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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended Commission File No.
December 31, 1997 0-22145
RWD TECHNOLOGIES, INC.
(Exact name of registrant as specified in charter)
MARYLAND 52-1552720
(State or other jurisdiction of (IRS employer
incorporation or organization) identification No.)
10480 LITTLE PATUXENT PARKWAY, COLUMBIA, MARYLAND 21044
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (410) 730-4377
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Class:
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COMMON SHARES, PAR VALUE $.10 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K [ ].
As of February 27, 1998, the aggregate market value of the voting
stock held by nonaffiliates was approximately $94,652,000.
As of February 27, 1998, 14,645,792 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Specified portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders of RWD Technologies, Inc. are incorporated
by reference in Part III.
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RWD TECHNOLOGIES, INC.
FORM 10-K
TABLE OF CONTENTS
Page
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PART I
Item 1. Business........................................................ 1
Item 2. Properties...................................................... 10
Item 3. Legal Proceedings............................................... 10
Item 4. Submission of Matters to a Vote of Security Holders............. 10
PART II
Item 5. Market for the Company's Common Equity and
Related Stockholder Matters..................................... 11
Item 6. Selected Consolidated Financial Data............................ 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 12
Item 8. Financial Statements............................................ 19
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 19
PART III
Item 10. Directors and Executive Officers of RWD Technologies, Inc....... 19
Item 11. Executive Compensation.......................................... 19
Item 12 Security Ownership of Certain Beneficial Owners
and Management.................................................. 19
Item 13. Certain Relationships and Related Transactions.................. 19
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K............................................. 20
SIGNATURES............................................................... 21
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PART I
ITEM 1. BUSINESS
RWD Technologies, Inc., (RWD) provides a broad range of integrated
solutions designed to improve the productivity and effectiveness of workers in
complex operating environments. As the scope and complexity of technology used
by businesses accelerates and the global business environment becomes more
competitive, companies are increasingly focused on maximizing the return on
their advanced technology investments. To achieve this goal, companies must
ensure their employees receive effective performance support, including the
information systems, performance support tools, and training to operate these
advanced systems effectively.
Founded in 1988, RWD initially provided performance support services such
as training and hard copy documentation to plant personnel in large industrial
companies employing complex manufacturing systems and technologies. In recent
years, the Company has expanded its performance support services to include the
design, development, and implementation of customized information technology
solutions, including enhanced user interface (EUI) systems, electronic
performance support systems (EPSS), electronic document management systems
(EDMS), remote diagnostic systems, sales force automation, and Internet/intranet
applications. More recently, RWD has expanded its services to include end user
training and performance support services essential to the effective
implementation of enterprise-wide business process reengineering efforts
(particularly SAP software implementation) and lean manufacturing consulting.
All of the Company's services are designed to improve its clients' product
quality, worker productivity, and competitiveness and to ensure our clients
receive an attractive return on their technology investments. RWD's services
integrate comprehensive expertise in information technology, performance
support, enterprise systems implementation support, and lean
manufacturing consulting in a coordinated manner and customized to the
individual needs of each client. The Company believes its focus on end user
performance, embedded in all its service offerings, differentiates the Company
from many of its competitors in the performance support and information
technology services marketplaces. The Company's registered service mark, "We
bring people and technology together,"(R) succinctly describes the Company's
activities.
RWD was founded in January 1988 by Dr. Robert W. Deutsch and Mr. John H.
Beakes. For the 21 years prior to founding RWD, Dr. Deutsch was the Chief
Executive Officer of General Physics Corporation (General Physics), a
company he founded while a professor of nuclear science and engineering at The
Catholic University of America in Washington, D.C. Mr. Beakes is a graduate of
the U.S. Naval Academy and served for 8 years in the U.S. Navy's Nuclear
Submarine Service. He joined General Physics in 1974 and had advanced to the
position of Executive Vice President and Chief Operating Officer by 1985. A
change of control and resulting shift in operating philosophy precipitated Dr.
Deutsch's and Mr. Beakes's decision to leave General Physics at the end of 1987.
Dr. Deutsch and Mr. Beakes believed large U.S. industrial companies were
making substantial investments in automation and other advanced operating
technologies but achieving relatively low returns on these investments. They
concluded this was the result of plant workers having inadequate training and
performance support systems. Dr. Deutsch and Mr. Beakes formed RWD with the
objective of applying proven performance support methodologies to large U.S.
industrial companies. The Company's first significant client was Chrysler.
The Company's client list has grown to include other clients in the
automotive industry, as well as clients in the telecommunications, consumer
products, pharmaceutical, and petrochemical industries, among others. In 1997,
RWD provided services to 96 companies in 20 industries. Among these clients were
seven of the Fortune 10 companies. The Company's clients include Bristol-Myers
Squibb, Chevron, Chrysler, MediaOne, Deere & Company, Detroit Edison, Dow
Chemical, Ford, Merck, Procter & Gamble, Bell Atlantic, Boston Edison, Dow,
Steelcase, and Visa. Chrysler engagements generated 33.9 percent, 28.5 percent,
and 28.1 percent of total revenue in 1995, 1996, and 1997, respectively. Ford
engagements generated 14.0 percent of total revenue in 1997. No other client
generated more than 10 percent of total revenue in any of these periods.
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RWD's SERVICES
The Company's core services are as follows:
Information Technology. The Company's Information Technology services
include the design and implementation of customized enhanced user interface
(EUI) systems, electronic performance support systems (EPSS), and
electronic document management systems (EDMS), all of which give the end
user easy access to information critical to operating advanced technology
effectively. These information technology solutions and services include
client/server applications development, implementation and support;
Internet/intranet technology solutions; software development; systems
integration; and strategic management consulting. The Company's Information
Technology services incorporate multimedia, detailed graphics, and animation to
generate intelligent learning tools and systems to support human performance.
RWD provides Information Technology services to clients in a number of
industries such as telecommunications, automotive and industrial manufacturing,
public utilities, and financial services. RWD has designed and implemented EUI-
based client/server systems for remote workers in the office furniture,
pharmaceutical, publishing, and agricultural machinery industries. RWD also
designs and implements remote diagnostic systems and sales force automation
systems and works with document management software manufacturers to provide
comprehensive enterprise-wide EDMS solutions. In addition, RWD is involved in
several projects that rely on Internet technology as a platform for
communication and information transfer in a variety of industries. These
projects include developing intranets, designing remote diagnostic information
systems, and related projects. Information Technology services generated $9.4
million (or 19.9%), $16.5 million (or 25.4%), and $22.4 million (or 26.1%) of
total revenue in 1995, 1996, and 1997, respectively.
The following are examples of the Company's Information Technology
projects:
. An international hotel chain using a text-based, computer reservation
system engaged the Company to design an EUI system to enable the client's
reservations center operators to handle incoming calls more quickly and
to market the chain's services more effectively. RWD designed an EUI
system, that was integrated with the client's existing reservation
system, resulting in an intuitive graphical interface. This replaced
the existing system, which required the operator to use up to 12,000
different codes. The Company's EUI system significantly shortened
operator training time, time to competency, and call handling time,
thereby resulting in increased caller satisfaction and improved overall
sales effectiveness. The chain's 1,800 reservation agents now use the
Company's EUI system to annually log approximately 25 million calls
worldwide.
. A major pulp and paper manufacturer, faced with the challenge of
transferring expert-level knowledge from its most experienced operators
to its newer workers, selected RWD to design and implement a stand-alone
EPSS. This EPSS is designed to reduce plant downtime and improve product
quality by providing job-related practical knowledge and structured
training information to all operators on the plant floor, whenever
needed. This just-in-time information system includes operating
procedures, equipment and process chemistry information, problem-solving
guidance, and training. The system uses text, photos, graphics,
animation, and video to explain concepts and provide information.
. A consortium of major oil companies and a foreign government needed to
manage more than 150,000 technical documents to construct and safely
operate a large offshore oil platform. RWD designed an extensive EDMS
that incorporated intuitive navigational strategies so end users could
readily access the required documents. End users accustomed to 8- to
10-minute document retrieval times now experience an on-screen document
delivery rate of 4 seconds, with printouts available in less than 1
minute.
Enterprise-Wide Systems Implementation Support. Capitalizing on its end
user focus and performance support expertise, RWD has developed a rapidly
growing service area supporting the implementation of enterprise-wide software
applications, principally SAP. The Company uses its standardized performance-
based training approach to support multiyear, high-cost, enterprise-wide
software implementation efforts of Fortune 500 companies. This approach is
designed to ensure that system end users have the knowledge and tools necessary
to operate effectively during enterprise-wide software implementations. As with
its other support services, the Company's software implementation support tools
include online help systems that provide end users with immediate access to
information specific to their identified tasks.
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In 1997, RWD formalized its relationship with SAP America, Inc., becoming
an R/3 implementation partner. The Company has establishing a laboratory to
demonstrate SAP's InfoDB product and now jointly markets implementation
services and contracts to provide services directly to SAP.
During 1996, RWD entered into a strategic alliance with Price Waterhouse,
an international consulting firm and leading provider of enterprise-wide
software implementation services. Under this nonbinding arrangement, the
Company provides performance support services in joint software implementation
engagements with Price Waterhouse. Through this relationship, Price Waterhouse
and the Company have worked together to assist clients in their enterprise-wide
software implementation efforts. During 1997, the Company added 22 enterprise-
wide software implementation training and documentation clients, 19 of these
after the formalization of its relationship with SAP. Enterprise-wide Software
Implementation Support services generated $7.6 million (or 16.2%), $13.4 million
(or 20.7%), and $17.8 million (or 20.8%) of total revenue in 1995, 1996, and
1997, respectively.
The following is an example of the Company's enterprise software
implementation projects:
. An international chemical company engaged RWD to provide performance
support to the client's employees during its multiyear, global
implementation of SAP enterprise-wide software. RWD prepared and
presented classroom and on-the-job materials and training. Each training
course contained an appropriate level of concepts, a series of job aids,
and scenario-based, hands-on exercises that made the SAP software easier
for the employees to understand and use. RWD also designed online
support tools that provide users with immediate access to information
specific to their tasks. Deploying RWD training and support materials has
resulted in reduced time spent in training and has improved time to
competency of the client's end users.
Performance Support. RWD provides a broad range of end user performance
support services. These services encompass the design, development, and delivery
of information to end users of complex technology and use the full spectrum
of electronic and paper-based delivery technologies, including designing and
presenting classroom and plant floor training; developing and managing hard copy
training materials, technical procedures, and documentation; designing and
developing customized job aids; and acting as plant floor consultants to ensure
proper integration of equipment and systems and reduction of plant downtime.
The Company believes it is essential that the delivery systems used to impart
knowledge to workers be cost-effective and readily accepted by workers.
Personnel who operate and maintain high-technology equipment often have little
experience using computers or other advanced technologies. RWD uses a
performance-based approach to training that focuses on streamlining training
content to include only the information required to perform each task
effectively. The Company's training materials make extensive use of graphical
representations of information. The Company believes these mental models are
particularly effective in facilitating quick and accurate comprehension and
decreasing training delivery costs.
RWD's documentation services are integral and complementary to its
performance-based training approach. These services include data collection and
the creation, management, and distribution of engineering, operating, and
technical information in electronic, intranet, and paper-based formats.
Documentation services also include upgrading existing documentation and
capturing best operating practices, which are then presented concisely in
steps that are accurate, user focused, easy to follow, and error resistant. RWD
documentation services make extensive use of graphics to illustrate how
equipment operates and create technical descriptions that help personnel
develop strong cognitive models of the equipment they operate.
RWD's performance support services are delivered to many industries,
including manufacturing and process industries, telecommunications, consumer
products, and pharmaceuticals. A significant portion of these services is
provided to the automotive industry in connection with the launch of new and
redesigned vehicles. In addition, the Company provides training courses for
engineers, operators, and maintenance and laboratory personnel. The Company
believes its expertise in performance support services provides a foundation for
all its other services and often serves as an effective first step in assisting
clients in their migration to more advanced performance support technologies.
Performance Support services generated $26.3 million (or 55.8%), $27.4 million
(or 42.1%), and $31.8 million (or 37.1%) of total revenue in 1995, 1996, and
1997, respectively.
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The following are examples of the Company's Performance Support projects:
. Since 1990, RWD has worked together with a large U.S. automobile
manufacturer to provide technical training to the manufacturer's plant-
floor workers in locations world-wide. This training is designed to
increase worker competency in connection with the launch of new and
redesigned vehicles. RWD's customized performance-based training programs
have resulted in significantly reduced classroom time and training costs.
RWD instructors also function as plant floor consultants, engaging in
systems integration and preparing workers to troubleshoot malfunctioning
equipment.
. A major oil company engaged RWD to help increase refinery run times and
reduce the frequency and duration of unit shutdowns. To accomplish this
goal, the Company developed user-friendly, task-oriented operating
manuals and procedures and performance-based training courses. RWD also
helped the client develop a laboratory calibration and maintenance
program.
