**UNITED STATES**

**SECURITIES 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 June 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 August 9, 2002 there were40,243,758****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 June 30, 2002 |
|                                                                                                      |   |
|                                                                                                      | Condensed Consolidated Statements of  Operations for the Three and Six Months Ended June 30, 2001 and 2002 |
|                                                                                                      |   |
|                                                                                                      | Condensed Consolidated Statements of Cash  Flows for the Three and Six Months Ended June 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                                    |   |
|                                                                                                      |   |   |
| **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 Maters to a Vote of  Security Holders                                         |   |
| ITEM 5 – Other Information                                                                           |   |
| ITEM 6 – Exhibits and Reports on Form 8-K                                                            |   |
|                                                                                                      |   |
| **SIGNATURES**                                                                                            |   |
|                                                                                                           |  |  |  |

 

2

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# **Part I**  –FINANCIAL INFORMATION (UNAUDITED)

## ** **

## **Item 1:**                                                          Financial Statements

** **

**VASTERA, INC.**

** **

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

** **

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

 
|                                                                                                                                                                |   | **December 31,  2001** |    | **June 30,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|---------|--------------------|--------|
|                                                                                                                                                                |   |                   |    | **(Unaudited)**    |   |
| **Assets**                                                                                                                                                          |   |                   |    |               |   |
| Current assets:                                                                                                                                                     |   |                   |    |               |   |
| Cash and cash equivalents                                                                                                                                           |   | $                      | 10,982  |               | $      | 17,983 |   |
| Short-term investments                                                                                                                                              |   | 62,789                 |    | 45,466             |   |
| Accounts receivable, net of allowance for  doubtful accounts of $632 and $528, respectively                                                                         |   | 14,294                 |    | 15,749             |   |
| Prepaid expenses and other current assets                                                                                                                           |   | 2,485                  |    | 2,741              |   |
| Total current assets                                                                                                                                                |   | 90,550                 |    | 81,939             |   |
| Property and equipment, net                                                                                                                                         |   | 7,934                  |    | 10,856             |   |
| Intangible assets, net                                                                                                                                              |   | 2,331                  |    | 11,287             |   |
| Goodwill                                                                                                                                                            |   | 62,205                 |    | 65,793             |   |
| Deposits and other assets                                                                                                                                           |   | 840                    |    | 900                |   |
|                                                                                                                                                                |   |                   |    |               |   |
| Total assets                                                                                                                                                        |   | $                      | 163,860 |               | $      | 170,775 |   |
|                                                                                                                                                                |   |                   |    |               |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                       |   |                   |    |               |   |
| Current liabilities:                                                                                                                                                |   |                   |    |               |   |
| Line of credit and capital lease  obligations, current                                                                                                              |   | $                      | 2,207   |               | $      | 2,062 |   |
| Accounts payable                                                                                                                                                    |   | 3,167                  |    | 5,259              |   |
| Accrued expenses                                                                                                                                                    |   | 5,313                  |    | 7,662              |   |
| Accrued compensation and benefits                                                                                                                                   |   | 4,588                  |    | 177                |   |
| Deferred revenue, current                                                                                                                                           |   | 6,936                  |    | 10,322             |   |
| Total current liabilities                                                                                                                                           |   | 22,211                 |    | 25,482             |   |
| Long-term liabilities:                                                                                                                                              |   |                   |    |               |   |
| Line of credit and capital lease  obligations, net of current portion                                                                                               |   | 2,344                  |    | 2,237              |   |
| Deferred revenue, net of current portion                                                                                                                            |   | 1,487                  |    | 1,333              |   |
| Total liabilities                                                                                                                                                   |   | 26,042                 |    | 29,052             |   |
| Commitments and contingencies (See Note 5)                                                                                                                          |   |                   |    |               |   |
|                                                                                                                                                                |   |                   |    |               |   |
| Stockholders’ equity:                                                                                                                                          |   |                   |    |               |   |
| Common stock, $0.01 par value; 100,000  shares authorized; 38,692 and 40,244 shares issued and outstanding as of  December 31, 2001 and June 30, 2002, respectively |   | 387                    |    | 402                |   |
| Additional paid-in capital                                                                                                                                          |   | 311,930                |    | 322,195            |   |
| Accumulated other comprehensive income  (loss)                                                                                                                      |   | 240                    |    | (1,041             | )      |
| Deferred compensation                                                                                                                                               |   | (3,607                 | )       | (2,045             | )      |
| Accumulated deficit                                                                                                                                                 |   | (171,132               | )       | (177,788           | )      |
|                                                                                                                                                                |   |                   |    |               |   |
| Total stockholders’ equity                                                                                                                                     |   | 137,818                |    | 141,723            |   |
|                                                                                                                                                                |   |                   |    |               |   |
| Total liabilities and stockholders’ equity                                                                                                                     |   | $                      | 163,860 |               | $      | 170,775 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

3

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**VASTERA, INC.**

** **

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

** **

**(UNAUDITED)**

** **

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

 
|                                        |   | **Three  Months Ended  June 30,** |    | **Six Months  Ended  June 30,** |   |
|---------------------------------------------|--------|-----------------------------------|---------|---------------------------------|--------|
|                                        |   | **2001**                          |    | **2002**                        |   | **2001** |   | **2002** |   |
|                                        |   |                              |    |                            |   |   |   |   |   |
| **Revenues:**                               |   |                              |    |                            |   |   |   |   |   |
| Managed services revenues                   |   | $                                 | 7,256   |                            | $      | 11,044 |   | $ | 13,495 |   | $ | 21,974 |   |
| Software revenues                           |   | 3,180                             |    | 3,109                           |   | 5,843 |   | 6,628 |   |
| Services revenues                           |   | 4,503                             |    | 4,185                           |   | 8,671 |   | 8,791 |   |
|                                        |   |                              |    |                            |   |   |   |   |   |
| Total revenues                              |   | 14,939                            |    | 18,338                          |   | 28,009 |   | 37,393 |   |
|                                        |   |                              |    |                            |   |   |   |   |   |
| **Cost of revenues:**                       |   |                              |    |                            |   |   |   |   |   |
| Cost of managed services revenues           |   | 3,889                             |    | 5,411                           |   | 7,213 |   | 10,788 |   |
| Cost of software revenues                   |   | 626                               |    | 667                             |   | 1,134 |   | 1,203 |   |
| Cost of services revenues                   |   | 3,303                             |    | 3,291                           |   | 6,547 |   | 6,668 |   |
|                                        |   |                              |    |                            |   |   |   |   |   |
| **Operating expenses:**                     |   |                              |    |                            |   |   |   |   |   |
| Sales and marketing                         |   | 4,593                             |    | 3,256                           |   | 8,912 |   | 6,643 |   |
| Research and development                    |   | 3,757                             |    | 3,493                           |   | 7,291 |   | 7,441 |   |
| General and administrative                  |   | 2,351                             |    | 2,308                           |   | 4,394 |   | 4,862 |   |
| Depreciation                                |   | 789                               |    | 1,094                           |   | 1,502 |   | 2,064 |   |
| Amortization                                |   | 5,812                             |    | 740                             |   | 10,787 |   | 1,193 |   |
| Restructuring                               |   | —                            |    | 1,976                           |   | — |   | 1,976 |   |
| In process research and development         |   | —                            |    | —                          |   | 6,901 |   | — |   |
| Stock-based compensation                    |   | 1,587                             |    | 710                             |   | 3,263 |   | 1,562 |   |
|                                        |   |                              |    |                            |   |   |   |   |   |
| Total operating expenses                    |   | 18,889                            |    | 13,577                          |   | 43,050 |   | 25,741 |   |
|                                        |   |                              |    |                            |   |   |   |   |   |
| Loss from operations                        |   | (11,768                           | )       | (4,608                          | )      | (29,935 | ) | (7,007 | ) |
|                                        |   |                              |    |                            |   |   |   |   |   |
| Other income, net                           |   | 959                               |    | 228                             |   | 1,896 |   | 533 |   |
|                                        |   |                              |    |                            |   |   |   |   |   |
| Loss before income taxes                    |   | (10,809                           | )       | (4,380                          | )      | (28,039 | ) | (6,474 | ) |
|                                        |   |                              |    |                            |   |   |   |   |   |
| Income taxes                                |   | (108                              | )       | (91                             | )      | (158 | ) | (182 | ) |
|                                        |   |                              |    |                            |   |   |   |   |   |
| Net loss                                    |   | $                                 | (10,917 | )                               | $      | (4,471 | ) | $ | (28,197 | ) | $ | (6,656 | ) |
|                                        |   |                              |    |                            |   |   |   |   |   |
| Basic and diluted net loss per common share |   | $                                 | (0.29   | )                               | $      | (0.11 | ) | $ | (0.76 | ) | $ | (0.17 | ) |
|                                        |   |                              |    |                            |   |   |   |   |   |
| Weighted-average common shares outstanding  |   | 37,695                            |    | 40,124                          |   | 37,054 |   | 39,700 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

4

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**VASTERA, INC.**

 

**CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

** **

**(UNAUDITED)**

** **

**(In thousands)**

 
|                                                                           |   | **Six Months Ended  June 30,** |    |
|--------------------------------------------------------------------------------|--------|--------------------------------|---------|
|                                                                           |   | **2001**                       |    | **2002** |   |
| **Cash flows from operating activities:**                                      |   |                           |    |   |   |
| Net loss                                                                       |   | $                              | (28,197 | ) | $ | (6,656 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:   |   |                           |    |   |   |
| Stock-based compensation                                                       |   | 3,263                          |    | 1,562 |   |
| Depreciation and amortization                                                  |   | 12,289                         |    | 3,257 |   |
| In process research and development                                            |   | 6,901                          |    | — |   |
| Provision for allowance for doubtful  accounts                                 |   | 741                            |    | 117 |   |
| Amortization of revenue discount related to  Ford contract                     |   | 150                            |    | 150 |   |
|                                                                           |   |                           |    |   |   |
| Changes in operating assets and  liabilities:                                  |   |                           |    |   |   |
| Accounts receivable                                                            |   | (2,871                         | )       | (1,519 | ) |
| Prepaid expenses and other current assets                                      |   | (995                           | )       | (265 | ) |
| Deposits and other assets                                                      |   | (60                            | )       | (65 | ) |
| Accounts payable and accrued expenses                                          |   | (1,253                         | )       | 2,958 |   |
| Accrued compensation and benefits                                              |   | (2,949                         | )       | (4,546 | ) |
| Deferred revenue                                                               |   | (996                           | )       | 2,418 |   |
| Net cash used in operating activities                                          |   | (13,977                        | )       | (2,589 | ) |
|                                                                           |   |                           |    |   |   |
| **Cash flows from investing activities:**                                      |   |                           |    |   |   |
| Acquisition of subsidiaries                                                    |   | —                         |    | (5,682 | ) |
| Net (purchases) sales of short-term  investments                               |   | (439                           | )       | 17,071 |   |
| Acquisition of property and equipment                                          |   | (873                           | )       | (6,258 | ) |
| Net cash (used in) provided by investing  activities                           |   | (1,312                         | )       | 5,131 |   |
|                                                                           |   |                           |    |   |   |
| **Cash flows from financing activities:**                                      |   |                           |    |   |   |
| Proceeds from the exercise of stock options  and preferred stock warrants      |   | 2,545                          |    | 3,276 |   |
| Principal payments on long-term debt                                           |   | (1,030                         | )       | 1,168 |   |
| Net cash provided by financing activities                                      |   | 1,515                          |    | 4,444 |   |
| Effect of foreign currency exchange rate  changes on cash and cash equivalents |   | (189                           | )       | 15 |   |
| Net decrease in cash and cash equivalents                                      |   | (13,963                        | )       | 7,001 |   |
| Cash and cash equivalents, beginning of  period                                |   | 19,693                         |    | 10,982 |   |
| Cash and cash equivalents, end of period                                       |   | $                              | 5,730   |   | $ | 17,983 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

5

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**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

** **

**(Unaudited)**

 

### **1.          Basisof Presentation and Nature of Business:**

 

The accompanying unaudited condensedconsolidated financial statements of Vastera, Inc. and its subsidiaries(“Vastera” the “Company,” “we,” or “us”) have been prepared on the same basisas audited financial statements and include all adjustments, including allnormal recurring adjustments that are necessary for a fair presentation of thefinancial position, results of operations and cash flows for the interimperiods presented. The results of operations for the interim periods presented arenot necessarily indicative of the results to be expected for any subsequentquarter or for the entire year ending December 31, 2002.  All significant intercompany balances andtransactions have been eliminated in consolidation. Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith generally accepted accounting principles have been condensed or omittedpursuant to the Securities and Exchange Commission’s (the “SEC”) rules andregulations.  The Company’s interimfinancial statements should be read in conjunction with the Company’s auditedconsolidated financial statements and notes thereto, as filed with the SEC withthe Company’s Annual Report on Form 10-K and other reports filed with theSEC.

