**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

| **ý** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|----------------------------------------------------------------------------------------------|

 

**For the Quarter Ended September 30, 2002**

 

**Commission File Number 000-31589**

 

| **VASTERA, INC.**                                                     |
|----------------------------------------------------------------------------|
| (Exact Name of Registrant as Specified in its Charter)                     |
|                                                                       |
| **Delaware**                                                               |   | **54-1616513** |
| (State or Other Jurisdiction of  Incorporation or Organization)            |   | (I.R.S. Employer  Identification Number) |
|                                                                       |   |   |
| **45025 Aviation Drive, Suite 300  Dulles, VA 20166  (703) 661-9006** |
| (Address and Phone Number of Principal Executive Offices)                  |

 

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Indicate by check numberwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes   ý   No  o

 

As of November 8, 2002 therewere 40,464,642****shares of theregistrant’s common stock, $.01 par value per share, outstanding.

 

 

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**VASTERA, INC.**

 

**TABLE OF CONTENTS**

 
| **PART  I – FINANCIAL INFORMATION**                                                                  |
|-----------------------------------------------------------------------------------------------------------|
|                                                                                                      |   |
| ITEM 1 – Financial Statements                                                                        |
|                                                                                                      |
|                                                                                                      | Condensed Consolidated Balance Sheets as of  December 31, 2001 and September 30, 2002 |
|                                                                                                      |   |
|                                                                                                      | Condensed Consolidated Statements of  Operations for the Three and Nine Months Ended September 30, 2001 and 2002 |
|                                                                                                      |   |
|                                                                                                      | Condensed Consolidated Statements of Cash  Flows for the Nine Months Ended September 30, 2001 and 2002 |
|                                                                                                      |   |
|                                                                                                      | Notes to Unaudited Condensed Consolidated  Financial Statements |
|                                                                                                      |
| ITEM 2 – Management’s Discussion and  Analysis of Financial Condition and Results of Operations |
|                                                                                                      |   |
| ITEM 3 – Quantitative and Qualitative  Disclosures of Market Risk                                    |
|                                                                                                      |   |
| ITEM 4 – Controls and Procedures                                                                     |
|                                                                                                      |   |
| **PART II – OTHER INFORMATION**                                                                      |
|                                                                                                      |   |
| ITEM  1 – Legal Proceedings                                                                          |
| ITEM 2 – Changes in Securities and Use of Proceeds                                                   |
| ITEM 3 – Defaults Upon Senior Securities                                                             |
| ITEM 4 – Submission of Matters to a Vote of  Security Holders                                        |
| ITEM  5 – Other Information                                                                          |
| ITEM 6 – Exhibits and Reports on Form 8-K                                                            |
|                                                                                                      |   |
| **SIGNATURES**                                                                                            |
|                                                                                                           |  |  |

 

i

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# **PART I - FINANCIAL INFORMATION(UNAUDITED)**

## ** **

## **Item 1**:             Financial Statements

 

**VASTERA, INC.**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 

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

 
|                                                                                                                                                                     |   | **December 31,  2001** |    | **September 30,  2002** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|---------|-------------------------|--------|
|                                                                                                                                                                     |   |                   |    | **(Unaudited)**         |   |
| **Assets**                                                                                                                                                               |   |                   |    |                    |   |
| Current assets:                                                                                                                                                          |   |                   |    |                    |   |
| Cash and cash equivalents                                                                                                                                                |   | $                      | 10,982  |                    | $      | 27,075 |   |
| Short-term investments                                                                                                                                                   |   | 62,789                 |    | 32,371                  |   |
| Accounts receivable, net of allowance for  doubtful accounts of $632 and $472, respectively                                                                              |   | 14,294                 |    | 16,366                  |   |
| Prepaid expenses and other current assets                                                                                                                                |   | 2,485                  |    | 2,875                   |   |
| Total current assets                                                                                                                                                     |   | 90,550                 |    | 78,687                  |   |
| Property and equipment, net                                                                                                                                              |   | 7,934                  |    | 12,420                  |   |
| Intangible assets, net                                                                                                                                                   |   | 2,331                  |    | 9,548                   |   |
| Goodwill                                                                                                                                                                 |   | 62,205                 |    | 65,418                  |   |
| Deposits and other assets                                                                                                                                                |   | 840                    |    | 949                     |   |
|                                                                                                                                                                     |   |                   |    |                    |   |
| Total assets                                                                                                                                                             |   | $                      | 163,860 |                    | $      | 167,022 |   |
|                                                                                                                                                                     |   |                   |    |                    |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                            |   |                   |    |                    |   |
| Current liabilities:                                                                                                                                                     |   |                   |    |                    |   |
| Line of credit and capital lease  obligations, current                                                                                                                   |   | $                      | 2,207   |                    | $      | 2,156 |   |
| Accounts payable                                                                                                                                                         |   | 3,167                  |    | 6,109                   |   |
| Accrued expenses                                                                                                                                                         |   | 5,313                  |    | 8,334                   |   |
| Accrued compensation and benefits                                                                                                                                        |   | 4,588                  |    | 1,581                   |   |
| Deferred revenue, current                                                                                                                                                |   | 6,936                  |    | 9,402                   |   |
| Total current liabilities                                                                                                                                                |   | 22,211                 |    | 27,582                  |   |
| Long-term liabilities:                                                                                                                                                   |   |                   |    |                    |   |
| Line of credit and capital lease  obligations, net of current portion                                                                                                    |   | 2,344                  |    | 1,508                   |   |
| Deferred revenue, net of current portion                                                                                                                                 |   | 1,487                  |    | 1,293                   |   |
| Total liabilities                                                                                                                                                        |   | 26,042                 |    | 30,383                  |   |
| Commitments and contingencies (See Note 6)                                                                                                                               |   |                   |    |                    |   |
|                                                                                                                                                                     |   |                   |    |                    |   |
| Stockholders’ equity:                                                                                                                                               |   |                   |    |                    |   |
| Common stock, $0.01 par value; 100,000  shares authorized; 38,692 and 40,279 shares issued and outstanding as of December  31, 2001 and September 30, 2002, respectively |   | 387                    |    | 403                     |   |
| Additional paid-in capital                                                                                                                                               |   | 311,930                |    | 322,228                 |   |
| Accumulated other comprehensive income  (loss)                                                                                                                           |   | 240                    |    | (2,550                  | )      |
| Deferred compensation                                                                                                                                                    |   | (3,607                 | )       | (1,460                  | )      |
| Accumulated deficit                                                                                                                                                      |   | (171,132               | )       | (181,982                | )      |
|                                                                                                                                                                     |   |                   |    |                    |   |
| Total stockholders’ equity                                                                                                                                          |   | 137,818                |    | 136,639                 |   |
|                                                                                                                                                                     |   |                   |    |                    |   |
| Total liabilities and stockholders’ equity                                                                                                                          |   | $                      | 163,860 |                    | $      | 167,022 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

1

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**VASTERA, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

 

**(UNAUDITED)**

 

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

 
|                                        |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|---------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                        |   | **2001**                               |   | **2002**                              |   | **2001** |   | **2002** |   |
|                                        |   |                                   |   |                                  |   |   |   |   |   |
| **Revenues:**                               |   |                                   |   |                                  |   |   |   |   |   |
| Managed services revenues                   |   | $                                      | 7,684  |                                  | $      | 10,961 |   | $ | 21,179 |   | $ | 32,935 |   |
| Software revenues                           |   | 4,533                                  |   | 2,967                                 |   | 10,376 |   | 9,595 |   |
| Services revenues                           |   | 5,175                                  |   | 5,328                                 |   | 13,846 |   | 14,119 |   |
|                                        |   |                                   |   |                                  |   |   |   |   |   |
| Total revenues                              |   | 17,392                                 |   | 19,256                                |   | 45,401 |   | 56,649 |   |
|                                        |   |                                   |   |                                  |   |   |   |   |   |
| **Cost of revenues:**                       |   |                                   |   |                                  |   |   |   |   |   |
| Cost of managed services revenues           |   | 4,453                                  |   | 6,536                                 |   | 11,666 |   | 17,324 |   |
| Cost of software revenues                   |   | 657                                    |   | 668                                   |   | 1,791 |   | 1,871 |   |
| Cost of services revenues                   |   | 3,875                                  |   | 3,758                                 |   | 10,422 |   | 10,426 |   |
|                                        |   |                                   |   |                                  |   |   |   |   |   |
| **Operating expenses:**                     |   |                                   |   |                                  |   |   |   |   |   |
| Sales and marketing                         |   | 4,893                                  |   | 2,627                                 |   | 13,805 |   | 9,270 |   |
| Research and development                    |   | 3,667                                  |   | 3,102                                 |   | 10,958 |   | 10,543 |   |
| General and administrative                  |   | 2,317                                  |   | 2,623                                 |   | 6,711 |   | 7,485 |   |
| Depreciation                                |   | 849                                    |   | 1,289                                 |   | 2,351 |   | 3,353 |   |
| Amortization                                |   | 5,710                                  |   | 717                                   |   | 16,497 |   | 1,910 |   |
| Restructuring                               |   | —                                 |   | 1,634                                 |   | — |   | 3,610 |   |
| In process research and development         |   | —                                 |   | —                                |   | 6,901 |   | — |   |
| Stock-based compensation                    |   | 1,421                                  |   | 585                                   |   | 4,684 |   | 2,147 |   |
|                                        |   |                                   |   |                                  |   |   |   |   |   |
| Total operating expenses                    |   | 18,857                                 |   | 12,577                                |   | 61,907 |   | 38,318 |   |
|                                        |   |                                   |   |                                  |   |   |   |   |   |
| Loss from operations                        |   | (10,450                                | )      | (4,283                                | )      | (40,385 | ) | (11,290 | ) |
|                                        |   |                                   |   |                                  |   |   |   |   |   |
| Other income, net                           |   | 594                                    |   | 192                                   |   | 2,490 |   | 725 |   |
|                                        |   |                                   |   |                                  |   |   |   |   |   |
| Loss before income taxes                    |   | (9,856                                 | )      | (4,091                                | )      | (37,895 | ) | (10,565 | ) |
|                                        |   |                                   |   |                                  |   |   |   |   |   |
| Income taxes                                |   | (89                                    | )      | (103                                  | )      | (247 | ) | (285 | ) |
|                                        |   |                                   |   |                                  |   |   |   |   |   |
| Net loss                                    |   | $                                      | (9,945 | )                                     | $      | (4,194 | ) | $ | (38,142 | ) | $ | (10,850 | ) |
|                                        |   |                                   |   |                                  |   |   |   |   |   |
| Basic and diluted net loss per common share |   | $                                      | (0.26  | )                                     | $      | (0.10 | ) | $ | (1.02 | ) | $ | (0.27 | ) |
|                                        |   |                                   |   |                                  |   |   |   |   |   |
| Weighted-average common shares outstanding  |   | 38,060                                 |   | 40,246                                |   | 37,392 |   | 39,883 |   |
|                                             |        |                                        |        |                                       |        |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

2

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**VASTERA, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

 

**(UNAUDITED)**

 

**(In thousands)**

 
|                                                                           |   | **Nine Months Ended  September 30,** |    |
|--------------------------------------------------------------------------------|--------|--------------------------------------|---------|
|                                                                           |   | **2001**                             |    | **2002** |   |
| **Cash flows from operating activities:**                                      |   |                                 |    |   |   |
| Net loss                                                                       |   | $                                    | (38,142 | ) | $ | (10,850 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:   |   |                                 |    |   |   |
| Stock-based compensation                                                       |   | 4,684                                |    | 2,147 |   |
| Depreciation and amortization                                                  |   | 18,848                               |    | 5,263 |   |
| In process research and development                                            |   | 6,901                                |    | — |   |
| Provision for allowance for doubtful  accounts                                 |   | 829                                  |    | 117 |   |
| Amortization of revenue discount related to  Ford contract                     |   | 225                                  |    | 225 |   |
|                                                                           |   |                                 |    |   |   |
| Changes in operating assets and  liabilities:                                  |   |                                 |    |   |   |
| Accounts receivable                                                            |   | (1,502                               | )       | (2,242 | ) |
| Prepaid expenses and other current assets                                      |   | (686                                 | )       | (403 | ) |
| Deposits and other assets                                                      |   | (225                                 | )       | (555 | ) |
| Accounts payable and accrued expenses                                          |   | (1,566                               | )       | 5,087 |   |
| Accrued compensation and benefits                                              |   | (885                                 | )       | (3,250 | ) |
| Deferred revenue                                                               |   | (4,525                               | )       | 1,491 |   |
| Net cash used in operating activities                                          |   | (16,044                              | )       | (2,970 | ) |
|                                                                           |   |                                 |    |   |   |
| **Cash flows from investing activities:**                                      |   |                                 |    |   |   |
| Acquisition of subsidiaries                                                    |   | —                               |    | (5,682 | ) |
| Net (purchases) sales of short-term  investments                               |   | 6,118                                |    | 30,208 |   |
| Acquisition of property and equipment                                          |   | (1,061                               | )       | (6,427 | ) |
| Net cash provided by investing activities                                      |   | 5,057                                |    | 18,099 |   |
|                                                                           |   |                                 |    |   |   |
| **Cash flows from financing activities:**                                      |   |                                 |    |   |   |
| Proceeds from the exercise of stock options  and preferred stock warrants      |   | 3,317                                |    | 3,310 |   |
| Principal payments on long-term debt                                           |   | (1,466                               | )       | (2,172 | ) |
| Net cash provided by financing activities                                      |   | 1,851                                |    | 1,138 |   |
| Effect of foreign currency exchange rate  changes on cash and cash equivalents |   | (20                                  | )       | (174 | ) |
| Net decrease in cash and cash equivalents                                      |   | (9,156                               | )       | 16,093 |   |
| Cash and cash equivalents, beginning of  period                                |   | 19,693                               |    | 10,982 |   |
| Cash and cash equivalents, end of period                                       |   | $                                    | 10,537  |   | $ | 27,075 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

3

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**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**(Unaudited)**

** **

### **1.**                              Basis ofPresentation and Nature of Business:

 

Theaccompanying unaudited condensed consolidated financial statements of Vastera,Inc. and its subsidiaries (“Vastera” the “Company,” “we,” or “us”) have beenprepared on the same basis as audited financial statements and include all adjustments,including all normal recurring adjustments that are necessary for a fairpresentation of the financial condition, results of operations and cash flowsfor the interim periods presented. The results of operations for the interimperiods presented are not necessarily indicative of the results to be expectedfor any subsequent quarter or for the entire year ending December 31, 2002. Allsignificant intercompany balances and transactions have been eliminated inconsolidation. Certain information and footnote disclosures normally includedin financial statements prepared in accordance with generally acceptedaccounting principles have been condensed or omitted pursuant to the Securitiesand Exchange Commission’s (the “SEC”) rules and regulations. The Company’sinterim financial statements should be read in conjunction with the Company’saudited consolidated financial statements and notes thereto, as filed with theSEC with the Company’s Annual Report on Form 10-K and other reports filedwith the SEC.

 

Vastera is aleading provider of web-native solutions for Global Trade Management and wasincorporated in Virginia in November 1991 under the name Export SoftwareInternational, Inc. The Company was reincorporated in Delaware inJuly 1996 and changed its name to Vastera, Inc. in June 1997.The Company has operations in the United States, Brazil, Canada, France,Germany, Ireland, Japan, Mexico, the Netherlands, Poland, Spain, and the UnitedKingdom.

 

The Company’sofferings include a library of global trade content, web-native softwaresolutions and management consulting and managed services. Managed servicesrange from managing a specific global trade function to managing a client’sglobal trade operation in its entirety. The Company’s customers utilize these offeringsto manage their global trade processes. Global trade involves the cross-bordershipment of goods between countries and the management of the associatedinformation and business processes necessary to complete shipment.

 

The Company’soperations are subject to certain risks and uncertainties, including amongothers, uncertainties relating to product development, rapidly changingtechnology, current and potential competitors with greater financial,technological, production and marketing resources, the potential loss ofsignificant customers, dependence on key management personnel, limitedprotection of intellectual property and proprietary rights, uncertainty offuture profitability and possible fluctuations in financial results.

 

### **2.**                              Summary ofSignificant Accounting Policies:

 

**Useof Estimates**

 

Thepreparation of the consolidated financial statements in conformity withaccounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosures of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ fromthose estimates. Estimates that are most susceptible to change are theCompany’s estimates of collections of accounts receivable and the estimatedlives and the realization of its intangible assets.

 

**RevenueRecognition**

 

The Company’srevenues consist of managed services revenues, software revenues and servicesrevenues.

