate of deposit.  Monthlyprincipal and interest repayments of $9 began April 2002 and are due ratablyover five years.  The interest rate onthe loan is the bank’s Certificate of Deposit Annual Rate plus 250 basispoints.

 

In February2002, the Company obtained a $500 interest-free loan from the Baltimore County,Maryland Economic Development Revolving Loan Fund to provide additional fundingfor leasehold improvements to the Company’s ATL facility.  The loan is fully secured by a $500 letterof credit issued by a commercial bank. The letter of credit is collateralized by a $500 certificate ofdeposit.  Monthly principal repaymentsof $4 began March 2002 and are due ratably over ten years.

 

Annualmaturities of all long-term debt are as follows:

 
| **Year Ended December 31,** |   |
|-----------------------------|--------|
| 2003                        |   | $ | 567 |   |
| 2004                        |   | 611 |   |
| 2005                        |   | 650 |   |
| 2006                        |   | 688 |   |
| 2007                        |   | 287 |   |
| 2008 and thereafter         |   | 476 |   |
|                        |   | $ | 3,279 |   |

 

**9.****                                                         AccumulatedOther Comprehensive Loss:**

 

The endingbalances of the components of accumulated other comprehensive loss are asfollows:

 
|                                    |   | **December 31,**                |       |
|-----------------------------------------|--------|---------------------------------|------------|
|                                    |   | **2001**                        |       | **2002** |   |
|                                    |   | **(as  restated,  see Note 2)** | ** ** |   | ** ** |
|                                    |   |                            |       |   |   |
| Unrealized gain on securities           |   | $                               | 29         |   | $ | 28 |   |
| Foreign currency translation adjustment |   | (715                            | )          | (145 | ) |
|                                    |   |                            |       |   |   |
|                                    |   | $                               | (686)      |   | $ | (117 | ) |

 

**10.****                                                  SegmentInformation:**

 

The Companydetermines 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: Enterprise Systems, which provides products andservices supporting the implementation of enterprise-wide systems andapplications; Performance Solutions, which addresses all aspects ofmanufacturing processes in order to promote continuous improvements; andApplied Technology Solutions, which encompasses the design and delivery ofinformation systems to end-users of technology as well as Web-based training.

 

The accountingpolicies for these segments are the same as those described in the summary ofsignificant accounting policies. Depreciation and amortization expense isreported in each operating segment. However, the Company’s tangible assets arenot managed as distinct asset groups. All tangible assets not specificallyidentified to a segment are recorded at the corporate level with depreciationexpense allocated to operating segments based on employee headcount. Interestexpense, interest income, and income taxes are reported at the corporate levelonly and are not disclosed below.

 