Lean Manufacturing Consulting. RWD is a leading provider of lean
manufacturing expertise to U.S. industry. The Company's Lean Manufacturing
Consulting services include developing and deploying entire production systems,
as well as designing and presenting specialized lean manufacturing training
workshops to illustrate and teach the benefits of lean manufacturing. The
objective of lean manufacturing is to achieve world-class quality and cost
performance based on continuous improvement and the elimination of waste. The
major components of lean manufacturing, a system developed and refined by the
Japanese, include high machine reliability, level production, just-in-time
material control, "stop-the-line" operating procedures, and the human systems
that support this manufacturing philosophy. This system uses specific,
simple-to-understand tools, including mistake-proofing, standardized work
procedures, and housekeeping techniques. RWD provides lean manufacturing
implementation guidance through a team of experts who have substantial
experience using and deploying this systems approach to manufacturing. Lean
Manufacturing Consulting services generated $3.8 million (or 8.1%),
$7.7 million (or 11.8%), and $13.7 million (or 16.0%) of total revenue in
1995, 1996, and 1997, respectively.
The following is an example of the Company's Lean Manufacturing Consulting
projects:
. In planning to manufacture a new engine at its plant in Europe, a large
automobile manufacturer projected requirements based on a traditional
mass manufacturing approach. RWD was asked to work with the
manufacturer's managers to assess the changes in processes that could
be made by applying lean manufacturing principles. The critical issues
facing the RWD team were reengineering the material supply system and
labor usage within the production process. RWD placed a team of
experienced lean manufacturing personnel on-site to perform the necessary
assessments and then to implement the recommended lean manufacturing
approaches on the engine production line. Based on the early success of
the Company's initial 5-month effort and other services provided by
RWD, the client asked RWD to help implement lean manufacturing concepts
in all of its world-wide operations.
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INDUSTRIES AND CLIENTS SERVED
The Company has provided services to clients in the following industries:
<TABLE>
<CAPTION>
INDUSTRIES
<S> <C> <C>
Automotive Manufacturing Healthcare Publishing
Automotive Components Hotel Pulp and Paper
Biotechnnology Industrial Manufacturing Restaurant
Chemical Office Furniture Software
Computer Systems Package Delivery Telecommunications
Consumer Products Petroleum Utilities
Electronics Pharmaceutical Wholesale/Retail
Financial Services
</TABLE>
The following is a list of representative clients served by the Company
during 1997. These clients generated, in the aggregate, more than 90% of the
Company's 1997 revenues.
<TABLE>
<CAPTION>
CLIENTS
<S> <C> <C>
Adaptec BC Telecom, Inc. Bell Atlantic
BellSouth Telecommunications Blandin Paper Company Boston Edison Company
Bristol-Myers Squibb Company Chevron U.S.A. Products Company Chrysler Corporation
CIGNA Company Deere & Company The Detroit Edison Company
The Dow Chemical Company Ford Motor Company Frito-Lay, Inc.
Genentech Inc. General Motors Corporation Hitachi America Ltd.
Houston Lighting & Power Company International Business Machines Kohler
MediaOne Merck & Co., Inc. Microsoft Corporation
Mobil Oil Corporation Pennzoil Products Company Price Waterhouse LLC
The Procter & Gamble Company SAP America, Inc. Simon & Schuster
Stanford University Steelcase, Inc. UAW Ford
Visa Whirlpool Corporation
</TABLE>
Chrysler, the Company's largest client, generated 33.9%, 28.5%, and 28.1%
of total revenue in 1995, 1996, and 1997, respectively. Ford generated 14.0% of
total revenue in 1997. No other client generated more than 10% of total revenue
in any of these periods. The Company's top five clients in 1995, 1996, and 1997
generated an aggregate of 57.8%, 51.4%, and 56.8% of total revenue in each of
these respective periods. Automotive industry clients generated an aggregate of
43.5%, 40.7%, and 44.3% of total revenue in 1995, 1996, and 1997, respectively.
COMPANY ORGANIZATION AND METHODOLOGIES
Adaptable Organizational Structure. The Company's organizational
structure provides its employees with clearly defined roles and accountability
across all levels of the organization. This well-defined structure is formally
evaluated on a semiannual basis and modified as necessary to adapt to changing
client demands, introduction of new services, and expansion and diversification
of the Company's client base. The Company has a divisional structure, with each
division organized into five tiers: team members, team leaders, managers,
directors, and a vice president. Specifically defined responsibilities,
communicated through formal training programs and review processes, exist at
each level. Each team leader, manager, director, and vice president generally
has no more than five individuals reporting directly to him or her. All
professionals in each division are involved directly in client engagements. The
Company believes its flexible, adaptable organizational structure and formal
periodic evaluations of this structure are important elements in successfully
managing the rapid growth of its business and its ability to adapt to changing
market demands while maintaining profitability and high-quality services.
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Project Management. RWD's project management process is critical to the
Company's ability to satisfy its clients. The Company's project management
process is used throughout all phases of an engagement and includes controls and
review processes to ensure each project is delivered in a high-quality, cost-
effective, and timely manner. The project manager has primary responsibility for
the success of the engagement, including managing project costs and staff
schedules, service quality, and the client relationship. The project manager is
supported in these efforts by the project director, a designated senior
individual with extensive project management experience. The project management
process includes processes for identifying and assessing project risks, as well
as mechanisms to help the project manager communicate project challenges to the
project director and senior management before those challenges escalate. In
addition, the process places significant emphasis on client feedback through
regular client alignment meetings. These client review meetings ensure
continuous agreement on project goals and expectations, leading ultimately to
client satisfaction with the results. Once an engagement is completed, the
Company assesses the extent to which the project team met client expectations
and evaluates the effectiveness of RWD's project management process. The Company
uses this analysis to support its continuous improvement process.
Project managers are certified only after completing a rigorous 1-year
training process that includes classroom and on-the-job training and an oral
examination before senior management. All RWD engagements are managed by a
certified project manager (or by an in-training project manager working under
the supervision of a certified project manager) and a project director. In
addition, all levels of management maintain technical proficiency to enable
them to direct projects.
Technical and Management Skills and Training. The Company's employees
have diverse educational and employment backgrounds, including engineering,
advanced manufacturing, computer systems analysis and design, technical writing
and editing, and graphic arts. Many have advanced degrees in a wide range of
technical disciplines, including chemical, computer systems, electrical,
industrial, mechanical, nuclear, and software engineering; instructional system
design; and organizational development. This breadth of expertise enables the
Company's professionals to interact with and understand the performance
challenges encountered by client personnel across a broad range of industries.
The Company employed 791 persons as of December 31, 1997.
The Company's use of internally developed, standardized tools and
methodologies and its strict adherence to a structured project management
process enable the Company to deliver consistent, high-quality services while
rapidly increasing the size of its workforce. The Company places significant
emphasis on training its employees to understand and apply the Company's
service methodologies and management processes. The Company uses a combination
of more than 200 hours of internally developed courses and externally
provided courses to provide this and other technical training. Employees are
encouraged to become trained in the Company's proprietary service methodologies.
Employees also participate in internal and external training in specific
technologies such as enterprise-wide software implementation, object-oriented
design, relational database design, software configuration management, software
programming languages (e.g., Visual C++, Visual Basic, MacApp, Java, and
JavaScript) and document management software. Employees are encouraged and
provided with financial support to enroll in advanced training and degree
programs to increase their technical and management capabilities.
Recruiting and Employee Retention. RWD places significant emphasis on
attracting, developing, and retaining a highly skilled and motivated workforce.
The Company recruits personnel through a variety of methods, including on-campus
recruiting, internet recruiting, postings at conferences, and advertising in
newspapers and technical publications. The Company actively recruits entry-level
personnel at selected college campuses and maintains a Web site targeted to
potential recruits. The Company has a policy of promoting from within whenever
appropriate and also actively recruits employees with in-depth expertise in
technical areas in which the Company currently provides services or expects to
provide services in the future. From time to time, the Company uses
technical recruiters to fill specific staffing needs. The Company engages a
limited number of technical personnel on a consulting basis when appropriate to
support particular client needs.
The Company's culture, its emphasis on training, and the design of its
compensation structure have been coordinated to attract, develop, and retain
qualified and motivated professionals. The Company's culture is captured and
communicated through its Mission, Values, and Guiding Principles. Senior
management expends significant effort in communicating these principles to new
employees and to incorporating these values into the day-to-day operation of the
Company. The Company believes this effort has played a significant role in
maintaining its culture and guiding the actions of its employees. The
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Company also strives to provide a challenging work environment and competitive
employee reward system. Additionally, the Company is committed to significant
and broad-based employee stock ownership, believing this maximizes employees'
dedication to the Company's growth and profitability. In addition to the co-
founders' 62.0%, fully diluted equity ownership of the Company, 544 persons (or
68.8%) of the Company's employees as of December 31, 1997, held options to
purchase, in aggregate, 17.4% of the fully diluted equity of the Company.
The Company's turnover rate in 1995, 1996, and 1997 was approximately
17.4%, 14.2%, and 16.8%, respectively. The Company considers its culture,
morale, and employee motivation to be excellent and key components of its
success to date.
Sales and Marketing. All RWD business is developed by senior management
and the technical personnel who manage client relationships and develop
solutions for clients rather than through a dedicated sales force. RWD
professionals who have worked closely with clients to solve complex technical
problems are best able to understand and communicate the Company's skills and
services to existing and prospective clients. This approach also contributes to
the Company's ability to establish and maintain long-term client relationships.
In addition to supporting existing client relationships, RWD's senior management
markets the Company's services at industry trade shows and delivers
presentations and papers at conferences. As a result, potential clients in new
and currently served industries have an opportunity to learn more about Company
services. The Company actively seeks to leverage existing client and strategic
relationships such as those with SAP, Price Waterhouse, Documentum, and
Peoplesoft to increase its exposure within and across industries and ultimately
expand its client base. The Company also distributes a quarterly newsletter that
highlights results of RWD projects to approximately 12,000 personnel of existing
and potential clients. Finally, RWD works closely with software vendors to
generate engagements in which their software products are incorporated into RWD
solutions.
COMPETITION
The Company's service areas are highly competitive and subject to both low
barriers to entry and rapid change. The Company faces competition for client
assignments from a number of companies having significantly greater financial,
technical, and marketing resources and greater name recognition than RWD.
Principal competitors for the Company's services include consulting practices of
the largest national accounting firms, as well as professional services groups
of many large technology and management consulting companies. The Company also
competes with smaller regional or local service providers whose specific, more
narrowly focused service offerings may be more attractive to potential clients
of the Company. In addition, clients may elect to use internal resources to
satisfy their needs for the services the Company provides. The Company believes
that the principal competitive factors in its industry are quality of service,
breadth of service offerings, reputation of the service provider, and price. The
Company believes it competes effectively with respect to each of these factors.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company relies on a combination of confidentiality and other
contractual arrangements and trade secret, copyright, and trademark laws to
protect its proprietary rights. The Company generally enters into
confidentiality agreements with its employees and clients, thereby seeking to
limit distribution of proprietary information. A substantial majority of the
Company's employees are not bound by their confidentiality agreements once their
employment has been terminated, although the Company believes common law
generally prohibits these employees from disclosing to third parties proprietary
information of the Company. There can be no assurance that the steps taken by
the Company in this regard will be adequate to deter misappropriation of
proprietary information or that the Company will be able to detect unauthorized
use of and take appropriate steps to enforce its intellectual property rights.
Software developed and other materials prepared by RWD in connection with
client engagements are usually assigned to the clients. The Company retains the
right to its general know-how and general applications such as software
diagnostic and development tools.
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The "RWD Technologies, Inc." logo, "RWD ProVision," "Continuous Improvement
by All Employees," and the phrase, "We bring people and technology together,"
are registered service marks of the Company. "Globally Serving a High-tech
World," "RWD InfoVision," "RWD PBA," "RWD PerformanceVison," and "We bring
people and technology together" (with graphic) are service marks of the Company.
The Company holds no patents. The Company may file additional copyright
applications for certain software it develops in the future.
RISK MANAGEMENT
The Company is subject to potential claims by dissatisfied clients that the
Company's services did not achieve the results expected by those clients or that
errors or omissions by the Company's employees contributed to disruptions in the
clients' operations. To mitigate this risk, RWD seeks to clearly articulate,
prior to commencement of each project, both the scope of services to be provided
and the solution to be achieved. The Company holds regular alignment meetings
with each client while services are being provided so that any problems can be
discovered and then corrected as early in the project as possible. This
procedure is intended to allow RWD to regularly ascertain and meet client
expectations during all phases of each project. In addition, RWD's standard
contract terms limit the Company's liability to the amount 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 a dissatisfied client, although
the Company has never been subject to litigation by a client arising out of
RWD's services.
The Company carries comprehensive liability and property damage insurance
in amounts it considers sufficient to cover these types of potential losses.
However, the Company is self-insured against any other claims by clients related
to services provided by RWD.
ITEM 2. PROPERTIES
RWD leases approximately 88,000 square feet of space for its executive
offices at 10480 Little Patuxent Parkway, Columbia, Maryland. This lease expires
on December 31, 2003. The Company leases 12 additional offices covering an
aggregate of approximately 64,000 square feet in Atlanta, Georgia; Auburn Hills,
Michigan; Berlin, Connecticut; Boston, Massachusetts; Cincinnati, Ohio;
Dearborn, Michigan; Houston, Texas; Huntsville, Alabama; Lexington, Kentucky;
Pleasanton, California; Princeton, New Jersey; and Sacramento, California. Each
of these offices is located near one or more significant clients of the Company.