 

Vastera is a leading provider of web-nativesolutions for Global Trade Management and was incorporated in Virginia inNovember 1991 under the name Export Software International, Inc. TheCompany was reincorporated in Delaware in July 1996 and changed its nameto Vastera, Inc. in June 1997. The Company has operations in theUnited States, Brazil, Canada, Mexico, Japan and the United Kingdom.

 

The Company’s offerings include a library ofglobal trade content, web-native software solutions and management consultingand managed services. Managed services range from managing a specific globaltrade function to managing a client’s global trade operation in its entirety.The Company’s customers utilize these offerings to manage their global tradeprocesses. Global trade involves the cross-border shipment of goods betweencountries and the management of the information and business processesnecessary to complete shipment.

 

The Company’s operations are subject tocertain risks and uncertainties, including among others, uncertainties relatingto product development, rapidly changing technology, current and potentialcompetitors with greater financial, technological, production and marketingresources, the potential loss of significant customers, dependence on key managementpersonnel, limited protection of intellectual property and proprietary rights,uncertainty of future profitability and possible fluctuations in financialresults.

### ** **

### **2.          Summaryof Significant Accounting Policies:**

** **

**Use of Estimates**

 

The preparation of the consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosures of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates. Estimates that are most susceptible tochange are the Company’s estimates of collections of accounts receivable andthe estimated lives and the realization of its intangible assets.

** **

**Revenue Recognition**

 

The Company’s revenues consist of managedservices revenues, software revenues and services revenues.

* *

*Managed ServicesRevenues*

 

Managed services revenues are derived fromagreements that provide for transaction fees based on the performance of itsmanaged services solutions. Managed services solutions include the processingof a clients’ custom entries and the classification of its clients’ goods.Managed services transaction arrangements are often subject to annual orquarterly

 

6

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minimum transaction thresholds,and revenues have been recognized based on the lower of the cumulative actualtransactions processed during the period using a weighted-average transactionrate or the cumulative amounts billable. For those managed 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 arrangementsare recognized based upon the average annual revenue over the life of thearrangement.  In addition, Vastera mayreceive annual gainsharing fees under certain managed services transactionarrangements based on a percentage of the client’s annual cost savings, asdefined in the managed services arrangements. Such fees are recognized when they become fixed and determinable.

* *

*SoftwareRevenues*

 

Software revenues consist of subscription–basedrevenues, transaction-based revenues and perpetual software license revenues.The Company recognizes revenue from the sale of software products in accordancewith Statement of Position (“SOP”) 97-2, “Software Revenue Recognition.”

 

Subscription-based revenues are derived fromterm-license arrangements in which the Company’s clients license its softwareproducts and obtain the right to unspecified enhancements on awhen-and-if-available basis and ongoing support and content update services.Revenues are recognized ratably over the contract term. Subscriptionarrangements typically range from three to five years.

 

Transaction-based revenues are derived fromarrangements that provide for transaction fees based on a client’s usage of theCompany’s software products. Revenues from the usage of its software productsare recognized as transactions occur.

 

Perpetual software license revenues arederived from perpetual software license arrangements and related maintenancecontracts. Maintenance contracts include the right to unspecified enhancementson a when-and-if available basis, ongoing support and content update services.The content updates provided under maintenance arrangements are significant andfrequent and thus the entire arrangement is in substance a subscription.Revenues from perpetual software license sales are recognized ratably over theestimated economic life of the product. The Company has estimated that the lifeof the product is three years, which is consistent with the historical periodsbetween major upgrades to the functionality and architecture of its productssuch that the Company would charge all customers a new fee to migrate to thenew version. Revenues from maintenance contracts are recognized ratably over thecontract term, which is typically one year.

* *

*ServicesRevenues*

 

Services revenues are derived fromimplementation, management consulting and training services. Services areperformed on a time and materials basis or under fixed price arrangements andare recognized as the services are performed or using the percentage ofcompletion method of accounting. Losses on arrangements are recognized whenknown.

** **

**Deferred Revenues**

 

Deferred revenues include amounts billed toclients for revenues that have not been recognized and generally result frombilled, but deferred subscription/transaction revenues and services not yetrendered. Deferred revenues will be recognized on a monthly basis over the termor the remaining economic life of the product or when the services areperformed.

** **

**Cost of Revenues**

 

Cost of revenues includes the cost of ourmanaged services revenues, the costs of our software revenues and the cost ofour services revenues.

 

Cost of managed services revenues and cost ofsoftware revenues include royalties owed to third parties for technologyproducts integrated into our software products, as well as the cost of salariesand related expenses for our technical support and managed servicesorganizations.

 

7

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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 clients.

** **

**Capitalized Costs**

 

In accordance with Statement of Position98-1, “Accounting for the Costs of Computer Software Developed or Obtained forInternal Use”, the Company capitalized costs associated with the implementationand integration related to migrating a managed services client to the Vasteratrade management platform of approximately $460,000 and $810,000 for the threeand six months, respectively, ended June 30, 2002.  These costs will be amortized as costs of managed servicesrevenues over the remaining contract life, but no longer than three years.  Amortization will commence upon thecompletion of the client’s migration to the Vastera platform.

** **

**Concentrations of Credit Risk**

 

Financial instruments that potentiallysubject the Company to concentrations of credit risk consist primarily of cashequivalents, short-term investments and accounts receivable. The Company limitsthe amount of investment exposure in any one financial instrument and does nothave any foreign currency investments. The Company sells products and servicesto customers across several industries throughout the world without requiringcollateral. However, the Company routinely assesses the financial strength ofits customers and maintains allowances for anticipated losses.

 

As of December 31, 2001, Ford accounted forapproximately 32 percent of the Company’s total accounts receivable and anothercustomer accounted for 13 percent of the Company’s total accountsreceivable.  As of June 30, 2002, Fordaccounted for 32 percent of the Company’s total accounts receivable.

** **

**Unaudited Net Loss Per Common Share**

 

Basic net loss per common share is computedby dividing net loss applicable to common stockholders by the weighted-averagenumber of common shares outstanding for the period. Diluted net loss per commonshare includes the potential dilution that could occur if securities or othercontracts to issue common stock were exercised or converted into common stock.As of June 30, 2001 and 2002, options to purchase approximately 7,828,000 and8,152,000 shares, respectively, of common stock were outstanding, and warrantsto purchase approximately 12,000 and zero shares, respectively, of common stockwere outstanding.  Due to theanti-dilutive effect of the options and warrants, these instruments have beenexcluded from the calculation of weighted–average shares for dilutedearnings per share. Accordingly, the basic and diluted loss per share amountsare identical.

** **

**Comprehensive Income**

 

As of December 31, 2001 and June 30, 2002,accumulated other comprehensive income included unrealized gains and losses oninvestments and foreign currency translation adjustments. As of June 30, 2002,accumulated unrealized gains on investments was approximately $200,000 and accumulatedforeign currency translation adjustments was approximately ($1.2 million).

** **

**Recent Accounting 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. 142 requiresthe use of a nonamortization approach to account for purchased goodwill andcertain intangibles. Under a nonamortization approach, goodwill and certainintangibles will not be amortized into results of operations, but instead willbe reviewed for impairment and written down and charged to results ofoperations 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 ourgoodwill. 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.

 

The results for the prioryear (three and six months ended June 30, 2001) have not been restated.Reconciliations of previously reported net loss and net loss per share to theamounts adjusted for the exclusion of goodwill amortization net of the relatedtax effects are as follows: 

 
|                                              |   | **For the  Three Months  Ended June 30,** |    | **For the  Six Months  Ended June 30,** |   |
|---------------------------------------------------|--------|-------------------------------------------|---------|-----------------------------------------|--------|
|                                              |   | **2001**                                  |    | **2002**                                |   | **2001** |   | **2002** |   |
| Reported net loss                                 |   | $                                         | (10,917 | )                                       | $      | (4,471 | ) | $ | (28,197 | ) | $ | (6,656 | ) |
| Goodwill amortization, net of tax                 |   | 5,701                                     |    | —                                  |   | 10,485 |   | — |   |
| Adjusted net loss                                 |   | $                                         | (5,216  | )                                       | $      | (4,471 | ) | $ | (17,712 | ) | $ | (6,656 | ) |
|                                              |   |                                      |    |                                    |   |   |   |   |   |
| Basic and diluted net loss per share as  reported |   | $                                         | (0.29   | )                                       | $      | (0.11 | ) | $ | (0.76 | ) | $ | (0.17 | ) |
| Goodwill amortization, net of tax                 |   | 0.15                                      |    | —                                  |   | 0.28 |   | — |   |
| Adjusted basic and diluted net loss per  share    |   | $                                         | (0.14   | )                                       | $      | (0.11 | ) | $ | (0.48 | ) | $ | (0.17 | ) |
|                                              |   |                                      |    |                                    |   |   |   |   |   |
| Weighted average common shares                    |   | 37,695                                    |    | 40,124                                  |   | 37,054 |   | 39,700 |   |

 

8

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In the aggregate, amortizationfor future periods is expected to be approximately $2.7 million for the yearsending December 31, 2002 and 2003 and approximately $2.4 million for the yearending December 31, 2004.

 

The recoverability and useful lives of theCompany’s intangible assets are based on estimates and are susceptible tochange. Although the Company believes that its intangible assets will berecoverable, changes in the economy, the business in which it operates and itsown relative performance could change the assumptions used to evaluateintangible asset recoverability. Management continues to monitor theseassumptions and their effect on the estimated recoverability. Any resultingimpairment loss could have a material adverse impact on the Company’s financialcondition and results of operations.

 

In June 2001, the FASB issued SFAS No. 143,“Accounting for Asset Retirement Obligations.” SFAS No. 143 requires an entity to recognize the fair value of aliability for an asset retirement obligation in the period in which it isincurred if a reasonable estimate of fair value can be made. If a reasonableestimate of fair value cannot be made in the period during which the assetretirement obligation is incurred, the liability shall be recognized when areasonable estimate of fair value can be made. This new standard is effectivein the first quarter of 2003. The Company does not believe that SFAS No. 143will have a material effect on its results of operations.

 

In August 2001, the FASB issued SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets,” whichsupersedes SFAS No. 121, and “Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to Be Disposed Of.”  SFAS No. 144 is effective in the first quarter of 2002. TheCompany does not believe that SFAS No. 144 will have a material effect on itsfinancial statements.

 

In April 2002, the FASB issued SFAS No. 145“Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB StatementNo. 13, and Technical Corrections.” This Statement rescinds FASB Statement No. 4, “Reporting Gains andLosses from Extinguishment of Debt”, and an amendment of that Statement, FASBStatement No. 64, “Extinguishments of Debt Made to Satisfy Sinking-FundRequirements”. This Statement also rescinds FASB Statement No. 44, “Accountingfor Intangible Assets of Motor Carriers”. This Statement amends FASB StatementNo. 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.  The provisions of this Statement related tothe rescission of Statement No. 4 shall be applied in fiscal years beginningafter May 15, 2002.  The provisions ofthis Statement related to Statement No. 13 shall be effective for transactionsoccurring after May 15, 2002.  All otherprovisions of this Statement shall be effective for financial statements issuedon or after May 15, 2002. The Company does not believe that SFAS No. 145 willhave a material effect on the Company’s financial position or results ofoperations.