 

*Managed Services Revenues*

 

Managedservices revenues are derived from agreements that provide for transaction orservices fees based on the performance of its managed services solutions.Managed services solutions include the processing of a client’s custom entriesand the classifying of clients’ goods. Managed services transactionarrangements are often subject to annual or quarterly minimum transactionthresholds, and revenues have been recognized based on the lower of thecumulative actual transactions processed during the period using aweighted-average transaction rate or the cumulative amounts billable. For thosemanaged 

 

4

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services transactionarrangements that are subject to annual minimums and the amount billable forinterim periods is limited to the pro rata portion of the annual minimum,transactions processed in excess of the minimum in each period are not billableand, therefore, revenue is not recognized until the end of the related period.Certain managed services arrangements are based upon a fixed services fee.Revenues associated with these arrangements are recognized ratably over theterm of the arrangement and limited to the amounts billable. In addition,Vastera may receive annual gainsharing fees under certain managed servicestransaction arrangements based on a percentage of the client’s annual costsavings, as defined in the managed services arrangements. Such fees are recognizedwhen they become fixed and determinable.

 

*Software Revenues*

 

Softwarerevenues consist of subscription–based revenues, transaction-basedrevenues and perpetual software license revenues. The Company recognizesrevenue from the sale of software products in accordance with Statement ofPosition (“SOP”) 97-2, “Software Revenue Recognition.”

 

Subscription-basedrevenues are derived from term-license arrangements in which the Company’sclients license its software products and obtain the right to unspecified enhancementson a when-and-if-available basis and ongoing support and content updateservices. Revenues are recognized ratably over the contract term. Subscriptionarrangements typically range from three to five years.

 

Transaction-basedrevenues are derived from arrangements that provide for transaction fees basedon a client’s usage of the Company’s software products. Revenues from the usageof its software products are recognized as transactions occur.

 

Perpetualsoftware license revenues are derived from perpetual software licensearrangements and related maintenance contracts. Maintenance contracts includethe right to unspecified enhancements on a when-and-if available basis, ongoingsupport and content update services. The content updates provided undermaintenance arrangements are significant and frequent and thus the entirearrangement is in substance a subscription. Revenues from perpetual softwarelicense sales are recognized ratably over the estimated economic life of theproduct. The Company has estimated that the life of the product is three years,which is consistent with the historical periods between major upgrades to thefunctionality and architecture of its products.  Revenues from maintenance contracts are recognized ratably overthe contract term, which is typically one year.  To the extent the Company hosts the software for its customers,the hosting fee is recognized ratably over the contract period in conjunctionwith the recognition of the license fee.

 

The Companyrecognizes revenues from arrangements with resellers once the software productis sold to the end user.    Annualtransaction minimums not sold by the reseller to end customers are recognizedas revenues upon the expiration of the annual minimum period.

 

*Services Revenues*

 

Servicesrevenues are derived from implementation, management consulting and trainingservices. Services are performed on a time and materials basis or under fixedprice arrangements and are recognized as the services are performed or usingthe percentage of completion method of accounting. Losses on arrangements arerecognized when known.

 

**DeferredRevenues**

 

Deferredrevenues include amounts billed to clients for revenues that have not beenrecognized and generally result from billed, but deferred subscription/transactionrevenues and services not yet rendered. Deferred revenues will be recognized ona monthly basis over the term or the remaining economic life of the product orwhen the services are performed.

 

**Costof Revenues**

 

Cost ofrevenues includes the cost of our managed services revenues, the costs of oursoftware revenues and the cost of our services revenues.

 

Cost ofmanaged services revenues and cost of software revenues include royalties owedto third parties for technology products integrated into our software products,as well as the cost of salaries and related expenses for our technical supportand managed services organizations.

 

5

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Cost ofservices revenues includes the cost of salaries and related expenses forimplementation, management consulting and training services provided toclients, as well as the cost of third parties contracted to provide eitherapplication consulting or implementation services to clients.

 

**InternalUse Software**

 

In accordancewith Statement of Position 98-1, “Accounting for the Costs of Computer SoftwareDeveloped or Obtained for Internal Use”, the Company capitalized costsassociated with the implementation and integration of our trade managementplatform to our managed services operations of approximately $463,000 and $1.3million for the three and nine months, respectively, ended September 30,2002.  Amortization will commence uponthe completion of the integration of the Vastera platform. These costs will beamortized as costs of managed services revenues over the remaining managedservices arrangement, but no longer than three years.  Total capitalized costs were $1.3 million as of September 30,2002.

 

**Concentrationsof Credit Risk**

 

Financialinstruments that potentially subject the Company to concentrations of creditrisk consist primarily of cash equivalents, short-term investments and accountsreceivable. The Company limits the amount of investment exposure in any onefinancial instrument and does not have any foreign currency investments. TheCompany sells products and services to customers across several industriesthroughout the world without requiring collateral. However, the Companyroutinely assesses the financial strength of its customers and maintains allowancesfor anticipated losses.

 

As of December31, 2001, Ford accounted for approximately 32% of the Company’s total accountsreceivable and General Electric accounted for 13% of the Company’s totalaccounts receivable. As of September 30, 2002, Ford and Lucent accounted for18% and 10%, respectively, of the Company’s total accounts receivable.

 

**UnauditedNet Loss Per Common Share**

 

Basic net lossper common share is computed by dividing net loss applicable to commonstockholders by the weighted-average number of common shares outstanding forthe period. Diluted net loss per common share includes the potential dilutionthat could occur if securities or other contracts to issue common stock wereexercised or converted into common stock. As of September 30, 2001 and 2002,options to purchase approximately 7,679,000 and 4,274,000 shares, respectively,of common stock were outstanding. Due to the anti-dilutive effect of theoptions and warrants, these instruments have been excluded from the calculationof weighted–average shares for diluted earnings per share. Accordingly,the basic and diluted loss per share amounts are identical.

 

**ComprehensiveIncome (Loss)**

 

As of December31, 2001 and September 30, 2002, accumulated other comprehensive incomeincluded unrealized gains and losses on investments and foreign currencytranslation adjustments. As of September 30, 2002, accumulated unrealized gainson investments available for sale was approximately $229,000 and accumulatedforeign currency translation adjustments was approximately a loss of $2.8million.

 

**RecentAccounting Pronouncements**

 

In June 2001,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 “BusinessCombinations” and SFAS No. 142 “Goodwill and Other Intangible Assets.” SFAS No.141 requires business combinations initiated after June 30, 2001 to beaccounted for using the purchase method of accounting, and broadens thecriteria for recording intangible assets separate from goodwill. SFAS No. 142requires the use of a nonamortization approach to account for purchasedgoodwill and certain intangibles. Under a nonamortization approach, goodwilland certain intangibles will not be amortized into results of operations, butinstead will be reviewed for impairment and written down and charged to resultsof operations only in the periods in which the recorded value of goodwill andcertain intangibles is more than its fair value. On January 1, 2002, inaccordance with SFAS No. 141, the Company reclassified its assembled workforceintangible assets to goodwill. As of January 1, 2002, the Company hadunamortized goodwill of approximately $62.2 million. On January 1, 2002, theCompany adopted the nonamortization approach under SFAS No. 142 for recordingour goodwill. During the first quarter of 2002, the Company completed theinitial impairment test of goodwill and indefinite-lived intangible assets,which did not indicate an impairment loss. The Company estimates that theeffect of the new rules will be to decrease amortization expense related togoodwill by approximately $22.8 million for the year endingDecember 31, 2002.

 

6

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The resultsfor the prior year (three and nine months ended September 30, 2001) havenot been restated. Reconciliations of previously reported net loss and net lossper share to the amounts adjusted for the exclusion of goodwill amortizationnet of the related tax effects are as follows: 

 
|                                              |   | **For the  Three Months  Ended September 30,** |   | **For the  Nine Months  Ended September 30,** |   |
|---------------------------------------------------|--------|------------------------------------------------|--------|-----------------------------------------------|--------|
|                                              |   | **2001**                                       |   | **2002**                                      |   | **2001** |   | **2002** |   |
| Reported net loss                                 |   | $                                              | (9,945 | )                                             | $      | (4,194 | ) | $ | (38,142 | ) | $ | (10,850 | ) |
| Goodwill amortization, net of tax                 |   | 5,588                                          |   | —                                        |   | 16,073 |   | — |   |
| Adjusted net loss                                 |   | $                                              | (4,357 | )                                             | $      | (4,194 | ) | $ | (22,069 | ) | $ | (10,850 | ) |
|                                              |   |                                           |   |                                          |   |   |   |   |   |
| Basic and diluted net loss per share as  reported |   | $                                              | (0.26  | )                                             | $      | (0.10 | ) | $ | (1.02 | ) | $ | (0.27 | ) |
| Goodwill amortization, net of tax                 |   | 0.15                                           |   | —                                        |   | 0.43 |   | — |   |
| Adjusted basic and diluted net loss per  share    |   | $                                              | (0.11  | )                                             | $      | (0.10 | ) | $ | (0.59 | ) | $ | (0.27 | ) |
|                                              |   |                                           |   |                                          |   |   |   |   |   |
| Weighted average common shares                    |   | 38,060                                         |   | 40,246                                        |   | 37,392 |   | 39,883 |   |
|                                                   |        |                                                |        |                                               |        |  |  |  |  |  |  |  |  |  |

 

In theaggregate, amortization for future periods is expected to be approximately $2.7million for the years ending December 31, 2002 and 2003 and approximately $2.4million for the year ending December 31, 2004.

 

The recoverabilityand useful lives of the Company’s intangible assets are based on estimates andare susceptible to change. Although the Company believes that its intangibleassets will be recoverable, changes in the economy, the business in which itoperates and its own relative performance could change the assumptions used toevaluate intangible asset recoverability. Management continues to monitor theseassumptions and their effect on the estimated recoverability.  In accordance with SFAS No. 142, the Companywill re-perform the initial impairment test of goodwill and indefinite livedintangible assets in the fourth quarter of 2002.   Any resulting impairment loss could have a material adverseimpact on the Company’s financial condition or results of operations.

 

In June 2001,the FASB issued SFAS No. 143, “Accounting for Asset RetirementObligations.”  SFAS No. 143 requires anentity to recognize the fair value of a liability for an asset retirementobligation in the period in which it is incurred if a reasonable estimate offair value can be made. If a reasonable estimate of fair value cannot be madein the period during which the asset retirement obligation is incurred, theliability shall be recognized when a reasonable estimate of fair value can bemade. This new standard is effective in the first quarter of 2003. The Companydoes not believe that SFAS No. 143 will have a material effect on its financialcondition or results of operations.

 

In August2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets,” which supersedes SFAS No. 121, and “Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to Be DisposedOf.”  SFAS No. 144 is effective in thefirst quarter of 2002. The Company does not believe that SFAS No. 144 will havea material effect on its financial condition or results of operations.

 

In April 2002,the FASB issued SFAS No. 145 “Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections.”  This Statement rescinds FASB Statement No.4, “Reporting Gains and Losses from Extinguishment of Debt”, and an amendmentof that Statement, FASB Statement No. 64, “Extinguishments of Debt Made toSatisfy Sinking-Fund Requirements”. This Statement also rescinds FASB StatementNo. 44, “Accounting for Intangible Assets of Motor Carriers”. This Statementamends FASB Statement No. 13, “Accounting for Leases”, to eliminate aninconsistency between the required accounting for sale-leaseback transactions andthe required accounting for certain lease modifications that have economiceffects that are similar to sale-leaseback transactions. This Statement alsoamends other existing authoritative pronouncements to make various technicalcorrections, clarify meanings, or describe their applicability under changedconditions. The provisions of this Statement related to the rescission ofStatement No. 4 shall be applied in fiscal years beginning after May 15, 2002.The provisions of this Statement related to Statement No. 13 shall be effectivefor transactions occurring after May 15, 2002. All other provisions of thisStatement shall be effective for financial statements issued on or after May15, 2002. The Company does not believe that SFAS No. 145 will have a materialeffect on the Company’s financial condition or results of operations.

 

In August2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exitor Disposal Activities”. It addresses financial accounting and reporting forcosts associated with exit or disposal activities and nullifies Emerging IssuesTask Force (EITF) Issue No. 94-3,”Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring).”  SFASNo. 146 requires that a liability 

 

7

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for a cost associated with anexit or disposal activity be recognized when the liability is incurred andestablishes that fair value is the objective for initial measurement of theliability. Under EITF Issue No. 94-3, a liability for an exit cost wasrecognized at the date of an entity’s commitment to an exit plan. The newstandard is effective for exit or disposal activities that are initiated afterDecember 31, 2002, with early application encouraged. The Company does notbelieve that SFAS No. 146 will have a material effect on the Company’sfinancial condition or results of operations.

 

**Reclassifications**

 

EffectiveJanuary 1, 2002, FASB’s Topic D-103 requires that reimbursed travel expenses beclassified as revenue. Consequently, revenues for the three and nine monthsended September 30, 2002 included travel expenses of approximately $513,000 and$1.3 million, respectively. Revenues for the three and nine months endedSeptember 30, 2001 increased by approximately $687,000 and $1.6 million,respectively.

 

All priorperiods have been reclassified to conform to the current period’s presentation.

 

### **3.**                              Restructuring

 

The Companyrecorded approximately $1.6 million and $2.0 million of restructuring costs,respectively, during the second and third quarter of 2002.  Costs associated with the termination ofapproximately 74 employees totaled $1.4 million.  Costs associated with the closing of redundant facilities, thecancellation of certain contracts, and other non-personnel related actionstotaled approximately $2.2 million.  TheCompany paid approximately $300,000 of restructuring costs in the secondquarter of 2002 and approximately $750,000 of these costs in the third quarterof 2002.  The Company expects to pay theremainder in 2002, 2003 and 2004.  Thebalance of the restructuring reserve was $2.6 million as of September 30, 2002.

 

### **4.**                              Acquisition

 

**2002Acquisitions**

 

In the firstquarter of 2002, the Company executed on its strategy of expanding its globalpresence to enhance its competitive position worldwide and its ability to serveand support its clients. As part of this strategy, the Company acquiredcompanies in Mexico, Canada and Brazil. The shares of common stock issued bythe Company were valued at the average of the closing prices for the three daysbefore and the three days after the date each acquisition’s definitive termswere finalized.

 

On January 3,2002, Vastera, Inc. entered into a definitive agreement to acquire PrismaTecnologia Computacional, S.A. de C.V. (“Prisma”) for approximately $5.2million. Prisma is a provider of Global Trade Management solutions in Mexico.The Company consummated this transaction on February 1, 2002 and paid $2.45million in cash and issued approximately 150,000 shares of it common stockvalued at approximately $2.4 million.

 

On February12, 2002, Vastera, Inc. acquired Imanet, an Ontario Corporation forapproximately $2.4 million. Imanet is a provider of Global Trade Management solutionsin Canada. The Company paid $850,000 in cash and issued approximately 90,000shares of its common stock valued at approximately $1.4 million.

 

On March 8,2002, Vastera Inc. acquired Bergen Informatica Ltda. (“Bergen”) forapproximately $6.2 million. Bergen is a provider of Global Trade Managementsolutions in Brazil. The Company paid $2.4 million in cash and issuedapproximately 223,000 shares of its common stock valued at approximately $3.1million.

 

Thepreliminary aggregate purchase price of the three 2002 acquisitions wasdetermined as follows  (in thousands):

 
|                        |   | **Value** |   |
|-----------------------------|--------|-----------|--------|
| Fair value of common stock  |   | $         | 6,933  |   |
| Cash consideration          |   | 5,682     |   |
| Assumed liabilities         |   | 28        |   |
| Transaction costs and other |   | 1,593     |   |
| Aggregate purchase price    |   | $         | 14,236 |   |

 

8

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The purchaseprice has been allocated on a preliminary basis as follows (in thousands):

 
|                             |   | **Value** |   |
|----------------------------------|--------|-----------|--------|
| Current assets                   |   | $         | 121    |   |
| Property and equipment           |   | 205       |   |
| Acquired technology and know-how |   | 10,400    |   |
| Acquired contracts               |   | 400       |   |
| Goodwill                         |   | 3,958     |   |
| Deferred revenue                 |   | (848      | )      |
|                             |   | $         | 14,236 |   |

 

The amountsallocated to acquired technology and know how and acquired contracts are beingamortized on a straight-line method over the estimated useful life of theseassets, which are five years and one year, respectively.

 

The purchaseprice allocations of the 2002 acquisitions are preliminary, as management isreviewing the activities and employees of the acquired companies. Costsassociated with the possible termination of certain acquired employees orexiting other activities would be accounted for as liabilities assumed in thebusiness combinations.

 

The followingunaudited pro forma information (in thousands) has been prepared as if the 2002acquisitions had occurred as of January 1, 2001.

 
|                                               |   | **Pro Forma for the  Year Ended  December 31, 2001** |   | **Pro Forma for the  Nine Months Ended  September 30, 2002** |   |
|----------------------------------------------------|--------|------------------------------------------------------|--------|--------------------------------------------------------------|--------|
|                                               |   | **(unaudited)**                                      |   | **(unaudited)**                                              |   |
| Total revenues                                     |   | $                                                    | 69,715 |                                                         | $      | 57,276 |   |
| Net loss                                           |   | (48,704                                              | )      | (11,169                                                      | )      |
| Pro forma basic and diluted loss per common  share |   | (1.28                                                | )      | (0.28                                                        | )      |
|                                                    |        |                                                      |        |                                                              |        |  |  |

 

### **5.**                              Long-TermDebt:

 

**Lineof Credit**

 

In July 2002,the Company refinanced $3.9 million of outstanding debt under its former creditfacility with a new facility from Comerica Bank. The term loan matures in June2004 and bears interest at the bank’s prime rate plus 50 basis points (5.25% asof September 30, 2002).  The balanceunder the term loan was approximately $3.5 million as of September 30, 2002 TheCompany also obtained a secured revolving line of credit and an equipment lineof credit with Comerica Bank. The Company may borrow up to $10 million underthe revolving line of credit, with a $2.5 million sub-limit for the issuance ofletters of credit. Advances under the revolving line of credit are limited tothe lesser of $10 million or 80% of eligible accounts receivable, as defined inthe loan agreement. The revolving line of credit bears interest at the bank’sprime rate (4.75% as of September 30, 2002). The revolving line of creditmatures in July 2004.  The balance underthe revolving line of credit was zero as of September 30, 2002.