The Company believes that all these leases can be renewed or alternative space
obtained. Aggregate annual rent for the Company's corporate headquarters and
satellite offices is approximately $2.6 million. The Company's strategy is to
locate offices in areas where it has significant client work. From time to time,
the Company uses office space provided at client sites to facilitate performance
of its services and maximize client contact. The Company expects to open an
office in London in 1998. The Company anticipates that additional office space
will be required within the next 12 months and believes appropriate facilities
can be leased at locations convenient to its existing offices and headquarters.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is a party to routine litigation in the
ordinary course of business. However, the Company is not currently a party to
any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1997.
10
<PAGE>
PART II.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock has traded on the Nasdaq Stock Market since its
initial public offering on June 19, 1997. Its trading symbol is RWDT. The
following table sets forth, for each quarterly period indicated, the high and
low last sale price for the common stock as reported by the Nasdaq National
Market.
<TABLE>
<CAPTION>
1997 High Low
<S> <C> <C>
2nd Quarter (beginning June 19) $18.25 $16.88
3rd Quarter 25.63 16.75
4th Quarter 25.75 18.00
1998
1st Quarter (through February 27) 23.75 17.25
</TABLE>
No dividends were declared on the Company's common stock during the year
ended December 31, 1997, and the Company does not anticipate paying dividends in
the foreseeable future.
The number of registered shareholders of record as of February 27, 1998,
was 1,734.
11
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Company's Financial Statements, and related Notes thereto and
other financial information included elsewhere in this 10-K. The balance sheet
and income statement data at and for the years ended December 31, 1993, 1994,
1995, 1996, and 1997 are derived from the Company's Financial Statements, which
have been audited by Arthur Andersen LLP, independent public accountants.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1993 1994 1995 1996 1997
(In thousands, except per share and share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenue................................. $18,418 $29,424 $47,132 $65,006 $85,670
Cost of services........................ 14,654 21,751 35,269 48,132 60,785
------- ------- ------- ------- -------
Gross profit............................ 3,764 7,673 11,863 16,874 24,885
General and administrative
Expenses.............................. 2,157 3,515 5,212 8,137 11,141
------- ------- ------- ------- -------
Operating income........................ 1,607 4,158 6,651 8,737 13,744
Other income (expense), net............. (368) (185) (121) (123) 982
------- ------- ------- ------- -------
Income before taxes..................... 1,239 3,973 6,530 8,614 14,726
Provision for income taxes.............. 45 60 168 365 8,053
------- ------- ------- ------- -------
Net income.............................. $ 1,194 $ 3,913 $ 6,362 $ 8,249 $ 6,673
======= ======= ======= ======= =======
Pro Forma Data(1):
Provision for income taxes.......... $ 508 $ 1,589 $ 2,612 $ 3,446 $ 5,725
Net income.......................... $ 731 $ 2,384 $ 3,918 $ 5,168 $ 9,001
======= ======= ======= ======= =======
Earnings per share:
Diluted calculation............... $ 0.32 $ 0.40 $ 0.62
======= ======= =======
Basic calculation................. $ 0.38 $ 0.47 $ 0.71
======= ======= =======
Weighted average shares
Outstanding:
Diluted calculation............... 12,348 13,030 14,470
======= ======= =======
Basic calculation................. 10,220 10,902 12,747
======= ======= =======
BALANCE SHEET DATA (END OF YEAR):
Cash and marketable securities...... $ 2,292 $ 1,726 $ 2,394 $ 5,534 $40,045
Working capital..................... 4,600 7,620 11,439 12,053 49,380
Total assets........................ 10,171 14,533 23,658 29,858 67,887
Total debt.......................... 4,677 4,276 6,500 3,925 1,101
Stockholders' equity................ 2,484 6,397 12,758 20,132 54,963
- ------------
</TABLE>
(1) Prior to June 13, 1997, the Company was an S Corporation and, accordingly,
was not subject to federal and certain state corporate income taxes. The pro
forma information has been computed as if the Company were subject to federal
and all applicable state corporate income taxes for all periods.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained in Management's Discussion and Analysis
and elsewhere in this 10-K, including statements regarding development
of the Company's services, markets, and future demand for the Company's
services and other statements regarding matters that are not historical
facts, are forward-looking statements (as defined in the Private
Securities Litigation Reform Act of 1995). Such forward-looking
statements include risks and uncertainties; consequently, actual
results may differ materially from those expressed or implied thereby.
Factors that could cause actual results to differ
12
<PAGE>
materially include, but are not limited to, reliance on a few key
clients, reliance on strategic partners, concentration of revenues in
the automotive industry, which is subject to cyclical and economic
factors outside the Company's control, the Company's ability to
effectively manage its growth, variability of operating results,
various project risks associated with individual projects that could
materially impact operating results, the Company's ability to attract
and retain sufficient employees, dependence on key personnel,
technological change, and substantial competition.
OVERVIEW
RWD provides a broad range of integrated solutions designed to improve the
productivity and effectiveness of workers in complex operating environments. The
Company was founded in 1988 by Dr. Robert W. Deutsch, the Company's Chief
Executive Officer, and Mr. John H. Beakes, the Company's Chief Operating
Officer. Since 1991, its third year of operations, the Company has been
profitable in every quarter. Since inception, the Company has significantly
expanded its client base and the breadth of its service offerings. The Company
initially offered Performance Support services, expanding into Information
Technology services in 1990. Since that time, the Company has added Lean
Manufacturing Consulting services in 1993, Enterprise-wide Systems
Implementation Support services in 1994, and strategic management consulting in
1997. During 1997, RWD formalized its relationship with SAP America, Inc.,
becoming an R/3 implementation partner. The Company has established a laboratory
to demonstrate SAP's InfoDB product and now jointly markets implementation
service and contracts to provide services directly to SAP. In 1997, RWD provided
services to 96 companies, including 45 new clients, in more than 20 industries.
Automotive industry clients generated 43.5 percent, 40.7 percent, and 44.3
percent of total revenue in 1995, 1996, and 1997, respectively. Chrysler
represented 33.9 percent, 28.5 percent, and 28.1 percent of revenues in 1995,
1996, and 1997, respectively. Ford generated 14.0 percent of revenues in 1997.
No other client generated greater than 10 percent of revenues between 1995 and
1997. The Company manages each project using proven state-of-the-art
methodologies and formalized management techniques designed to ensure that each
engagement meets the Company's high standards for quality and client
satisfaction, as well as its profitability objectives.
The majority of the Company's contracts are on a time-and-materials basis,
although many of these contracts contain initial "not-to-exceed" fees and
Company performance obligations. The remainder of the Company's contracts are on
a fixed-price basis, particularly those related to the Company's Information
Technology services. All revenue is recognized using the percentage-of-
completion method. The Company typically bills contracts on a monthly basis, and
senior management reviews outstanding accounts receivable balances weekly to
monitor client satisfaction and collections. Historically, a large percentage of
the Company's revenue has come from follow-on business from its existing
clients. For example, in each of the past 3 years, more than 80 percent of the
year's total revenue was generated by clients who had been clients in the
previous year.
Gross profit margins per project and professional staff utilization rates
are critical to the Company's financial performance. The Company manages these
parameters by carefully establishing and monitoring project budgets and
timetables and by closely tracking staffing requirements for projects in
progress and projects that are anticipated. The status of all projects in
progress and personnel utilization are reviewed twice per month by project
managers, first-line supervisors, and senior management to ensure client
satisfaction and to monitor performance relative to internal financial and
operating expectations. The number of professionals assigned to a project varies
according to the size, complexity, duration, and demands of the project.
Professional staff utilization rates vary from period to period not only because
of variations in the Company's volume of business but because of the timing of
employee vacations, hiring and training, the amount of time spent by employees
on marketing, and project terminations or postponements. The Company has
experienced some seasonality in its business, with higher levels of
profitability and sequential growth in revenues in the first half of each year.
This trend has resulted primarily from reduced utilization due to holidays and
vacations in the second half of the year. Client engagements are generally
terminable with little or no notice or penalty, and a client's unanticipated
decision to terminate or postpone a project may result in higher than expected
unassigned Company professionals or severance expenses.
The principal components of cost of services are compensation and benefits
to the Company's professional staff. Cost of services also includes training and
travel expenses for the Company's professional staff, fees paid to
subcontractors, and depreciation of capital equipment provided to the
professional staff. The Company does not maintain a dedicated sales
13
<PAGE>
staff, and time devoted by professional personnel to marketing is included in
cost of services, as are costs associated with administrative personnel that
directly support the Company's professional staff. General and administrative
expenses are primarily composed of salaries for corporate, accounting,
other headquarters executive and administrative personnel, and other corporate
overhead. The Company was an S Corporation until just prior to its initial
public offering on June 19, 1997. The pro forma provision for income taxes
assumes the Company was subject to federal, state, and local income taxes
applicable to C Corporations for all periods and was calculated using an
effective tax rate of 40.0 percent during these periods.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, income statement
data expressed as a percentage of revenue and the percentage change in such
items versus the previous comparable period.
<TABLE>
<CAPTION>
Percentage of Revenue Percentage Increase
Year Ended December 31, (Decrease)
------------------------- ------------------------------
1995 1996 1997 1995 to 1996 1996 to 1997
---- ---- ---- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue......................... 100.0% 100.0% 100.0% 37.9% 31.8%
Cost of services................ 74.8 74.0 71.0 36.5 26.3
----- ----- ----- ------- -------
Gross profit.................... 25.2 26.0 29.0 42.2 47.5
General and administrative
expenses...................... 11.1 12.5 13.0 56.1 36.9
----- ----- ----- ------- -------
Operating income................. 14.1 13.4 16.0 31.4 57.3
Other income (expense), net...... (0.3) (0.2) 1.2 2.2 nm
----- ----- ----- ------- -------
Income before taxes.............. 13.8 13.3 17.2 31.9 71.0
Provision for income taxes....... 0.4 0.6 9.4(1) 116.6 2,106.3(1)
----- ----- ----- ------- -------
Net income....................... 13.4% 12.7% 7.83% 29.7% (19.1)%
===== ===== ====== ======= ========
Pro Forma Data(1):
Provision for income taxes.. 5.5% 5.3% 6.7% 31.9% 66.1%
Net income.................. 8.3% 8.0% 10.5% 31.9% 74.2%
===== ===== ====== ======= ========
</TABLE>
- --------
(1) During 1997, the Company converted from S corporation to C corporation tax
status and, as a result, recognized a $4.5 million charge to establish a
deferred tax liability. The pro forma information has been computed as if
the Company were subject to corporate income taxes for all periods.
YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenue. Revenue increased by $20.7 million, or 31.8 percent, from $65.0
million in 1996 to $85.7 million in 1997. The Company experienced growth in all
of its service areas in 1997 compared to the same period in 1996, with
Performance Support services revenue increasing by 16.0 percent, from $27.4
million to $31.8 million; Enterprise-wide Systems Implementation Support
services revenue increasing by 32.8 percent, from $13.4 million to $17.8
million; Information Technology services revenue increasing by 35.6 percent,
from $16.5 million to $22.4 million; and Lean Manufacturing Consulting services
revenue increasing by 78.3 percent from $7.7 million to $13.7 million.
Performance Support services, Enterprise-wide Systems Implementation Support
services, Information Technology services, and Lean Manufacturing Consulting
generated 37.1 percent, 20.8 percent, 26.1 percent, and 16.0 percent of total
revenue, respectively, in 1997.
Revenue from the Company's largest client, Chrysler, increased by 29.6
percent, from $18.6 million in 1996 to $24.0 million in 1997, as a result of
increases in Information Technology and Performance Support services, partially
offset by decreases in Lean Manufacturing Consulting services provided by the
Company. The Company's total employees grew 22 percent, from 648 at the end of
1996 to 791 employees at the end of 1997.
14
<PAGE>
Gross Profit. Gross profit increased by $8.0 million (or 47.5 percent),
from $16.9 million in 1996 to $24.9 million in 1997, and increased from 26.0
percent of revenue in 1996 to 29.0 percent in 1997. This increase in gross
margin resulted primarily from increases in billing rates charged to clients,
increases in staff utilization rates, and improvements in individual project
profitability.
General and Administrative Expenses. General and administrative expenses
increased by $3.0 million (or 36.9 percent), from $8.1 million in 1996 to $11.1
million in 1997, increasing from 12.5 percent of revenue in 1996 to 13.0 percent
of revenue in 1997. This increase in general and administrative expenses as a
percentage of revenue resulted primarily from increases in legal and accounting
fees, marketing expenses, and recruiting costs, partially offset by savings in
health insurance costs.
Operating Income. As a result of the foregoing, the Company's operating
income increased by $5.0 million (or 57.3 percent), from $8.7 million in 1996 to
$13.7 million in 1997 and increased from 13.4 percent of revenue in 1996 to 16.0
percent of revenue in 1997.