57

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|                                                                 |   | **Year Ended December 31,**    |    |
|----------------------------------------------------------------------|--------|--------------------------------|---------|
|                                                                 |   | **2000**                       |    | **2001** |   | **2002** |   |
|                                                                 |   | **(as restated,  see Note 2)** |    | **(as restated,  see Note 2** |   |   |   |
|                                                                 |   |                           |    |   |   |   |   |
| **Revenue (all external):**                                          |   |                           |    |   |   |   |   |
| Enterprise Systems:                                                  |   |                           |    |   |   |   |   |
| Consulting services                                                  |   | $                              | 45,371  |   | $ | 43,290 |   | $ | 43,697 |   |
| Products and product services                                        |   | 1,391                          |    | 4,692 |   | 9,746 |   |
|                                                                 |   | 46,762                         |    | 47,982 |   | 53,443 |   |
| Performance Solutions:                                               |   |                           |    |   |   |   |   |
| Consulting services                                                  |   | 48,656                         |    | 40,235 |   | 45,619 |   |
| Products and product services                                        |   | —                         |    | — |   | — |   |
|                                                                 |   | 48,656                         |    | 40,235 |   | 45,619 |   |
| Applied Technology Solutions:                                        |   |                           |    |   |   |   |   |
| Consulting services                                                  |   | 36,687                         |    | 27,116 |   | 15,386 |   |
| Products and product services                                        |   | 1,601                          |    | 2,707 |   | 3,037 |   |
|                                                                 |   | 38,288                         |    | 29,823 |   | 18,423 |   |
| **Total Revenue**                                                    |   | $                              | 133,706 |   | $ | 118,040 |   | $ | 117,485 |   |
|                                                                 |   |                           |    |   |   |   |   |
| **Gross Profit (Loss):**                                             |   |                           |    |   |   |   |   |
| Enterprise Systems                                                   |   | $                              | 12,703  |   | $ | 9,718 |   | $ | 11,571 |   |
| Performance Solutions                                                |   | 13,425                         |    | 6,997 |   | 11,246 |   |
| Applied Technology Solutions                                         |   | 6,455                          |    | (700 | ) | (7,119 | ) |
| **Total Gross Profit**                                               |   | $                              | 32,583  |   | $ | 16,015 |   | $ | 15,698 |   |
|                                                                 |   |                           |    |   |   |   |   |
| **Depreciation and Amortization Expense  Allocated to****Segments:** |   |                           |    |   |   |   |   |
| Enterprise Systems                                                   |   | $                              | 1,446   |   | $ | 2,329 |   | $ | 3,195 |   |
| Performance Solutions                                                |   | 941                            |    | 1,763 |   | 795 |   |
| Applied Technology Solutions                                         |   | 1,704                          |    | 1,798 |   | 4,958 |   |
| **Total Allocated to Segments**                                      |   | 4,091                          |    | 5,890 |   | 8,948 |   |
| **Amount not Allocated to Segments**                                 |   | 2,578                          |    | 2,959 |   | 2,301 |   |
| **Total Depreciation and Amortization Expense**                      |   | $                              | 6,669   |   | $ | 8,849 |   | $ | 11,249 |   |
|                                                                 |   |                           |    |   |   |   |   |
| **Revenue (by geography):**                                          |   |                           |    |   |   |   |   |
| United States                                                        |   | $                              | 121,373 |   | $ | 104,282 |   | $ | 95,515 |   |
| United Kingdom                                                       |   | 11,372                         |    | 12,428 |   | 19,515 |   |
| Other                                                                |   | 961                            |    | 1,330 |   | 2,455 |   |
| **Total Revenue**                                                    |   | $                              | 133,706 |   | $ | 118,040 |   | $ | 117,485 |   |

 

*ClientConcentrations*

 

Automotiveindustry clients generated 37.0 percent, 32.1 percent, and 24.4 percent oftotal revenue in 2000, 2001, and 2002, respectively. Petroleum-chemical clientsgenerated 7.8 percent, 9.6 percent, and 15.2 percent of total revenue in 2000,2001, and 2002, respectively.  Sales toDaimlerChrysler during 2000, 2001, and 2002 were approximately 18.6 percent,17.7 percent, and 19.0 percent, respectively, of total revenue.  Sales to Ford Motor Company during 2000,2001, and 2002 were approximately 12.0 percent, 7.1 percent, and 2.6percent.  No other client represented more than 10 percent of the Company’stotal revenue in any of these periods.

 

The Company’salliance agreement with SAP generated approximately $31.5 million of revenue,or 26.8 percent of total revenues, for 2002. The SAP alliance generates revenue related to the Company’s EnterpriseSystems segment.  The SAP alliancerevenue represents 59.0 percent of revenue for this segment.

 

58

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The top fiveclients of Enterprise Systems generated 34.5 percent of 2002 annual segmentrevenue.  The top five clients ofPerformance Solutions generated 84.1 percent of 2002 annual segment revenuewith sales to one client representing 48.9 percent.  The top five clients of Applied Technology Solutions generated43.8 percent of 2002 annual segment revenue.

 

For EnterpriseSystems, petroleum and chemical industry clients were 28.5 percent of segmentrevenue in 2002.  For PerformanceSolutions, automotive industry and railroad industry clients were of 62.4percent and 21.5 percent of segment revenue in 2002, respectively.  For Applied Technology Solutions, pharmaceuticalindustry clients were 45.8 percent of segment revenue in 2002.

** **

**11.****                                                  RetirementSavings Plans:**

 

The Companyhas a retirement savings plan (401(k) plan) whereby United States employees maycontribute up to the limits established by the Internal Revenue Service.  In accordance with Company policy, eachemployee can contribute up to 25 percent of their annual compensation.  The Company, at the discretion of the Boardof Directors, may choose to match employee contributions in cash.  Employees in the United States are fullyvested in Company contributions after 6 years. Employees have the option to invest their contributions and theCompany’s matching amounts in up to 13 different funds at the employee’s discretion.  RWD common stock is not available as a401(k) plan investment alternative.  TheCompany’s contribution expense, net of forfeitures, during 2000, 2001, and 2002was $897, $751, and $730, respectively.