 

In August 2002, the FASB issued SFAS No. 146“Accounting for Costs Associated with Exit or Disposal Activities”.  It addresses financial accounting andreporting for costs associated with exit or disposal activities and nullifiesEmerging Issues Task Force (EITF) Issue No. 94-3,”Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity (includingCertain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability 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, aliability for an exit cost was recognized at the date of an entity’s commitmentto an exit plan.  The new standard iseffective for exit or disposal activities that are initiated after December 31,2002, with early application encouraged. The Company does not believe that SFAS No. 146 will have a materialeffect on the Company’s financial position or results of operations.

** **

**Reclassifications**

 

Effective January 1, 2002, FASB’s Topic D-103requires that reimbursed travel expenses be recognized as revenue.  Consequently, revenues for the three and sixmonths ended June 30, 2002 increased by approximately $376,000 and $737,000,respectively. Revenues for the three and six months ended June 30, 2001 increasedby approximately $517,000 and $886,000, respectively.

 

All prior periods have been reclassified toconform to the current period’s presentation.

### ** **

### **3.          Restructuring**

 

In the second quarter of 2002, the Companybegan a restructuring plan that it expects to complete in the third quarter of2002.  Management estimates that theCompany will record additional restructuring expense of $2.5 million to $3.5million in the third quarter of 2002. The Company recorded approximately $2.0 million in costs associated withthe termination of certain employees, the closing of redundant facilities andthe cancellation of certain contracts. The Company paid out approximately $300,000 of these costs in the secondquarter and expects to pay out the remainder in 2002 and 2003.

 

### **4.          Acquisition**

** **

**2002 Acquisitions**

 

In the first quarter of 2002, the Companyexecuted on its strategy to expand its global presence to enhance itscompetitive position worldwide and its ability to serve and support itsclients.  As part of this strategy, theCompany acquired companies in Mexico, Canada and Brazil.  The shares of common stock issued by theCompany 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. enteredinto a definitive agreement to acquire Prisma Tecnologia Coputacional, S.A. deC.V. (“Prisma”) for approximately $5.2 million. Prisma is a provider of GlobalTrade Management solutions in Mexico. The Company consummated this transactionon February 1, 2002 and paid $2.45 million in cash and issued approximately150,000 shares of it common stock valued at approximately $2.4 million.

 

On February 12, 2002, Vastera, Inc. acquiredImanet, an Ontario Corporation for approximately $2.4 million. Imanet is aprovider of Global Trade Management solutions in Canada. The Company paid$850,000 in cash and issued approximately 90,000 shares of its common stockvalued at approximately $1.4 million.

 

On March 8, 2002, Vastera Inc. acquiredBergen Informatica Ltda. (“Bergen”) for approximately $6.2 million.  Bergen is a provider of Global TradeManagement solutions in Brazil.  The Companypaid $2.4 million in cash and issued approximately 223,000 shares of its commonstock valued at approximately $3.1 million.

 

9

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The preliminary aggregate purchase price ofthe three 2002 acquisitions was determined as follows  (in thousands):

 
|                        |   | **Value** |   |
|-----------------------------|--------|-----------|--------|
| Fair value of common stock  |   | $         | 6,933  |   |
| Cash consideration          |   | 5,682     |   |
| Assumed liabilities         |   | 28        |   |
| Transaction costs and other |   | 1,490     |   |
| Aggregate purchase price    |   | $         | 14,133 |   |

 

The purchase price has been allocated on apreliminary basis as follows (in thousands):

 
|                             |   | **Value** |   |
|----------------------------------|--------|-----------|--------|
| Current assets                   |   | $         | 121    |   |
| Property and equipment           |   | 205       |   |
| Acquired technology and know-how |   | 10,400    |   |
| Acquired contracts               |   | 400       |   |
| Goodwill                         |   | 3,855     |   |
| Deferred revenue                 |   | (848      | )      |
|                             |   | $         | 14,133 |   |

 

The amounts allocated to acquired technologyand know how and acquired contracts are being amortized on a straight-linemethod over the estimated useful life of these assets, which are five years andone year, respectively.

 

The purchase price and the related allocationof the 2002 acquisitions are preliminary, as management is reviewing theactivities and employees of the acquired companies. Costs associated with thepossible termination of certain acquired employees or exiting other activitieswould be accounted for as liabilities assumed in the business combinations.

 

The following unaudited pro forma information(in thousands) has been prepared as if the 2002 acquisitions had occurred as ofJanuary 1, 2001.

 
|                                              |   | **Pro Forma  for the  Year Ended  December 31, 2001** |   | **Pro Forma  for the****Six Months EndedJune 30, 2002** |   |
|---------------------------------------------------|--------|-------------------------------------------------------|--------|---------------------------------------------------------|--------|
|                                              |   | **(unaudited)**                                       |   | **(unaudited)**                                         |   |
| Total revenues                                    |   | $                                                     | 69,715 |                                                    | $      | 38,020 |   |
| Net loss                                          |   | (48,704                                               | )      | (6,976                                                  | )      |
| Pro forma basic and diluted loss per common share |   | (1.28                                                 | )      | (.18                                                    | )      |
|                                                   |        |                                                       |        |                                                         |        |  |  |

 

**2001 Acquisition**

 

On March 29, 2001, the Company acquired SpeedChain Network, Inc. (“Speedchain”), a development stage company that generatedno revenues since its inception in 1999. Speedchain was a supply chain eventmanagement and global e-logistics solutions provider. The acquisition waseffected through the merger of Speedchain into one of Vastera’s wholly-owned subsidiaries,Vastera Acquisition Corporation. The acquisition was accounted for under thepurchase method of accounting and the operating results of Speedchain have beenincluded in the accompanying condensed consolidated financial statements fromthe date of acquisition.

 

Under the terms of the acquisition agreement,the Company issued an aggregate of 944,485 shares of common stock in exchangefor all of the outstanding preferred stock and common stock of Speedchain. Theshares of common stock issued by the Company were valued at $14.00 per share,which was the average of the closing prices for the three days before and threedays after March 1, 2001, the date the acquisition was announced. The Companyalso issued options to acquire approximately 24,000 shares of its common stockin exchange for the vested Speedchain stock options assumed in the businesscombination.

 

10

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The options were valued atapproximately $328,000 using the Black-Scholes model assuming 128 percentvolatility, a risk-free interest rate of 6.19 percent, and an expected life ofthree years. On March 29, 2001, the Company also issued options to acquireapproximately 64,000 shares of its common stock in exchange for the unvestedSpeedchain stock options assumed in the business combination. Accordingly, theCompany recorded $465,000 of deferred compensation that will be amortized on anaccelerated basis over the remaining vesting period of these options.

 

The aggregate purchase price was determinedas follows (in thousands):

 
|                        |   | **Value** |   |
|-----------------------------|--------|-----------|--------|
| Fair value of common stock  |   | $         | 13,223 |   |
| Fair value of options       |   | 328       |   |
| Assumed liabilities         |   | 3,401     |   |
| Transaction costs and other |   | 1,860     |   |
| Aggregate purchase price    |   | $         | 18,812 |   |

 

The acquisition resulted in an allocation ofthe purchase price to the net tangible and intangible assets of Speedchain, aswell as, the write-off of the portion of the purchase price allocated toin-process research and development (“IPR&D”) projects. The Company hasallocated the purchase price based upon the fair values of the assets and theliabilities acquired.

 

The purchase price has been allocated asfollows  (in thousands):

 
|                   |   | **Value** |   |
|------------------------|--------|-----------|--------|
| Current assets         |   | $         | 38     |   |
| Property and equipment |   | 57        |   |
| Assembled workforce    |   | 300       |   |
| IPR&D              |   | 6,901     |   |
| Goodwill               |   | 11,516    |   |
|                   |   | $         | 18,812 |   |

 

The amounts allocated to assembled workforceand goodwill are being amortized on a straight-line method over the estimateduseful life of these assets, which are two years and four years, respectively.In accordance with SFAS No. 142 these intangible assets are no longer beingamortized after January 1, 2002.

 

The Company valued IPR&D projectsacquired in the acquisition at approximately $6.9 million, based upon theresults of an independent appraisal of the development projects for whichtechnological feasibility has not been established and no alternative futureuses exist. The acquired IPR&D projects are targeted at the supply chainevent management and e-logistics market.

 

The value of the IPR&D projectsidentified was determined by estimating the future cash flows from each of therespective projects at the assumed date of commercial feasibility, discountingthese net cash flows back to their present value and then applying a percentageof completion to the calculated present value. The percentage of completion forthe projects were determined using milestones representing management’sestimate of effort, value added and degree of difficulty of the portion of theprojects completed as of March 29, 2001, as compared to the remaining researchand development to be completed to bring the projects to technical feasibility.Speedchain’s projects started in February 2000 and, as of March 29, 2001, theCompany estimated the projects were approximately 70 percent complete.

 

Development of the technology remains asubstantial risk to the Company due to factors including the remaining effortnecessary to achieve technical feasibility, rapidly changing customer needs andcompetitive threats from other companies. Failure to bring these products tomarket in a timely manner could adversely affect future sales and profitabilityof the combined company. Additionally, the value of the other intangible assetsacquired may become impaired.

 

In connection with the Speedchainacquisition, the Company recognized approximately $550,000 in liabilities asthe cost associated with closing redundant facilities and terminating certainemployees. These activities resulted in the termination of the employment ofeight employees in connection with the elimination of duplicative positions andthe restructuring of

 

11

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certain operations.Approximately $300,000 of this accrual was paid out in 2001 and the remaining$250,000 was paid out during the six months ended June 30, 2002.  

 

The following unaudited pro forma information(in thousands) has been prepared as if the acquisition of Speedchain hadoccurred as of January 1, 2001, excluding the one-time IPR&D charge ofapproximately $6.9 million.

 
|                                               |   | **Pro Forma for the  Six Months Ended  June 30, 2001** |   |
|----------------------------------------------------|--------|--------------------------------------------------------|--------|
|                                               |   | **(unaudited)**                                        |   |
| Total revenues                                     |   | $                                                      | 27,123 |   |
| Net loss                                           |   | (24,185                                                | )      |
| Pro forma basic and diluted loss per common  share |   | (.64                                                   | )      |
|                                                    |        |                                                        |        |  |

 

The unaudited pro forma information is notnecessarily indicative of the results of operations that would have occurredhad the acquisition been made at the beginning of the periods presented or thefuture results of the combined operations.

### ** **

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

** **

**Line of Credit**

 

The Company has a secured revolving line ofcredit and an equipment line of credit with PNC Bank. As of December 31, 2001and June 30, 2002, the outstanding balance under the equipment line of creditwas approximately $4.2 million and $4.1 million, respectively, and there wereno amounts outstanding under the secured revolving line of credit. Therevolving line of credit was scheduled to expire on December 31, 2000 andwas extended to April 30, 2001. In May 2001, the Company renegotiated andamended its secured revolving line of credit and equipment line of credit. As amended,the Company could borrow up to $10 million under the revolving line of credit,with a $2.5 million sub-limit for the issuance of letters of credit. Advancesunder the revolving line of credit were limited to the lesser of $10 million or80 percent of eligible accounts receivable, as defined in the loan agreement.The revolving line of credit bore interest at the greater of the bank’s primerate or the overnight federal funds rate (4.75 percent as of June 30, 2002).The revolving line of credit was scheduled to mature in May 2002.  PNC Bank extended the term until November2002. In July 2002, the Company obtained a credit facility with a differentfinancial institution.

 

The terms of the former revolving line ofcredit and equipment line of credit require the Company to comply with certainfinancial covenants including, but not limited to, restrictions and limitationson future indebtedness, sale of assets and material changes in the Company’sbusiness. The financial covenants include a minimum quick ratio, as defined inthe loan agreement, of 2.0 to 1.0 and a maximum ratio of total liabilities totangible net worth of 1.0 to 1.0 for 2001 and 1.5 to 1.0 for 2002 andthereafter. The most restrictive of the financial covenants is that theCompany’s negative operating income shall not be in excess of $1.0 million forthe quarter ended June 30, 2002.  As ofJune 30, 2002, the Company was not in compliance with this covenant. 