Other Income (Expense). Other income (expense) was ($123,100) in 1996 and
$981,900 in 1997. In 1996, this expense consisted primarily of interest expense
paid on the Stockholder Notes, partially offset by interest income from cash and
investment balances. In 1997, this income consisted primarily of interest income
from cash and investment balances including the proceeds from the Company's
June 1997 initial public offering, partially offset by interest expense paid
on the Stockholder Notes and the Company's capital lease. The Stockholder Notes
were repaid during the second quarter of 1997.
Pro Forma Net Income. Pro forma net income increased by $3.8 million (or
74.2 percent), from $5.2 million in 1996 to $9.0 million in 1997. Pro forma
results assume the Company was a C corporation throughout the periods presented.
During the second quarter of 1997, the Company converted from S corporation to C
corporation tax status and, as a result, recognized a $4.5 million charge to
establish a deferred tax liability.
YEAR ENDED DECEMBER 31, 1996, COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenue. Revenue increased by $17.9 million (or 37.9 percent), from $47.1
million in 1995 to $65.0 million in 1996. The Company experienced growth in each
of its service areas from 1995 to 1996, with Enterprise-wide Systems
Implementation Support services revenue increasing by 75.8 percent, from $7.6
million to $13.4 million; Lean Manufacturing Consulting revenue increasing by
102.6 percent, from $3.8 million to $7.7 million; Information Technology
services revenue increasing by 76.2 percent, from $9.4 million to $16.5 million;
and Performance Support services revenue increasing by 4.2 percent, from $26.3
million to $27.4 million. Performance Support services, Enterprise-wide Systems
Implementation Support services, Information Technology services, and Lean
Manufacturing Consulting services generated 42.1 percent, 20.7 percent, 25.4
percent, and 11.8 percent of total revenue, respectively, in 1996 compared to
55.8 percent, 16.2 percent, 19.9 percent, and 8.1 percent of total revenue,
respectively, in 1995.
Revenue from the Company's largest client, Chrysler, increased by 16.3
percent, from $16.0 million in 1995 to $18.6 million in 1996, primarily as a
result of increases in Information Technology and Lean Manufacturing Consulting
services provided by the Company.
Gross Profit. Gross profit increased by $5.0 million (or 42.2 percent),
from $11.9 million in 1995 to $16.9 million in 1996 and increased from 25.2
percent of revenue in 1995 to 26.0 percent of revenue in 1996. This increase in
gross margin resulted from an increase in billing rates charged to clients,
partially offset by a decline in professional staff utilization. In addition,
reimbursable expenses made up a smaller proportion of revenue, increasing the
gross margin because these expenses are reimbursed to the Company generally
without significant markup.
General and Administrative Expenses. General and administrative expenses
increased by $2.9 million (or 56.1 percent), from $5.2 million in 1995 to $8.1
million in 1996, increasing from 11.1 percent of revenue in 1995 to 12.5 percent
of revenue in 1996. This increase in general and administrative expenses as a
percentage of revenue resulted primarily from
15
<PAGE>
increased rent associated with expansion of existing offices and increased
depreciation associated with purchases of furniture, computer and office
equipment, and leasehold improvements.
Operating Income. As a result of the foregoing, the Company's operating
income increased by $2.1 million or (31.4 percent), from $6.7 million in 1995 to
$8.7 million in 1996 but declined from 14.1 percent of revenue in 1995 to 13.4
percent of revenue in 1996.
Other Income (Expense). Other expense was ($120,500) in 1995 and ($123,100)
in 1996. In both years, this expense consisted primarily of interest paid on the
Stockholder Notes and the Company's line of credit, partially offset by interest
income from cash balances.
Pro Forma Net Income. Pro forma net income increased by $1.3 million (or
31.9 percent), from $3.9 million in 1995 to $5.2 million in 1996 but declined
slightly from 8.3 percent of revenue in 1995 to 8.0 percent of revenue in 1996.
Pro forma net income in 1995 and 1996 assumes the Company was taxed for federal
and state income tax purposes as a C Corporation at an effective rate of 40.0
percent.
16
<PAGE>
SELECTED QUARTERLY OPERATING RESULTS
The following tables set forth unaudited income statement data for each of
the eight quarters in the period beginning January 1, 1996, and ending December
31, 1997, as well as the percentage of the Company's total revenue represented
by each item. In management's opinion, this unaudited information has been
prepared on a basis consistent with the Company's audited annual financial
statements and includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the information for the
quarters presented, when read in conjunction with the Financial Statements and
related Notes thereto included elsewhere in this 10-K. The operating results for
any quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
--------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
--------- -------- --------- -------- --------- -------- --------- --------
1996 1996 1996 1996 1997 1997 1997 1997
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $14,632 $15,999 $16,606 $17,769 $19,100 $ 20,706 $22,016 $23,849
Cost of services 10,863 11,717 12,382 13,170 13,413 14,273 15,768 17,332
------- ------- ------- ------- ------- -------- ------- -------
Gross profit 3,769 4,282 4,224 4,599 5,687 6,433 6,248 6,517
General and administrative
expenses 1,820 1,938 2,107 2,272 2,686 2,782 2,738 2,936
------- ------- ------- ------- ------- -------- ------- -------
Operating income 1,949 2,344 2,117 2,327 3,001 3,652 3,510 3,582
Other income (expense), net (61) (48) 4 (18) 22 (21) 484 497
------- ------- ------- ------- ------- -------- ------- -------
Income before taxes 1,888 2,296 2,121 2,309 3,023 3,631 3,993 4,079
Provision for income taxes 70 70 75 150 100 4,889 (1) 1,514 1,550
------- ------- ------- ------- ------- -------- ------- -------
Net income (loss) $ 1,818 $ 2,226 $ 2,046 $ 2,159 $ 2,923 ($ 1,258) $ 2,479 $ 2,529
======= ======= ======= ======= ------- -------- ------- -------
Pro Forma Data (1):
Provision for income taxes 755 918 848 925 1,209 1,452 1,514 1,550
Net income $ 1,133 $ 1,378 $ 1,273 $ 1,384 $ 1,814 $ 2,178 $ 2,479 $ 2,529
======= ======= ======= ======= ======= ======= ======= =======
Pro forma earnings per share:
Diluted calculation $ 0.09 $ 0.11 $ 0.10 $ 0.11 $ 0.14 $ 0.16 $ 0.16 $ 0.16
======= ======= ======= ======= ======= ======== ======= =======
Basic calculation $ 0.10 $ 0.13 $ 0.12 $ 0.13 $ 0.17 $ 0.19 $ 0.17 $ 0.18
======= ======= ======= ======= ======= ======== ======= =======
Weighted average shares
outstanding:
Diluted calculation 13,030 13,030 13,030 13,030 12,968 13,381 15,724 15,807
======= ======= ======= ======= ======= ======== ======= =======
Basic calculation 10,902 10,902 10,902 10,902 10,918 11,408 14,237 14,424
======= ======= ======= ======= ======= ======== ======= =======
Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services 74.2 73.2 74.6 74.1 70.2 68.9 71.6 72.7
------- ------- ------- ------- ------- -------- ------- -------
Gross profit 25.8 26.8 25.4 25.9 29.8 31.1 28.4 27.3
General and administrative
expenses 12.4 12.1 12.7 12.8 14.1 13.4 12.4 12.3
------- ------- ------- ------- ------- -------- ------- -------
Operating income 13.4 14.7 12.7 13.1 15.7 17.6 15.9 15.0
Other income (expense), net (0.4) (0.3) 0.1 (0.1) 0.1 (0.1) 2.2 2.1
------- ------- ------- ------- ------- -------- ------- -------
Income before taxes 13.0 14.4 12.8 13.0 15.8 17.5 18.1 17.1
Provision for income taxes 0.5 0.4 0.5 0.8 0.5 23.6 6.9 6.5
------- ------- ------- ------- ------- -------- ------- -------
Net income 12.5% 14.0% 12.3% 12.2% 15.3% (6.1)% 11.3% 10.6%
======= ======= ======= ======= ======= ======== ======= =======
Pro Forma Data (1):
Provision for income taxes 5.2% 5.7% 5.1% 5.2% 6.3% 7.0% 6.9% 6.5%
Net income 7.7% 8.6% 7.7% 7.8% 9.5% 10.5% 11.3% 10.6%
======= ======= ======= ======= ======= ======== ======= =======
</TABLE>
- ----------
(1) Prior to June 13, 1997, the Company was an S Corporation and, accordingly,
was not subject to federal and certain state corporate income taxes. The pro
forma information has been computed as if the Company were subject to federal
and all applicable state corporate income taxes for all periods. In connection
with its conversion from S Corporation to C Corporation status in June 1997, the
Company recorded a one-time deferred tax liability of $4.5 million, which is
included in the second quarter 1997 tax provision.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and investments were $40.0 million as of December 31,
1997, compared to $5.5 million as of December 31, 1996. Increases in cash and
investments as of December 31, 1997, were attributable primarily to proceeds
from the Company's June 1997 initial public offering. The Company's working
capital was $49.4 million as of December 31, 1997, compared to $12.1 million as
of December 31, 1996.
The Company's operating activities provided cash of $15.6 million for the
year ended December 31, 1997, compared to $11.9 million and $3.0 million for the
years ended December 31, 1996 and 1995, respectively. The increase in cash from
operations in 1997 resulted primarily from higher operating income, increases in
depreciation expense, accrued expenses, and other liabilities partially offset
by increases in accounts receivable. The increase in cash provided by operations
in 1996 compared to 1995 resulted from higher net income, depreciation, and
accounts payable.
Investing activities used cash of $38.2 million in the year ended December
31, 1997, compared to the use of $5.0 million and $4.0 million for the same
periods in 1996 and 1995, respectively. Cash used for investing in the year
ended December 31, 1997, consisted primarily of the net purchase of investments
from the proceeds of the Company's initial public offering and purchases of
capital assets. Cash used in investing in 1996 and 1995 consisted primarily of
purchases of capital assets.
Financing activities provided cash of $22.7 million in the year ended
December 31, 1997, compared to the use of $3.8 million for the same period in
1996. Cash provided from financing activities for the same period in 1995 was
$1.4 million. Increases in cash provided from financing activities in 1997
resulted primarily from the issuance of common stock in the Company's initial
public offering and proceeds from the exercise of options, partially offset by
repayments of shareholders' loans and distributions to S corporation
shareholders of previous period earnings of the Company. Distributions in 1997
to S Corporation shareholders were approximately $16.4 million. In 1996 and
1995, financing activities consisted primarily of borrowings and repayments
under the Company's line of credit.
The Company has a $10.0 million unsecured revolving line of credit with a
commercial bank, which bears interest at the 30-day LIBOR rate, plus 1.0 percent
(6.2 percent on December 31, 1997). The Company has used this line of credit to
finance a portion of its working capital needs. There was no balance outstanding
as of December 31, 1997 or 1996.
During the second quarter of 1997, the Company converted from S
corporation to C corporation tax status and, as a result, recognized a $4.5
million charge to establish a deferred tax liability. This tax liability will
become due ratably over the 4 years beginning with 1997.
During 1997, the Company made $3.7 million in capital expenditures,
primarily for office furniture, computer and office equipment, and leasehold
improvements to support the growth of its professional and administrative staff.
Capital expenditures during 1998 are currently expected to be between $5.0
million and $6.0 million, funded from available cash, although the Company may
consider alternative financing methods, such as equipment leases or asset-based
borrowings in future periods.
EFFECTS OF INFLATION
Inflation has not had a significant effect on the Company's business
during the past 3 years. The Company cannot predict what effect, if any,
inflation may have on its future results of operations.
18
<PAGE>
YEAR 2000
The Company recognizes the need to ensure its operations will not be
adversely affected by Year 2000 software failures. Specifically, software
computational errors are a potential risk with respect to dates after December
31, 1999. The Company has made a preliminary assessment of its Year 2000
compliance issues and is developing plans to address such issues. Although the
Company has not yet estimated the total costs needed for Year 2000 compliance,
the Company does currently believe it will be able to upgrade and maintain its
computer systems to recognize years beginning with 2000 and that the cost to do
so will not be material to its financial position, liquidity, or results of
operations.
ITEM 8. FINANCIAL STATEMENTS
The financial statements of the Company are included on pages 23 through
26.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in accountants, disagreements, or other events
requiring reporting under this item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF RWD TECHNOLOGIES, INC.
Information required under this caption will be included in the Company's
Definitive Proxy Statement prepared in connection with the 1998 Annual Meeting
of Stockholders, which will be filed on or before April 29, 1998, and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this caption will be included in the Company's
Definitive Proxy Statement prepared in connection with the 1998 Annual Meeting
of Stockholders, which will be filed on or before April 29, 1998, and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this caption will be included in the Company's
Definitive Proxy Statement prepared in connection with the 1998 Annual Meeting
of Stockholders, which will be filed on or before April 29, 1998, and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this caption will be included in the Company's
Definitive Proxy Statement prepared in connection with the 1998 Annual Meeting
of Stockholders, which will be filed on or before April 29, 1998, and is
incorporated herein by reference.
19
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements
The response to this portion of Item 14 is submitted as a separate
section of this report.