 

For theCompany’s United Kingdom subsidiary, the Company has a defined contribution pensionscheme and contributed a total of 10 percent of the employees’ annual basicsalary.  Employees may contributeadditional voluntary contributions as a percentage of their salary.  Maximum limits on contributions made varyaccording to age at the beginning of the tax year and include any employer’scontributions in addition to any government contribution.  The Company’s contribution expense during2000, 2001, and 2002 was $367, $440, and $610, respectively.  Due to the nature of the plan, employees inthe United Kingdom are immediately vested in Company contributions.

 

The Companyalso contributes to retirement savings plans in Canada and Germany.  The Company’s contribution expense, net offorfeitures, during 2002 was $34 for these subsidiaries.

** **

**12.****                                                  IncomeTaxes:**

 

The Companyincurred a net operating loss for the year ended December 31, 2002, a portionof which will be carried back to obtain refunds of prior income taxespaid.  The remaining tax based netoperating loss of approximately $900 will be carried forward and will expire in2023.  As a result of two consecutiveyears of reported net losses and uncertainties regarding the realization ofdeferred tax assets, the Company has recorded a valuation allowance against itsnet deferred tax assets of $5.3 million at December 31, 2002.  The general business credits of $464included in the tax credits carryforward begin to expire in 2022.  The provisions for income taxes were as follows:

 
|                                                                 |   | **Year Ended December 31,**    |   |
|----------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                 |   | **2000**                       |   | **2001** |   | **2002** |   |
|                                                                 |   | **(as restated,  see Note 2)** |   | **(as restated,   see Note 2)** |   |   | ** ** |
| Current:                                                             |   |                           |   |   |   |   |   |
| Federal                                                              |   | $                              | 2,192  |   | $ | (2,725 | ) | $ | (4,280 | ) |
| State                                                                |   | 553                            |   | (212 | ) | 175 |   |
| Foreign                                                              |   | —                         |   | — |   | 135 |   |
| Deferred:                                                            |   |                           |   |   |   |   |   |
| Federal                                                              |   | (354                           | )      | (1,729 | ) | (3,046 | ) |
| State                                                                |   | (68                            | )      | (296 | ) | (415 | ) |
| Total provision for (benefit from) taxes  before valuation allowance |   | 2,323                          |   | (4,962 | ) | (7,431 | ) |
| Less valuation allowance                                             |   | —                         |   | 1,822 |   | 3,461 |   |
|                                                                 |   |                           |   |   |   |   |   |
| Total provision for (benefit from) taxes                             |   | $                              | 2,323  |   | $ | (3,140 | ) | $ | (3,970 | ) |

 

Areconciliation of the reported income tax expense (benefit) to the amountcalculated using the U.S. federal statutory income tax rate is as follows:

 

59

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|                                                  |   | **Year Ended December 31,**    |   |
|-------------------------------------------------------|--------|--------------------------------|--------|
|                                                  |   | **2000**                       |   | **2001** |   | **2002** |   |
|                                                  |   | **(as restated,  see Note 2)** |   | **(as restated,  see Note 2)** |   |   | ** ** |
|                                                  |   |                           |   |   |   |   |   |
| Statutory federal income tax rate (34%)               |   | $                              | 2,219  |   | $ | (4,474 | ) | $ | (8,957 | ) |
| State income taxes, net of federal income  tax effect |   | 366                            |   | (435 | ) | 140 |   |
| Foreign taxes, net of federal income tax  effect      |   | —                         |   | — |   | 108 |   |
| Permanent differences                                 |   | —                         |   | — |   | 772 |   |
| Conversion of foreign tax credits to  expense         |   | —                         |   | — |   | 500 |   |
| Other                                                 |   | (262                           | )      | (53 | ) | 6 |   |
| Total provision for (benefit from) taxes              |   | 2,323                          |   | (4,962 | ) | (7,431 | ) |
| Change in valuation allowance                         |   | —                         |   | 1,822 |   | 3,461 |   |
|                                                  |   |                           |   |   |   |   |   |
| Total provision for (benefit from) taxes              |   | $                              | 2,323  |   | $ | (3,140 | ) | $ | (3,970 | ) |