 

 InJuly 2002, the Company refinanced $3.9 million of outstanding debt under itsformer credit facility with Comerica Bank. The term loan matures in June 2004 and bears interest at the bank’sprime rate plus 50 basis points.  TheCompany also obtained a secured revolving line of credit and an equipment lineof credit with Comerica Bank.  The Companymay borrow up to $10 million under the revolving line of credit, with a $2.5million sub-limit for the issuance of letters of credit. Advances under therevolving line of credit are limited to the lesser of $10 million or 80 percentof eligible accounts receivable, as defined in the loan agreement. Therevolving line of credit bears interest at the bank’s prime rate.  The revolving line of credit matures in July2004.  

 

The Company may borrow up to $5 million underthe equipment line of credit.  Theequipment line of credit bears interest at the bank’s prime rate plus 50 basispoints.  The equipment line of credithas two interest-only payment periods and matures in July 2005.

 

The terms of the revolving lineof credit and equipment line of credit require the Company to comply withcertain financial covenants including, but not limited to, restrictions andlimitations on future indebtedness, sale of assets and material

 

12

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changes in theCompany’s business. The financial covenants include a minimum quick ratio, asdefined in the loan agreement, of 2.0 to 1.0 and a maximum ratio of totalliabilities to tangible net worth of 1.5 to 1.0.  The most restrictive of the financial covenants is that theCompany’s pro forma income/(loss) shall not be in excess of ($1.5) million forthe three months ended September 30, 2002 and $0 for the three months endedDecember 31, 2002 and thereafter, measured quarterly.  As of and for the three months ended June 30, 2002, the Companywas in compliance with the covenants of its new credit facility.

 

Pro forma income (loss) is defined in theloan agreement as net income, plus interest expense, taxes, non-cash charges(including depreciation, amortization, stock-based compensation, research anddevelopment related charges and one-time restructuring charges), and cashrestructuring charges (not to exceed $5.0 million in the aggregate), and lessinterest income, and one-time or non-recurring revenue. 

### ** **

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

** **

**Litigation**

 

The Company is periodically a party todisputes arising from normal business activities. In the opinion of management,resolution of these matters will not have a material adverse effect upon thefinancial position or future operating results of the Company.

 

On March 14, 2001, Expeditors Internationalof Washington, Inc. and Expeditors Tradewin, L.L.C. (collectively “Expeditors”)filed suit against the Company in the United States District Court for theEastern District of Michigan, Southern Division primarily alleging that theCompany misappropriated certain of Expeditors’ trade secrets in connection withits acquisition of Ford’s customs operations, by utilizing systems and businessprocesses that Expeditors assisted in developing for Ford and through itsemployee hiring practices. The Company believes that the allegations containedin the complaint are without merit and that there will be no material adverseimpact to its operations from this litigation. In connection with its acquisitionof Ford’s customs operations, Ford agreed to indemnify the Company forintellectual property infringement claims and Ford is currently indemnifyingthe Company in connection with this litigation. Subsequent to Expeditors filingof its complaint, the Company filed a counterclaim against Expeditors for,among other things, trade libel and tortious interference with a contractualrelationship.

 

On April 16, 2002, the Court granted in partand denied in part our motion to dismiss this case. Specifically, the Courtdismissed Expeditors claims of common law misappropriation of confidentialinformation on the grounds that such claims were preempted by the MichiganUniform Trade Secrets Act (“MUTSA”). The Court preserved Expeditors remainingclaims, as dismissal was deemed to be premature as of the date of the Court’sruling.

### ** **

### **7.          SegmentInformation:**

 

The Company has three reportable operatingsegments: managed services, software and services. The managed services segmentgenerates revenues from managed services transaction 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.

 

13

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

 
|          | **Three Months Ended  June 30,** |    | **Six Months Ended  June 30,** |    |
|---------------|----------------------------------|---------|--------------------------------|---------|
|          | **2001**                         |    | **2002**                       |    | **2001** |   | **2002** |   |
|          | **(unaudited)**                  |    | **(unaudited)**                |    | **(unaudited)** |   | **(unaudited)** |   |
| Revenues:     |                             |    |                           |    |   |   |   |   |
|          | Managed services                 | $       | 7,256                          |    | $ | 11,044 |   | $ | 13,495 |   | $ | 21,974 |   |
|          | Software                         |    | 3,180                          |    |   | 3,109 |   |   | 5,843 |   |   | 6,628 |   |
|          | Services                         | 4,503   |                           | 4,185   |   | 8,671 |   | 8,791 |   |
|          | Total revenues                   | 14,939  |                           | 18,338  |   | 28,009 |   | 37,393 |   |
|          |                             |    |                           |    |   |   |   |   |
| Gross Profit: |                             |    |                           |    |   |   |   |   |
|          | Managed services                 | 3,367   |                           | 5,633   |   | 6,282 |   | 11,186 |   |
|          | Software                         | 2,554   |                           | 2,442   |   | 4,709 |   | 5,425 |   |
|          | Services                         | 1,200   |                           | 894     |   | 2,124 |   | 2,123 |   |
|          | Gross profit                     | 7,121   |                           | 8,969   |   | 13,115 |   | 18,734 |   |
|          |                             |    |                           |    |   |   |   |   |
| Net loss:     |                             |    |                           |    |   |   |   |   |
|          | Unallocated expense              | (18,889 | )                              | (13,577 | ) | (43,050 | ) | (25,741 | ) |
|          | Interest income                  | 1,059   |                           | 354     |   | 2,104 |   | 771 |   |
|          | Interest expense                 | (100    | )                              | (126    | ) | (208 | ) | (238 | ) |
|          | Income tax                       |    | (108                           | )       |   | (91 | ) |   | (158 | ) |   | (182 | ) |
|          | Net loss                         | $       | (10,917                        | )       | $ | (4,471 | ) | $ | (28,197 | ) | $ | (6,656 | ) |
|               |                                  |         |                                |         |  |  |  |  |  |  |  |  |  |  |  |

 

**Revenues**

 

The following table summarizes the Company’srevenues by products and services.

 
|      | **Three Months Ended  June 30,** |   | **Six Months Ended  June 30,** |   |
|-----------|----------------------------------|--------|--------------------------------|--------|
|      | **2001**                         |   | **2002**                       |   | **2001** |   | **2002** |   |
|      | **(unaudited)**                  |   | **(unaudited)**                |   | **(unaudited)** |   | **(unaudited)** |   |
| Revenues: |                             |   |                           |   |   |   |   |   |
|      | Managed  services                | $      | 7,256                          |   | $ | 11,044 |   | $ | 13,495 |   | $ | 21,974 |   |
|      | Software                         |   | 3,180                          |   |   | 3,109 |   |   | 5,843 |   |   | 6,628 |   |
|      | Services                         | 4,503  |                           | 4,185  |   | 8,671 |   | 8,791 |   |
|      | Total  revenues                  | $      | 14,939                         |   | $ | 18,338 |   | $ | 28,009 |   | $ | 37,393 |   |
|           |                                  |        |                                |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Geographic Information**

 

The Company sells its products and servicesthrough its offices in the United States and through its subsidiaries in theUnited Kingdom, Brazil, Japan, Canada and Mexico. Information regardingrevenues and long-lived assets attributable to the United States and to allforeign countries is stated below. The geographic classification of product andservices revenues was based upon the location of the customer.

 

14

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Vastera’s product and services revenues weregenerated in the following geographic regions (in thousands):

 
|   | **Three Months Ended  June 30,** |   | **Six Months Ended  June 30,** |   |
|--------|----------------------------------|--------|--------------------------------|--------|
|   | **2001**                         |   | **2002**                       |   | **2001** |   | **2002** |   |
|   | **(unaudited)**                  |   | **(unaudited)**                |   | **(unaudited)** |   | **(unaudited)** |   |
|   | United  States                   | $      | 11,950                         |   | $ | 15,072 |   | $ | 23,808 |   | $ | 31,051 |   |
|   | Europe and  Asia                 |   | 1,588                          |   |   | 906 |   |   | 1,788 |   |   | 1,704 |   |
|   | Other  international regions     | 1,401  |                           | 2,360  |   | 2,413 |   | 4,638 |   |
|   | Total  revenues                  | $      | 14,939                         |   | $ | 18,338 |   | $ | 28,009 |   | $ | 37,393 |   |
|        |                                  |        |                                |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Vastera’s tangible long-lived assets werelocated as follows:

 
|                        |   | **December 31,  2001** |   | **June 30,  2002** |   |
|-----------------------------|--------|------------------------|--------|--------------------|--------|
|                        |   |                   |   | **(unaudited)**    |   |
| United States               |   | $                      | 7,108  |               | $      | 9,717 |   |
| Europe and Asia             |   | 510                    |   | 545                |   |
| Other international regions |   | 316                    |   | 594                |   |
| Total long-lived assets     |   | $                      | 7,934  |               | $      | 10,856 |   |

 

**Significant Customers**

 

For the three months ended June 30, 2001 and2002, one customer accounted for approximately 37 percent and 34 percent,respectively, of total revenues. For the six months ended June 30, 2002, onecustomer accounted for 35 percent of total revenues.  For the six months ended June 30, 2001, two customers accountedfor 36 percent and 10 percent, respectively, of total revenue.

### ** **

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

 

On August 29, 2000, the Company acquiredFord’s global customs operations and merged Ford’s global customs operationsinto its managed services operations. Ford received 8,000,000 shares of itscommon stock valued at approximately $79.2 million in consideration at the timeof the transaction. As of June 30, 2002, Ford owned 8,000,000 shares orapproximately 20 percent of the Company.

 

In August 2000, the Company also entered intoa managed services agreement whereby Vastera will manage Ford’s global tradeoperations. The agreement with Ford U.S. has a minimum term of four years andmay continue for a total of ten years. In January 2001 and March 2001, theCompany entered into a managed services agreements with Ford Mexico and FordCanada, respectively. The agreements with Ford Mexico and Ford Canada also haveminimum terms of four years and each may continue for a total of ten years. Forthe three months ended June 30, 2001 and 2002, Ford accounted for approximately37 percent and 34 percent, respectively, of total revenues. As of June 30,2002, Ford owed the Company approximately $5.1 million or 32 percent of theCompany’s total accounts receivable.

 

In February 2002, the Company amended itsagreement with Ford U.S. to provide for quarterly minimum transaction levelsinstead of annual minimum transaction levels. By amending this agreement, theCompany was able to bill Ford on a quarterly basis the transactions processedin excess of the minimum levels. In connection with the amendment, the Companyagreed 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 FordU.S. to carry forward a portion of the transactions processed for Ford U.S. in2001 in excess of the contractual minimum in the event that transactionprocessed in the first quarter of 2002 are less than the contractual minimum.For the three and six months ended June 30, 2002, the Company derivedapproximately $1.0 million and $2.5 million, respectively, in revenues relatedto transactions in excess of the quarterly minimum.

 

In July 2002, the Company further amended itsagreement with Ford U.S. to provide that it will now bill Ford at a fixedannual rate of $11.8 million for the remaining life of the agreement, beginningJanuary 1, 2003.  By amending theagreement in this manner, the Company will no longer bill Ford for transactionsprocessed in excess of specified minimum quarterly levels.  In connection with this amendment, theCompany and Ford agreed that it would bill Ford $4.9 million for the remainderof 2002. 

 

15

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The Company reimburses Ford for expensesincurred on its behalf by Ford for the use of facilities, the costs of leasedemployees, and the maintenance and expenses related to the acquired technology.For the three months ended June 30, 2001 and 2002, the Company paid Fordapproximately $1.5 million and $1.4 million, respectively. These payments areexpected to decrease in the future as the Company leverages its existingfacilities and employees and deploys its own technology.