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
<TABLE>
<CAPTION>
Exhibit No Description
- ---------- -----------------------------------------------------------------
<S> <C>
3.01 Articles of Amendment and Restatement of the Charter**
3.02 Amended and Restated Bylaws**
4.01 Specimen Common Stock Certificate**
10.01 Maryland Full-Service Office Lease between the Company
and Columbia Management, Inc., dated as of January 1, 1994,
as amended**
10.02 Amended and Restated Equity Participation Plan**
10.03 Employee Stock Purchase Plan**
10.04 Chrysler Corporation General Terms & Conditions/Clause
Manual--Facilities and Material Purchasing--General Terms
and Conditions**
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**
10.06 Form of Executive Employment Agreement**
10.07 1998 Omnibus Stock Incentive Plan*
21.01 Subsidiaries of the Registrant*
23.01 Consent of Arthur Andersen LLP*
24.01 Powers of Attorney*
27.01 Financial Data Schedule*
- -------------------
</TABLE>
* Filed herewith
** Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-1 dated February 14, 1997 (No. 333-21779), as amended.
(b). Reports on Form 8-K. None were filed during the fourth
quarter of 1997.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on March 18, 1998.
RWD TECHNOLOGIES, INC.
(Registrant)
By: /s/ Robert W. Deutsch
---------------------
Robert W. Deutsch
Chairman of the Board, Chief Executive
Officer and Director (Principal Executive
Officer)
By: /s/ Ronald E. Holtz
-------------------
Ronald E. Holtz
Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
RWD Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of RWD
Technologies, Inc., (a Maryland corporation) and subsidiaries as of December 31,
1996 and 1997, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the 3 years in the period
ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of RWD
Technologies, Inc., and subsidiaries as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the 3 years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
/s/ Arthur Andersen LLP
Baltimore, Maryland
January 23, 1998
22
<PAGE>
RWD TECHNOLOGIES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....................................... $ 3,530,600 $ 3,619,500
Investments, available-for-sale................................. 500,600 36,425,900
Investments, held to maturity................................... 1,502,300 -
Contract accounts receivable, net of allowance for doubtful
accounts of $383,700 and $427,800, respectively................ 11,981,600 13,328,200
Costs and estimated earnings in excess of billings on
uncompleted contracts.......................................... 3,331,400 4,779,000
Prepaid expenses and other...................................... 849,500 1,011,900
----------- -----------
Total Current Assets................................. 21,696,000 59,164,500
----------- -----------
Fixed Assets:
Furniture and fixtures.......................................... 4,826,300 5,608,500
Office equipment................................................ 1,448,300 1,673,200
Computer equipment.............................................. 5,594,400 8,055,500
Leasehold improvements.......................................... 725,900 923,800
----------- -----------
Total Fixed Assets................................... 12,594,900 16,261,000
Less accumulated depreciation and amortization.................. (4,718,000) (7,785,300)
----------- -----------
Net Fixed Assets..................................... 7,876,900 8,475,700
----------- -----------
Other Assets...................................................... 285,500 246,400
----------- -----------
Total Assets..................................... $29,858,400 $67,886,600
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................ $ 652,800 $ 1,292,300
Accrued payroll and other....................................... 1,641,500 2,500,100
Accrued vacation payable........................................ 817,400 1,103,000
Billings in excess of costs and estimated earnings on
uncompleted contracts.......................................... 2,689,300 3,646,000
Deferred tax liability.......................................... - 1,190,600
Current portion of capital lease obligation..................... 41,600 52,300
Related party debt.............................................. 3,800,000 -
----------- -----------
Total Current Liabilities............................ 9,642,600 9,784,300
Noncurrent Liabilities:
Capital lease obligation, net of current portion................ 83,400 31,200
Deferred tax liability.......................................... - 2,090,300
Other liabilities............................................... - 1,017,600
----------- -----------
Total Liabilities.................................... 9,726,000 12,923,400
----------- -----------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.10 par value: authorized-50,000,000
shares; issued and outstanding-4,859,640 and
14,424,315, respectively....................................... 486,000 1,442,400
Unrealized gain on marketable securities........................ - 24,600
Additional paid-in capital...................................... 2,753,800 46,626,500
Retained earnings............................................... 16,892,600 6,869,700
----------- -----------
Total Stockholders' Equity........................... 20,132,400 54,963,200
----------- -----------
Total Liabilities and Stockholders' Equity....... $29,858,400 $67,886,600
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
RWD TECHNOLOGIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31,
--------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenue........................................................... $ 47,131,600 $ 65,005,500 $ 85,670,500
Cost of services.................................................. 35,268,900 48,131,300 60,785,400
------------ ------------ ------------
Gross profit.................................................. 11,862,700 16,874,200 24,885,100
General and administrative expenses............................... 5,212,100 8,137,500 11,141,200
------------ ------------ ------------
Operating income.................................................. 6,650,600 8,736,700 13,743,900
Interest expense.................................................. (342,800) (388,600) (190,700)
Interest and other income......................................... 222,300 265,500 1,172,600
------------ ------------ ------------
Income before taxes........................................... 6,530,100 8,613,600 14,725,800
Provision for income taxes (including the $4,500,000 deferred
tax liability related to C corp. conversion).................... 168,500 364,900 8,053,300
------------ ------------ ------------
Net income.................................................... $ 6,361,600 $ 8,248,700 $ 6,672,500
============ ============ ============
Earnings per share:
Diluted calculation......................................... $ 0.52 $ 0.63 $ 0.46
============ ============ ============
Basic calculation........................................... $ 0.62 $ 0.76 $ 0.53
============ ============ ============
Pro Forma Information:
Income before taxes, as reported.............................. $ 6,530,100 $ 8,613,600 $ 14,725,800
Pro forma income tax provision................................ 2,612,000 3,445,500 5,725,100
------------ ------------ ------------
Pro forma net income.......................................... $ 3,918,100 $ 5,168,100 $ 9,000,700
============ ============ ============
Pro forma earnings per share:
Diluted calculation......................................... $ 0.32 $ 0.40 $ 0.62
============ ============ ============
Basic calculation........................................... $ 0.38 $ 0.47 $ 0.71
============ ============ ============
Weighted average shares outstanding:
Diluted calculation........................................... 12,348,300 13,030,000 14,470,100
============ ============ ============
Basic calculation............................................. 10,220,300 10,902,000 12,746,700
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
RWD TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
Unrealized
Gains on Additional
Common Marketable Paid-In Retained
Stock Securities Capital Earnings
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994.............. $ 484,900 $ - $ 2,748,600 $3,163,300
Stock options exercised............... - - 300 -
Common stock repurchased.............. - - (1,000) -
Net income............................ - - - 6,361,600
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1995.............. $ 484,900 - $ 2,747,900 $ 9,524,900
Stock options exercised............... 4,600 - 26,800 -
Common stock repurchased.............. (3,500) - (20,900) (189,700)
S Corporation distributions........... - - - (691,300)
Net income............................ - - - 8,248,700
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996.............. $ 486,000 - $ 2,753,800 $16,892,600
Stock options exercised............... 637,200 - 6,199,800
Common stock repurchased.............. (9,200) - (481,200) (330,900)
S Corporation distributions........... - (16,364,400)
Initial Public Offering............... 328,400 - 38,154,100 -
Unrealized gain on securities
Available-for-sale.................. - 24,600 - -
Net income............................ - - - 6,672,500
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 $ 1,442,400 $ 24,600 $46,626,500 $ 6,869,700
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
RWD TECHNOLOGIES, INC., AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31,
----------------------------------------------
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income................................................ $ 6,361,600 $ 8,248,700 $ 6,672,500
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 1,179,800 2,232,400 3,103,600
Gain on sale of fixed assets............................ 6,000 31,600 (19,000)
Deferred income taxes................................... - - 3,280,900
(Increase)/Decrease in contract accounts receivable..... (3,652,900) (532,800) (1,346,700)
(Increase)/Decrease in costs and estimated earnings in
excess of billings on uncompleted contracts........... (1,826,200) 508,400 (1,447,700)
(Increase)/Decrease in prepaid expenses and other....... (436,500) 7,400 (152,500)
Increase/(Decrease) in accounts payable and
accrued expenses...................................... 806,000 571,800 3,551,900
Increase/(Decrease) in billings in excess of costs and
estimated earnings on uncompleted contracts........... 593,800 828,800 956,600
Increase/(Decrease) in other liabilities................ - - 1,017,600
----------- ----------- ------------
Net cash provided by operating activities............... 3,031,600 11,896,300 15,617,200
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (Purchases)/Sale of Investments..................... (276,900) 200 (34,398,400)
Purchase of fixed assets................................ (3,738,100) (4,961,300) (3,719,400)
(Increase)/Decrease in other assets..................... 3,400 (50,000) (123,100)
Proceeds from sale of fixed assets...................... 7,300 8,400 36,200
----------- ----------- ------------
Net cash used in investing activities................... (4,004,300) (5,002,700) (38,204,700)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal portion paid on capital lease................. - (17,500) (41,500)
Borrowings (payments) under line of credit, net......... 1,364,300 (2,700,000) -
Payments of shareholder loans........................... - - (3,800,000)
Distributions to shareholders........................... - (691,300) (16,364,400)
Public offering costs................................... - (162,400) (4,041,400)
Issuance of common stock................................ 300 31,400 47,743,500
Repurchase of common stock.............................. (1,000) (214,100) (819,800)
----------- ----------- ------------
Net cash provided by (used in) financing activities..... 1,363,600 (3,753,900) 22,676,400
----------- ----------- ------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS............................................... 390,900 3,139,700 88,900
CASH AND CASH EQUIVALENTS, beginning of year................ - 390,900 3,530,600
----------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of year...................... $ 390,900 $ 3,530,600 $ 3,619,500
=========== =========== ============
Supplemental Cash Flow Disclosures:
Income taxes paid....................................... $ 270,400 $ 334,600 $ 2,734,600
Interest paid........................................... 342,800 388,600 188,400
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
RWD TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996, AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Business
- -------------------------
RWD Technologies, Inc., and subsidiaries (the "Company") was
incorporated on January 22, 1988, in the State of Maryland. The Company provides
a broad range of integrated solutions designed to improve the productivity and
effectiveness of workers in complex operating environments.
The Company's operations depend upon, among other things, the
Company's ability to attract, develop, and retain a sufficient number of highly
skilled professional employees. In addition, the Company's revenue is generated
from a limited number of clients in specific industries. Future operations may
be affected by its ability to retain these clients and cyclical and economic
factors that could have an impact on those industries.
Basis of Presentation
- ---------------------
The accompanying consolidated financial statements include the
accounts of RWD Technologies, Inc., and its wholly owned subsidiaries and are
presented on the accrual basis of accounting in accordance with generally
accepted accounting principles. All significant intercompany balances and
transactions have been eliminated in consolidation. The preparation of
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the consolidated financial
statements and the reported amounts of total revenue and expenses during the
reporting period. While actual results could differ from those estimates,
management believes that actual results will not be materially different from
amounts provided in the accompanying consolidated financial statements.
Initial Public Offering (IPO)
- -----------------------------
The Company effected an initial public offering (IPO) of common stock
during 1997, in which it sold 3.3 million shares of its common stock, par value
$0.10 per share. The Company realized $38.5 million from the offering, net of
expenses. Also during 1997, prior to the IPO, the Company made a $16,364,400 S
Corporation distribution, representing earnings accumulated by the Company while
it was taxed as a Subchapter S corporation, which had not been previously
distributed to the stockholders. The proceeds of the IPO were used to retire the
$3,800,000 of shareholder notes, and the Company will use the remaining proceeds
for working capital to support its planned growth and for other general
corporate purposes.
Investments
- -----------
Investments as of December 31, 1996 and 1997, consisted of U.S.
government and tax-exempt municipal securities expected to mature within 1 year.
As of December 31, 1996, $1,502,300 of investments were classified as held-to-
maturity and were recorded at amortized cost, which approximated market value.
As of December 31, 1996 and 1997, $500,600 and $36,425,900, respectively, were
classified as available-for-sale and were recorded at market value, with the
change in market value being recorded as a component of stockholders' equity as
of December 31, 1997.
27
<PAGE>
Financial Instruments
- ---------------------
Financial instruments as of December 31, 1996 and 1997, consist of
cash, investments, receivables, payables, debt, and a capital lease obligation,
all of which the carrying amounts approximate market value.
Fixed Assets
- ------------
Fixed assets are stated at cost. Depreciation and amortization is
computed using the straight-line method based on the estimated useful lives, as
follows:
<TABLE>
<CAPTION>
<S> <C>
Furniture and fixtures 7 years
Office equipment 5 years
Computer equipment 3-5 years
Leasehold improvements 7-10 years
</TABLE>
The depreciation and amortization expense for 1995, 1996, and 1997,
was $1,179,800, $2,232,400, and $3,103,600, respectively.
Revenue Recognition
- -------------------
Almost all of RWD's revenue is generated from professional fees. The
majority of the Company's contracts are on a time-and-materials basis, although
many of the contracts contain initial "not-to-exceed" fees and Company
performance obligations. The remainder of the Company's contracts are on a
fixed-bid basis. Revenue is recognized using the percentage of completion
method. The Company's contracts generally vary in length from 1 to 24 months.