 

Temporarydifferences arise between the financial reporting and income tax basis carryingamounts of assets and liabilities, which gives rise to deferred income taxes.The Company’s deferred taxes as of December 31, 2001 and 2002, and the elementsof the deferred taxes are as follows:

 
|                                            |   | **As of December 31,**         |   |
|-------------------------------------------------|--------|--------------------------------|--------|
|                                            |   | **2001**                       |   | **2002** |   |
|                                            |   | **(as restated,  see Note 2)** |   |   | ** ** |
| Current deferred taxes:                         |   |                           |   |   |   |
| Deferred tax assets:                            |   |                           |   |   |   |
| Accrued compensation                            |   | $                              | 639    |   | $ | 542 |   |
| Allowance for bad debts                         |   | 294                            |   | 462 |   |
| Other                                           |   | 47                             |   | 9 |   |
| Deferred rent credits                           |   | 92                             |   | 692 |   |
| Net operating loss                              |   | 3,427                          |   | — |   |
| Deferred tax assets before valuation  allowance |   | 4,499                          |   | 1,705 |   |
| Valuation allowance                             |   | (1,822                         | )      | (1,221 | ) |
| Deferred tax assets                             |   | 2,677                          |   | 484 |   |
|                                            |   |                           |   |   |   |
| Deferred tax liabilities:                       |   |                           |   |   |   |
| Prepaid expenses                                |   | (42                            | )      | (43 | ) |
| Other                                           |   | —                         |   | (53 | ) |
| Deferred tax liabilities                        |   | (42                            | )      | (96 | ) |
|                                            |   |                           |   |   |   |
| Net current deferred tax assets                 |   | $                              | 2,635  |   | $ | 388 |   |
|                                            |   |                           |   |   |   |
| Noncurrent deferred taxes:                      |   |                           |   |   |   |
| Deferred tax assets:                            |   |                           |   |   |   |
| Business  expansion costs                       |   | $                              | 30     |   | $ | 23 |   |
| Tax credit  carryforward                        |   | 273                            |   | 1,358 |   |
| Minority  interest                              |   | 312                            |   | 338 |   |
| Net operating  loss                             |   | —                         |   | 334 |   |
| Amortization of  goodwill                       |   | —                         |   | 3,620 |   |
| Valuation  allowance                            |   | —                         |   | (4,062 | ) |
| Deferred tax assets                             |   | 615                            |   | 1,611 |   |
|                                            |   |                           |   |   |   |
| Deferred tax liabilities:                       |   |                           |   |   |   |
| Depreciation and amortization                   |   | (3,249                         | )      | (1,999 | ) |
|                                            |   |                           |   |   |   |
| Net noncurrent deferred tax liabilities         |   | $                              | (2,634 | ) | $ | (388 | ) |

 

60

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**13.****                                                  StockOptions and Purchase Plans:**

 

The Company’sAmended and Restated Employee Equity Participation Plan (the “Equity Plan”),was originally adopted as of January 1, 1989. There were a total of 4.065 million shares of the Company’s common stockreserved for issuance upon the exercise of options under the Equity Plan.  The Equity Plan expired on January 1, 1999;however, as of December 31, 2002, approximately 1.3 million options remainedoutstanding but unexercised under the Equity Plan.  On March 6, 1998, the Company’s Board of Directors adopted theCompany’s 1998 Omnibus Stock Incentive Plan (the “Omnibus Plan”).  The Omnibus Plan originally reserved 2.0million shares of common stock to be awarded as stock options.  On April 28, 2000, the Company’sshareholders approved an amendment to the Omnibus Plan to add an additional 3.5million shares.  On April 26, 2002, theCompany’s shareholders approved an amendment to the Omnibus Plan to add anadditional 2.0 million shares.  As ofDecember 31, 2002, there were 4.607 million options outstanding and unexercisedunder the Omnibus Plan.  The optionsgranted to employees under these plans vest over periods of three to fiveyears.  All options generally vestevenly over the vesting period.  Optionshave been granted with expiration dates that vary from ten years following thedate of grant to ten years after the first vesting date.  In addition, options generally expire withinthirty days of any individual employee’s termination of employment, except inthe case of retirement, death, or disability. In that event, the options expire twelve months following the employee’sseparation date.  The options granted tonon-employee directors vest ratably over a three-year period, beginning oneyear after grant date, and expire ten years after the date of grant.  The Company has also granted stock optionsto certain key employees with accelerated vesting.