 

The Companymay borrow up to $5 million under the equipment line of credit. The equipmentline of credit bears interest at the bank’s prime rate plus 50 basis points(5.25% as of September 30, 2002). The equipment line of credit has twointerest-only payment periods and matures in July 2005.  The balance under the equipment line ofcredit was zero as of September 30, 2002.

 

The terms ofthe revolving line of credit and equipment line of credit require the Companyto comply with certain financial covenants including, but not limited to,restrictions and limitations on future indebtedness, sale of assets andmaterial changes in the Company’s business. The financial covenants include aminimum modified quick ratio, as defined in the loan agreement, of 2.0 to 1.0and a maximum ratio of total liabilities to tangible net worth of 1.5 to 1.0.The most restrictive of the financial covenants is that the Company’s pro formaloss shall not exceed $1.5 million for the three months ended September 30,2002 and pro forma income must be at least $0 for the three months endedDecember 31, 2002 and thereafter, measured quarterly. As of and for the threemonths ended September 30, 2002, the Company was in compliance with thecovenants of its credit facility.

 

Pro formaincome (loss) is defined in the loan agreement as net income, plus interestexpense, taxes, non-cash charges (including depreciation, amortization,stock-based compensation, research and development related charges and one-

 

9

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time restructuring charges),and cash restructuring charges (not to exceed $5.0 million in the aggregate),and less interest income, and one-time or non-recurring revenue.

 

### **6.**                              Commitmentsand Contingencies:

 

**Litigation**

 

The Company isperiodically a party to disputes arising from normal business activities. Inthe opinion of management, resolution of these matters will not have a materialadverse effect upon the financial condition or future operating results of theCompany.

 

On March 14,2001, Expeditors International of Washington, Inc. and Expeditors Tradewin,L.L.C. (collectively “Expeditors”) filed suit against the Company in the UnitedStates District Court for the Eastern District of Michigan, Southern Divisionprimarily alleging that the Company misappropriated certain of Expeditors’trade secrets in connection with its acquisition of Ford’s customs operations,by utilizing systems and business processes that Expeditors assisted indeveloping for Ford and through its employee hiring practices. The Companybelieves that the allegations contained in the complaint are without merit andthat there will be no material adverse impact to its operations from thislitigation. In connection with its acquisition of Ford’s customs operations,Ford agreed to indemnify the Company for intellectual property infringementclaims and Ford is currently indemnifying the Company in connection with thislitigation.

 

On April 16,2002, the Court granted in part and denied in part our motion to dismiss thiscase. Specifically, the Court dismissed Expeditors’ claims of common lawmisappropriation of confidential information on the grounds that such claimswere preempted by the Michigan Uniform Trade Secrets Act (“MUTSA”). The Courtpreserved Expeditors remaining claims, as dismissal was deemed to be prematureas of the date of the Court’s ruling.

 

### **7.**                              SegmentInformation:

 

The Companyhas three reportable operating segments: managed services, software andservices. The managed services segment generates revenues from managed servicestransaction arrangements. The software segment generates revenues fromsubscription, transaction, and software license agreements of its Global TradeManagement solutions. The services segment generates revenues by charging itscustomers for implementation, management consulting and training services. TheCompany evaluates its segments’ performance based on revenues and gross profit.The Company’s unallocated costs include corporate and other costs not allocatedto the segments for management’s reporting purposes.

 

The followingtable summarizes the Company’s three segments (in thousands):

 
|                |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|---------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                |   | **2001**                              |   | **2002**                             |   | **2001** |   | **2002** |   |
|                |   | **(unaudited)**                       |   | **(unaudited)**                      |   | **(unaudited)** |   | **(unaudited)** |   |
| Revenues:           |   |                                  |   |                                 |   |   |   |   |   |
| Managed services    |   | $                                     | 7,684  |                                 | $      | 10,961 |   | $ | 21,179 |   | $ | 32,935 |   |
| Software            |   | 4,533                                 |   | 2,967                                |   | 10,376 |   | 9,595 |   |
| Services            |   | 5,175                                 |   | 5,328                                |   | 13,846 |   | 14,119 |   |
| Total revenues      |   | 17,392                                |   | 19,256                               |   | 45,401 |   | 56,649 |   |
|                |   |                                  |   |                                 |   |   |   |   |   |
| Gross Profit:       |   |                                  |   |                                 |   |   |   |   |   |
| Managed services    |   | 3,231                                 |   | 4,425                                |   | 9,513 |   | 15,611 |   |
| Software            |   | 3,876                                 |   | 2,299                                |   | 8,585 |   | 7,724 |   |
| Services            |   | 1,300                                 |   | 1,570                                |   | 3,424 |   | 3,693 |   |
| Gross profit        |   | 8,407                                 |   | 8,294                                |   | 21,522 |   | 27,028 |   |
|                |   |                                  |   |                                 |   |   |   |   |   |
| Net loss:           |   |                                  |   |                                 |   |   |   |   |   |
| Unallocated expense |   | (18,857                               | )      | (12,577                              | )      | (61,907 | ) | (38,318 | ) |
| Interest income     |   | 709                                   |   | 328                                  |   | 2,813 |   | 1,099 |   |
| Interest expense    |   | (115                                  | )      | (136                                 | )      | (323 | ) | (374 | ) |
| Income tax          |   | (89                                   | )      | (103                                 | )      | (247 | ) | (285 | ) |
| Net loss            |   | $                                     | (9,945 | )                                    | $      | (4,194 | ) | $ | (38,142 | ) | $ | (10,850 | ) |

 

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**GeographicInformation**

 

The Companysells its products and services through its offices in the United States andthrough its subsidiaries in Brazil, Canada, France, Germany, Ireland, Japan,Mexico, the Netherlands, Poland, Spain and the United Kingdom. Informationregarding revenues and long-lived assets attributable to the United States andto all foreign countries is stated below. The geographic classification ofproduct and services revenues was based upon the location of the customer.

 

Vastera’sproduct and services revenues were generated in the following geographicregions (in thousands):

 
|                        |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|-----------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                        |   | **2001**                              |   | **2002**                             |   | **2001** |   | **2002** |   |
|                        |   | **(unaudited)**                       |   | **(unaudited)**                      |   | **(unaudited)** |   | **(unaudited)** |   |
| United States               |   | $                                     | 12,085 |                                 | $      | 15,392 |   | $ | 35,894 |   | $ | 46,443 |   |
| Europe and Asia             |   | 2,731                                 |   | 1,199                                |   | 4,519 |   | 2,933 |   |
| Other international regions |   | 2,576                                 |   | 2,665                                |   | 4,988 |   | 7,273 |   |
| Total revenues              |   | $                                     | 17,392 |                                 | $      | 19,256 |   | $ | 45,401 |   | $ | 56,649 |   |

 

Vastera’stangible long-lived assets were located as follows:

 
|                        |   | **December 31,  2001** |   | **September30,  2002** |   |
|-----------------------------|--------|------------------------|--------|------------------------|--------|
|                        |   |                   |   | **(unaudited)**        |   |
| United States               |   | $                      | 7,108  |                   | $      | 11,067 |   |
| Europe and Asia             |   | 510                    |   | 542                    |   |
| Other international regions |   | 316                    |   | 811                    |   |
| Total long-lived assets     |   | $                      | 7,934  |                   | $      | 12,420 |   |

 

**SignificantCustomers**

 

For the threemonths ended September 30, 2002, two customers accounted for approximately 25%and 12%, respectively, of total revenues. For the nine months ended September30, 2002, one customer accounted for 32% of total revenues. For the threemonths ended September 30, 2001, two customers accounted for 31% and 15%,respectively, of total revenues.  For thenine months ended September 30, 2001, one customer accounted for 34% of totalrevenues.

 

### **8.**                              Transactionswith Ford Motor Company:

 

On August 29,2000, the Company acquired Ford’s global customs operations and merged Ford’sglobal customs operations into its managed services operations. Ford received8,000,000 shares of its common stock valued at approximately $79.2 million inconsideration at the time of the transaction. As of September 30, 2002, Fordowned 8,000,000 shares or approximately 19.8% of the Company.

 

In August2000, the Company also entered into a managed services agreement under whichVastera manages Ford’s global trade operations. The agreement with Ford U.S.has a minimum term of four years and may continue for a total of ten years. InJanuary 2001 and March 2001, the Company entered into a managed servicesagreements with Ford Mexico and Ford Canada, respectively. The agreements withFord Mexico and Ford Canada also have minimum terms of four years and each maycontinue for a total of ten years. For the three months ended September 30,2001 and 2002, Ford accounted for approximately 31% and 25%, respectively, oftotal revenues. As of September 30, 2002, Ford owed the Company approximately$3.0 million or 18% of the Company’s total accounts receivable.

 

In February2002, the Company amended its agreement with Ford U.S. to provide for quarterlyminimum transaction levels in lieu of annual minimum transaction levels. Byamending the agreement in this manner, the Company was able to bill Ford on aquarterly basis for the transactions processed in excess of the minimum levels.In connection with the amendment, the Company agreed to reduce Ford’s U.S.aggregate annual minimum revenue guarantee from $11.6 million to $11.0 million.In December 2001, the Company permitted Ford U.S. to carry forward a portion ofthe transactions processed for Ford U.S. in 2001 in excess of the contractualminimum to be applied to transactions processed in the first quarter of 2002that were less than the contractual minimum. For the three and six months endedJune 30, 2002, the Company derived approximately $1.0 million and $2.5 million,respectively, in revenues related to transactions in excess of the quarterlyminimum.

 

11

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In July 2002,the Company further amended its agreement with Ford U.S. to provide for billingFord at a fixed annual rate of $11.8 million for the remaining life of theagreement, beginning January 1, 2003. By amending the agreement in this manner,the Company will no longer bill Ford on a per transaction processed basis, butinstead will bill Ford at a fixed annual rate. In connection with thisamendment, the Company and Ford agreed that it would bill Ford $4.9 millionratably over the remainder of 2002.

 

The Companyreimburses Ford for expenses incurred on its behalf by Ford for the use offacilities, the costs of leased employees, and the maintenance and expensesrelated to the acquired technology. For the three months ended September 30,2001 and 2002, the Company paid Ford approximately $1.43 million and $1.38million, respectively.  For the ninemonths ended September 30, 2001 and 2002, the Company paid Ford approximately$4.4 million and $4.0 million, respectively. These payments are expected to decreasein the future as the Company leverages its existing facilities and employeesand as it deploys its own technology.

 

### **9.**                              Stock-basedCompensation

 

In September2002, the Company offered each employee an opportunity to cancel certain stockoptions (the “Options Trade-In”) in exchange for the right to receive a futurestock option grant for the same number of shares six months and one day fromthe date of cancellation with a strike price equal to the market price on thenew grant date.  Options to purchaseapproximately 3,750,000 shares were cancelled pursuant to the Option Trade-In.

 

The Companyapplies Accounting Principles Board (“APB”) Opinion No. 25, “Accounting forStock Issued to Employees,” and related interpretations in accounting for itstock option plan. The Company recorded deferred compensation cost ofapproximately $6.4 million in the last six months of 1999 andapproximately $13.4 million in the first nine months of 2000. On March 29,2001, the Company also recorded approximately $465,000 of deferred compensationin connection with the issuance of options to acquire 64,000 shares of itscommon stock in exchange for the unvested Speedchain stock options it assumedin the related business combination. These deferred compensation amountsrepresent the aggregate difference between the exercise price and the fairvalue for accounting purposes of the underlying shares of common stock at thedate of grant. This amount is included as a component of stockholders’ equityand is being amortized on an accelerated basis over the applicable vestingperiod. Stock-based compensation, which has been separately identified in theaccompanying condensed consolidated statement of operations, has not beenincluded in costs of revenues, sales and marketing, research and development,and general and administrative expense as indicated below:

 
|                              |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|-----------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                              |   | **2001**                              |   | **2002**                             |   | **2001** |   | **2002** |   |
|                              |   | **(unaudited)**                       |   | **(unaudited)**                      |   | **(unaudited)** |   | **(unaudited)** |   |
| Cost of managed services revenues |   | $                                     | 41     |                                 | $      | 16 |   | $ | 133 |   | $ | 60 |   |
| Cost of software revenues         |   | 6                                     |   | 3                                    |   | 21 |   | 10 |   |
| Cost of services revenues         |   | 199                                   |   | 82                                   |   | 656 |   | 300 |   |
| Sales and marketing               |   | 570                                   |   | 235                                  |   | 1,879 |   | 862 |   |
| Research and development          |   | 138                                   |   | 57                                   |   | 455 |   | 209 |   |
| General and administrative        |   | 467                                   |   | 192                                  |   | 1,540 |   | 706 |   |
| Total stock-based compensation    |   | $                                     | 1,421  |                                 | $      | 585 |   | $ | 4,684 |   | $ | 2,147 |   |

 

12

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### **10.**                       SupplementalInformation:

 

**CashFlow Information**

 

Cash paid forinterest was $327,000 and $391,000 for the nine months ended September 30, 2001and 2002, respectively.  In July 2002,the Company refinanced $3.9 million of outstanding debt under its former creditfacility with a new facility from Comerica Bank.

 

Noncash activities were asfollows (in thousands):

 
|                                                                                                           |   | **Nine Months Ended  September 30,  (unaudited)** |   |
|----------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------|--------|
|                                                                                                           |   | **2001**                                          |   | **2002** |   |
| Increase in equipment line of credit and  capital lease obligations                                            |   | $                                                 | 2,131  |   | $ | 1,243 |   |
| Issuance of common stock and stock options  in acquisitions                                                    |   | 13,551                                            |   | 6,933 |   |
| Deferred compensation in connection with  stock options issued to employees in acquisition                     |   | 465                                               |   | — |   |
| Assumed liabilities, transaction costs and  other, net of assets and deferred revenue acquired in acquisitions |   | 5,311                                             |   | 2,143 |   |
|                                                                                                                |        |                                                   |        |  |  |  |  |

 

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

 

The followingdiscussion and analysis of our financial condition and results of operationsshould be read in conjunction with our condensed consolidated financialstatements and related notes appearing elsewhere in this Report, which aredeemed to be incorporated into this section. Our actual results could differmaterially from those anticipated in such forward–looking statements due tovarious factors, including, but not limited to, those set forth under “RiskFactors” and elsewhere in this Report.

 

**Overview**

 

We are aleading provider of web-native software products and services that facilitatethe international purchase and sale of goods by streamlining and optimizingglobal trade processes. Global trade involves the cross-border shipment ofgoods and the management of the associated information and business processesrequired to complete these shipments. In 1992, we introduced EMS-2000, aU.S.-centric, DOS-based export management solution. In 1994, we introducedEMS-2000 Version 4, a multi-country, two-tier, Windows-based export managementsolution. In 1997, we introduced Global Passport, a multi-country, three-tier,client-server based, import/export management solution. In 2000, we introducedTradeSphere, a multi-country, multi-module suite of web-native Global TradeManagement solutions and we introduced TradePrism.com, a trade portal thatprovides an Internet-based delivery mechanism for our Global Trade Managementcapabilities. Since our inception, we have continued to develop comprehensivesolutions with features, functionality and services that allow companies tomanage the complexities of global trade.

 

We provide ourproducts and services to over 200 clients from our offices in the UnitedStates, Brazil, Canada, France, Germany, Ireland, Japan, Mexico, theNetherlands, Poland, Spain, and the United Kingdom. Our clients typicallyacquire a limited number of server and user subscriptions or licenses toimplement in a division or department. As they expand implementation of ourproducts globally and to their clients, suppliers and business partners, ourclients acquire additional subscriptions or licenses. We currently market ourproducts and services on a global basis through our direct sales force andother channels, such as strategic alliances and partners. We expect revenuesfrom our international operations to increase as we continue to expand ourinternational sales and services organizations.

 

In July 2000,we entered into an agreement to acquire Ford Motor Company’s global customsoperations and merged Ford’s global customs operations into our managedservices operations. The Ford operations that were merged into us consist ofFord personnel and technology utilized by Ford to manage its internationaltrade transactions. By combining our existing technology and intellectualcapital with that acquired from Ford, we intend to expand our managed servicesto companies of varying sizes on a global basis. Ford received 8,000,000 sharesof our common stock valued at approximately $79.2 million in consideration atthe time of the transaction. As of November 8, 2002, Ford owned approximately19.8% of our common stock.