Earned revenue is based on the percentage that direct labor and other
contract costs incurred to date bear to total estimated costs, after giving
effect to the most recent estimates of total cost. The cumulative impact of
revisions in total cost estimates during the progress of work is reflected in
the period in which these changes become known. Earned revenue reflects the
original contract price adjusted for agreed-upon claim and change order revenue,
if any. Losses expected to be incurred on jobs in process, after consideration
of estimated minimum recoveries from claims and change orders, are charged to
income as soon as such losses are known.
Significant Clients
- -------------------
Automobile industry clients generated an aggregate of 43.5 percent,
40.7 percent, and 44.3 percent of the Company's total revenue in 1995, 1996, and
1997, respectively. Telecommunications industry clients generated an aggregate
of 10.1 percent of the Company's total revenue in 1997. Sales to one client
during 1995, 1996, and 1997 were approximately 33.9 percent, 28.5 percent and
28.1 percent, respectively, of total revenue in each of these respective
periods. Sales to another client were approximately 14.0 percent of total
revenue in 1997. No other client represented more than 10 percent of the
Company's total revenue in any of these periods.
Income Taxes
- ------------
Historically, the Company had elected to be taxed under the provisions
of Subchapter S of the Internal Revenue Code, which provide that, in lieu of
corporate, federal, and some state income taxes, the stockholders are taxed on
their proportionate share of the Company's taxable income. In conjunction with
the IPO of the Company's common stock during 1997, the Company elected to change
its tax status from an S Corporation to a C Corporation. As a result of the
Company's Subchapter S election, the accompanying consolidated statements of
income do not include an income tax provision for federal and most state income
taxes during the periods of the S Corporation election; however, pro forma
adjustments have been made to reflect the income tax provision as if the Company
was taxed as a C Corporation during all periods. The pro forma adjustments have
been made at an
28
<PAGE>
effective rate of 40.0 percent, which is the tax rate that would have been in
effect had the Company been taxed as a C Corporation for the duration of each of
those periods.
Earnings Per Share (EPS)
- ------------------------
During 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128 (SFAS No. 128), "Earnings Per Share," which establishes new
standards for computing and presenting earnings per share. The Company adopted
SFAS No. 128 during 1997 and has restated earnings per share data presented to
reflect the new standard. SFAS No. 128 requires presentation of basic earnings
per share and diluted earnings per share. The weighted average shares used to
calculate basic and diluted earnings per share for 1995, 1996, and 1997, in
accordance with SFAS No. 128 are as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
BASIC EPS:
Common stock outstanding 4,850,300 4,857,800 6,702,500
Majority stockholder shares issued in
conjunction with the IPO 5,370,000 5,370,000 5,370,000
Assumed IPO shares for S Corp.
distribution - 674,200 674,200
---------- ---------- ----------
Weighted average shares
outstanding for basic EPS
(pro forma) 10,220,300 10,902,000 12,746,700
DILUTED EPS:
Dilutive effect of common stock
equivalents 2,128,000 2,128,000 1,723,400
---------- ---------- ----------
Weighted average shares
outstanding for diluted
EPS (pro forma) 12,348,300 13,030,000 14,470,100
========== ========== ==========
</TABLE>
The majority stockholder exercised options to acquire 5,370,000 shares
concurrent with the completion of the IPO. The weighted average shares
outstanding have been pro forma adjusted as if the majority stockholder's
5,370,000 shares exercised were outstanding for all periods presented and to
include the effect of shares that would have had to have been issued during 1996
and 1997, prior to the IPO (at the IPO price of $13.00 per share, less the
underwriting discount expenses) to generate sufficient cash to fund the portion
of the $16,400,000 S Corporation distribution that was in excess of the net
income for 1996. While this assumption of how the S Corporation distribution was
funded was made to calculate the EPS for 1996 and 1997, the Company used
operating cash flows, and not IPO proceeds, to fund the S Corporation
distribution. Weighted average shares outstanding for calculating dilutive EPS
includes basic shares outstanding, plus shares issuable upon the exercise of
stock options, using the treasury stock method. Market value of the Company's
stock prior to the IPO was assumed to be the IPO price per share of $13.00. The
options outstanding as of December 31, 1996, were assumed to be outstanding for
all of 1995 and 1996.
Stock Split
- -----------
The Company effected a three-for-one stock split, effective March 21,
1997. All share data included in the accompanying consolidated financial
statements and notes thereto are as if the stock split had occurred prior to the
periods presented.
New Accounting Standards
- ------------------------
During 1997, the FASB issued Statement No. 130, "Reporting
Comprehensive Income" (SFAS No. 130), which is effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for
reporting and display of comprehensive income and its components. Comprehensive
income is defined as the
29
<PAGE>
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. The Company plans to
adopt this standard during 1998. The Company estimates that its income in
accordance with SFAS No. 130 for 1997 would consist of net income of $6,672,500,
plus unrealized gains on investments available-for-sale of $24,600. The Company
is still analyzing the effects of SFAS No. 130 and whether there would be any
other components to its comprehensive income.
During 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS No. 131), which is
effective for fiscal years beginning after December 15, 1997. This statement
establishes revised standards under which an entity must report business segment
information in its financial statements and what segment information must be
disclosed. The Company believes it has reportable operating segments, as defined
by SFAS No. 131, and is currently evaluating what those segments are and the
financial statement presentation required for those segments.
2. COSTS AND ESTIMATED EARNINGS ON CONTRACTS IN PROCESS:
<TABLE>
<CAPTION>
As of December 31,
1996 1997
------------ ------------
<S> <C> <C>
Cost incurred and estimated earnings on
uncompleted contracts $59,311,700 $77,980,700
Less: Billings to date on
uncompleted contracts 58,669,600 76,847,700
------------ ------------
Net unbilled revenues $ 642,100 $ 1,133,000
============ ============
Included in the accompanying
consolidated balance sheets under
the following captions:
Costs and estimated earnings
in excess of billings on
uncompleted contracts $ 3,331,400 $ 4,779,000
Billings in excess of costs
and estimated earnings on
uncompleted contracts 2,689,300 3,646,000
------------ ------------
Net unbilled revenues $ 642,100 $ 1,133,000
============ ============
</TABLE>
Generally, contracts provide for the billing of costs incurred and
estimated fees on primarily a monthly basis. Amounts recorded in "costs and
estimated earnings in excess of billings on uncompleted contracts" in the
accompanying consolidated financial statements will be billed within 12 months
of the balance sheet date.
3. DEBT:
Notes payable as of December 31, 1996, consisted of two loans payable
to principal stockholders of the Company. The notes bore interest at 9 percent,
were unsecured, and were due on March 31, 1998; these notes were repaid during
1997. Interest expense on these loans was $342,000, $342,000, and $165,300 in
1995, 1996, and 1997, respectively.
30
<PAGE>
The Company has a line of credit agreement with a bank that extends
to working capital (Facility A) and vehicle and equipment purchases or leases
(Facility B). Facility A is an unsecured line of $10,000,000 at an interest rate
equivalent to the 30-day LIBOR rate plus 1.0 percent. Facility B is secured by
the specific vehicles or equipment being leased or purchased, and advances under
this $250,000 line are limited to 80 percent of the cost of assets purchased or
100 percent of the cost of assets leased. Interest under this agreement is at
the 30-day LIBOR rate, plus 1.0 percent. During 1995, 1996, and 1997, the
average month-end outstanding balance, the highest balance outstanding, the
weighted average interest rate, and the interest rate at end of the year were as
follows:
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Average month-end outstanding balance $ 225,000 $ 58,300 $ -
Highest balance outstanding 2,700,000 2,700,000 -
Weighted average interest rate 7.8 % 7.2 % -
Interest rate at end of the year 7.7 % 7.4 % 6.2 %
</TABLE>
4. COMMITMENTS AND CONTINGENCIES:
Commitments
- -----------
The Company leases office facilities under various operating leases
that expire through December 31, 2003. The leases require the Company to pay
for a portion of common area maintenance expenses and real estate taxes. Rent
expense was $1,265,800, $2,016,000, and $2,566,600 in 1995, 1996, and 1997,
respectively. During 1996, the Company entered into a capital lease obligation
for a copy machine. Future minimum payments under these leases, as of December
31, 1997, were as follows:
<TABLE>
<CAPTION>
Capital Operating
Year Ending December 31, Lease Leases
- ------------------------ -------- -----------
<S> <C> <C>
1998 $ 66,900 $2,633,100
1999 33,500 2,478,000
2000 - 2,273,300
2001 - 1,657,500
2002 - 1,503,000
2003 and thereafter - 1,503,000
--------
Total minimum lease payments 100,400
Less: Amounts representing imputed interest 16,900
--------
Present value of net minimum payments 83,500
Less: Current portion 52,300
--------
$ 31,200
========
</TABLE>
The Company has entered into employment agreements with certain key
employees with initial terms of 3 years ending in June 2000, which are
subject to successive 1-year renewals.
Litigation
- ----------
The Company is party to litigation arising in the ordinary course of
its business. It is management's opinion, after consultation with its legal
counsel, that none of the outcomes of these claims, whether individually or in
the aggregate, will have a material adverse effect on the Company's financial
position or results of operations.
31
<PAGE>
5. STOCK OPTION AND PURCHASE AGREEMENTS:
The Company has a stock option plan whereby the Board of Directors, at
its discretion, can award employees and outside directors options to purchase
shares of the Company's common stock. Options for 4,065,000 shares are
authorized under the plan. The options granted to employees under this plan vest
over 5 years at a rate of 20 percent per year and expire at the earlier of
termination of employment or December 31, 10 years after the first vesting
date. The options granted to outside directors vest ratably over a 3-year
period, beginning 1 year after grant, and will expire at the earlier of
termination or 10 years after the first vesting date. The Company has also
granted stock options to certain key employees and its outside Board of
Directors. The options granted under these agreements expire at the earlier of
termination of employment or 10 years from the date of grant.
The Company accounts for its stock-based compensation plans as
permitted by FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
which allows the Company to follow Accounting Principles Board Opinion No. 25
("APB No. 25"), "Accounting for Stock Issued to Employees" and recognize no
compensation cost for options granted at fair market prices. The Company has
computed, for pro forma disclosure purposes, the value of all compensatory
options granted during 1995, 1996, and 1997, using the Black-Scholes option
pricing model. During 1995, the Company issued noncompensatory stock options to
its founding stockholders. The following assumptions were used for grants:
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------
1995 1996 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Risk-free interest rate (range) 5.4 %-7.8 % 6.2 %-6.7 % 5.5 %-6.5 %
Expected dividend yield 0.0 % 0.0 % 0.0 %
Expected lives 5 years 5 years 5 years
Expected volatility 42.0 % 42.0 % 42.0 %
</TABLE>
Options were assumed to be exercised upon vesting for the purposes of
this valuation. Adjustments are made for options forfeited prior to vesting. Had
compensation costs for compensatory options been determined consistent with SFAS
No. 123, the Company's pro forma net income and earnings per share information
reflected on the accompanying consolidated statements of income would have been
reduced to the following "as adjusted" amounts:
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------
1995 1996 1997
----------- --------------- ---------------
<S> <C> <C> <C>
Net Income:
As reported $3,918,100 $5,168,100 $9,000,700
As adjusted 3,881,700 5,038,800 8,606,300
Basic Earnings Per Share:
As reported $ 0.38 $ 0.47 $ 0.71
As adjusted 0.38 0.46 0.68
Diluted Earnings Per Share:
As reported $ 0.32 $ 0.40 $ 0.62
As adjusted 0.31 0.39 0.59
</TABLE>
The Company's stock did not trade prior to June 1997.
32
<PAGE>
The following table summarizes all stock option and purchase right
activity during 1995, 1996, and 1997.
<TABLE>
<CAPTION>
Number of Shares
-----------------------------
Key Party
Option Employee Exercise Price
Agreements Plan Per Share
---------- --------- -----------
<S> <C> <C> <C>
Outstanding as of December 31, 1994 3,912,000 1,137,540 $ 0.67
Granted 2,125,740 1,464,750 0.67-1.00
Exercised - (450) 0.67
Terminated (37,500) (298,590) 0.67-1.00
---------- ---------
Outstanding as of December 31, 1995 6,000,240 2,303,250 0.67-1.00
Granted - 1,069,350 6.00
Exercised (10,080) (36,150) 0.67-1.00
Terminated - (132,450) 0.67-1.00
---------- ---------
Outstanding as of December 31, 1996 5,990,160 3,204,000 0.67-6.00
Granted - 755,300 6.00-20.00
Exercised (5,944,200) (388,500) 0.67-20.00
Terminated (39,160) (238,910) 0.67-20.00
---------- ---------
Outstanding as of December 31, 1997 6,800 3,331,890 0.67-20.00
========== =========
</TABLE>
Weighted average fair value of options granted for the years ended
December 31, 1995, 1996, and 1997, was $0.43, $2.78, and $8.68, respectively.
These fair values were calculated using the Black-Scholes option pricing model.