 

The followingtable summarizes all stock option and purchase right activity during 2000,2001, and 2002 (share amounts in thousands).

 
|                                |   | **Number of  Shares**             |   |               |   |                           |   |
|-------------------------------------|--------|-----------------------------------|--------|--------------------|--------|--------------------------------|--------|
|                                |   | **Key Party  Option  Agreements** |   | **Employee  Plan** |   | **Exercise  Price  Per Share** |   |   |
|                                |   |                              |   |               |   |                           |   |   |
| Outstanding as of January 1, 2000   |   | 1                                 |   | 4,490              |   | $0.67                          | -      | $24.00 |   |   |
| Granted                             |   | —                            |   | 1,732              |   | 3.13                           | -      | 9.00 |   |   |
| Exercised                           |   | —                            |   | (290               | )      | 0.67                           | -      | 6.00 |   |   |
| Terminated                          |   | —                            |   | (1,012             | )      | 1.00                           | -      | 24.00 |   |   |
|                                |   |                              |   |               |   |                           |   |
| Outstanding as of December 31, 2000 |   | 1                                 |   | 4,920              |   | 0.67                           | -      | 24.00 |   |   |
| Granted                             |   | —                            |   | 1,661              |   | 2.20                           | -      | 4.31 |   |   |
| Exercised                           |   | —                            |   | (132               | )      | 0.67                           | -      | 1.00 |   |   |
| Terminated                          |   | —                            |   | (883               | )      | 0.83                           | -      | 24.00 |   |   |
|                                |   |                              |   |               |   |                           |   |
| Outstanding as of December 31, 2001 |   | 1                                 |   | 5,566              |   | 0.67                           | -      | 24.00 |   |   |
| Granted                             |   | —                            |   | 1,388              |   | 1.73                           | -      | 3.60 |   |   |
| Exercised                           |   | —                            |   | (58                | )      | 0.67                           | -      | 3.50 |   |   |
| Terminated                          |   | —                            |   | (989               | )      | 0.83                           | -      | 24.00 |   |   |
|                                |   |                              |   |               |   |                           |   |   |
| Outstanding as of December 31, 2002 |   | 1                                 |   | 5,907              |   | 0.67                           | -      | 24.00 |   |   |
|                                     |        |                                   |        |                    |        |                                |        |  |  |  |  |  |  |  |  |

 

The number ofoptions exercisable as of December 31, 2000, 2001, and 2002 were (in thousands)1,531, 2,247, and 2,960, respectively. The weighted-average fair value ofoptions granted for the years ended December 31, 2000, 2001, and 2002 was$2.52, $1.69, and $1.27, respectively. These fair values were calculated usingthe Black-Scholes option pricing model.

 

61

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The followingtable summarizes information about stock options outstanding as of December 31,2002 (share amounts in thousands).

 
|                          |   |                                           |   | **Options Outstanding**                           |   | **Options Exercisable**                |   |
|-------------------------------|--------|------------------------------------------------|--------|---------------------------------------------------|--------|----------------------------------------|--------|
| **Range of Exercise  Prices** |   | **Number  Outstanding at  December 31,  2002** |   | **Weighted Average  Remaining  Contractual Life** |   | **Weighted  Average  Exercise  Price** |   | **Number  Exercisable  at December  31, 2002** |   | **Weighted   Average  Exercise Price** |   |
| $ 0.67                        | -      | $1.73                                          |   | 506                                               |   | 5.10 years                             |   | $ | 1.12 |   | 366 |   | $ | 0.89 |   |
| 2.20                          | -      | 3.60                                           |   | 3,425                                             |   | 8.57 years                             |   | 2.91 |   | 1,095 |   | 3.33 |   |
| 4.31                          | -      | 7.94                                           |   | 433                                               |   | 5.23 years                             |   | 6.04 |   | 395 |   | 6.03 |   |
| 8.00                          | -      | 13.00                                          |   | 811                                               |   | 6.85 years                             |   | 8.50 |   | 503 |   | 8.66 |   |
| 17.23                         | -      | 24.00                                          |   | 732                                               |   | 6.31 years                             |   | 18.55 |   | 601 |   | 18.57 |   |
|                          |   |                                           |   |                                              |   |                                   |   |   |   |   |   |   |   |
| 0.67                          | -      | 24.00                                          |   | 5,907                                             |   | 7.50 years                             |   | 5.72 |   | 2,960 |   | 7.46 |   |
|                               |        |                                                |        |                                                   |        |                                        |        |  |  |  |  |  |  |  |  |  |  |