### ** **

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

 

The Company applies Accounting PrinciplesBoard (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” andrelated interpretations in accounting for it stock option plan.  Accordingly, the Company has recordeddeferred compensation cost of approximately $6.4 million in the last sixmonths of 1999 and approximately $13.4 million in the first nine months of2000. On March 29, 2001, the Company also recorded approximately $465,000 ofdeferred compensation in connection with the issuance of options to acquire64,000 shares of its common stock in exchange for the unvested Speedchain stockoptions it assumed in 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  June 30,** |   | **Six Months Ended  June 30,** |   |
|------------------------------------|----------------------------------|--------|--------------------------------|--------|
|                               | **2001**                         |   | **2002**                       |   | **2001** |   | **2002** |   |
|                               | **(unaudited)**                  |   | **(unaudited)**                |   | **(unaudited)** |   | **(unaudited)** |   |
| Cost of  managed services revenues | $                                | 7      |                           | $      | 20 |   | $ | 14 |   | $ | 44 |   |
| Cost of  software revenues         |                             | 45     |                           |   | 3 |   |   | 93 |   |   | 7 |   |
| Cost of  services revenues         |                             | 222    |                           |   | 99 |   |   | 457 |   |   | 218 |   |
| Sales and  marketing               |                             | 637    |                           |   | 286 |   |   | 1,309 |   |   | 628 |   |
| Research and  development          |                             | 154    |                           |   | 69 |   |   | 317 |   |   | 152 |   |
| General and  administrative        | 522                              |   | 233                            |   | 1,073 |   | 513 |   |
| Total stock-based compensation     | $                                | 1,587  |                           | $      | 710 |   | $ | 3,263 |   | $ | 1,562 |   |
|                                    |                                  |        |                                |        |  |  |  |  |  |  |  |  |  |  |  |

 

### **10.        SupplementalInformation:**

** **

**Cash Flow Information**

 

Cash paid for interest was $202,000 and$252,000 for the six months ended June 30, 2001 and 2002, respectively. Noncashactivities were as follows (in thousands):

 
|                                                                                       |   | **Six Months Ended  June 30,  (unaudited)** |   |
|--------------------------------------------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                                                       |   | **2001**                                    |   | **2002** |   |
| Capitalized lease obligations incurred                                                     |   | $                                           | 1,988  |   | $ | 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 acquired in acquisitions  |   | 5,311                                       |   | 2,040 |   |
|                                                                                            |        |                                             |        |  |  |  |  |

 

16

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## **Item 2:**                                                          Management’sDiscussion and Analysis of Financial Condition and Results of Operations

* *

*The following discussion and analysis of ourfinancial condition and results of operations should be read in conjunctionwith our condensed consolidated financial statements and related notesappearing elsewhere in this Report, which are deemed to be incorporated intothis section. Our actual results could differ materially from those anticipatedin such forward–looking statements due to various factors, including, but notlimited to, those set forth under “Risk Factors” and elsewhere in this Report.*

** **

**Overview**

 

We are a leading provider of web-nativesoftware products and services that facilitate the international purchase andsale of goods by streamlining and optimizing global trade processes. Globaltrade involves the cross-border shipment of goods and the management of theinformation and business processes required to complete these shipments. In 1992,we introduced EMS-2000, a U.S.-centric, DOS-based export management solution.In 1994, we introduced EMS-2000 Version 4, a multi-country, two-tier,Windows-based export management solution. In 1997, we introduced GlobalPassport, a multi-country, three-tier, client-server based, import/exportmanagement solution. In 2000, we introduced TradeSphere, a multi-country,multi-module suite of web-native Global Trade Management solutions and weintroduced TradePrism.com, a trade portal that provides an Internet-baseddelivery mechanism for our Global Trade ManagementGlobal 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 our products and services to over200 clients from our offices in the United States, the United Kingdom, Brazil,Canada, Japan and Mexico. Our clients typically acquire a limited number ofserver and user subscriptions or licenses to implement in a division ordepartment. As they expand implementation of our products globally and to theirclients, suppliers and business partners, our clients acquire additionalsubscriptions or licenses. We currently market our products and services on aglobal basis through our direct sales force and other channels, such asstrategic alliances and partners. We expect revenues from our internationaloperations to increase as we continue to expand our international sales andservices organizations.

 

In July 2000, we entered into an agreement toacquire Ford Motor Company’s global customs operations and merged Ford’s globalcustoms operations into our managed services operations. The Ford operationsthat were merged into us consist of Ford personnel and technology utilized byFord to manage its international trade transactions. By combining our existingtechnology and intellectual capital with that acquired from Ford, we intend toexpand our managed services to companies of varying sizes on a global basis.Ford received 8,000,000 shares of our common stock valued at approximately$79.2 million in consideration at the time of the transaction. As of August 9,2002, Ford owned approximately 20% of our common stock.

 

In January 2001 and March 2001, we expandedthe Global Trade Management services we provide to Ford by assumingresponsibility for administering and managing Ford’s global trade operations inMexico and Canada, respectively. The contractual terms relating to negotiatingmanaged services arrangements with other foreign operations have not beenfinalized and are subject to negotiation based upon the actual costs. Thesecosts include personnel costs, administrative overhead and informationtechnology processing costs.

 

Our agreements with Ford have a minimum termof four years.  These agreements provideus with a guaranteed, predictable and recurring revenue stream from Ford overthe next three years. We expect to derive at least $18.0 million in revenues in2002 and $16.9 million in revenues in 2003 from our agreements with Ford U.S.,Ford Mexico and Ford Canada. We believe our client relationship with Ford willhave a significant impact on our total revenues and is expected to account forgreater than 10% of revenues for the foreseeable future. For the three monthsended June 30, 2001 and 2002, Ford accounted for approximately 37% and 34%,respectively, of our total revenues. For the six months ended June 30, 2001 and2002, Ford accounted for approximately 36% and 35%, respectively, of our totalrevenues.

 

In February 2002, we amended our agreementwith Ford U.S. to provide for quarterly minimum transaction levels instead ofannual minimum transaction levels. By amending this agreement, we could bill ona quarterly basis the transactions processed in excess of the minimum levels.In connection with the amendment, we agreed to reduce Ford’s U.S. aggregateannual minimum revenue guarantee from $11.6 million to $11.0 million. InDecember 2001, we permitted Ford U.S. to carry forward a portion of thetransactions processed for Ford U.S. in 2001 in excess of the contractualminimum in the event that transaction processed in the first quarter of 2002are less than the contractual minimum. For the three and six months

 

17

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ended June 30, 2002, we derivedapproximately $1.0 million and $2.5 million, respectively, in revenue relatedto transactions in excess of the quarterly minimum.

 

In July 2002, we further amended ouragreement with Ford U.S. to provide that we will now bill Ford at a fixedannual rate of $11.8 million for the remaining life of the agreement.  By amending the agreement in this manner, wewill no longer bill Ford for transactions processed in excess of specifiedminimum quarterly levels.  In connectionwith this amendment, Ford and we agreed that we would bill Ford $4.9 millionfor the remainder of 2002.

** **

**Acquisitions**

 

In the first quarter of 2002, we executed onour strategy to expand our global presence to enhance our competitive positionworldwide and our ability to serve and support our clients.  As part of this strategy, we acquiredcompanies in Mexico, Canada and Brazil. The shares of common stock we issued were valued at the average of theclosing prices for the three days before and the three days after the date eachacquisition’s definitive terms were finalized.

 

On January 3, 2002, we entered into adefinitive agreement to acquire Prisma Tecnologia Computacional, S.A. de C.V.(“Prisma”) for approximately $5.2 million. Prisma is a provider of Global TradeManagement solutions in Mexico. The Company consummated this transaction onFebruary 1, 2002 and paid $2.45 million in cash and issued approximately150,000 shares of it common stock valued at approximately $2.4 million.

 

On February 12, 2002, we acquired Imanet, anOntario Corporation for approximately $2.4 million. Imanet is a provider ofGlobal Trade Management solutions in Canada. The Company paid $850,000 in cashand issued approximately 90,000 shares of its common stock valued atapproximately $1.4 million.

 

On March 8, 2002, we acquired BergenInformatica Ltda (“Bergen”) for approximately $6.2 million.  Bergen is a provider of Global TradeManagement solutions in Brazil.  TheCompany paid $2.4 million in cash and issued approximately 223,000 shares ofits common stock valued at approximately $3.1 million.

 

On March 29, 2001, we acquired Speedchain, adevelopment stage company with no revenues since its inception in 1999.Speedchain is a supply chain event management and global e-logistics solutionsprovider. The acquisition was effected through the merger of Speedchain intoone of our wholly owned subsidiaries, Vastera Acquisition Corporation. Theacquisition was accounted for under the purchase method of accounting and theoperating results of Speedchain have been included in the accompanyingcondensed consolidated financial statements from the date of acquisition.

 

Under the terms of the acquisition agreement,we issued an aggregate of 944,485 shares of common stock in exchange for all ofthe outstanding preferred stock and common stock of Speedchain. The shares ofcommon stock issued by us were valued at $14.00 per share, the average of theclosing prices for the three days before and three days after March 1, 2001. Wealso issued options to acquire approximately 24,000 shares of our common stockin exchange for the vested Speedchain stock options we assumed in the businesscombination. The options were valued at approximately $328,000 using theBlack-Scholes model, assuming 128% volatility, a risk free interest rate of6.19% and an exercise period of three years. We also issued options to acquire approximately 64,000 shares of ourcommon stock in exchange for the unvested Speedchain stock options assumed inthe business combination. Accordingly, we recorded $465,000 of deferredcompensation that will be amortized on an accelerated basis over the remainingvesting period of these options.

 

We valued in-process research and development(“IPR&D”) projects acquired in the acquisition at approximately $6.9million, based on the results of an independent appraisal of the developmentprojects for which technological feasibility has not been established and noalternative future uses exist. The acquired IPR&D projects are targeted at thesupply chain event management and e-logistics market.

 

The value of the IPR&D projectsidentified was determined by estimating the future cash flows from each of therespective projects at the assumed date of commercial feasibility, discountingthese net cash flows back to their present value and then applying a percentageof completion to the calculated present value. The percentage of completion foreach project was determined using milestones representing management’s estimateof effort, value added and degree of difficulty of the portion of the projectscompleted as of March 29, 2001, as compared to the remaining research anddevelopment to be

 

18

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completed to bring the projectsto technical feasibility. Speedchain’s projects started in February 2000 and,as of March 29, 2001, we estimated the projects were 70% complete.

 

Development of the Speedchain technologyremains a substantial risk to us due to factors including the remaining effortnecessary to achieve technical feasibility, rapidly changing customer needs andcompetitive threats from other companies. Failure to bring these products tomarket in a timely manner could adversely affect future sales and profitabilityof the combined company. Additionally, the value of the other intangible assetsacquired may become impaired.

 

Goodwill and identifiable intangibles havebeen amortized on a straight-line basis over three to four years and resultedin charges to operations of approximately $5.8 million and $740,000 for thethree months ended June 30, 2001 and 2002, respectively, and $10.8 million and$1.2 million for the six months ended June 30, 2001 and 2002, respectively. 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. Inthe aggregate, amortization for future periods is expected to be approximately$2.7 million for the years ending December 31, 2002 and 2003 and approximately$2.4 million for the year ending December 31, 2004.

** **

**Critical Accounting Policies**

 

We consider certain accounting policiesrelated to revenue recognition, deferred revenues and intangible assets to becritical to our business operations and the understanding of our results ofoperations. The impact and any associated risks related to these policies onour business operations is discussed throughout Management’s Discussion andAnalysis of Financial Condition and Results of Operations where such policiesaffect our reported and expected financial results. For a detailed discussionon the application of these and other accounting policies, see the Notes to theCondensed Consolidated Financial Statements in Item 1 of this Report on Form10-Q. Note that our preparation of this Report on Form 10-Q requires us to makeestimates and 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.

** **

**Source of Revenues and Revenue RecognitionPolicy**

 

Our revenues consist of managed servicesrevenues, software revenues and services revenues.

* *

*ManagedServices Revenues*

 

Managed services revenues are derived fromagreements that provide for transaction fees based on the performance of ourmanaged services solutions. Managed services solutions include the processingof our clients’ custom entries and the classification of its clients’ goods.Managed services transaction arrangements are often subject to annual orquarterly minimum transaction thresholds and revenues have been recognizedbased on the lower of the cumulative actual transactions processed during theperiod using a weighted-average transaction rate or the amount billable for theperiod. For those managed services transaction arrangements that are subject toannual minimums and the amount billable for interim periods is limited to thepro-rata portion of the annual minimum, transactions processed in excess of theminimum in each period are not billable and, therefore, revenue is notrecognized until the end of the related period. Certain managed servicesarrangements are based upon a fixed services fee.  Revenues associated with these arrangements are recognized basedupon the average annual revenue over the life of the arrangement.  In addition, we may receive annualgainsharing fees under certain managed services transaction arrangements basedon a percentage of the client’s annual cost savings, as defined in the managedservices arrangements.  Such fees arerecognized when they become fixed and determinable.