During 1997, the Company approved an employee stock purchase plan (the
"Stock Purchase Plan"). The Stock Purchase Plan qualifies as an "employee stock
purchase plan" under Section 423 of the Code. All regular full-time employees of
the Company (including officers), and all other employees whose customary
employment is for more than 20 hours per week are eligible to participate in the
Stock Purchase Plan. Directors who are not employees are not eligible. A maximum
of 175,000 shares of the company's common stock are reserved for issuance under
the Stock Purchase Plan and available for purchase thereunder, subject to
antidilution adjustments in the event of certain changes in the capital
structure of the Company.
6. RETIREMENT SAVINGS PLAN:
The Company has a retirement savings plan (401(k) plan) whereby
employees may contribute up to the limits established by the Internal Revenue
Service. The Company, at the discretion of the Board of Directors, may choose to
match employee contributions up to 15 percent of each employee's compensation.
The Company's contribution expense during 1995, 1996, and 1997 was $1,100,900,
$1,102,400, and $1,247,700, respectively.
7. INCOME TAXES:
In connection with the Company's conversion from an S Corporation to a
C Corporation during 1997, the Company recognized a $4,500,000 income tax
provision during 1997 to establish deferred taxes related to the conversion.
33
<PAGE>
The provisions for income taxes were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------
1995 1996 1997
------------ ---------------- ---------------
<S> <C> <C> <C>
Current:
Federal $ - $ - 3,751,900
State 168,500 364,900 1,020,500
Deferred:
Federal - - 2,980,900
State - 300,000
----------- ----------- ------------
Total provision $ 168,500 $ 364,900 $ 8,053,300
=========== =========== ============
</TABLE>
The statutory federal income tax rate, reconciled to the effective tax rate
provision, is as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Statutory federal income tax rate (34 %) $ 2,220,200 $ 2,928,600 $ 5,006,800
State income taxes, net of federal income
tax effect 346,100 456,500 700,000
Effect of S Corporation income taxes (2,455,100) (3,092,200) (1,944,500)
Effect of change to C Corporation - - 4,500,000
Other 57,300 72,000 (209,000)
----------- ----------- -----------
Total $ 168,500 $ 364,900 $ 8,053,300
=========== =========== ===========
</TABLE>
Temporary differences arise between the financial reporting and
income tax basis carrying amounts of assets and liabilities, which gives rise
to deferred income taxes. The Company's net deferred tax liability as of
December 31, 1997, and the elements of the deferred tax liability are as
follows:
<TABLE>
<CAPTION>
Deferred Tax Liabilities:
<S> <C>
Depreciation and amortization $ 105,100
Cash basis of accounting for 2,977,700
income taxes
Accrued expenses and other 198,100
----------
Net deferred tax liability $3,280,900
==========
</TABLE>
34
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
RWD Technologies, Inc:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements of RWD Technologies, Inc., (a
Maryland corporation) and subsidiaries included in this Form 10-K and have
issued our report thereon dated January 23, 1998. Our audit was made for the
purpose of forming an opinion on the basic consolidated financial statements
taken as a whole. The accompanying schedule is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected
to the auditing procedures applied in the audit of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
Arthur Andersen LLP
/s/ Arthur Andersen LLP
Baltimore, Maryland
January 23, 1998
35
<PAGE>
RWD TECHNOLOGIES, INC., AND SUBSIDIARIES
----------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
Balance as of Additions Balance as of
Beginning Charges to End of
of Period Expense Deductions Period
------------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended December 31, 1995 $303,900 $108,400 $ - $412,300
Year ended December 31, 1996 412,300 - 28,600 383,700
Year ended December 31, 1997 383,700 44,100 - 427,800
</TABLE>
36
<PAGE>
EXHIBIT 10.07
RWD TECHNOLOGIES, INC.
1998 OMNIBUS STOCK INCENTIVE PLAN
1. ESTABLISHMENT, PURPOSE, AND TYPES OF AWARDS
RWD Technologies, Inc., hereby establishes the RWD Technologies, Inc.,
1998 OMNIBUS STOCK INCENTIVE PLAN (the "Plan"). The purpose of the Plan is to
promote the long-term growth and profitability of RWD Technologies, Inc., (the
"Corporation") by (i) providing its employees and directors with incentives to
improve stockholder value and to contribute to the growth and financial success
of the Corporation, and (ii) enabling the Corporation to attract, retain, and
reward the best-available persons.
The Plan permits the granting of stock options (including incentive
stock options qualifying under Code section 422 and nonqualified stock options),
stock appreciation rights, restricted or unrestricted stock awards, phantom
stock, performance awards, or any combination of the foregoing.
2. DEFINITIONS
Under this Plan, except where the context otherwise indicates, the
following definitions apply:
(a) "Affiliate" shall mean any entity, whether now or hereafter
existing, which controls, is controlled by, or is under common control with, the
Corporation (including, but not limited to, joint ventures, limited liability
companies, and partnerships). For this purpose, "control" shall mean ownership
of 50% or more of the total combined voting power or value of all classes of
stock or interests of the entity.
(b) "Award" shall mean any stock option, stock appreciation right,
stock award, phantom stock award, or performance award.
(c) "Board" shall mean the Board of Directors of the Corporation.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended,
and any regulations promulgated thereunder.
(e) "Common Stock" shall mean shares of common stock of the
Corporation, par value of ten cents ($0.10) per share.
(f) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(g) "Fair Market Value" of a share of the Corporation's Common Stock
for any purpose on a particular date shall mean (i) the closing price on the
trading day preceding such date, (ii) the closing price on the fifth trading day
preceding such date, or (iii) the average of the closing price on each of the
10 trading days preceding such date, as determined in the discretion of the
Administrator on the date of grant; provided, however, that, with respect to any
Award, whichever definition is selected by the Administrator on the date of
grant shall be used on all other dates on which the meaning of Fair Market Value
is required for the duration of that Award. Notwithstanding the preceding
sentence, with respect to the grant of incentive stock options within the
meaning of Code section 422, Fair Market Value of a share of the Corporation's
Common Stock on the grant date shall mean the Closing Price on the trading day
preceding such date. As used herein, the "Closing Price" on a particular date
shall mean the last reported sale price per share of common stock, regular way,
on such date or, in case no such sale takes place on such date, the average of
the closing bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on a national securities exchange or included for
quotation on the Nasdaq National Market, or if the common stock is not so listed
or admitted to trading or included for quotation, the last quoted price, or if
the common stock is not so quoted, the average of the high bid and low asked
prices, regular way, in the over-the-
<PAGE>
counter market, as reported by the National Association of Securities Dealers,
Inc. Automated Quotation System or, if such system is no longer in use, the
principal other automated quotations system that may then be in use or, if the
common stock is not quoted by any such organization, the average of the closing
bid and asked prices, regular way, as furnished by a professional market maker
making a market in the common stock as selected in good faith by the
Administrator or by such other source or sources as shall be selected in good
faith by the Administrator. If, as the case may be, the relevant date is not a
trading day, the determination shall be made as of the next preceding trading
day. As used herein, the term "trading day" shall mean a day on which public
trading of securities occurs and is reported in the principal consolidated
reporting system referred to above, or if the common stock is not listed or
admitted to trading on a national securities exchange or included for quotation
on the Nasdaq National Market, any business day.
(h) "Grant Agreement" shall mean a written document memorializing the
terms and conditions of an Award granted pursuant to the Plan and shall
incorporate the terms of the Plan.
(i) "Parent" shall mean a corporation, whether now or hereafter
existing, within the meaning of the definition of "parent corporation" provided
in Code section 424(e), or any successor thereto.
(j) "Rule 16b-3" shall mean Rule 16b-3 as in effect under the Exchange
Act on the effective date of the Plan, or any successor provision prescribing
conditions necessary to exempt the issuance of securities under the Plan (and
further transactions in such securities) from Section 16(b) of the Exchange Act.
(k) "Subsidiary" and "subsidiaries" shall mean only a corporation or
corporations, whether now or hereafter existing, within the meaning of the
definition of "subsidiary corporation" provided in Section 424(f) of the Code,
or any successor thereto.
3. ADMINISTRATION
(a) Administration of the Plan. The Plan shall be administered by the
Board or by such committee or committees as may be appointed by the Board from
time to time (the Board, committee, or committees hereinafter referred to as the
"Administrator").
(b) Powers of the Administrator. The Administrator shall have all the
powers vested in it by the terms of the Plan, such powers to include authority,
in its sole and absolute discretion, to grant Awards under the Plan, prescribe
Grant Agreements evidencing such Awards, and establish programs for granting
Awards.
The Administrator shall have full power and authority to take all
other actions necessary to carry out the purpose and intent of the Plan,
including, but not limited to, the authority to: (i) determine the eligible
persons to whom, and the time or times at which Awards shall be granted; (ii)
determine the types of Awards to be granted; (iii) determine the number of
shares to be covered by or used for reference purposes for each Award; (iv)
impose such terms, limitations, restrictions, and conditions upon any such Award
as the Administrator shall deem appropriate; (v) modify, amend, extend, or renew
outstanding Awards, or accept the surrender of outstanding Awards and substitute
new Awards (provided however, that, except as provided in Section 7(d) of the
Plan, any modification that would materially adversely affect any outstanding
Award shall not be made without the consent of the holder); (vi) accelerate or
otherwise change the time in which an Award may be exercised or becomes payable
and to waive or accelerate the lapse, in whole or in part, of any restriction or
condition with respect to such Award, including, but not limited to, any
restriction or condition with respect to the vesting or exercisability of an
Award following termination of any grantee's employment; and (vii) establish
objectives and conditions, if any, for earning Awards and determining whether
Awards will be paid after the end of a performance period.
The Administrator shall have full power and authority, in its sole and
absolute discretion, to administer and interpret the Plan and to adopt and
interpret such rules, regulations, agreements, guidelines, and instruments for
the administration of the Plan and for the conduct of its business as the
Administrator deems necessary or advisable.
<PAGE>
(c) Non-Uniform Determinations. The Administrator's determinations
under the Plan (including without limitation, determinations of the persons to
receive Awards; the form, amount, and timing of such Awards; the terms and
provisions of such Awards; and the grant agreements evidencing such Awards) need
not be uniform and may be made by the Administrator selectively among persons
who receive, or are eligible to receive, Awards under the Plan, whether or not
such persons are similarly situated.
(d) Limited Liability. To the maximum extent permitted by law, the
Administrator shall be liable for any action taken or decision made in good
faith relating to the Plan or any Award thereunder.
(e) Indemnification. To the maximum extent permitted by law and by
the Corporation's charter and by-laws, the Administrator shall be indemnified by
the Corporation in respect of all their activities under the Plan.
(f) Effect of Administrator's Decision. All actions taken and
decisions and determinations made by the Administrator on all matters relating
to the Plan pursuant to the powers vested in it hereunder shall be in the
Administrator's sole and absolute discretion and shall be conclusive and binding
on all parties concerned, including the Corporation, its stockholders, any
participants in the Plan and any other employee of the Corporation, and their
respective successors in interest.
4. SHARES AVAILABLE FOR THE PLAN; MAXIMUM AWARDS
Subject to adjustments as provided in Section 7(d) of the Plan, the
shares of common stock that may be issued with respect to Awards granted under
the Plan shall not exceed an aggregate of 2,000,000 shares of common stock. The
Corporation shall reserve such number of shares for Awards under the Plan,
subject to adjustments as provided in Section 7(d) of the Plan. If any Award,
or portion of an Award, under the Plan expires or terminates unexercised,
becomes unexercisable or is forfeited or otherwise terminated, surrendered or
canceled as to any shares, or if any shares of common stock are surrendered to
the Corporation in connection with any Award (whether or not such surrendered
shares were acquired pursuant to any Award), the shares subject to such Award
and the surrendered shares shall thereafter be available for further Awards
under the Plan; provided, however, that any such shares that are surrendered to
the Corporation in connection with any Award or that are otherwise forfeited
after issuance shall not be available for purchase pursuant to incentive stock
options intended to qualify under Code section 422.
Subject to adjustments as provided in Section 7(d) of the Plan, the
maximum number of shares of common stock subject to Awards of any combination
that may be granted during any one fiscal year of the Corporation to any one
individual shall be limited to 200,000. Such per-individual limit shall not be
adjusted to effect a restoration of shares of common stock with respect to which
the related Award is terminated, surrendered or canceled.
5. PARTICIPATION
Participation in the Plan shall be open to all employees, officers,
and directors of the Corporation or of any Affiliate of the Corporation, as may
be selected by the Administrator from time to time.
6. AWARDS
The Administrator, in its sole discretion, establishes the terms of
all Awards granted under the Plan. Awards may be granted individually or in
tandem with other types of Awards. All Awards are subject to the terms and
conditions provided in the Grant Agreement.
(a) Stock Options. The Administrator may from time to time grant to
eligible participants Awards of incentive stock options as that term is defined
in Code section 422 or nonqualified stock options; provided, however, that
Awards of incentive stock options shall be limited to employees of the
Corporation or of any Parent
<PAGE>
or Subsidiary of the Corporation. Options intended to qualify as incentive stock
options under Code section 422 must have an exercise price at least equal to
fair market value on the date of grant, but nonqualified stock options may be
granted with an exercise price less than fair market value. No stock option
shall be an incentive stock option unless so designated by the Administrator at
the time of grant or in the Grant Agreement evidencing such stock option.