 

The Companyhas an approved employee stock purchase plan (the “Stock Purchase Plan”) foremployees in the United States, United Kingdom, and Germany. The Stock PurchasePlan qualifies as an “employee stock purchase plan” under Section 423 of theInternal Revenue Code. All regular full-time employees of the Company(including officers), and all other employees whose customary employment is formore than 20 hours per week are eligible to participate in the Stock PurchasePlan. Directors who are not employees are not eligible. The Stock Purchase Planoriginally reserved four hundred seventy-five thousand shares of common stockfor issuance.  On April 26, 2002, theCompany’s shareholders approved an amendment to the Stock Purchase Plan to addan additional four hundred thousand shares. Participants are permitted to withhold up to 10 percent of eligiblecompensation. A participant can purchase no more than two thousand shares ofstock per six month offering period. The purchase price of stock is 85 percentof the fair market value of the Company’s common stock on the first or lastbusiness day of the offering period, whichever is lower. Offering periods runfor consecutive six-month periods, with the current offering period endingApril 30, 2003. As of December 31, 2002, approximately two hundred twenty-sixthousand shares remained available for sale.

 

A summary ofthe Stock Purchase Plan is as follows (share amounts in thousands):

 
| **Offering period** |   | **Began**        |   | **Ended**        |   | **Shares  Purchased** |   | **Exercise  Price** |   |
|---------------------|--------|------------------|--------|------------------|--------|-----------------------|--------|---------------------|--------|
| 1                   |   | April 16, 1998   |   | October 31, 1998 |   | 38                    |   | $                   | 15.81  |   |
| 2                   |   | November 1, 1998 |   | April 30, 1999   |   | 45                    |   | 13.71               |   |
| 3                   |   | May 1, 1999      |   | October 31, 1999 |   | 75                    |   | 6.91                |   |
| 4                   |   | November 1, 1999 |   | April 30, 2000   |   | 66                    |   | 6.69                |   |
| 5                   |   | May 1, 2000      |   | October 31, 2000 |   | 68                    |   | 5.95                |   |
| 6                   |   | November 1, 2000 |   | April 30, 2001   |   | 97                    |   | 2.98                |   |
| 7                   |   | May 1, 2001      |   | October 31, 2001 |   | 86                    |   | 1.87                |   |
| 8                   |   | November 1, 2001 |   | April 30, 2002   |   | 83                    |   | 2.21                |   |
| 9                   |   | May 1, 2002      |   | October 31, 2002 |   | 91                    |   | 1.45                |   |
| 10                  |   | November 1, 2002 |   | April 30, 2003   |   | —                |   | —              |   |
|                     |        |                  |        |                  |        |                       |        |                     |        |  |

 

**14.****                                                  Leases:**

 

The Companyleases office facilities under various operating leases that expire throughNovember 2011. The leases require the Company to pay for a portion of common areamaintenance expenses and real estate taxes. Rent expense was $5,357, $5,733,and $8,768 in 2000, 2001, and 2002, respectively.  Included in rent expense for 2002 was approximately $1,939 invacant space and lease termination expenses. The charges for vacant space represent the remaining rental obligationsfrom facilities where the Company has consolidated operations and vacatedoffice space, reduced by actual or probable sublease income.