* *

*SoftwareRevenues*

 

Software revenues consist of subscription–basedrevenues, transaction–based revenues and perpetual software licenserevenues. We recognize revenue from the sale of software products in accordancewith Statement of Position (“SOP”) 97–2, “Software Revenue Recognition.”

 

19

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Subscription-based revenues are derived fromterm-license arrangements in which our clients license our software productsand obtain the right to unspecified enhancements on a when-and-if-availablebasis and ongoing support and content update services. Revenues are recognizedratably over the contract term. Subscription arrangements typically range from threeto five years.

 

Transaction-based revenues are derived fromagreements that provide for transaction fees based on a client’s usage of oursoftware products. Revenues from the usage of its software products arerecognized as transactions occur.

 

Perpetual software license revenues arederived from perpetual software license arrangements and related maintenancecontracts. Maintenance contracts include the right to unspecified enhancementson a when-and-if available basis, ongoing support and content update services.The content updates provided under maintenance arrangements are significant andfrequent and thus the entire arrangement is in substance a subscription.Revenues from perpetual software license sales are recognized ratably over theestimated economic life of the product. We have estimated that the life of theproduct is three years, which is consistent with the historical periods betweenmajor upgrades to the functionality and architecture of its products such thatwe would charge all customers a new fee to migrate to the new version. Revenuesfrom maintenance contracts are recognized ratably over the contract term,typically one year.

* *

*ServicesRevenues*

 

Services revenues are derived fromimplementation, management consulting and training services. Services areperformed on a time and materials basis or under fixed price arrangements andare recognized as the services are performed or using the percentage ofcompletion method of accounting. Losses on arrangements are recognized whenknown.

** **

**Deferred Revenues**

 

Deferred revenues include amounts billed toclients for revenues that have not been recognized and generally result frombilled, but deferred subscription/transaction revenues and services not yetrendered. Deferred revenues will be recognized on a monthly basis over the termor the remaining economic life of the product or when the services areperformed. As we continue to increase our subscription and transaction-basedrevenues relative to our perpetual licenses, we expect our deferred revenues tofluctuate since subscription and transaction-based customers are billed andpaid ratably (monthly or quarterly). We do not consider deferred revenue to bean indicator of future revenues.

** **

**Intangible Assets**

 

As of June 30, 2002, we have intangible assetsrecorded of approximately $77.1 million related to our 1999, 2000, 2001 and2002 acquisitions. Goodwill related to the 1999 acquisitions was amortizedusing the straight-line method over five years. Intangible assets from ouracquisition of Ford’s global customs unit in 2000 consists of goodwill,assembled workforce, acquired technology and the Ford contract. Prior toJanuary 1, 2002, goodwill and assembled workforce were amortized using thestraight-line method over three to four years. Acquired technology is amortizedover five years. The value assigned to the Ford contract is being amortized asa discount to revenue over the minimum term of the contract. The value assignedto the assembled workforce has been allocated to each country in which we willacquire Ford’s global customs operations, based on the number of employees ineach country. The related amortization is recorded on a straight-line basisover three years from the date we assume Ford’s customs operations in eachcountry. The assembled workforce intangible asset and goodwill from ourSpeedchain acquisition in 2001 were amortized using the straight-line methodover 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 andcharged to results of operations only in the periods in which the recordedvalue of goodwill and certain intangibles is more than its fair value. Duringthe first 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 results for the prioryear (three and six months ended June 30, 2001) have not been restated.Reconciliations of previously reported net loss and net loss per share to theamounts adjusted for the exclusion of goodwill amortization net of the relatedtax effects are as follows: 

 
|                                              |   | **For the  Three Months  Ended June 30,** |    | **For the  Six Months  Ended June 30,** |   |
|---------------------------------------------------|--------|-------------------------------------------|---------|-----------------------------------------|--------|
|                                              |   | **2001**                                  |    | **2002**                                |   | **2001** |   | **2002** |   |
| Reported net loss                                 |   | $                                         | (10,917 | )                                       | $      | (4,471 | ) | $ | (28,197 | ) | $ | (6,656 | ) |
| Goodwill amortization, net of tax                 |   | 5,701                                     |    | —                                  |   | 10,485 |   | — |   |
| Adjusted net loss                                 |   | $                                         | (5,216  | )                                       | $      | (4,471 | ) | $ | (17,712 | ) | $ | (6,656 | ) |
|                                              |   |                                      |    |                                    |   |   |   |   |   |
| Basic and diluted net loss per share as  reported |   | $                                         | (0.29   | )                                       | $      | (0.11 | ) | $ | (0.76 | ) | $ | (0.17 | ) |
| Goodwill amortization, net of tax                 |   | 0.15                                      |    | —                                  |   | 0.28 |   | — |   |
| Adjusted basic and diluted net loss per  share    |   | $                                         | (0.14   | )                                       | $      | (0.11 | ) | $ | (0.48 | ) | $ | (0.17 | ) |
|                                              |   |                                      |    |                                    |   |   |   |   |   |
| Weighted average common shares                    |   | 37,695                                    |    | 40,124                                  |   | 37,054 |   | 39,700 |   |

 

             For the three months ended June 30, 2001 and2002, we recorded amortization expense related to our goodwill and intangiblesof approximately $5.8 million and $740,000, respectively. For the six monthsended June 30, 2001 and 2002, we recorded amortization expense of $10.8 millionand $1.2 million, respectively.

20

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The recoverability and useful lives of ourintangible assets are based on estimates and are susceptible to change.Although we believe our intangible assets will be recoverable, changes in theeconomy, the business in which we operate and our own relative performancecould change the assumptions used to evaluate intangible asset recoverability.We continue to monitor these assumptions and their effect on the estimatedrecoverability. Any resulting impairment loss could have a material adverseimpact on our financial condition and results of operations.

** **

**Comparison of the Three Months Ended June 30,2001 to the Three Months Ended June 30, 2002**

* *

*Revenues*

** **

**Totalrevenues.** Total revenues increased 23% fromapproximately $14.9 million for the three months ended June 30, 2001 toapproximately $18.3 million for the three months ended June 30, 2002.

** **

**Managedservices revenues.** Managed services revenues increased52% from approximately $7.3 million for the three months ended June 30,2001 to approximately $11.0 million for the three months ended June 30,2002.  We attribute this increase to thecontinued growth in our automotive and high-tech managed services client base.For the three months ended June 30, 2002, we derived approximately $1.0 millionin revenue under our Ford U.S. global managed services agreement related totransactions in excess of the quarterly minimum.  Revenues derived from our managed services agreements accountedfor 49% of our total revenues for the three months ended June 30, 2001 and 60%of our total revenues for the three months ended June 30, 2002. In February2002, our agreement with Ford U.S. was amended to provide for quarterlyminimums so that transactions processed in excess of the minimum will bebillable quarterly rather than at the end of the year. In July 2002, we furtheramended our agreement with Ford U.S. to provide that we will now bill Ford at afixed annual rate of $11.8 million for the remaining life of theagreement.  By amending the agreement inthis manner, we will no longer bill Ford for transactions processed in excessof specified minimum quarterly levels. In connection with this amendment, Ford and we agreed that we would billFord $4.9 million for the remainder of 2002. We expect managed services revenues to account for at least 55% of ourtotal revenues for the near future.

** **

**Softwarerevenues.** Software revenues decreased 2% fromapproximately $3.2 million for the three months ended June 30, 2001 toapproximately $3.1 million for the three months ended June 30, 2002.  We attribute this decrease to the decreasein information technology spending and the conversion of our software clientsto managed services clients.  Revenuesderived from our software agreements accounted for 21% of our total revenuesfor the three months ended June 30, 2001 and 17% of our total revenues for thethree months ended June 30, 2002. We expect software revenues to account for nomore than 20% of our total revenues for the near future.

** **

**Servicesrevenues.** Services revenues decreased 7% fromapproximately $4.5 million for the three months ended June 30, 2001 toapproximately $4.2 million for the three months ended June 30, 2002. Implementationstypically begin in the quarter following a software deal.  Since we closed fewer software deals in thefirst quarter of 2002 compared to previous quarters, our services revenues inthe second quarter decreased. Services revenues accounted for 30% of our totalrevenues for the three months ended June 30, 2001 and 23% for the three monthsended June 30, 2002. We expect services revenues to continue to account for upto 25% of our total revenues for the near future.

* *

*Cost ofRevenues*

** **

**Costof managed services revenues.** Cost of managed servicesrevenues includes the cost of salaries and related expenses for our managedservices organizations. We expect the cost of managed services revenues inabsolute dollars to continue to increase as we expand our offerings further,build out our managed services trade hubs and integrate other technologyproducts into our product offerings. The cost of managed services revenues increased 39% from approximately$3.9 million for the three months ended June 30, 2001 to approximately $5.4million for the three months ended June 30, 2002. This increase was largely dueto the growth of our managed services client base. The cost of managed servicesrevenues as a percentage of managed services revenues was 54% for the threemonths ended June 30, 2001 and 49% for the three months ended June 30,2002.  This decrease as a percentage ofmanaged services revenues reflected our ability to leverage our managedservices organization. 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,

 

21

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we expect that our cost ofmanaged services revenues may fluctuate on a quarterly basis as a percentage ofmanaged services revenues.

** **

**Costof software revenues.** Cost of software revenuesincludes royalties owed to third parties for technology products integratedinto our software products, as well as the cost of salaries and relatedexpenses for our technical support 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 productofferings.  The cost of softwarerevenues increased 7% from approximately $626,000 for the three months endedJune 30, 2001 to approximately $667,000 for the three months ended June 30,2002.  This increase was due to ourinvestment in our client support infrastructure. The cost of software revenuesas a percentage of software revenues was 20% for the three months ended June30, 2001 as compared to 21% for the three months ended June 30, 2002.  This increase as a percentage of softwarerevenues reflected additional support costs related to our foreign operations.  We expect the cost of software revenues as apercentage of software revenues to be approximately 20% on an annual basis, butthis percentage could fluctuate in any given quarter.

** **

**Costof services revenues.** Cost of services revenuesincludes the cost of salaries and related expenses for implementation,management consulting and training services provided to clients, as well as thecost of third parties contracted to provide either application consulting orimplementation services to our clients.

 

The cost of services revenues remainedconstant at $3.3 million for the three months ended June 30, 2001 and for thethree months ended June 30, 2002. The cost of services revenues as a percentageof services revenues was 73% for the three months ended June 30, 2001 and 79%for three months ended June 30, 2002. This increase reflects the decrease in service revenues while costs ofservices remained constant.  We expectthe cost of services revenues as a percentage of services revenues to be in therange of 73% to 78% on an annual basis, but this percentage could fluctuateoutside this range in any given quarter.

* *

*OperatingExpenses*

** **

**Salesand marketing.** Sales and marketing expense consistsprimarily of salaries, commissions and bonuses earned by sales and marketingpersonnel, sales training events, public relations, advertising, trade showsand travel expenses related to both promotional events and direct salesefforts. Sales and marketing decreased 29% from approximately $4.6 millionfor the three months ended June 30, 2001 to approximately $3.3 million forthe three months ended June 30, 2002. This decrease was primarily due to areduction in annual bonuses expected to be paid to employees and compensationpaid to our employees.  Sales andmarketing expenses represented 31% of our total revenues for the three monthsended June 30, 2001 and 18% for the three months ended June 30, 2002. Weanticipate that sales and marketing expenses will continue to decrease as apercentage of total revenues in future years.

** **

**Researchand development.** Research and development expenseconsists primarily of salaries, benefits and equipment for software developers,quality assurance personnel, program managers and technical writers. Researchand development expense decreased 7% from approximately $3.8 million forthe three months ended June 30, 2001 to approximately $3.5 million for thethree months ended June 30, 2002. Research and development expenses represented25% of our total revenues for the three months ended June 30, 2001 and 19% forthe three months ended June 30, 2002. We believe that we must continue to invest in research and developmentin order to develop new products and services. 