 

In January2001 and March 2001, we expanded the Global Trade Management services weprovide to Ford by assuming responsibility for administering and managingFord’s global trade operations in Mexico and Canada, respectively. Thecontractual terms relating to negotiating managed services arrangements withother foreign operations have not been finalized and are subject to negotiationbased upon the actual costs. These costs include personnel costs,administrative overhead and information technology processing costs.

 

Our agreementswith Ford have a minimum term of four years. These agreements provide us with aguaranteed, predictable and recurring revenue stream from Ford over the nextthree years. We expect to derive at least $18.0 million in revenues in 2002 and$16.9 million in revenues in 2003 from our agreements with Ford U.S., FordMexico and Ford Canada. We believe our client relationship with Ford will havea significant impact on our total revenues and is expected to account forgreater than 10% of revenues for the foreseeable future. For the three monthsended September 30, 2001 and 2002, Ford accounted for approximately 31% and25%, respectively, of our total revenues. For the nine months ended September30, 2001 and 2002, Ford accounted for approximately 34% and 32%, respectively,of our total revenues.

 

In February 2002,we amended our agreement with Ford U.S. to provide for quarterly minimumtransaction levels in****lieu ofannual minimum transaction levels. By amending the agreement in this manner, wecan bill on a quarterly basis the transactions processed in excess of theminimum levels. In connection with the amendment, we agreed to reduce Ford’sU.S. aggregate annual minimum revenue guarantee from $11.6 million to $11.0million. In December 2001, we permitted Ford U.S. to carry forward a portion ofthe transactions processed for Ford U.S. in 2001 in excess of the contractualminimum to be applied to transactions processed in the first quarter of 2002that were less than the contractual minimum. For the three and six months endedJune 30, 2002, we derived approximately $1.0 million and $2.5 million,respectively, in revenue related to transactions in excess of the quarterlyminimum.

 

14

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In July 2002,we further amended our agreement with Ford U.S. to provide that we will nowbill Ford U.S. at a fixed annual rate of $11.8 million for the remaining lifeof the agreement. By amending the agreement in this manner, we will no longerbill Ford U.S.  on a per transactionprocessed basis, but instead will bill Ford U.S.  at a fixed annual service fee. In connection with this amendment,Ford U.S. and we agreed that we would bill Ford U.S. $4.9 million ratably overthe remainder of 2002.

 

**Acquisitions**

 

In the firstquarter of 2002, we executed on our strategy of expanding our global presenceto enhance our competitive position worldwide and our ability to serve andsupport our clients. As part of this strategy, we acquired companies in Mexico,Canada and Brazil. The shares of common stock we issued were valued at theaverage of the closing prices for the three days before and the three daysafter the date each acquisition’s definitive terms were finalized.

 

On January 3,2002, we entered into a definitive agreement to acquire Prisma TecnologiaComputacional, S.A. de C.V. (“Prisma”) for approximately $5.2 million. Prismais a provider of Global Trade Management solutions in Mexico. The Companyconsummated this transaction on February 1, 2002 and paid $2.45 million in cashand issued approximately 150,000 shares of it common stock valued atapproximately $2.4 million.

 

On February12, 2002, we acquired Imanet, an Ontario Corporation for approximately $2.4million. Imanet is a provider of Global Trade Management solutions in Canada.The Company paid $850,000 in cash and issued approximately 90,000 shares of itscommon stock valued at approximately $1.4 million.

 

On March 8,2002, we acquired Bergen Informatica Ltda (“Bergen”) for approximately $6.2million. Bergen is a provider of Global Trade Management solutions in Brazil.The Company paid $2.4 million in cash and issued approximately 223,000 sharesof its common stock valued at approximately $3.1 million.

 

Goodwill andidentifiable intangibles have been amortized on a straight-line basis overthree to four years and resulted in charges to operations of approximately $5.7million and $717,000 for the three months ended September 30, 2001 and 2002,respectively, and $16.5 million and $1.9 million for the nine months endedSeptember 30, 2001 and 2002, respectively. On January 1, 2002, in accordancewith SFAS No. 141, we reclassified our assembled workforce intangible assets togoodwill. As of January 1, 2002, we had unamortized goodwill of approximately$62.2 million. On January 1, 2002, we adopted the nonamortization approachunder SFAS No. 142 for our goodwill. In the aggregate, amortization for futureperiods is expected to be approximately $2.7 million for the years endingDecember 31, 2002 and 2003 and approximately $2.4 million for the year endingDecember 31, 2004.

 

**CriticalAccounting Policies**

 

We considercertain accounting policies related to revenue recognition, deferred revenues,capitalized costs and intangible assets to be critical to our businessoperations and the understanding of our results of operations. The impact of,and any associated risks related to, these policies on our business operationsis discussed throughout Management’s Discussion and Analysis of FinancialCondition and Results of Operations where such policies affect our reported andexpected financial results. For a detailed discussion on the application ofthese and other accounting policies, see the Notes to the CondensedConsolidated Financial Statements in Item 1 of this Report on Form 10-Q. Notethat our preparation of this Report on Form 10-Q requires us to make estimatesand assumptions that affect the reported amount of assets and liabilities,disclosure of contingent assets and liabilities at the date of our financialstatements, and the reported amounts of revenue and expenses during thereporting period. There can be no assurance that actual results will not differfrom those estimates.

 

**Sourceof Revenues and Revenue Recognition Policy**

 

Our revenuesconsist of managed services revenues, software revenues and services revenues.

 

*Managed Services Revenues*

 

Managedservices revenues are derived from agreements that provide for transaction orservices fees based on the performance of our managed services solutions.Managed services solutions include the processing of our clients’ customsentries and the classifying of clients’ goods. Managed services transactionarrangements are often subject to annual or quarterly minimum transactionthresholds and revenues have been recognized based on the lower of thecumulative actual transactions processed during the period using aweighted-average transaction rate or the amount billable for the period. For 

 

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those managed servicestransaction arrangements that are subject to annual minimums and the amountbillable for interim periods is limited to the pro-rata portion of the annualminimum, transactions processed in excess of the minimum in each period are notbillable and, therefore, revenue is not recognized until the end of the relatedperiod. Certain managed services arrangements are based upon a fixed servicesfee. Revenues associated with these arrangements are recognized ratably overthe term of the arrangement and limited to the amounts billable. In addition,we may receive annual gainsharing fees under certain managed servicestransaction arrangements based on a percentage of the client’s annual costsavings, as defined in the managed services arrangements. Such fees arerecognized when they become fixed and determinable.

 

*Software Revenues*

 

Softwarerevenues consist of subscription-based revenues, transaction–basedrevenues and perpetual software license revenues. We recognize revenue from thesale of software products in accordance with Statement of Position (“SOP”)97-2, “Software Revenue Recognition.”

 

Subscription-basedrevenues are derived from term-license arrangements in which our clientslicense our software products and obtain the right to unspecified enhancementson a when-and-if-available basis and ongoing support and content updateservices. Revenues are recognized ratably over the contract term. Subscriptionarrangements typically range from three to five years.

 

Transaction-basedrevenues are derived from agreements that provide for transaction fees based ona client’s usage of our software products. Revenues from the usage of itssoftware products are recognized as transactions occur.

 

Perpetualsoftware license revenues are derived from perpetual software licensearrangements and related maintenance contracts. Maintenance contracts includethe right to unspecified enhancements on a when-and-if available basis, ongoingsupport and content update services. The content updates provided undermaintenance arrangements are significant and frequent and thus the entirearrangement is in substance a subscription. Revenues from perpetual softwarelicense sales are recognized ratably over the estimated economic life of theproduct.  We have estimated that thelife of the product is three years, which is consistent with the historicalperiods between major upgrades to the functionality and architecture of itsproducts.  Revenues from maintenancecontracts are recognized ratably over the contract term, typically oneyear.  To the extent that we host thesoftware for our customers, the hosting fee is recognized ratably over thecontract period in conjunction with the recognition of the license fee.

 

We recognizerevenues from arrangements with resellers once the software product is sold tothe end user.  Annual minimums not soldby the reseller to end customers are recognized as revenues upon the expirationof the annual minimum period.

 

*Services Revenues*

 

Servicesrevenues are derived from implementation, management consulting and trainingservices. Services are performed on a time and materials basis or under fixedprice arrangements and are recognized as the services are performed or usingthe percentage of completion method of accounting. Losses on arrangements arerecognized when known.

 

**DeferredRevenues**

 

Deferredrevenues include amounts billed to clients for revenues that have not beenrecognized and generally result from billed, but deferredsubscription/transaction revenues and services not yet rendered. Deferredrevenues will be recognized on a monthly basis over the term or the remainingeconomic life of the product or when the services are performed. As we continueto increase our subscription and transaction-based revenues relative to ourperpetual licenses, we expect our deferred revenues to fluctuate sincesubscription and transaction-based customers are billed and paid ratably(monthly or quarterly). We do not consider deferred revenue to be an indicatorof future revenues.

 

**InternalUse Software**

 

In accordancewith Statement of Position 98-1, “Accounting for the Costs of Computer SoftwareDeveloped or Obtained for Internal Use”, the Company capitalized costsassociated with the implementation and integration of our trade managementplatform to our managed services operations of approximately $463,000 and $1.3million for the three and nine months, respectively, ended September 30,2002.  Amortization will commence uponthe completion of the integration of the 

 

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Vastera platform.  These costs will be amortized as costs ofmanaged services revenues over the remaining managed services arrangement, butno longer than three years.

 

**IntangibleAssets**

 

As ofSeptember 30, 2002, we have intangible assets recorded of approximately $75million related to our 1999, 2000, 2001 and 2002 acquisitions. Goodwill relatedto the 1999 acquisitions was amortized using the straight-line method over fiveyears. Intangible assets from our acquisition of Ford’s global customs unit in2000 consist of goodwill, assembled workforce, acquired technology and the Fordcontract. Prior to January 1, 2002, goodwill and assembled workforce wereamortized using the straight-line method over three to four years. Acquiredtechnology is amortized over five years. The value assigned to the Fordcontract is being amortized as a discount to revenue over the minimum term ofthe contract. The value assigned to the assembled workforce has been allocatedto each country in which we will acquire Ford’s global customs operations,based on the number of employees in each country. The related amortization wasrecorded on a straight-line basis over three years from the date we assumeFord’s customs operations in each country. The assembled workforce intangibleasset and goodwill from our Speedchain acquisition in 2001 were amortized usingthe straight-line method over two and fours years, respectively.

 

On January 1,2002, in accordance with SFAS No. 141, we reclassified our assembled workforceintangible assets to goodwill. As of January 1, 2002, we had unamortizedgoodwill of approximately $62.2 million. On January 1, 2002, we adopted thenonamortization approach under SFAS No. 142 for our goodwill. Under thenonamortization approach, goodwill will not be amortized into results ofoperations, but instead will be reviewed for impairment and written down and chargedto results of operations only in the periods in which the recorded value ofgoodwill and certain intangibles is more than its fair value. During thefirst quarter of 2002, the Company completed the initial impairment test ofgoodwill and indefinite lived intangible assets, which did not indicate animpairment loss. The Company estimates that the effect of the new rules will beto decrease amortization expense related to goodwill by approximately$22.8 million for the year ending December 31, 2002.

 

The resultsfor the prior year (three and nine months ended September 30, 2001) havenot been restated. Reconciliations of previously reported net loss and net lossper share to the amounts adjusted for the exclusion of goodwill amortizationnet of the related tax effects are as follows:

 
|                                              |   | **For the  Three Months  Ended September 30,** |   | **For the  Nine Months  Ended September 30,** |   |
|---------------------------------------------------|--------|------------------------------------------------|--------|-----------------------------------------------|--------|
|                                              |   | **2001**                                       |   | **2002**                                      |   | **2001** |   | **2002** |   |
| Reported net loss                                 |   | $                                              | (9,945 | )                                             | $      | (4,194 | ) | $ | (38,142 | ) | $ | (10,850 | ) |
| Goodwill amortization, net of tax                 |   | 5,588                                          |   | —                                        |   | 16,073 |   | — |   |
| Adjusted net loss                                 |   | $                                              | (4,357 | )                                             | $      | (4,194 | ) | $ | (22,069 | ) | $ | (10,850 | ) |
|                                              |   |                                           |   |                                          |   |   |   |   |   |
| Basic and diluted net loss per share as  reported |   | $                                              | (0.26  | )                                             | $      | (0.10 | ) | $ | (1.02 | ) | $ | (0.27 | ) |
| Goodwill amortization, net of tax                 |   | 0.15                                           |   | —                                        |   | 0.43 |   | — |   |
| Adjusted basic and diluted net loss per  share    |   | $                                              | (0.11  | )                                             | $      | (0.10 | ) | $ | (0.59 | ) | $ | (0.27 | ) |
|                                              |   |                                           |   |                                          |   |   |   |   |   |
| Weighted average common shares                    |   | 38,060                                         |   | 40,246                                        |   | 37,392 |   | 39,883 |   |
|                                                   |        |                                                |        |                                               |        |  |  |  |  |  |  |  |  |  |

 

For the threemonths ended September 30, 2001 and 2002, we recorded amortization expenserelated to our goodwill and intangibles of approximately $5.7 million and$717,000, respectively. For the nine months ended September 30, 2001 and 2002,we recorded amortization expense of $16.5 million and $1.9 million,respectively.

 

Therecoverability and useful lives of our intangible assets are based on estimatesand are susceptible to change. Although we believe our intangible assets willbe recoverable, changes in the economy, the business in which we operate andour own relative performance could change the assumptions used to evaluateintangible asset recoverability. We continue to monitor these assumptions andtheir effect on the estimated recoverability. In accordance with SFAS No. 142, the Company will re-perform the initialimpairment test of goodwill and indefinite lived intangible assets in thefourth quarter of 2002.  Any resultingimpairment loss could have a material adverse impact on our financial conditionand results of operations.

 

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**Comparisonof the Three Months Ended September 30, 2001 to the Three Months EndedSeptember 30, 2002**

 

*Revenues*

 

**Total revenues.**Total revenues increased 11% from approximately $17.4 million for thethree months ended September 30, 2001 to approximately $19.3 million forthe three months ended September 30, 2002.

 

**Managed servicesrevenues.** Managed services revenues increased 43% fromapproximately $7.7 million for the three months ended September 30, 2001to approximately $11.0 million for the three months ended September 30,2002. We attribute this increase to the continued growth in our automotive andhigh-tech managed services client base. Revenues derived from our managedservices agreements accounted for 44% of our total revenues for the threemonths ended September 30, 2001 and 57% of our total revenues for the threemonths ended September 30, 2002. In February 2002, our agreement with Ford U.S.was amended to provide for quarterly minimums so that transactions processed inexcess of the minimum were billable quarterly rather than at the end of theyear. In July 2002, we further amended our agreement with Ford U.S. to providefor billing Ford at a fixed annual rate of $11.8 million for the remaining lifeof the agreement. By amending the agreement in this manner, we will no longerbill Ford on a per transaction processed basis, but instead will bill Ford at afixed annual rate. In connection with this amendment, Ford and we agreed thatwe will bill Ford $4.9 million for the remainder of 2002. We expect managed servicesrevenues to account for approximately 60% of our total revenues for the nearfuture.

 

**Software revenues.**Software revenues decreased 35% from approximately $4.5 million for thethree months ended September 30, 2001 to approximately $3.0 million forthe three months ended September 30, 2002. We attribute this decrease to approximately $2.25 million innonrecurring revenue derived from Vectant’s 2001 annual minimum in connectionwith their distributor/reseller arrangement, the decrease in informationtechnology spending and the conversion of certain of our software clients tomanaged services clients. Revenues derived from our software agreementsaccounted for 26% of our total revenues for the three months ended September30, 2001 and 15% of our total revenues for the three months ended September 30,2002. We expect software revenues to account for approximately 15% of our totalrevenues for the near future.

 

**Services revenues.**Services revenues increased 3% from approximately $5.2 million for thethree months ended September 30, 2001 to approximately $5.3 million forthe three months ended September 30, 2002. Services revenues increased due tohigher utilization of our services personnel and a favorable mix ofengagements.  Services revenuesaccounted for 30% of our total revenues for the three months ended September30, 2001 and 28% for the three months ended September 30, 2002. We expectservices revenues to continue to account for approximately 25% of our totalrevenues for the near future.

 

*Cost of Revenues*

 

**Cost of managedservices revenues.** Cost of managed services revenuesincludes the cost of salaries and related expenses for our managed servicesorganizations. We expect the cost of managed services revenues in absolutedollars to continue to increase as we expand our offerings further, build outour managed services trade hubs and integrate other technology products intoour product offerings. The cost of managed services revenues increased 47% fromapproximately $4.5 million for the three months ended September 30, 2001 toapproximately $6.5 million for the three months ended September 30, 2002. Thisincrease was largely due to the growth of our managed services operations tosupport our growing client base and the expansion of our European operations.The cost of managed services revenues as a percentage of managed servicesrevenues was 58% for the three months ended September 30, 2001 and 60% for thethree months ended September 30, 2002. This increase as a percentage of managedservices revenues was due to decreased revenues from Ford resulting from theJuly 2002 amendment of our contract and the expansion of our European managedservices operations. We expect to realize productivity improvements from ourinvestment in our support infrastructure and the leveraging of personnel in theperformance of our managed services agreements. As we enter into largemulti-year managed services agreements in new industry verticals or newgeographic regions that may require significant investments in the relatedinfrastructure, the costs associated with these managed services agreements maybe greater in the initial year than in the later years when we realizeproductivity improvements from these infrastructure investments. Accordingly,we expect that our cost of managed services revenues may fluctuate on aquarterly basis as a percentage of managed services revenues.