(b) Stock Appreciation Rights. The Administrator may from time to
time grant to eligible participants Awards of Stock Appreciation Rights (SAR).
An SAR entitles the grantee to receive, subject to the provisions of the Plan
and the Grant Agreement, a payment having an aggregate value equal to the
product of (i) the excess of (A) the fair market value on the exercise date of
one share of common stock over (B) the base price per share specified in the
Grant Agreement, times (ii) the number of shares specified by the SAR, or
portion thereof, which is exercised. Payment by the Corporation of the amount
receivable upon any exercise of an SAR may be made by the delivery of common
stock or cash, or any combination of common stock and cash, as determined in the
sole discretion of the Administrator. If upon settlement of the exercise of an
SAR a grantee is to receive a portion of such payment in shares of common stock,
the number of shares shall be determined by dividing such portion by the fair
market value of a share of common stock on the exercise date. No fractional
shares shall be used for such payment and the Administrator shall determine
whether cash shall be given in lieu of such fractional shares or whether such
fractional shares shall be eliminated.
(c) Stock Awards. The Administrator may from time to time grant
restricted or unrestricted stock Awards to eligible participants in such
amounts, on such terms and conditions, and for such consideration, including no
consideration or such minimum consideration as may be required by law, as it
shall determine. A stock Award may be paid in common stock, in cash, or in a
combination of common stock and cash, as determined in the sole discretion of
the Administrator.
(d) Phantom Stock. The Administrator may from time to time grant
Awards to eligible participants denominated in stock-equivalent units ("phantom
stock") in such amounts and on such terms and conditions as it shall determine.
Phantom stock units granted to a participant shall be credited to a bookkeeping
reserve account solely for accounting purposes and shall not require a
segregation of any of the Corporation's assets. An Award of phantom stock may
be settled in common stock, in cash, or in a combination of common stock and
cash, as determined in the sole discretion of the Administrator. Except as
otherwise provided in the applicable Grant Agreement, the grantee shall not have
the rights of a stockholder with respect to any shares of common stock
represented by a phantom stock unit solely as a result of the grant of a phantom
stock unit to the grantee.
(e) Performance Awards. The Administrator may, in its discretion,
grant performance awards which become payable on account of attainment of one or
more performance goals established by the Administrator. Performance awards may
be paid by the delivery of common stock or cash, or any combination of common
stock and cash, as determined in the sole discretion of the Administrator.
Performance goals established by the Administrator may be based on the
Corporation's or an Affiliate's operating income or one or more other business
criteria selected by the Administrator that apply to an individual or group of
individuals, a business unit, or the Corporation or an Affiliate as a whole,
over such performance period as the Administrator may designate.
7. MISCELLANEOUS
(a) Withholding of Taxes. Grantees and holders of Awards shall pay to
the Corporation, or make provision satisfactory to the Administrator for payment
of, any taxes required to be withheld in respect of Awards under the Plan no
later than the date of the event creating the tax liability. The Corporation
may, to the extent permitted by law, deduct any such tax obligations from any
payment of any kind otherwise due to the grantee or holder of an Award, or to
retain or sell without notice a sufficient number of the shares to be issued to
such grantee or holder to cover any such taxes. In the event that payment to
the Corporation of such tax obligations is made in shares of common stock, such
shares shall be valued at fair market value on the applicable date for such
purposes.
<PAGE>
(b) Loans. The Corporation may make or guarantee loans to grantees to
assist grantees in exercising Awards and satisfying any withholding tax
obligations.
(c) Transferability. Except as otherwise determined by the
Administrator, and in any event in the case of an incentive stock option or a
stock appreciation right granted with respect to an incentive stock option, no
Award granted under the Plan shall be transferable by a grantee otherwise than
by will or the laws of descent and distribution. Unless otherwise determined by
the Administrator in accord with the provisions of the immediately preceding
sentence, an Award may be exercised during the lifetime of the grantee, only by
the grantee or, during the period the grantee is under a legal disability, by
the grantee's guardian or legal representative.
(d) Adjustments; Business Combinations. In the event of changes in
the common stock of the Corporation by reason of any stock dividend, split-up,
recapitalization, merger, consolidation, business combination or exchange of
shares and the like, the Administrator shall, in its discretion, make
appropriate adjustments to the maximum number and kind of shares reserved for
issuance or with respect to which Awards may be granted under the Plan as
provided in Section 4 of the Plan and to the number, kind, and price of shares
covered by outstanding Awards, and shall, in its discretion and without the
consent of holders of Awards, make any other adjustments in outstanding Awards,
including but not limited to reducing the number of shares subject to Awards or
providing or mandating alternative settlement methods such as settlement of the
Awards in cash or in shares of common stock or other securities of the
Corporation or of any other entity, or in any other matters which relate to
Awards as the Administrator shall, in its sole discretion, determine to be
necessary or appropriate.
Notwithstanding anything in the Plan to the contrary and without the
consent of grantees or holders of Awards, the Administrator, in its sole
discretion, may make any modifications to any Awards, including but not limited
to cancellation, forfeiture, surrender, or other termination of the Awards in
whole or in part regardless of the vested status of the Award, in order to
facilitate any business combination that is authorized by the Board to comply
with requirements for treatment as a pooling of interests transaction for
accounting purposes under generally accepted accounting principles.
The Administrator is authorized to make, in its discretion and without
the consent of grantees or holders of Awards, adjustments in the terms and
conditions of, and the criteria included in, Awards in recognition of unusual or
nonrecurring events affecting the Corporation, or the financial statements of
the Corporation or any Subsidiary, or of changes in applicable laws,
regulations, or accounting principles, whenever the Administrator determines
that such adjustments are appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made available
under the Plan.
(e) Substitution of Awards in Mergers and Acquisitions. Awards may be
granted under the Plan from time to time in substitution for Awards held by
employees or directors of entities who become or are about to become employees
or directors of the Corporation or an Affiliate as the result of a merger or
consolidation of the employing entity with the Corporation or an Affiliate, or
the acquisition by the Corporation or an Affiliate of the assets or stock of the
employing entity. The terms and conditions of any substitute Awards so granted
may vary from the terms and conditions set forth herein to the extent that the
Administrator deems appropriate at the time of grant to conform the substitute
Awards to the provisions of the awards for which they are substituted.
(f) Termination, Amendment, and Modification of the Plan. The Board
may terminate, amend, or modify the Plan or any portion thereof at any time.
(g) Non-Guarantee of Employment or Service. Nothing in the Plan or in
any Grant Agreement thereunder shall confer any right on an individual to
continue in the service of the Corporation or shall interfere in any way with
the right of the Corporation to terminate such service at any time.
(h) No Trust or Fund Created. Neither the Plan nor any Award shall
create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Corporation and a grantee or any other
person. To the extent that any grantee or other person acquires a right to
receive payments from the Corporation
<PAGE>
pursuant to an Award, such right shall be no greater than the right of any
unsecured general creditor of the Corporation.
(i) Governing Law. The validity, construction, and effect of the Plan,
of Grant Agreements entered into pursuant to the Plan, and of any rules,
regulations, determinations, or decisions made by the Administrator relating to
the Plan or such Grant Agreements, and the rights of any and all persons having
or claiming to have any interest therein or thereunder, shall be determined
exclusively in accordance with applicable federal laws and the laws of the State
of Maryland, without regard to its conflict of laws principles.
(j) Effective Date; Termination Date. The Plan is effective as of the
date on which the Plan was adopted by the Board, subject to approval of the
stockholders within 12 months before or after such date. No Award shall be
granted under the Plan after the close of business on the day immediately
preceding the tenth anniversary of the effective date of the Plan. Subject to
other applicable provisions of the Plan, all Awards made under the Plan prior to
such termination of the Plan shall remain in effect until such Awards have been
satisfied or terminated in accordance with the Plan and the terms of such
Awards.
Date Approved by the Board: March 6, 1998
-------------
Date Approved by the Stockholders:
-------------------
<PAGE>
EXHIBIT 21.01
RWD TECHNOLOGIES, INC.
RWD SUBSIDIARIES
<TABLE>
<CAPTION>
LOCATION/ADDRESS REGISTRATION/COMPANY NO. DATE FORMED
- --------------------------------------- ---------------------------- --------------------------
<S> <C> <C>
UK
RWD Technologies UK Limited
C/O Garrett & Co. 03314693 FEBRUARY 3, 1997
180 Strand
London WC2R 2NN
- --------------------------------------- ---------------------------- --------------------------
AUSTRALIA
RWD Technologies Australia Pty Ltd
C/- Mr R Tracey, 079 969 930 SEPTEMBER 4, 1997
Level 18, 141 Walker Street, North Sydney,
NSW 2060.
Directors: Dr R Deutsch, Mr J Beakes Jr,
Mr R Holtz and Mr R Tracey
Secretary: Mr R Tracey
Public Officer: Mr R Tracey
Shareholder: RWD Technologies, Inc.
- --------------------------------------- ---------------------------- --------------------------
MEXICO
RWD Mexico, S. de R.L.
Versalles 21 303 RME970423BF7 APRIL 23, 1997
Col. Juarez Cuauhtemoc DF C.P. 06600
Entre Atenas Y General Prim
Mexico
- --------------------------------------- ---------------------------- --------------------------
</TABLE>
<PAGE>
EXHIBIT 23.01
RWD TECHNOLOGIES, INC.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K into the Company's
previously filed Form S-8 Registration Statement File No. 333-36157.
Arthur Andersen LLP
/s/ Arthur Andersen LLP
Baltimore, Maryland
January 23, 1998
44
<PAGE>
EXHIBIT 24.01
RWD TECHNOLOGIES, INC.
POWER OF ATTORNEY
Know all men by these presents, that the undersigned directors and
officers of RWD Technologies, Inc., a Maryland corporation, constitute, and
appoint Dr. Robert W. Deutsch, John H. Beakes, and Ronald E. Holtz (with full
power to each of them to act alone) as his true and lawful attorney-in-fact and
agent, with full power of substitution, for him and in his name, place and stead
in any and all capacities to sign the Annual Report on Form 10-K and any or all
amendments thereto and to file the same with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents or any of them, or their or his
substitute or substitutes, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, thereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------- ------------------------------------ -------------
<S> <C> <C>
/s/ Robert W. Deutsch Chairman of the Board, Chief March 6, 1998
- --------------------------- Executive Officer, and Director
Robert W. Deutsch, Ph.D.
/s/ John H. Beakes President, Chief Operating Officer, March 6, 1998
- --------------------------- and Director
John H. Beakes
/s/ Ronald E. Holtz Vice President, Chief Financial March 6, 1998
- --------------------------- Officer, and Director
Ronald E. Holtz
/s/ John E. Lapolla Group Vice President and Director March 6, 1998
- ---------------------------
John E. Lapolla
/s/ Kenneth J. Rebeck Group Vice President and Director March 6, 1998
- ---------------------------
Kenneth J. Rebeck
/s/ Jeffrey W. Wendel Group Vice President and Director March 6, 1998
- ---------------------------
Jeffrey W. Wendel
/s/ Robert T. O'Connell Senior Vice President - Strategic March 6, 1998
- --------------------------- Business Planning and Director
Robert T. O'Connell
/s/ David J. Deutsch Director March 6, 1998
- ---------------------------
David J. Deutsch, Ph.D.
/s/ Jerry P. Malec Director March 6, 1998
- ---------------------------
Jerry P. Malec
/s/ Bruce D. Alexander Director March 6, 1998
- ---------------------------
Bruce D. Alexander
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 DEC-31-1997
<CASH> 3,530,600 3,619,500
<SECURITIES> 2,002,900 36,425,900
<RECEIVABLES> 12,365,300 13,756,000
<ALLOWANCES> (383,700) (427,800)
<INVENTORY> 0 0
<CURRENT-ASSETS> 21,696,000 59,164,500
<PP&E> 12,594,900 16,261,000
<DEPRECIATION> (4,718,000) (7,785,300)
<TOTAL-ASSETS> 29,858,400 67,886,600
<CURRENT-LIABILITIES> 9,642,600 9,784,300
<BONDS> 0 0
0 0
0 0
<COMMON> 486,000 1,442,400
<OTHER-SE> 19,646,400 53,520,800
<TOTAL-LIABILITY-AND-EQUITY> 29,858,400 67,886,600
<SALES> 65,005,500 85,670,500
<TOTAL-REVENUES> 65,005,500 85,670,500
<CGS> 0 0
<TOTAL-COSTS> 48,131,300 60,785,400
<OTHER-EXPENSES> 8,137,500 11,141,200
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 388,600 190,700
<INCOME-PRETAX> 8,613,600 14,725,800
<INCOME-TAX> 364,900 8,053,300
<INCOME-CONTINUING> 8,248,700 6,672,500<F1>
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 8,248,700 6,672,500
<EPS-PRIMARY> 0.76 0.53<F1>
<EPS-DILUTED> 0.63 0.46<F1>
<FN>
<F1>Including $4.5 million deferred tax liability related to C-Corporation
conversion.
</FN>
</TABLE>