 

Future minimumlease commitments as of December 31, 2002 for all operating leases having aninitial or remaining non-cancelable lease term in excess of one year are asfollows:

 

62

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| **Year  Ending December 31,** |   | **Operating  Leases** |   | **Sublease****Income** |   | **Net  Operating  Leases** |   |
|-------------------------------|--------|-----------------------|--------|------------------------|--------|----------------------------|--------|
|                          |   |                  |   |                   |   |                       |   |
| 2003                          |   | $                     | 6,196  |                   | $      | (799                       | )      | $ | 5,397 |   |
| 2004                          |   | 2,867                 |   | (79                    | )      | 2,788                      |   |
| 2005                          |   | 1,934                 |   | (17                    | )      | 1,917                      |   |
| 2006                          |   | 1,451                 |   | —                 |   | 1,451                      |   |
| 2007                          |   | 1,298                 |   | —                 |   | 1,298                      |   |
| 2008 and thereafter           |   | 4,870                 |   | —                 |   | 4,870                      |   |
|                          |   |                  |   |                   |   |                       |   |
|                          |   | $                     | 18,616 |                   | $      | (895                       | )      | $ | 17,721 |   |

 

**15.****                                                                               Litigation:**

 

The Company isparty to litigation from time to time arising in the ordinary course of itsbusiness. It is management’s opinion, after consultation with its legalcounsel, that none of the outcomes of known claims, whether individually or inthe aggregate, will have a material adverse effect on the Company’s financialposition or results of operations.

 

**16.****                                                                               RelatedParty Transactions:**

 

In 2000, theCompany entered into a loan agreement with an executive officer and director ofthe Company for $60 related to relocation expenses.  The loan will be repaid over a 5 year period bearing an annualinterest rate of 9 percent.  During thefirst quarter of 2002, the terms of the loan were renegotiated to modify theannual interest rate from 9 percent to 3 percent retroactive to January 1,2002.  As of December 31, 2001 and 2002,approximately $45 and $31 was outstanding, respectively.

 

In 2001, theCompany entered into a $57 loan agreement with another officer of the Companyrelating to relocation costs, for which the entire balance was outstanding asof December 31, 2001.  The agreementcalled for the loan to be repaid upon the sale of the officer’s former home orthe one-year anniversary, whichever was sooner.  Additionally, the agreement provided that if the proceeds fromthe sale of the home did not provide sufficient equity for full repayment ofthe loan, the unpaid balance plus accrued interest at 9 percent per annum,would be repaid over one year beginning in September, 2002.  The agreement also provided that if the homewere not sold within a year from the date of the agreement, repayments would bemade over a three-year period beginning in September, 2002 with interestaccruing at 9 percent per year. During the fourth quarter of 2002, the loan wasrepaid in full.

 

**17.****                                                                               SubsequentEvents:**

 

During thefirst quarter of 2003, RWD management and SAP initiated discussions concerningthe future plans for the joint venture in Singapore, SAPLS.  These discussions are expected to result ina dissolution of the joint venture.  RWDwill take direct responsibility for the Australian and Japanese entities andwill have an alliance relationship with the remaining Asian initiatives.

 

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**RWD Technologies, Inc.**

**Schedule II – Valuation and QualifyingAccounts**

**For the Years Ended December 31, 2000, 2001and 2002**

**(In thousands)**

 
|                                 |   | **Balance as  of  Beginning  of Period** |   | **Charges to  Expense** |   | **Deductions** |   | **Balance as  of End of  Period** |   |
|--------------------------------------|--------|------------------------------------------|--------|-------------------------|--------|----------------|--------|-----------------------------------|--------|
| Allowance for Doubtful Accounts      |   |                                     |   |                    |   |           |   |                              |   |
|                                 |   |                                     |   |                    |   |           |   |                              |   |
| Year ended December 31, 2000         |   | $                                        | 239    |                    | $      | 297            |   | $                                 | 191    |   | $ | 345 |   |
|                                 |   |                                     |   |                    |   |           |   |                              |   |
| Year ended December 31, 2001         |   | 345                                      |   | 3,724                   |   | 3,316          |   | 753                               |   |
|                                 |   |                                     |   |                    |   |           |   |                              |   |
| Year ended December 31, 2002         |   | 753                                      |   | 254                     |   | 54             |   | 953                               |   |
|                                 |   |                                     |   |                    |   |           |   |                              |   |
| Valuation Allowance for Income Taxes |   |                                     |   |                    |   |           |   |                              |   |
|                                 |   |                                     |   |                    |   |           |   |                              |   |
| Year ended December 31, 2001         |   | $                                        | 0      |                    | $      | 1,822          |   | $                                 | 0      |   | $ | 1,822 |   |
|                                 |   |                                     |   |                    |   |           |   |                              |   |
| Year ended December 31, 2002         |   | 1,822                                    |   | 5,283                   |   | 1,822          |   | 5,283                             |   |

 

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