 

**Cost of softwarerevenues.** Cost of software revenues includes royaltiesowed to third parties for technology products integrated into our softwareproducts, as well as the cost of salaries and related expenses for ourtechnical support and content organization. We expect the cost of softwarerevenues in absolute dollars to continue to increase as we further expand ourofferings and integrate other technology products into our product offerings.The cost of software revenues 

 

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increased 2% from approximately$657,000 for the three months ended September 30, 2001 to approximately$668,000 for the three months ended September 30, 2002. This increase was dueto our investment in our client support infrastructure. The cost of softwarerevenues as a percentage of software revenues was 14% for the three monthsended September 30, 2001 as compared to 23% for the three months endedSeptember 30, 2002. This increase as a percentage of software revenuesreflected additional support costs related to our foreign operations and theeffect of $2.25 million of nonrecurring software revenue recognized in thethird quarter of 2001.   We expect thecost of software revenues as a percentage of software revenues to beapproximately 20% to 25% on an annual basis, but this percentage couldfluctuate in any given quarter.

 

**Cost of servicesrevenues.** Cost of services revenues includes the costof salaries and related expenses for implementation, management consulting andtraining services provided to clients, as well as the cost of third partiescontracted to provide either application consulting or implementation servicesto our clients.

 

The cost ofservices revenues decreased 3% from approximately $3.9 million for the threemonths ended September 30, 2001 to approximately $3.8 million from the threemonths ended September 30, 2002. The cost of services revenues as a percentageof services revenues was 75% for the three months ended September 30, 2001 and71% for three months ended September 30, 2002. This decrease resulted fromhigher utilization of our services personnel and a favorable mix ofengagements.  We expect the cost ofservices revenues as a percentage of services revenues to be approximately 73%to 78% on an annual basis, but this percentage could fluctuate outside thisrange in any given quarter.

 

*Operating Expenses*

 

**Sales and marketing.**Sales and marketing expense consists primarily of salaries, commissions andbonuses earned by sales and marketing personnel, sales training events, publicrelations, advertising, trade shows and travel expenses related to bothpromotional events and direct sales efforts. Sales and marketing decreased 46%from approximately $4.9 million for the three months ended September 30,2001 to approximately $2.6 million for the three months ended September30, 2002. This decrease was primarily due to a reduction in annual bonuses expectedto be paid to employees and compensation paid to our employees. Sales andmarketing expenses represented 28% of our total revenues for the three monthsended September 30, 2001 and 14% for the three months ended September 30, 2002.We anticipate that sales and marketing expenses will continue to decrease as apercentage of total revenues in future years.

 

**Research anddevelopment.** Research and development expense consistsprimarily of salaries, benefits and equipment for software developers, qualityassurance personnel, program managers and technical writers. Research anddevelopment expense decreased 15% from approximately $3.7 million for thethree months ended September 30, 2001 to approximately $3.1 million forthe three months ended September 30, 2002. Research and development expensesrepresented 21% of our total revenues for the three months ended September 30,2001 and 14% for the three months ended September 30, 2002. We believe that wemust continue to invest in research and development in order to develop newproducts and services.

 

**General andadministrative.** General and administrative expenseconsists primarily of salaries, benefits and related costs for executive,finance, administrative and information services personnel. These expenses alsoinclude fees for legal, audit and accounting, and other professional services.General and administrative expense increased 13% from approximately$2.3 million for the three months ended September 30, 2001 toapproximately $2.6 million for the three months ended September 30, 2002.General and administrative expenses represented 13% of our total revenues forthe three months ended September 30, 2001 and 14% for the three months endedSeptember 30, 2002. We believe our general and administrative expenses will decreaseas a percentage of total revenues, but increase in absolute dollar amounts aswe expand our administrative staff, domestically and internationally, and incuradditional expenses associated with being a global company.

 

**Depreciation.**Depreciationexpense increased 52% from approximately $849,000 for the three months endedSeptember 30, 2001 to approximately $1.3 million for the three months endedSeptember 30, 2002. This increase resulted from the depreciation of fixedassets purchased to build the infrastructure needed to support the growth ofour business. Depreciation expense represented 5% and 7% of our total revenuesfor the three months ended September 30, 2001 and 2002, respectively. Webelieve depreciation expense will decrease as a percentage of total revenues,but increase absolute dollar amounts as we continue to invest in the build outof our global infrastructure.

 

**Amortization.**Amortizationexpense decreased 87% from approximately $5.7 million for the three monthsended September 30, 2001 to approximately $717,000 for the three months endedSeptember 30, 2002. This decrease resulted from our adoption of thenonamortization approach under SFAS No. 142 for our goodwill. Amortizationexpense represented 33% of our total revenues for the three months endedSeptember 30, 2001 and 4% for the three months ended September 30, 2002. OnJanuary 1, 2002, in accordance with SFAS No. 141, we reclassified our assembledworkforce intangible assets to goodwill. As of January 1, 2002, we hadunamortized goodwill of approximately $62.2 million. In the aggregate, 

 

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amortization for future periodsis expected to be approximately $2.7 million for the years ending December 31,2002 and 2003, $2.4 million for the year ending 2004, and approximately $2.0million for the year ending December 31, 2005.

 

**Restructuring.**We recorded approximately $1.6 million of restructuring costs for the threemonths ended September 30, 2002. Approximately $850,000 of these costs were associated with thetermination of approximately 39 employees. Approximately $784,000 related to the closing of redundant facilities,the cancellation of certain contracts, and other non-personnel related actions.  We paid approximately $750,000 of these costsin the three months ended September 30, 2002 and expect to pay the remainder in2002, 2003 and 2004.  The  balance of the restructuring reserves was$2.6 million as of September 30, 2002.

 

**In-process research and development.**For the nine months ended September 30, 2001, we incurred a one-time IPR&Dcharge of approximately $6.9 million associated with the acquisition ofSpeedchain. We valued IPR&D acquired in the Speedchain acquisitionconsummated on March 29, 2001 at approximately $6.9 million based on anindependent appraisal of the development project for which technologicalfeasibility has not been established and no alternative future uses exist. Theacquired IPR&D project is targeted at the supply chain event management ande-logistics market.

 

**Stock-based compensation.**We recorded deferred compensation of approximately $6.4 million in thelast six months of 1999 and approximately $13.1 million for the year endedDecember 31, 2000. These amounts represent the aggregate difference between theexercise price and the fair value for accounting purposes of the underlyingcommon stock at the date of grant. On March 29, 2001, we recorded $465,000 ofdeferred compensation in connection with the unvested stock options that wereassumed in connection with the Speedchain acquisition. These amounts areincluded as a component of stockholders’ equity and are being amortized on anaccelerated basis over the applicable vesting period. For the three monthsended September 30, 2001 and 2002, we amortized approximately $1.4 million and$585,000, respectively, of deferred compensation. We expect to amortizedeferred compensation of approximately $2.6 million, $941,000 and $45,000for the years ending December 31, 2002, 2003 and 2004. The amount of stockoption compensation expense to be recorded in future periods could decrease ifoptions are forfeited for which accrued but unvested compensation has beenrecorded.

 

**Other income(expenses), net.**Other income (expenses), netfluctuates based on the amount of cash balances available for investment,borrowings under our line of credit, interest and other expense related to ourequipment borrowings and realized gains and losses on investments. Other income(expenses), net decreased from approximately $594,000 for the three monthsended September 30, 2001 to approximately $192,000 for the three months endedSeptember 30, 2002. This decrease resulted from the decrease in interestincome. Interest income decreased due to lower interest rates and ourutilization of certain of our cash resources to fund our operations and toacquire companies.

 

**Income taxes.**Noprovision for income taxes has been recorded for either the three months endedSeptember 30, 2001 or 2002 due to accumulated net operating losses. We haverecorded tax expense from franchise or other similar business taxes. We haverecorded a valuation allowance for the full amount of our net deferred taxassets as a result of the uncertainty surrounding the realization of thesefuture tax benefits.

 

As ofDecember 31, 2001, we had net operating loss carry-forwards for federaltax purposes of approximately $70.5 million. These federal tax losscarry-forwards are available to reduce future taxable income and begin toexpire in 2011. Under the provisions of the Internal Revenue Code, certainsubstantial changes in our ownership have occurred, and as a result, our futureutilization of these net operating carry-forwards that we accumulated prior tothe change in ownership will be subject to an annual limitation. We have alsogenerated foreign net operating losses of approximately $5.0 million that areavailable for carry-forward. We may generate additional net operating losscarry-forwards in the future.

 

**Comparisonof the Nine Months Ended September 30, 2001 to the Nine Months Ended September30, 2002**

 

*Revenues*

 

**Total revenues.**Total revenues increased 25% from approximately $45.4 million for the ninemonths ended September 30, 2001 to approximately $56.7 million for thenine months ended September 30, 2002.

 

**Managed servicesrevenues.** Managed services revenues increased 56% fromapproximately $21.2 million for the nine months ended September 30, 2001to approximately $32.9 million for the nine months ended September 30,2002. We attribute this increase to the continued growth in our automotive andhigh-tech managed services client base. In February 2002, our agreement withFord U.S. was amended to provide for quarterly minimums so that transactionsprocessed in excess of the minimum will be billable quarterly rather than atthe end of the year, and accordingly we derived approximately $2.5 million inrevenue under our Ford U.S. global managed services agreement related totransactions in excess of the quarterly 

 

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minimum for the nine monthsended September 30, 2002. Revenues derived from our managed services agreementsaccounted for 47% of our total revenues for the nine months ended September 30,2001 and 58% of our total revenues for the nine months ended September 30,2002. In July 2002, we further amended our agreement with Ford U.S. to providethat we will now bill Ford U.S. at a fixed annual rate of $11.8 million for theremaining life of the agreement. By amending the agreement in this manner, wewill no longer bill Ford U.S. for transactions processed in excess of specifiedminimum quarterly levels. In connection with this amendment, Ford U.S. andVastera agreed that Vastera would bill Ford U.S. $4.9 million for the remainderof 2002. We expect managed services revenues to account for approximately  60% of our total revenues for the nearfuture.

 

**Software revenues.**Software revenues decreased 8% from approximately $10.4 million for thenine months ended September 30, 2001 to approximately $9.6 million for the ninemonths ended September 30, 2002. We attribute this decrease to approximately$2.25 million in nonrecurring revenue derived from Vectant’s 2001 annualminimum in connection with their distributor/reseller arrangement, the decreasein information technology spending and the conversion of our software clientsto managed services clients.  Revenuesderived from our software agreements accounted for 23% of our total revenuesfor the nine months ended September 30, 2001 and 17% of our total revenues forthe nine months ended September 30, 2002. We expect software revenues toaccount for approximately 15% of our total revenues for the near future.

 

**Services revenues.**Services revenues increased 2% from approximately $13.8 million for thenine months ended September 30, 2001 to approximately $14.1 million forthe nine months ended September 30, 2002. Services revenues accounted for 31%of our total revenues for the nine months ended September 30, 2001 and 25% forthe nine months ended September 30, 2002. We expect services revenues tocontinue to account for approximately 25% of our total revenues for the nearfuture.

 

*Cost of Revenues*

 

**Cost of managedservices revenues.** The cost of managed servicesrevenues increased 49% from approximately $11.7 million for the nine monthsended September 30, 2001 to approximately $17.3 million for the nine monthsended September 30, 2002. This increase was largely due to the growth of ourmanaged services operations to support our growing client base. The cost ofmanaged services revenues as a percentage of managed services revenues was 55%for the nine months ended September 30, 2001 and 53% for the nine months endedSeptember 30, 2002. This decrease as a percentage of managed services revenuesreflected our ability to leverage our managed services organization. We expectto realize productivity improvements from our investment in our supportinfrastructure and the leveraging of personnel in the performance of ourmanaged services agreements. As we enter into large multi-year managed servicesagreements in new industry verticals or new geographic regions that may requiresignificant investments in the related infrastructure, the costs associatedwith these managed services agreements may be greater in the initial year thanin the later years when we realize productivity improvements from theseinfrastructure investments. Accordingly, we expect that our cost of managedservices revenues may fluctuate on a quarterly basis as a percentage of managedservices revenues.

 

**Cost of softwarerevenues.** The cost of software revenues increased 5%from approximately $1.8 million for the nine months ended September 30, 2001 toapproximately $1.9 million for the nine months ended September 30, 2002. Thisincrease was largely due to our investment in our client supportinfrastructure. The cost of software revenues as a percentage of softwarerevenues was 17% for the nine months ended September 30, 2001 as compared to19% for the nine months ended September 30, 2002. This increase as a percentageof software revenues reflected additional investment in our client supportinfrastructure. We expect the cost of software revenues as a percentage ofsoftware revenues to be approximately 20% to 25% on an annual basis, but thispercentage could fluctuate in any given quarter.

 

**Cost of servicesrevenues.** The cost of services revenues remainedrelatively constant at $10.4 million for the nine months ended September 30,2002 and 2001. The cost of services revenues as a percentage of servicesrevenues was 75% for the nine months ended September 30, 2001 and 74% for ninemonths ended September 30, 2002. We expect the cost of services revenues as apercentage of services revenues to be approximately 73% to 78% on an annualbasis, but this percentage could fluctuate outside this range in any givenquarter.

 

*Operating Expenses*

 

**Sales and marketing.**Sales and marketing decreased 33% from approximately $13.8 million for thenine months ended September 30, 2001 to approximately $9.3 million for thenine months ended September 30, 2002. This decrease was primarily due to areduction in annual bonuses expected to be paid to employees and compensationpaid to our employees. Sales and marketing expenses represented 30% of ourtotal revenues for the nine months ended September 30, 2001 and 16% 

 

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for the nine months endedSeptember 30, 2002. We anticipate that sales and marketing expenses willcontinue to decrease as a percentage of total revenues in future years.

 

**Research anddevelopment.** Research and development expensedecreased 4% from approximately $11.0 million for the nine months endedSeptember 30, 2001 to approximately $10.5 million for the nine monthsended September 30, 2002. This decrease resulted from an increase in the numberof internal and contract software developers and quality assurance personnelneeded to support our product development and testing activities. Research anddevelopment expenses represented 24% of our total revenues for the nine monthsended September 30, 2001 and 19% for the nine months ended September 30, 2002.We believe that we must continue to invest in research and development in orderto develop new products and services. We anticipate that research anddevelopment expenses will continue to decrease as a percentage of totalrevenues in future years.

 

**General andadministrative.** General and administrative expenseincreased 12% from approximately $6.7 million for the nine months endedSeptember 30, 2001 to approximately $7.5 million for the nine months endedSeptember 30, 2002. This increase resulted from the additional of legal andadministrative personnel to support the growth of our business. General andadministrative expenses represented 15% of our total revenues for the ninemonths ended September 30, 2001 and 13% for the nine months ended September 30,2002. We believe our general and administrative expenses will decrease as apercentage of total revenues, but increase in absolute dollar amounts as weexpand our administrative staff, domestically and internationally, and incuradditional expenses associated with being a global company.

 

**Depreciation.**Depreciationexpense increased 43% from approximately $2.4 million for the nine months endedSeptember 30, 2001 to approximately $3.4 million for the nine months endedSeptember 30, 2002. This increase resulted from the depreciation of fixedassets purchased to build the infrastructure needed to support the growth ofour business. Depreciation expense represented 5% and 6% of our total revenuesfor the nine months ended September 30, 2001 and 2002, respectively.

 

**Amortization.**Amortizationexpense decreased 88% from approximately $16.5 million for the nine monthsended September 30, 2001 to approximately $1.9 million for the nine monthsended September 30, 2002. This decrease resulted from our adoption of thenonamortization approach under SFAS No. 142 for our goodwill. Amortizationexpense represented 36% of our total revenues for the nine months endedSeptember 30, 2001 and 3% for the nine months ended September 30, 2002. OnJanuary 1, 2002, in accordance with SFAS No. 141, we reclassified our assembledworkforce intangible assets to goodwill. As of January 1, 2002, we hadunamortized goodwill of approximately $62.2 million. In the aggregate,amortization for future periods is expected to be approximately $2.7 millionfor the years ending December 31, 2002 and 2003, $2.4 million for the yearending 2004, and approximately $2.0 million for the year ending December 31,2005.

 

**Restructuring.** Werecorded approximately $1.6 million and $2.0 million of restructuring costs,respectively, during the second and third quarter of 2002.  Costs associated with the termination ofapproximately 74 employees totaled $1.4 million.  Costs associated with the closing of redundant facilities, thecancellation of certain contracts, and other non-personnel related actionstotaled approximately $2.2 million.  Wepaid approximately $300,000 of restructuring costs in the second quarter of2002 and approximately $750,000 of these costs in the third quarter of2002.  We expect to pay the remainder in2002, 2003 and 2004.  The balance of therestructuring reserve was $2.6 million as of September 30, 2002.