** **

**Generaland administrative.** 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 decreased 2% from approximately$2.4 million for the three months ended June 30, 2001 to approximately$2.3 million for the three months ended June 30, 2002. General andadministrative expenses represented 16% of our total revenues for the threemonths ended June 30, 2001 and 13% for the three months ended June 30, 2002. Webelieve our general and administrative expenses will continue to 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.**Depreciation expense increased 39% from approximately$789,000 for the three months ended June 30, 2001 to approximately $1.1 millionfor the three months ended June 30, 2002. This increase resulted from the depreciation of fixed assets purchasedto build the infrastructure needed to support the growth of our business.Depreciation expense represented 5% and 6% of our total revenues for the threemonths ended June 30, 2001 and 2002, respectively.

 

22

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**Amortization.**Amortization expense decreased 87% from approximately$5.8 million for the three months ended June 30, 2001 to approximately $740,000for the three months ended June 30, 2002. This decrease resulted from our adoption of the nonamortization approachunder SFAS No. 142 for our goodwill. Amortization expense represented 39% of our total revenues for the threemonths ended June 30, 2001 and 4% for the three months ended June 30,2002.  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. In the aggregate, amortization for future periods is expected tobe approximately $2.7 million for the years ending December 31, 2002, 2003 and2004 and approximately $2.4 million for the year ending December 31, 2005.

### ** **

### **Restructuring.**In the second quarter of 2002, we began a restructuring plan that weexpect to complete in the third quarter of 2002.  We recorded approximately $2.0 million in costs associated withthe termination of certain employees, the closing of redundant facilities andthe cancellation of certain contracts. We estimate that we will record additional restructuring expense of $2.5million to $3.5 million in the third quarter of 2002.  We paid out approximately $300,000 of these costs in the secondquarter and expects to pay out the remainder in 2002 and 2003.

** **

**In-process research and development.**For the six 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-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 June 30, 2001 and 2002, we amortized approximately $1.6 million and$710,000, respectively, of deferred compensation.  We expect to amortize deferred compensation of approximately$2.6 million, $941,000 and $45,000 for the years ending December 31,2002, 2003 and 2004. The amount of stock option compensation expense to berecorded in future periods could decrease if options are forfeited for whichaccrued but unvested compensation has been recorded.

** **

**Otherincome (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 $959,000 for the three monthsended June 30, 2001 to approximately $228,000 for the three months ended June30, 2002. This decrease resulted from the decrease in interest income.  Interest income decreased due to lowerinterest rates and our utilization of our cash resources to fund our operationsand to acquire companies.

** **

**Incometaxes.**No provision for income taxes has been recordedfor either the three months ended June 30, 2001 or 2002 due to accumulated netoperating losses. We have recorded tax expense from franchise or other similarbusiness taxes. We have recorded a valuation allowance for the full amount ofour net deferred tax assets as a result of the uncertainty surrounding therealization of these future tax benefits.

 

As of December 31, 2001, we had netoperating loss carry–forwards for federal tax purposes of approximately$70.5 million. These federal tax loss carry-forwards are available toreduce future taxable income and begin to expire in 2011. Under the provisionsof the Internal Revenue Code, certain substantial changes in our ownership haveoccurred, and as a result, our future utilization of these net operatingcarry-forwards that we accumulated prior to the change in ownership will besubject to an annual limitation. We have also generated foreign net operating lossesof approximately $5.0 million that are available for carry-forward. We maygenerate additional net operating loss carry-forwards in the future.

 

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**Comparison of the Six Months Ended June 30,2001 to the Six Months Ended June 30, 2002**

* *

*Revenues*

** **

**Totalrevenues.** Total revenues increased 34% fromapproximately $28 million for the six months ended June 30, 2001 toapproximately $37.4 million for the six months ended June 30, 2002.

** **

**Managedservices revenues.** Managed services revenues increased63% from approximately $13.5 million for the six months ended June 30,2001 to approximately $22.0 million for the six months ended June 30,2002. We attribute this increase to the continued growth in our automotive andhigh-tech managed services client base. For the six months ended June 30, 2002,we derived approximately $2.5 million in revenue under our Ford U.S. globalmanaged services agreement related to transactions in excess of the quarterlyminimum.  Revenues derived from ourmanaged services agreements accounted for 49% of our total revenues for the sixmonths ended June 30, 2001 and 59% of our total revenues for the six monthsended June 30, 2002. In February 2002, our agreement with Ford U.S. was amendedto provide for quarterly minimums so that transactions processed in excess ofthe minimum will be billable quarterly rather than at the end of the year. InJuly 2002, we further amended our agreement with Ford U.S. to provide that wewill now bill Ford at a fixed annual rate of $11.8 million for the remaininglife of the agreement.  By amending theagreement in this manner, we will no longer bill Ford for transactionsprocessed in excess of specified minimum quarterly levels.  In connection with this amendment, Ford andwe agreed that we would bill Ford $4.9 million for the remainder of 2002.  We expect managed services revenues toaccount for at least 55% of our total revenues for the near future.

** **

**Softwarerevenues.** Software revenues increased 13% from approximately$5.8 million for the six months ended June 30, 2001 to approximately$6.6 million for the six months ended June 30, 2002.  We attribute this increase to the growth inour software client base.  Revenuesderived from our software agreements accounted for 21% of our total revenuesfor the six months ended June 30, 2001 and 18% of our total revenues for thesix months ended June 30, 2002. We expect software revenues to account for nomore than 20% of our total revenues for the near future.

** **

**Servicesrevenues.** Services revenues remained relativelyconstant at $8.7 million for the six months ended June 30, 2001 andapproximately $8.8 million for the six months ended June 30, 2002.Services revenues accounted for 31% of our total revenues for the six monthsended June 30, 2001 and 23% for the six months ended June 30, 2002. We expectservices revenues to continue to account for up to 25% of our total revenuesfor the near future.

* *

*Cost ofRevenues*

** **

**Costof managed services revenues.** The cost of managed servicesrevenues increased 50% from approximately $7.2 million for the six months endedJune 30, 2001 to approximately $10.8 million for the six months ended June 30,2002. This increase was largely due to the growth of our managed servicesclient base. The cost of managed services revenues as a percentage of managedservices revenues was 54% for the six months ended June 30, 2001 and 49% forthe six months ended June 30, 2002. This decrease as a percentage of managed services revenues reflected ourability to leverage our managed services organization. We expect to realizeproductivity improvements from our investment in our support infrastructure andthe leveraging of personnel in the performance of our managed servicesagreements. As we enter into large multi-year managed services agreements innew industry verticals or new geographic regions that may require significantinvestments in the related infrastructure, the costs associated with thesemanaged services agreements may be greater in the initial year than in thelater years when we realize productivity improvements from these infrastructureinvestments. Accordingly, we expect that our cost of managed services revenuesmay fluctuate on a quarterly basis as a percentage of managed servicesrevenues.

** **

**Costof software revenues.** The cost of software revenuesincreased 6% from approximately $1.1 million for the six months ended June 30,2001 to approximately $1.2 million for the six months ended June 30, 2002.  This increase was largely due to ourinvestment in our client support infrastructure. The cost of software revenuesas a percentage of software revenues was 19% for the six months ended June 30,2001 as compared to 18% for the six months ended June 30, 2002.  This decrease as a percentage of software revenuesreflected the productivity improvements from our investment in our supportinfrastructure. We expect the cost of software revenues as a percentage ofsoftware revenues to be approximately 20% on an annual basis, but thispercentage could fluctuate in any given quarter.

 

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**Costof services revenues.** The cost of services revenuesremained relatively constant at $6.5 million for the six months ended June 30,2001 to approximately $6.7 million for the six months ended June 30, 2002. Thisincrease resulted from an increase in services revenues. The cost of servicesrevenues as a percentage of services revenues was 76% for the six months endedJune 30, 2001 and 76% for three months ended June 30, 2002.  We expect the cost of services revenues as apercentage of services revenues to be in the range of 73% to 78% on an annualbasis, but this percentage could fluctuate outside this range in any givenquarter.

* *

*OperatingExpenses*

** **

**Salesand marketing.** Sales and marketing decreased 26% fromapproximately $8.9 million for the six months ended June 30, 2001 toapproximately $6.6 million for the six months ended June 30, 2002. Thisdecrease was primarily due to a reduction in annual bonuses expected to be paidto employees and compensation paid to our employees.  Sales and marketing expenses represented 32% of our totalrevenues for the six months ended June 30, 2001 and 18% for the six monthsended June 30, 2002. We anticipate that sales and marketing expenses will continueto decrease as a percentage of total revenues in future years.

** **

**Researchand development.** Research and development expenseincreased 2% from approximately $7.3 million for the six months ended June30, 2001 to approximately $7.4 million for the six months ended June 30,2002. This increase resulted from an increase in the number of internal andcontract software developers and quality assurance personnel needed to supportour product development and testing activities. Research and development expensesrepresented 27% of our total revenues for the six months ended June 30, 2001and 20% for the six months ended June 30, 2002.  We believe that we must continue to invest in research anddevelopment in order to develop new products and services. We anticipate thatresearch and development expenses will continue to decrease as a percentage oftotal revenues in future years.

** **

**Generaland administrative.** General and administrative expenseincreased 11% from approximately $4.4 million for the six months endedJune 30, 2001 to approximately $4.9 million for the six months ended June30, 2002. This increase resulted from the additional of legal andadministrative personnel to support the growth of our business. General andadministrative expenses represented 16% of our total revenues for the sixmonths ended June 30, 2001 and 13% for the six months ended June 30, 2002. Webelieve our general and administrative expenses will continue to 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.**Depreciation expense increased 37% from approximately$1.5 million for the six months ended June 30, 2001 to approximately $2.1million for the six months ended June 30, 2002.  This increase resulted from the depreciation of fixed assetspurchased to build the infrastructure needed to support the growth of ourbusiness. Depreciation expense represented 5% and 6% of our total revenues forthe six months ended June 30, 2001 and 2002, respectively.

** **

**Amortization.**Amortization expense decreased 89% from approximately$10.8 million for the six months ended June 30, 2001 to approximately $1.2million for the six months ended June 30, 2002.  This decrease resulted from our adoption of the nonamortizationapproach under SFAS No. 142 for our goodwill. Amortization expense represented 39% of our total revenues for the sixmonths ended June 30, 2001 and 3% for the six months ended June 30, 2002.  On January 1, 2002, in accordance with SFASNo. 141, we reclassified our assembled workforce intangible assets to goodwill.As of January 1, 2002, we had unamortized goodwill of approximately $62.2million. In the aggregate, amortization for future periods is expected to beapproximately $2.7 million for the years ending December 31, 2002, 2003 and2004 and approximately $2.4 million for the year ending December 31, 2005.

** **

**Restructuring.** Inthe second quarter of 2002, we began a restructuring plan that we expect tocomplete in the third quarter of 2002. We recorded approximately $2.0 million in costs associated with thetermination of certain employees, the closing of redundant facilities and thecancellation of certain contracts.  Weestimate that we will record additional restructuring expense of $2.5 millionto $3.5 million in the third quarter of 2002. We paid out approximately $300,000 of these costs in the second quarterand expects to pay out the remainder in 2002 and 2003.

** **

**In-process research and development.**For the six 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.

 

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**Stock-basedcompensation.**We recorded deferred compensation ofapproximately $6.4 million in the last six months of 1999 and approximately$13.1 million for the year ended December 31, 2000. These amountsrepresent the aggregate difference between the exercise price and the fairvalue for accounting purposes of the underlying common stock at the date ofgrant. 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 six months ended June 30, 2001 and 2002, weamortized approximately $3.3 million and $1.6 million, respectively, ofdeferred compensation.  We expect toamortize deferred compensation of approximately $2.6 million, $941,000 and$45,000 for the years ending December 31, 2002, 2003 and 2004,respectively. The amount of stock option compensation expense to be recorded infuture periods could decrease if options are forfeited for which accrued butunvested compensation has been recorded.

** **

**Otherincome (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 $1.9 million for the six monthsended June 30, 2001 to approximately $533,000 for the six months ended June 30,2002. This decrease resulted from the decrease in interest income.  Interest income decreased due to lowerinterest rates and our utilization of our cash resources to fund our operationsand to acquire companies.