 

**In-process research and development.**For the nine months ended December 31, 2001, we incurred a one-time IPR&Dcharge of approximately $6.9 million associated with the acquisition ofSpeedchain. We valued IPR&D acquired in the Speedchain acquisitionconsummated on March 29, 2001 at approximately $6.9 million based on anindependent appraisal of the development project for which technologicalfeasibility has not been established and no alternative future uses exist. Theacquired IPR&D project is targeted at the supply chain event management ande-logistics market.

 

**Stock-basedcompensation.**We recorded deferred compensation ofapproximately $6.4 million in the last nine months of 1999 andapproximately $13.1 million for the year ended December 31, 2000. Theseamounts represent the aggregate difference between the exercise price and thefair value for accounting purposes of the underlying common stock at the dateof grant. On March 29, 2001, we recorded $465,000 of deferred compensation inconnection with the unvested stock options that were assumed in connection withthe Speedchain acquisition. These amounts are included as a component ofstockholders’ equity and are being amortized on an accelerated basis over theapplicable vesting period. For the nine months ended September 30, 2001 and2002, we amortized approximately $4.7 million and $2.1 million, respectively,of deferred compensation. We expect to amortize deferred compensation ofapproximately $2.6 million, $941,000 and $45,000 for the years endingDecember 31, 2002, 2003 and 2004, respectively. The amount of stock optioncompensation expense to be recorded in future periods could decrease if optionsare forfeited for which accrued but unvested compensation has been recorded.

 

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**Other income(expenses), net.**Other income (expenses), net fluctuatesbased on the amount of cash balances available for investment, borrowings underour line of credit, interest and other expense related to our equipmentborrowings and realized gains and losses on investments. Other income(expenses), net decreased from approximately $2.5 million for the nine monthsended September 30, 2001 to approximately $725,000 for the nine months endedSeptember 30, 2002. This decrease resulted from the decrease in interestincome. Interest income decreased due to lower interest rates and ourutilization of our cash resources to fund our operations and to acquirecompanies.

 

**Income taxes.**Noprovision for income taxes has been recorded for either the nine months endedSeptember 30, 2001 or 2002 due to accumulated net operating losses. We haverecorded tax expense from franchise or other similar business taxes. We haverecorded a valuation allowance for the full amount of our net deferred taxassets as a result of the uncertainty surrounding the realization of thesefuture tax benefits.

 

**Liquidityand Capital Resources**

 

We had cashand cash equivalents and short-term investments of $59.4 million as ofSeptember 30, 2002, a decrease of $14.3 million from $73.8 million as ofDecember 31, 2001.

 

In July 2002,we refinanced $3.9 million of outstanding debt under our former credit facilitywith a new facility from Comerica Bank. The term loan matures in June 2004 andbears interest at the bank’s prime rate plus 50 basis points (5.25% as ofSeptember 30, 2002).  The balance underthe term loan was approximately $3.5 million as of September 30, 2002.  We also obtained a secured revolving line ofcredit and an equipment line of credit with Comerica Bank. We may borrow up to$10 million under the revolving line of credit, with a $2.5 million sub-limitfor the issuance of letters of credit. Advances under the revolving line ofcredit are limited to the lesser of $10 million or 80% of eligible accountsreceivable, as defined in the loan agreement. The revolving line of creditbears interest at the bank’s prime rate (4.75% as of September 30, 2002). Therevolving line of credit matures in July 2004. The balance under the revolvingline of credit was zero as of September 30, 2002.

 

We may borrowup to $5 million under the equipment line of credit. The equipment line ofcredit bears interest at the bank’s prime rate plus 50 basis points (5.25% asof September 30, 2002). The equipment line of credit has two interest-onlypayment periods and matures in July 2005. The balance under the equipment lineof credit was zero as of September 30, 2002.

 

The terms ofthe revolving line of credit and equipment line of credit require the Companyto comply with certain financial covenants including, but not limited to,restrictions and limitations on future indebtedness, sale of assets andmaterial changes in our business. The financial covenants include a minimummodified quick ratio, as defined in the loan agreement, of 2.0 to 1.0 and amaximum ratio of total liabilities to tangible net worth of 1.5 to 1.0. The mostrestrictive of the financial covenants is that our pro forma loss shall notexceed $1.5 million for the three months ended September 30, 2002 and pro formaincome must be at least $0 for the three months ended December 31, 2002 andthereafter, measured quarterly. As of and for the three months ended September30, 2002, we were in compliance with the covenants of our credit facility.Management expects to be in compliance with these covenants for at least thenext 12 months

 

Pro formaincome (loss) is defined in the loan agreement as net income, plus interestexpense, taxes, non-cash charges (including depreciation, amortization,stock-based compensation, research and development related charges and one-timerestructuring charges), and cash restructuring charges (not to exceed $5.0million in the aggregate), and less interest income, and one-time ornon-recurring revenue.

 

Amountsborrowed from one lending institution for capital leases are due over 36-monthto 48-month repayment periods and are collateralized by our intellectualproperty. As of December 31, 2001 and September 30, 2002, the outstandingbalance under this capital lease agreement was approximately $309,000 and$83,000, respectively.

 

Net cash usedin operating activities totaled approximately $16.0 million for the nine monthsended September 30, 2001 and $3.0 million for the nine months ended September30, 2002. Net cash flows from operating activities reflect net losses ofapproximately $38.1 million and $10.9 million for the nine months ended September30, 2001 and 2002, respectively, and are offset by the non-cash expensesrelating to depreciation and amortization, stock-based compensation, IPR&Dand provision for doubtful accounts. In addition, the net cash used inoperations increased due to an increase in accounts receivable and a decreasein accrued compensation.

 

Net cashprovided by investing activities was approximately $5.1 million and $18.1million for the nine months ended September 30, 2001 and 2002, respectively.Our investing activities reflect the acquisition of subsidiaries, additions ofproperty and equipment and purchases and sales of short-term investments. Weanticipate that our capital 

 

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expenditures will increase overthe next several years as we expand our facilities and acquire equipment tosupport expansion of our sales, marketing and research and developmentactivities. We may also utilize our cash to acquire other companies.

 

Net cashprovided by financing activities was approximately $1.9 million and $1.1million for the nine months ended September 30, 2001 and 2002, respectively.These financing cash flows primarily reflect the net proceeds from the exerciseof stock options and principal payments on our debt.

 

We intend tocontinue investing in the business, particularly in the areas of research anddevelopment, sales and marketing. Our future liquidity and capital requirementswill depend on numerous factors, including:

 

•                  The costs andtiming of expansion of sales and marketing activities;

 

•                  The costs andtiming of expansion of our operational capabilities;

 

•                  The costs andtiming of product development efforts and the success of these developmentefforts;

 

•                  The extent towhich our existing and new products and services gain market acceptance;

 

•                  The level andtiming of revenues;

 

•                  The costsinvolved in maintaining and enforcing intellectual property rights;

 

•                  The timing ofmarket developments; and

 

•                  Availableborrowings under line of credit and capital lease arrangements.

 

In addition,we may use cash resources to fund acquisitions of complementary businesses andtechnologies. We believe that our current cash resources will be sufficient tomeet our working capital and capital requirements for at least the next12 months. Thereafter, we may find it necessary to obtain additionalequity or debt financing. In the event that additional financing is required,we may not be able to raise it on terms acceptable to us, if at all.

 

We reimburseFord for certain expenses in connection with the acquisition of Ford’s globalcustoms operations. We  expect to payapproximately $459,000 in fees to Ford each month for the reimbursement ofexpenses incurred by Ford for the use of facilities, the costs of leasedemployees and the maintenance and expenses related to the acquired technology.We expect these payments to decrease as we leverage our existing facilities anddeploy our technology.

 

**RecentAccounting Pronouncements**

 

In June 2001,FASB issued SFAS No. 141 “Business Combinations” and SFAS No. 142 “Goodwill andOther Intangible Assets.” SFAS No. 141 requires business combinations initiatedafter June 30, 2001 to be accounted for using the purchase method ofaccounting, and broadens the criteria for recording intangible assets separatefrom goodwill. SFAS No. 142 requires the use of a nonamortization approach toaccount for purchased goodwill and certain intangibles. Under a nonamortizationapproach, goodwill and certain intangibles will not be amortized into resultsof operations, but instead will be reviewed for impairment and written down andcharged to results of operations only in the periods in which the recordedvalue of goodwill and certain intangibles is more than its fair value. OnJanuary 1, 2002, in accordance with SFAS No. 141, we reclassified our assembledworkforce intangible assets to goodwill. As of January 1, 2002, we hadunamortized goodwill of approximately $62.2 million. On January 1, 2002, weadopted the nonamortization approach under SFAS No. 142 for our goodwill.During the first quarter of 2002, the Company completed the initial impairmenttest of goodwill and indefinite lived intangible assets, which did not indicatean impairment loss. The Company estimates that the effect of the new rules willbe to decrease amortization expense related to goodwill by approximately$22.8 million for the year ending December 31, 2002.

 

The resultsfor the prior year (three and nine months ended September 30, 2001) havenot been restated. Reconciliations of previously reported net loss and net lossper share to the amounts adjusted for the exclusion of goodwill amortizationnet of the related tax effects are as follows:

 

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|                                              |   | **For the  Three Months  Ended September 30,** |   | **For the  Nine Months  Ended September 30,** |   |
|---------------------------------------------------|--------|------------------------------------------------|--------|-----------------------------------------------|--------|
|                                              |   | **2001**                                       |   | **2002**                                      |   | **2001** |   | **2002** |   |
| Reported net loss                                 |   | $                                              | (9,945 | )                                             | $      | (4,194 | ) | $ | (38,142 | ) | $ | (10,850 | ) |
| Goodwill amortization, net of tax                 |   | 5,588                                          |   | —                                        |   | 16,073 |   | — |   |
| Adjusted net loss                                 |   | $                                              | (4,357 | )                                             | $      | (4,194 | ) | $ | (22,069 | ) | $ | (10,850 | ) |
|                                              |   |                                           |   |                                          |   |   |   |   |   |
| Basic and diluted net loss per share as  reported |   | $                                              | (0.26  | )                                             | $      | (0.10 | ) | $ | (1.02 | ) | $ | (0.27 | ) |
| Goodwill amortization, net of tax                 |   | 0.15                                           |   | —                                        |   | 0.43 |   | — |   |
| Adjusted basic and diluted net loss per  share    |   | $                                              | (0.11  | )                                             | $      | (0.10 | ) | $ | (0.59 | ) | $ | (0.27 | ) |
|                                              |   |                                           |   |                                          |   |   |   |   |   |
| Weighted average common shares                    |   | 38,060                                         |   | 40,246                                        |   | 37,392 |   | 39,883 |   |
|                                                   |        |                                                |        |                                               |        |  |  |  |  |  |  |  |  |  |

 

In theaggregate, amortization for the year ended December 31, 2001 was approximately$21.7 million. In the aggregate, amortization for future periods is expected tobe approximately $2.7 million for the years ending December 31, 2002 and 2003and approximately $2.4 million for the year ending December 31, 2004.

 

In June 2001,the FASB issued SFAS No. 143, “Accounting for Asset RetirementObligations.”  It requires an entity torecognize the fair value of a liability for an asset retirement obligation inthe period in which it is incurred if a reasonable estimate of fair value canbe made. If a reasonable estimate of fair value cannot be made in the periodduring which the asset retirement obligation is incurred, the liability shallbe recognized when a reasonable estimate of fair value can be made. This newstandard is effective in the first quarter of 2003. We do not believe that SFASNo. 143 will have a material effect on our financial condition or results ofoperations.

 

In August2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets,” which supersedes SFAS No. 121, and “Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to Be DisposedOf.”  SFAS No. 144 is effective in thefirst quarter of 2002. We do not believe that SFAS No. 144 will have a materialeffect on our financial condition or results of operations.

 

In April 2002,the FASB issued SFAS No. 145 “Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections.”  This Statement rescinds FASB Statement No.4, “Reporting Gains and Losses from Extinguishment of Debt”, and an amendmentof that Statement, FASB Statement No. 64, “Extinguishments of Debt Made toSatisfy Sinking-Fund Requirements”. This Statement also rescinds FASB StatementNo. 44, “Accounting for Intangible Assets of Motor Carriers.”  This Statement amends FASB Statement No. 13,“Accounting for Leases”, to eliminate an inconsistency between the requiredaccounting for sale-leaseback transactions and the required accounting forcertain lease modifications that have economic effects that are similar tosale-leaseback transactions. This Statement also amends other existingauthoritative pronouncements to make various technical corrections, clarifymeanings, or describe their applicability under changed conditions. Theprovisions of this Statement related to the rescission of Statement No. 4 shallbe applied in fiscal years beginning after May 15, 2002. The provisions of thisStatement related to Statement No. 13 shall be effective for transactionsoccurring after May 15, 2002. All other provisions of this Statement shall beeffective for financial statements issued on or after May 15, 2002. We do notbelieve that SFAS No. 145 will have a material effect on our financialcondition or results of operations.

 

In August2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exitor Disposal Activities.”  It addressesfinancial accounting and reporting for costs associated with exit or disposalactivities and nullifies Emerging Issues Task Force (EITF) Issue No.94-3,”Liability Recognition for Certain Employee Termination Benefits and OtherCosts to Exit an Activity (including Certain Costs Incurred in aRestructuring).” SFAS No. 146 requires that a liability for a cost associatedwith an exit or disposal activity be recognized when the liability is incurredand establishes that fair value is the objective for initial measurement of theliability. Under EITF Issue No. 94-3, a liability for an exit cost wasrecognized at the date of an entity’s commitment to an exit plan. The newstandard is effective for exit or disposal activities that are initiated afterDecember 31, 2002, with early application encouraged. We do not believe thatSFAS No. 146 will have a material effect on our financial condition or resultsof operations.

 

EffectiveJanuary 1, 2002, FASB’s Topic D-103 requires that reimbursed travel expenses berecognized as revenue. Accordingly, all prior periods have been reclassified toconform to the current period’s presentation.

 

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**RisksRelating to Our Business**

 

*Before deciding to invest in us or tomaintain or increase your investment, you should carefully consider the risksdescribed below, in addition to the other information contained in this reportand in our other filings with the SEC, including our subsequent reports onForms 10-K, 10-Q and 8-K. The risks and uncertainties described below are notthe only ones facing us. Additional risks and uncertainties not presently knownto us or that we currently deem immaterial may also affect our businessoperations. If any of these risks actually occur, our business, financialcondition or results of operations could be seriously harmed. The market pricefor our common stock could decline and you may lose all or part of yourinvestment.*

 

**Wehave a history of losses and expect to incur losses in the future.**

 

We incurrednet losses of approximately $8.3 million in 1998, $10.5 million in1999, $35.8 million in 2000 and $45.8 million in 2001. For the nine monthsended September 30, 2002, we incurred a net loss of approximately $10.9million. Our accumulated deficit as of September 30, 2002 was approximately$182.0 million. We expect to continue to incur net losses in theforeseeable future. We believe that the success of our business depends on ourability to significantly increase revenue and to limit our operating expenses.If our revenues fail to grow at anticipated rates or our operating expensesincrease without a corresponding increase in our revenues, or we fail to adjustoperating expense levels appropriately, we may not be able to achieve andmaintain profitability, which would increase the possibility that the value ofyour investment will decline.

 

**Ourinability to provide managed services successfully to existing and futureclients would substantially reduce our revenues, increase our costs, hurt ourreputation in our industry and adversely affect our business.**

 

As a criticalelement of our strategy, we intend to continue to provide managed services toour current and future clients. These services range from providing operationalmanagement for a single global trade process to managing a client’s worldwidetrade operation. Accordingly, in July 2000, we established a relationship withFord pursuant to which we administer, automate and manage Ford’s global customsoperations for a minimum of four years. In early 2001, we expanded the scope ofthe Global Trade Management services provided to Ford by assumingresponsibility for administering and managing Ford’s global trade operations inMexico and Canada. In August 2001, we entered into an agreement with LucentTechnologies to manage Lucent’s U.S.-based global trade operations. In March2002, we entered into an agreement with Nortel Networks to manage Nortel’sglobal trade operations. In June 2002, we entered into an agreement with Lucentto manage its European-based global trade operations.

 

We expectthat, over time, the revenues that we receive from providing managed servicesto these and future clients will continue to represent the largest portion ofour total revenues. Any inability to perform our agreements with Ford, Lucentand Nortel or to provide managed services successfully to our existing andfuture clients would significantly reduce our revenues, increase our costs,hurt our reputation in our industry and adversely affect our business andresults of operations.

 

**Wedepend on Ford for a significant portion of our revenues.**

 

Beginning inJuly 2000, we established a relationship with Ford, pursuant to which weacquired Ford’s global customs operations and provide Ford with our managed services.Through this relationship, Ford became a significant stockholder, holdingapproximately 19.8% of our outstanding common stock as of September 30, 2002,and has become our single largest client. For the nine months ended September30, 2001 and 2002, we derived approximately 34% and 32%, respectively, of ourtotal revenues from Ford. We expect that we will continue to derive asignificant portion of our total revenues from Ford in the near future. Becauseour services agreement with Ford has a ten-year term that may be terminated byeither party for any reason after August 2004, we cannot assure you that wewill be able to maintain our current agreement with Ford, or renew the servicesagreement with Ford after the initial term of the agreement. The terminationof, or failure to renew, the Ford agreements would adversely affect our resultsof operations and financial condition. In addition, if we are unable to expandinto the additional geographic regions envisioned under the Ford agreements, orotherwise assume responsibility for Ford’s customs operations in thesegeographic regions, such events would adversely affect our results ofoperations and financial condition. Because the Ford contract is our largestcontract to date, we cannot assure you that we have adequate resources to meetour obligations at Ford. Any events adversely affecting our relationship withFord may also result in our inability to achieve the full marketing benefitassociated with having Ford as a principal client, which would reduce ourrevenues, increase our costs and harm our reputation in our industry.

 

**Anyrestriction on our ability to access cost-effectively and legally a foreigncountry’s rules and regulations that are incorporated into our global tradecontent, Global Content, or any failure to update our Global Content timely to**

 

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**includechanges in such rules and regulations, may compromise the effectiveness of oursolutions and adversely impact our revenues.**

 

The success ofour Global Trade Management solutions for our clients depends on our ability toobtain or access the complex rules and regulations published by foreigngovernments governing a particular country’s import and export of goods. Thefoundation of our solutions, Global Content, is subject to rapid change at theinitiative of foreign governments, based on factors beyond our control. Anychanges in a country’s rules and regulations relating to global trade that weare unable to include in our Global Content library may result in dissatisfiedclients and possible litigation. In addition, to the extent a foreigngovernment restricts our access to its rules and regulations, charges a fee forsuch access or grants proprietary rights to such information to one or more ofour competitors, our solutions may not be useful to, or cost efficient for, ourcurrent and future clients and our revenues could decrease.

 

**Fluctuationsin our operating results and the composition of our revenues, particularlycompared to the expectations of market analysts and investors, may cause theprice of common stock to decline.**

 

Our operatingresults have varied in the past and could fluctuate significantly in thefuture. We expect that our operating results will continue to vary in the future,based on a number of factors, including:

 

•                  The loss of asignificant customer;

 

•                  Therenegotiation of contract terms with one or more significant customers;

 

•                  Fluctuations inthe demand for our products and services;

 

•                  Our ability toachieve targeted cost and expense reductions;

 

•                  Our ability, andthe associated timing, to transition from the Ford technology platform;

 

•                  Price andsolution competition in our industry;

 

•                  Changes inimport/export laws;

 

•                  Changes ingeneral economic conditions that would adversely affect technology companies inour industry;

 

•                  The timing oforders and our ability to satisfy all contractual obligations in customercontracts;

 

•                  Variability inthe mix of our managed services, software and our consulting revenues; and

 

•                  Timing of newsolution introductions and enhancements to our TradeSphere and TradePrism.comsolutions.

 

Due to theforegoing factors, our annual or quarterly results of operations may not meetthe expectations of securities analysts and investors, which could cause theprice of our common stock to decline.

 

**Ourability to achieve or maintain profitability will be constrained if we do notmanage our rapid growth effectively.**

 

We havesignificantly increased our employee base to meet increasing demand for ourclient solutions. The number of our employees has increased by 114 employees from 464 as ofDecember 31, 2001 to 578 as of September 30, 2002. As we expand ouroperations, we expect to continue to increase the size of our employee base.Our management and operations have been strained by this growth and willcontinue to be strained by our anticipated growth. To compete effectively andto manage future growth, we must continue to improve our financial andmanagement controls, reporting systems and procedures on a timely basis. Wemust also expand, train and manage our employee base. If we are not successfulin managing our growth, our ability to achieve and maintain profitability maybe harmed.

 

**Wemay be unable to attract and retain key personnel, which would adversely affectour ability to develop and effectively manage our business.**

 

Our futureperformance will depend largely on the efforts and abilities of our seniorexecutives, key technical, professional services, sales and marketing andmanagerial personnel. This dependence is particular to our business because 

 

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personal relationships are acritical element of obtaining and maintaining clients. Our success will dependon our ability to attract and retain these key employees in the future. Theemployment of our key personnel, including our executives, is at will. Themarket for such individuals is extremely competitive, and we may not findqualified replacements for personnel who leave us. The loss of, or theinability to attract, any one or more of our key personnel may harm our abilityto develop and effectively manage our business.

 

**Ifwe are unable to obtain additional capital as needed or obtain additionalcapital on unfavorable terms in the future, our operations and growth strategymay be adversely affected and the market price for our common stock coulddecline.**

 

Historically,we have financed our operations primarily through the sale of our equitysecurities. As of September 30, 2002, we had cash and cash equivalents ofapproximately $27.1 million plus short-term investments of approximately $32.4million and an accumulated deficit of approximately $182.0 million. While webelieve that our current cash resources will be sufficient to meet our workingcapital needs and finance capital expenditures for at least 12 months, we mayneed to raise additional debt or equity capital to fund the expansion of ouroperations, to enhance our products and services, or to acquire or invest incomplementary products, services, businesses or technologies. If we raiseadditional funds through further issuances of convertible debt or equitysecurities, our existing stockholders could suffer significant dilution, andany new equity securities we issue could have rights, preferences andprivileges superior to those of holders of our common stock. Any debt financingsecured by us in the future could involve restrictive covenants relating to ourcapital raising activities and other financial and operational matters, whichmay make it more difficult for us to obtain additional capital and to pursuebusiness opportunities, including potential acquisitions. In addition, we maynot be able to obtain additional financing on terms favorable to us, if at all.If adequate funds are not available on terms favorable to us, our operationsand growth strategy may be adversely affected and the market price for ourcommon stock could decline.

 

**Ourinternational operations and planned expansion expose us to business risks thatcould limit the effectiveness of our growth strategy and cause our operatingresults to suffer.**

 

We intend toexpand our international operations substantially and enter new internationalmarkets, including providing our services to divisions and subsidiaries of Fordoperating in foreign countries. This expansion will require significantmanagement attention and financial resources to translate successfully oursoftware products into various languages, to develop compliance expertiserelating to international regulatory agencies and to develop direct andindirect international sales and support channels. We face a number of risksassociated with conducting our business internationally that could negativelyimpact our operating results, including:

 

•                  Languagebarriers, conflicting international business practices and other difficultiesrelated to the management and administration of a global business;

 

•                  Longer salescycles associated with educating foreign clients about the benefits of ourproducts and services;

 

•                  Currencyfluctuations and exchange rates;

 

•                  Longercollection time from foreign clients;

 

•                  Multiple andpossibly overlapping tax structures and the burdens of complying with a widevariety of foreign laws;

 

•                  The need toconsider characteristics unique to technology systems used internationally; and

 

•                  Economic orpolitical instability in some international markets.

 

We may notsucceed in our efforts or we may experience delays in the execution of our planto enter new international markets, establish, maintain or increaseinternational demand for our solutions or expand our international operations,which may harm our growth strategy and could cause our operating results tosuffer.

 

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**Ourlengthy and variable sales cycle makes it difficult for us to predict when orif sales will occur and, therefore, we may experience an unplanned shortfall inrevenues.**

 

Our productshave a lengthy and unpredictable sales cycle that contributes to theuncertainty of our operating results. Clients typically view the purchase ofour solutions as a significant and strategic decision. As a result, clients andpotential clients generally evaluate our solutions and determine their impacton existing infrastructure over a lengthy period of time. Our sales cycle hasaveraged approximately six to nine months for software sales and nine to 12months for managed services agreements, depending on a particular client’simplementation requirements and whether the client is new or is extending anexisting implementation. The license of our software products may be subject todelays if the client has lengthy internal budgeting, approval and evaluationprocesses. We may incur significant selling and marketing expenses during aclient’s evaluation period, including the costs of developing a full proposaland completing a rapid proof of concept or custom demonstration, before theclient engages us. Larger clients may purchase our solutions as a part ofmultiple simultaneous purchasing decisions, which may result in additionalunplanned administrative processing and other delays. In addition, anyprolonged decline in the demand for technology products and services couldreduce the market for our solutions, making sales more difficult. If revenues forecastedfrom a specific client for a particular quarter are not realized or are delayedto another quarter, we may experience an unplanned shortfall in revenues, whichcould adversely affect our operating results.

 

**Anyloss of our licensed third-party technology may result in increased costs of,or delays in, providing our solutions, which would harm our operating results.**

 

We licensetechnology from several companies on a non-exclusive basis that is integratedinto our TradeSphere product suite, including development tools and facilitiesfrom IBM (WebSphere and MQ Series) and Forte, which was acquired by SunMicrosystems. We anticipate that we will continue to license technology fromthese and other third parties in the future. This software may not continue tobe available on commercially reasonable terms, or at all. Our license with SunMicrosystems expires on December 23, 2002, and our license with IBM expires onJune 30, 2006. These licenses would be difficult, expensive andtime-consuming to replace. The loss of any of these technology licenses couldresult in delays in the licensing of our TradeSphere products until equivalenttechnology, if any, is identified, licensed and integrated, and would adverselyaffect our operating results.

 

**Thedynamic and complex nature of Global Content increases the likelihood that wemay face costly product liability claims.**

 

The foundationof our software solutions and managed services, Global Content, is arules-based application that provides comprehensive management of governmenttrade regulations and programs acquired, interpreted, and updated by Vastera’sin-country trade experts. Because of the dynamic and complex nature of GlobalContent, we may face product liability claims in connection with our currentproducts and future products. Any provisions in our agreements with our clientsdesigned to limit our exposure to potential product liability claims and anyproduct liability insurance may not be adequate to protect us from such claimsunder our agreements. A successful product liability claim brought against uscould harm our financial condition. Even if unsuccessful, any product liabilityclaim could result in costly litigation and divert management’s attention andresources. In addition, the effective implementation of our products may dependupon the successful operation of third-party licensed products in conjunctionwith our products and, therefore, any undetected errors in these licensedproducts may prevent the implementation or impair the functionality of ourproducts, delay new product introductions and harm our reputation.

 

**Theuncertainty of future government regulation of the Internet and global trademay add to our operating costs.**

 

We may faceunanticipated operating costs because of the current uncertainty surroundingpotential government regulation of the Internet and e-commerce. The Internethas rapidly emerged as a commerce medium, and governmental agencies have notyet been able to adapt all existing regulations to the Internet environment.Laws and regulations may be introduced and court decisions reached that affectthe Internet or other online services, covering issues such as user pricing,user privacy, freedom of expression, access charges, content and quality ofproducts and services, advertising, intellectual property rights andinformation security. The regulation of the Internet in the U.S. and in othercountries could decrease the demand for our products and increase the cost ofour solutions, which could have a material adverse effect on our business,financial condition and results of operations. As a company that deliverssolutions through the Internet, it is unclear in which jurisdictions we areactually conducting business. Our failure to qualify to do business in ajurisdiction that requires us to do so could subject us to fines or penaltiesand could result in our inability to enforce contracts in that jurisdiction.Even if we were able to ascertain correctly in which jurisdictions we conductbusiness, many of these jurisdictions have yet to determine the application oftheir existing laws to web-based global trade or develop laws that apply tosuch trade. Complying with new regulation would increase our operating costs.

 

29

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**Wemay be unable to expand the import and export trade management servicesprovided to Ford into other geographic regions and other product lines in themanner anticipated.**

 

Under ouragreement, we provide Ford with import and export trade management servicesusing a phased-in geographical approach, which started with the United States,and presently includes Mexico and Canada. Under the terms of the Fordagreements, we were to have assumed responsibilities for Ford’s Europeancustoms operations in late 2001. The transfer of Ford’s European customsoperations to us has been delayed beyond the originally anticipated 2001commencement date and may continue to be delayed into the foreseeable future.If the transfer of Ford’s European customs operations to us continues to bedelayed or if Ford is unable to incorporate our services into many of itsoperations in other geographic regions and product lines, our future revenuegrowth and profitability would be adversely impacted. Additionally, in the pastFord may not have complied fully with all of the regulatory requirementsestablished by foreign governments, which may impede our ability to establishand leverage our operations under the Ford agreements in other geographicregions, which in turn would reduce our future revenue growth. Any failure toreceive the requisite government approvals in connection with providing Fordmanaged services would adversely impact our operating results.

 

**Themarket for our Global Trade Management managed services offering is a nascentone, and if companies fail to adopt our managed services offerings, it willadversely affect our business.**

 

For mostcompanies, Global Trade Management is a critical but non-core function of theirbusiness.  Because the market forthird-party Global Trade Management is a nascent one, many companies may bereluctant or unwilling to utilize a third-party service provider to managetheir global trade, and will retain these functions in-house.  If companies fail to adopt managed serviceofferings, our business will be adversely affected.

 

**Wemay be unable to protect our proprietary rights adequately, which could resultin their unauthorized use by our competitors and have an adverse impact on ourrevenues.**

 

Our successdepends on our ability to protect our proprietary rights. We rely primarily on:

 

•                  Confidentialityagreements with employees and third parties;

 

•                  Protectivecontractual provisions such as those contained in license agreements withconsultants, vendors and clients, although we have not signed such agreementsin every case; and

 

•                  Copyright, tradesecret and trademark laws.

 

Despite ourefforts to protect our proprietary rights, unauthorized parties may copyaspects of our products and obtain and use information we regard asproprietary. Other parties may breach confidentiality agreements and otherprotective contracts. We may not become aware of these breaches or haveadequate remedies available. We may need to litigate claims against thirdparties who infringe our intellectual property rights, which could be costly,time-consuming and would divert management’s attention and resources.

 

We have notsecured registration of all our marks in the United States and have pursuedonly limited registration of our intellectual property in foreign countries.The laws of some foreign countries do not protect our proprietary rights to thesame extent, as the laws of the United States. Effective copyright, trademarkand trade secret protection may not be available in other jurisdictions. If wecannot adequately protect our proprietary rights, our competitors could benefitfrom the unauthorized use of such rights, adversely impacting our revenues andour business. Even if we are able to protect our proprietary rights, we couldincur significant costs to defend our rights.

 

**Ourpatent protection strategy is in development currently and any inadequacy inthe protection of our technology could increase our operating costs.**

 

We may alsorely on patents to protect our proprietary rights in the future. Any patentstrategy we attempt to implement may not be successful and could harm ourbusiness by disclosing unpatentable trade secrets. The laws that apply to thetypes of patents we may seek are evolving and are subject to change. Wepresently have filed provisional patent applications in the United States.These applications may not result in patents or may take longer than we expectto result in patents. We may also decide to not file patent applications in allthe countries in which we operate or intend to operate. Our decision to do somay inhibit our ability to protect our proprietary rights in those countries.Even if we are issued patents, we cannot assure you that they will provide usany meaningful protection or competitive advantage. If we try to enforce ourpatents, third parties may challenge our patents in court or before the UnitedStates Patent and Trademark Office. An 

 

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unfavorable outcome in any suchproceeding could require us to cease using the technology or to license rightsfrom prevailing third parties. We cannot assure you that any prevailing partywould offer us a license or that we could execute a license on terms that arecommercially acceptable to us, if at all. Developing and enforcing our patentprotection strategy may increase our operating costs.

 

**Wemay have to defend against intellectual property infringement claims, whichcould be expensive, and if we are not successful, could result in substantialmonetary liability and disrupt our business.**

 

We cannot becertain that our solutions do not or will not infringe valid patents,copyrights, trademarks or other intellectual property rights held by thirdparties, both inside and outside the U.S.. As a result, we may be subject tolegal proceedings and claims from time to time relating to the intellectualproperty of others in the ordinary course of our business.

 

We may incursubstantial expenses in defending against any third-party infringement claims,regardless of their merit. Successful infringement claims against us may resultin substantial monetary liability, may divert management’s attention from ourcore business and may disrupt our business. In addition, if we are notsuccessful in defending such claims, we may need to obtain a license to thetechnology, which may not be available on acceptable terms or at all.

 

**Anyfuture acquisitions may be difficult to integrate and disruptive to ouroperations. We may not realize the expected benefits from any suchacquisitions, and if we cannot address the challenges presented byacquisitions, our operating results may be harmed.**

 

In the past wehave acquired businesses to expand our operations or market presence and weintend to continue our expansion by acquiring or investing in companies, assetsor technologies that complement our business and offer opportunities forgrowth. These transactions involve many risks and challenges that we might notsuccessfully overcome, including:

 

•                  Difficulties inassimilating technologies, products, personnel and operations;

 

•                  Disruption ofour ongoing business and diversion of management’s attention from otherbusiness concerns;

 

•                  Risks ofentering markets in which we have no or limited prior experience;

 

•                  Issuances ofequity securities that may dilute your ownership interest in our common stock;

 

•                  Cash paymentsto, or the assumption of debt or other liabilities of, the companies weacquire; and

 

•                  Large write-offsrelated to goodwill and other intangible assets and other adverse auditconsequences.

 

Our inabilityto address these risks could negatively impact our operating results. Inaddition, in connection with our acquisition of Ford’s global customsoperations, we acquired, or are receiving full-time services from, a number ofFord employees. Any failure to successfully integrate these employees into ouroperations will increase our operating expenses and may adversely impact ourrevenues. Moreover, any future acquisitions or investments, even ifsuccessfully completed, may not generate any additional revenue or provide anybenefit to our business.

 

**Yourability to influence corporate matters may be limited because our officers,directors and affiliates will be able to control, and Ford will be able toinfluence, matters requiring stockholder approval and these parties may haveinterests that differ from yours.**

 

As of November8, 2002, our officers, directors and affiliated entities, including Ford,together beneficially owned approximately 42% of the outstanding shares of our common stock. Thisconcentration of ownership may delay, deter or prevent acts that would resultin a change of control, which in turn could reduce the market price of ourcommon stock. Accordingly, these stockholders collectively may be able tocontrol all matters requiring stockholder approval and, thereby, our managementand affairs. In addition, Ford beneficially owns approximately 19.8% of theoutstanding shares of our common stock. As the single largest stockholder ofVastera, Ford may exercise significant influence over corporate acts requiringstockholder approval, including a merger or sale of Vastera for so long as Fordholds at least 5% of our common stock, it has the right to appoint a non-votingobserver to our board of directors. Our officers, directors and affiliatedentities, including Ford, may have interests that differ from your interestsand their decisions may negatively impact our future success.

 

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**Becauseof provisions in our corporate charter and bylaws, Delaware law and Ford’ssignificant ownership position, other companies may have difficulty acquiringus, even if doing so would benefit our stockholders.**

 

Provisions inour certificate of incorporation, in our bylaws and under Delaware law couldmake it more difficult for other companies to acquire us, even if doing sowould benefit our stockholders. Our certificate of incorporation and bylawscontain the following provisions, among others, which may inhibit anacquisition of our company by a third party:

 

•                  a staggeredboard of directors, where stockholders elect only a minority of the board eachyear;

 

•                  advancenotification procedures for matters to be brought before stockholder meetings;

 

•                  a limitation onwho may call stockholder meetings; and

 

•                  a prohibition onstockholder action by written consent.

 

We are subjectto provisions of Delaware law that prohibit us from engaging in any businesscombination with any “interested stockholder,” meaning generally a stockholderwho beneficially owns more than 15% of our stock, for a period of three yearsfrom the date this person became an interested stockholder, unless variousconditions are met, such as approval of the transaction by our board. Thiscould have the effect of delaying or preventing a change in control.Additionally, in connection with establishing our strategic relationship withFord, Ford acquired approximately 8,000,000 shares of our common stock. Becauseof Ford’s significant holdings, other companies may be deterred from acquiringus, even if being acquired would be in the best interest of our otherstockholders.

 

**Therecent terrorist acts have negatively impacted the U.S. economy and may make itmore difficult to implement our growth strategy and to forecast future resultsof operations.**

 

The terroristacts of September 11, 2001 have negatively impacted an already deceleratingU.S. economy and caused U.S. businesses to stop spending on new products andservices and to reduce costs. Accordingly, it may be more difficult to marketour solutions to new clients and derive additional revenues from our existingclients. The unpredictability of future military action and other responsesassociated with a global war on terrorism has resulted in economic uncertaintythat will negatively impact consumer as well as business confidence in the nearterm. This economic uncertainty may make it more difficult to implement ourgrowth strategy and negatively impact our revenues in the future. We also mayhave more difficulty forecasting our future results of operations.

 

## **Item 3**:            Qualitative and QuantitativeDisclosures About Market Risk

 

We developproducts in the United States and market our products in North America, and toa lesser extent, Europe, Canada, Mexico, Latin America and the Asia-Pacificregion. Our financial results could be affected by factors such as changes inforeign currency exchange rates or weak economic conditions in foreign markets.With a majority of our sales being generated in U.S. dollars, a strengtheningof the dollar could make our products less competitive in foreign markets. Wedo not expect any material adverse effect on our consolidated financialcondition, results of operations or cash flows due to movements in any specificforeign currency.

 

We currentlydo not use financial instruments to hedge operating expenses of our European,Mexican, Brazilian or Canadian subsidiaries. We intend to assess the need toutilize financial instruments to hedge currency exposures on an ongoing basis.We have existing obligations relating to amounts outstanding under our equipmentline of credit and amounts borrowed under capital lease arrangements. Thesefinancial instruments expose us to interest rate risk as our lendinginstitution changes its prime rate. As disclosed in Note 5 of our condensedconsolidated financial statements, which are included as part of this Report,we have approximately $3.5 million in variable rate debt as of September 30,2002. The significant terms of our debt facilities are fully disclosed in Note5 of the condensed consolidated financials statements. Our interest income issensitive to changes in the general level of U.S. interest rates, particularlysince the majority of our investments are in short-term instruments. Due to theshort-term nature of our investments, we believe that there is no material riskexposure. We do not hold or issue derivative securities, derivative commodityinstruments or other financial instruments for trading purposes. Therefore, noquantitative tabular disclosures are required.

 

We have asubstantial amount of intangible assets. Although we believe our intangibleassets will be recoverable, changes in the economy, the business in which weoperate and our own relative performance could change the assumptions 

 

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used to evaluate intangibleasset recoverability. We continue to monitor these assumptions and their effecton the estimated recoverability of our intangible assets.

 

## **Item 4**:            Controlsand Procedures

 

Under thesupervision of, and with the participation of, the Company’s management,including the Company’s Chief Executive Officer and Chief Financial Officer,the Company has evaluated the effectiveness of the design and operation of itsdisclosure controls and procedures within 90 days of the filing date of thisquarterly report.  Based on theirevaluation, the Chief Executive Officer and Chief Financial Officer haveconcluded that these disclosure controls and procedures are effective.  There were no significant changes in ourinternal controls or in other factors that could significantly affect thesecontrols subsequent to the date of their evaluation.

 

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**PartII – Other Information**

 

## **Item 1:           **Legal Proceedings

 

We areperiodically a party to disputes arising from normal business activities. Inthe opinion of management, resolution of these matters will not have a materialadverse effect upon our financial condition or our future operating results.

 

On March 14,2001, Expeditors International of Washington, Inc. and Expeditors Tradewin,L.L.C. (collectively “Expeditors”) filed suit against us in the United StatesDistrict Court for the Eastern District of Michigan, Southern Divisionprimarily alleging that we misappropriated certain of Expeditors’ trade secretsin connection with our acquisition of Ford’s customs operations, by utilizingsystems and business processes that Expeditors assisted in developing for Fordand through our employee hiring practices. We believe that the allegationscontained in the complaint are without merit and that there will be no materialadverse impact to our operations from this litigation. In connection with ouracquisition of Ford’s customs operations, Ford agreed to indemnify us forintellectual property infringement claims and Ford is currently indemnifying usin connection with this litigation.

 

On April 16,2002, the Court granted in part and denied in part our motion to dismiss thiscase. Specifically, the Court dismissed Expeditors’ claims of common lawmisappropriation of confidential information on the grounds that such claimswere preempted by the Michigan Uniform Trade Secrets Act (“MUTSA”). The Courtpreserved Expeditors remaining claims, as dismissal was deemed to be prematureas of the date of the Court’s ruling.

 

## **Item 2:            Changes in Securities and Use of Proceeds**

 

We receivednet offering proceeds from our initial public offering of approximately $86.1million. We have used approximately $26.7 million of the net proceeds from theinitial public offering for general corporate purposes, principally workingcapital for increased domestic and international sales and marketingexpenditures, product development expenditures, expenditures related to theexpansion of our consulting services organization and capital expenditures madein the ordinary course of business and certain business acquisitions. Theremaining portions of the net proceeds have been invested in cash, cashequivalents and short-term investments. We may also use a portion of theremaining net proceeds to expand internationally and to acquire or invest inadditional businesses, products and technologies that we believe willcomplement our current or future business.

 

We issued463,598 shares of common stock in the quarter ended March 31, 2002 inconnection with our acquisitions of Prisma, Imanet and Bergen. In issuing theseshares to the shareholders of Prisma, Imanet and Bergen, we relied on Section4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunderand Regulation S for exemptions from the registration requirements of theSecurities Act. All of the shareholders who received shares of our common stockwere accredited investors or off shore foreign nationals.

 

## **Item 3:           **DefaultsUpon Senior Securities

 

None.

 

## **Item 4:           **Submissionof Matters to a Vote of SecurityHolders

 

None.

 

## **Item 5:           **Other Information

 

None.

 

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## **Item 6:           **Exhibits andReports on Form 8-K

 
| The  following exhibits are included herein: |
|----------------------------------------------|
|                                         |   |
| (a)                                          | Exhibits. |
|                                         |
| 99.1                                         | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, by the Chief Executive Officer, dated November  14, 2002, 2002. |
|                                         |
| 99.2                                         | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, by the Chief Financial Officer, dated November  14, 2002. |
|                                         |
| (b)                                          | Reports on  Form 8-K. |
|                                              |  |  |

 

 

On September 24, 2002, we filed a Form 8-K announcing the appointmentof Maria Henry as Chief Financial Officer upon the departure of PhilipJ. Balsamo.

 

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**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized in Dulles, Virginia on November 14, 2002.

 
|   | VASTERA,  INC. |                            |   |
|--------|----------------|---------------------------------|--------|
|   |           |
|   | By:            | /s/ Maria  Henry                |   |
|   |           | Maria Henry,                    |   |
|   |           | Chief  Financial Officer        |   |
|   |           | (Principal  Financial Officer)  |   |
|   |           |                            |   |
|   | By:            | /s/ Kevin M.  Boyce             |   |
|   |           | Kevin M.  Boyce,                |   |
|   |           | Corporate  Controller           |   |
|   |           | (Principal  Accounting Officer) |   |
|        |                |                                 |        |  |  |

 

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**VASTERA, INC.**

 

**CERTIFICATIONS PURSUANT TOSECTION 302 OFTHE SARBANES-OXLEY ACT OF 2002**

 

**CERTIFICATION**

 

I, Mark J. Ferrer, certifythat:

 
| 1.                                     |   | I have  reviewed this quarterly report on Form 10-Q of Vastera, Inc.;                                                                                                                                                                                                                                                                                                                        |
|----------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                   |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| 2.                                     |   | Based on my  knowledge, this quarterly report does not contain any untrue statement of a  material fact or omit to state a material fact necessary to make the  statements made, in light of the circumstances under which such statements  were made, not misleading with respect to the period covered by this  quarterly report;                                                          |
|                                   |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.                                     |   | Based on my  knowledge, the financial statements, and other financial information included  in this quarterly report, fairly present in all material respects the  financial condition, results of operations and cash flows of the registrant  as of, and for, the periods presented in this quarterly report;                                                                              |
|                                   |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.                                     |   | The  registrant’s other certifying officers and I are responsible for establishing  and maintaining disclosure controls and procedures (as defined in Exchange  Act Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                                                                            |
|                                   |   |                                                                                                                                                                                                                                                                                                                                                                                         |
|                                   |   |                                                                                                                                                                                                                                                                                                                                                                                         | 1.   designed  such disclosure controls and procedures to ensure that material information  relating to the registrant, including its consolidated subsidiaries, is made  known to us by others within those entities, particularly during the period  in which this quarterly report is being prepared; |
|                                   |   |                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|                                   |   |                                                                                                                                                                                                                                                                                                                                                                                         | 2.   evaluated  the effectiveness of the registrant’s disclosure controls and procedures as  of a date within 90 days prior to the filing date of this quarterly report  (the “Evaluation Date”); and |
|                                   |   |                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|                                   |   |                                                                                                                                                                                                                                                                                                                                                                                         | 3.   presented  in this quarterly report our conclusions about the effectiveness of the  disclosure controls and procedures based on our evaluation as of the  Evaluation Date; |
|                                   |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| 5.                                     |   | The  registrant’s other certifying officers and I have disclosed, based on our  most recent evaluation, to the registrant’s auditors and the audit committee  of registrant’s board of directors (or persons performing the equivalent  function):                                                                                                                            |
|                                   |   |                                                                                                                                                                                                                                                                                                                                                                                         |
|                                   |   | 1.                                                                                                                                                                                                                                                                                                                                                                                           | all  significant deficiencies in the design or operation of internal controls that  could adversely affect the registrant’s ability to record, process, summarize  and report financial data and have identified for the registrant’s auditors  any material weaknesses in internal controls; and |
|                                   |   |                                                                                                                                                                                                                                                                                                                                                                                         |   |
|                                   |   | 2.                                                                                                                                                                                                                                                                                                                                                                                           | any fraud,  whether or not material, that involves management or other employees who have  a significant role in the registrant’s internal controls; and |
|                                   |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| 6.                                     |   | The registrant’s  other certifying officers and I have indicated in this quarterly report  whether there were significant changes in internal controls or in other  factors that could significantly affect internal controls subsequent to the  date of our most recent evaluation, including any corrective actions with  regard to significant deficiencies and material weaknesses. |
|                                   |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| November 14,  2002                     |
|                                   |   |
| /s/ Mark J.  Ferrer                    |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| Mark J.  Ferrer                        |   |
| President  and Chief Executive Officer |   |
|                                        |        |                                                                                                                                                                                                                                                                                                                                                                                              |  |  |  |  |

 

37

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**CERTIFICATION**

 

I, Maria Henry, certify that:

 
| 1.                       |   | I have  reviewed this quarterly report on Form 10-Q of Vastera, Inc.;                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                        |
|--------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                     |   |                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                        |
| 2.                       |   | Based on my  knowledge, this quarterly report does not contain any untrue statement of a  material fact or omit to state a material fact necessary to make the  statements made, in light of the circumstances under which such statements  were made, not misleading with respect to the period covered by this  quarterly report;                                                          |                                                                                                                                                                                                                                                                                                        |
|                     |   |                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                        |
| 3.                       |   | Based on my  knowledge, the financial statements, and other financial information included  in this quarterly report, fairly present in all material respects the  financial condition, results of operations and cash flows of the registrant  as of, and for, the periods presented in this quarterly report;                                                                              |                                                                                                                                                                                                                                                                                                        |
|                     |   |                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                        |
| 4.                       |   | The  registrant’s other certifying officers and I are responsible for establishing  and maintaining disclosure controls and procedures (as defined in Exchange  Act Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                                                                            |                                                                                                                                                                                                                                                                                                        |
|                     |   |                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                        |
|                     |   | 3.                                                                                                                                                                                                                                                                                                                                                                                           | designed  such disclosure controls and procedures to ensure that material information  relating to the registrant, including its consolidated subsidiaries, is made  known to us by others within those entities, particularly during the period  in which this quarterly report is being prepared;         |   |
|                     |   |                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                        |   |   |
|                     |   | 4.                                                                                                                                                                                                                                                                                                                                                                                           | evaluated  the effectiveness of the registrant’s disclosure controls and procedures as  of a date within 90 days prior to the filing date of this quarterly report  (the “Evaluation Date”); and                                                                                             |   |
|                     |   |                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                        |   |   |
|                     |   | 5.                                                                                                                                                                                                                                                                                                                                                                                           |  presented in this quarterly report our conclusions  about the effectiveness of the disclosure controls and procedures based on  our evaluation as of the Evaluation Date;                                                                                                                             |   |
|                     |   |                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                        |
| 5.                       |   | The  registrant’s other certifying officers and I have disclosed, based on our  most recent evaluation, to the registrant’s auditors and the audit committee  of registrant’s board of directors (or persons performing the equivalent  function):                                                                                                                            |                                                                                                                                                                                                                                                                                                        |
|                     |   |                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                        |
|                     |   | 6.                                                                                                                                                                                                                                                                                                                                                                                           | all  significant deficiencies in the design or operation of internal controls that  could adversely affect the registrant’s ability to record, process, summarize  and report financial data and have identified for the registrant’s auditors  any material weaknesses in internal controls; and |   |
|                     |   |                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                        |   |
|                     |   | 7.                                                                                                                                                                                                                                                                                                                                                                                           | any fraud,  whether or not material, that involves management or other employees who have  a significant role in the registrant’s internal controls; and                                                                                                                                               |   |
|                     |   |                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                        |
| 6.                       |   | The  registrant’s other certifying officers and I have indicated in this quarterly  report whether there were significant changes in internal controls or in  other factors that could significantly affect internal controls subsequent to  the date of our most recent evaluation, including any corrective actions with  regard to significant deficiencies and material weaknesses. |                                                                                                                                                                                                                                                                                                        |
|                     |   |                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                        |
| November 14,  2002       |
|                     |
| /s/ Maria  Henry         |   |
| Maria Henry              |   |
| Chief  Financial Officer |   |
|                          |        |                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                             |  |  |  |  |  |

 

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**EXHIBITS**

 
| 99.1   |   | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002, by the Chief Executive  Officer, dated November 14,****2002. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                  |
| 99.2   |   | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002, by the Chief Financial  Officer, dated November 14,****2002. |

 

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