** **

**Incometaxes.**No provision for income taxes has been recordedfor either the three months ended June 30, 2001 or 2002 due to accumulated netoperating losses. We have recorded tax expense from franchise or other similarbusiness taxes. We have recorded a valuation allowance for the full amount ofour net deferred tax assets as a result of the uncertainty surrounding therealization of these future tax benefits.

** **

**Liquidity and Capital Resources**

 

We had cash and cash equivalents andshort-term investments of $63.4 million as of June 30, 2002, a decrease of$10.3 million from $73.8 million as of December 31, 2001.

 

We have a secured revolving line of creditand an equipment line of credit with PNC Bank. As of December 31, 2001 and June30, 2002, the outstanding balance under the equipment line of credit wasapproximately $4.2 million and $4.1 million, respectively, and there were noamounts outstanding under the secured revolving line of credit. The revolvingline of credit was scheduled to expire on December 31, 2000 and wasextended to April 30, 2001. In May 2001, we renegotiated and amended oursecured revolving line of credit and equipment line of credit. As amended, wecould borrow up to $10 million under the revolving line of credit, with a $2.5million sub-limit for the issuance of letters of credit. Advances under therevolving line of credit were limited to the lesser of $10 million or 80percent of eligible accounts receivable, as defined in the loan agreement. Therevolving line of credit bore interest at the greater of the bank’s prime rateor the overnight federal funds rate (4.75 percent as of June 30, 2002). Therevolving line of credit was scheduled to mature in May 2002.  PNC Bank extended the term until November2002. In July 2002, we obtained a credit facility with a different financialinstitution.

 

The terms of the former revolving line ofcredit and equipment line of credit require us to comply with certain financialcovenants including, but not limited to, restrictions and limitations on futureindebtedness, sale of assets and material changes in our business. Thefinancial covenants include a minimum quick ratio, as defined in the loanagreement, of 2.0 to 1.0 and a maximum ratio of total liabilities to tangiblenet worth of 1.0 to 1.0 for 2001 and 1.5 to 1.0 for 2002 and thereafter. Themost restrictive of the financial covenants is that our negative operatingincome shall not be in excess of $1.0 million for the quarter ended June 30,2002.  As of June 30, 2002, we were notin compliance with this covenant. 

 

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In July 2002, we refinanced $3.9 million ofoutstanding debt under our former credit facility with Comerica Bank.  The term loan matures in June 2004 and bearsinterest at the bank’s prime rate plus 50 basis points.  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 therevolving 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 percent of eligible accounts receivable, asdefined in the loan agreement. The revolving line of credit bears interest atthe bank’s prime rate.  The revolvingline of credit matures in July 2004.  

 

We may borrow up to $5 million under theequipment line of credit.  The equipmentline of credit bears interest at the bank’s prime rate plus 50 basispoints.  The equipment line of credithas two interest-only payment periods and matures in July 2005.

 

The terms of the  revolving line of credit and equipment lineof credit require the Company to comply with certain financial covenantsincluding, but not limited to, restrictions and limitations on futureindebtedness, sale of assets and material changes in our business. The financialcovenants include a minimum quick ratio, as defined in the loan agreement, of2.0 to 1.0 and a maximum ratio of total liabilities to tangible net worth of1.5 to 1.0.  The most restrictive of thefinancial covenants is that our pro forma income/(loss) shall not be in excessof ($1.5) million for the three months ended September 30, 2002 and $0 for thethree months ended December 31, 2002 and thereafter, measured quarterly.  As of and for the three months ended June30, 2002, we were in compliance with the covenants of our new credit facility.

 

Pro forma income (loss) is defined in theloan agreement as net income, plus interest expense, taxes, non-cash charges(including depreciation, amortization, stock-based compensation, research anddevelopment related charges and one-time restructuring charges), and cashrestructuring charges (not to exceed $5.0 million in the aggregate), and lessinterest income, and one-time or non-recurring revenue. 

 

Amounts borrowed from one lending institutionfor capital leases are due over 36 to 48-month repayment periods and arecollateralized by our intellectual property. As of December 31, 2001 andJune 30, 2002, the outstanding balance under this capital lease agreement wasapproximately $309,000 and $139,000, respectively.

 

Net cash used in operating activities totaledapproximately $14.0 million for the six months ended June 30, 2001 and $2.6million for the six months ended June 30, 2002. Net cash flows from operatingactivities reflect net losses of approximately $28.2 million and $6.7 millionfor the six months ended June 30, 2001 and 2002, respectively, and are offsetby the non-cash expenses relating to depreciation and amortization, stock-basedcompensation, IPR&D and provision for doubtful accounts. In addition, thenet cash used in operations increased due to an increase in accounts receivableand a decrease in accrued compensation and accounts payable and accruedexpenses.

 

Net cash (used in) provided by investingactivities was approximately $(1.3) million and $5.1 million for the six monthsended June 30, 2001 and 2002, respectively. Our investing activities reflect the acquisition of subsidiaries,additions of property and equipment and purchases and sales of short-terminvestments. We anticipate that our capital expenditures will increase over thenext several years as we expand our facilities and acquire equipment to supportexpansion of our sales, marketing and research and development activities. Wemay also utilize our cash to acquire other companies.

 

Net cash provided by financing activities wasapproximately $1.5 million and $4.4 million for the six months ended June 30,2001 and 2002, respectively.  Thesefinancing cash flows primarily reflect the net proceeds from the exercise ofstock options and principal payments on our debt.

 

We intend to continue investing in thebusiness, particularly in the areas of research and development, sales andmarketing. Our future liquidity and capital requirements will depend onnumerous factors, including:

 

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

 

•     The costs and timing ofexpansion 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;

 

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•                  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 tofund acquisitions of complementary businesses and technologies. We believe thatour current cash resources will be sufficient to meet our working capital andcapital requirements for at least the next 12 months. Thereafter, we mayfind it necessary to obtain additional equity or debt financing. In the eventthat additional financing is required, we may not be able to raise it on termsacceptable to us, if at all.

 

We reimburse Ford for certain expenses inconnection with the acquisition of Ford’s global customs operations. We  expect to pay approximately $477,000 in feesto Ford each month for the reimbursement of expenses incurred by Ford for theuse of facilities, the costs of leased employees and the maintenance andexpenses related to the acquired technology. We expect these payments to decrease as we leverage our existingfacilities and deploy our technology.

** **

**Recent Accounting 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. Duringthe first 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 results for the prioryear (three and six months ended June 30, 2001) have not been restated.Reconciliations of previously reported net loss and net loss per share to theamounts adjusted for the exclusion of goodwill amortization net of the relatedtax effects are as follows: 

 
|                                              |   | **For the  Three Months  Ended June 30,** |    | **For the  Six Months  Ended June 30,** |   |
|---------------------------------------------------|--------|-------------------------------------------|---------|-----------------------------------------|--------|
|                                              |   | **2001**                                  |    | **2002**                                |   | **2001** |   | **2002** |   |
| Reported net loss                                 |   | $                                         | (10,917 | )                                       | $      | (4,471 | ) | $ | (28,197 | ) | $ | (6,656 | ) |
| Goodwill amortization, net of tax                 |   | 5,701                                     |    | —                                  |   | 10,485 |   | — |   |
| Adjusted net loss                                 |   | $                                         | (5,216  | )                                       | $      | (4,471 | ) | $ | (17,712 | ) | $ | (6,656 | ) |
|                                              |   |                                      |    |                                    |   |   |   |   |   |
| Basic and diluted net loss per share as  reported |   | $                                         | (0.29   | )                                       | $      | (0.11 | ) | $ | (0.76 | ) | $ | (0.17 | ) |
| Goodwill amortization, net of tax                 |   | 0.15                                      |    | —                                  |   | 0.28 |   | — |   |
| Adjusted basic and diluted net loss per  share    |   | $                                         | (0.14   | )                                       | $      | (0.11 | ) | $ | (0.48 | ) | $ | (0.17 | ) |
|                                              |   |                                      |    |                                    |   |   |   |   |   |
| Weighted average common shares                    |   | 37,695                                    |    | 40,124                                  |   | 37,054 |   | 39,700 |   |

 

In the aggregate, amortization for the yearended December 31, 2001 was approximately $21.7 million.  In the aggregate, amortization for futureperiods is expected to be approximately $2.7 million for the years endingDecember 31, 2002 and  2003 andapproximately $2.4 million for the year ending December 31, 2004.

 

In June 2001, the FASB issued SFAS No. 143,“Accounting for Asset Retirement Obligations.” It requires an entity to recognize the fair value of a liability for anasset retirement obligation in the period in which it is incurred if areasonable estimate of fair value can be made. If a reasonable estimate of fairvalue cannot be made in the period during which the asset retirement obligationis incurred, the liability shall be recognized when a reasonable estimate offair value can be made. This new standard is effective in the first quarter of2003. We do not believe that SFAS No. 143 will have a material effect on ourfinancial statements.

 

In August 2001, the FASB issued SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets,” whichsupersedes SFAS No. 121, and “Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to Be Disposed Of.”  SFAS No. 144 is effective in the first quarter of 2002. We do notbelieve that SFAS No. 144 will have a material effect on our financialstatements.

 

In April 2002, the FASB issued SFAS No. 145 “Rescission of FASB StatementsNo. 4, 44, and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections.”  This Statement rescindsFASB Statement No. 4, “Reporting Gains and Losses from Extinguishment of Debt”,and an amendment of that Statement, FASB Statement No. 64, “Extinguishments ofDebt Made to Satisfy Sinking-Fund Requirements”. This Statement also rescindsFASB Statement No. 44, “Accounting for Intangible Assets of Motor Carriers”.This Statement amends FASB Statement No. 13, “Accounting for Leases”, toeliminate an inconsistency between the required accounting for sale-leasebacktransactions and the required accounting for certain lease modifications thathave economic effects that are similar to sale-leaseback transactions. ThisStatement also amends other existing authoritative pronouncements to makevarious technical corrections, clarify meanings, or describe theirapplicability under changed conditions. The provisions of this Statement related to the rescission of StatementNo. 4 shall be applied in fiscal years beginning after May 15, 2002.  The provisions of this Statement related toStatement No. 13 shall be effective for transactions occurring after May 15,2002.  All other provisions of thisStatement shall be effective for financial statements issued on or after May15, 2002. We do not believe that SFAS No. 145 will have a material effect onthe Company’s financial position or results of operations.

 

             In August 2002, the FASB issued SFAS No. 146“Accounting for Costs Associated with Exit or Disposal Activities”.  It addresses financial accounting andreporting for costs associated with exit or disposal activities and nullifiesEmerging Issues Task Force (EITF) Issue No. 94-3,”Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring).”  SFAS No. 146 requires that a liability for acost associated with an exit or disposal activity be recognized when theliability is incurred and establishes that fair value is the objective forinitial measurement of the liability. Under EITF Issue No. 94-3, a liability for an exit cost was recognizedat the date of an entity’s commitment to an exit plan.  The new standard is effective for exit ordisposal activities that are initiated after December 31, 2002, with earlyapplication encouraged.  We do notbelieve that SFAS No. 146 will have a material effect on the Company’sfinancial position or results of operations.

 

Effective January 1, 2002, FASB’s Topic D-103requires that reimbursed travel expenses be recognized as revenue.  Accordingly, all prior periods have beenreclassified to conform with the current period’s presentation.

* *

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**Risks Relating to Our Business**

* *

*Before deciding to invest in us or to maintain or increase yourinvestment, you should carefully consider the risks described below, inaddition to the other information contained in this report and in our otherfilings with the SEC, including our subsequent reports on Forms 10-K, 10-Q and8-K. The risks and uncertainties described below are not the only ones facingus. Additional risks and uncertainties not presently known to us or that wecurrently deem immaterial may also affect our business operations. If any ofthese risks actually occur, our business, financial condition or results ofoperations could be seriously harmed. The market price for our common stockcould decline and you may lose all or part of your investment.*

** **

**We have a history of losses and expect toincur losses in the future.**

 

We incurred net losses of approximately$8.3 million in 1998, $10.5 million in 1999, $35.8 million in2000 and $45.8 million in 2001. For the six months ended June 30, 2002, weincurred a net loss of approximately $6.7 million.  Our accumulated deficit as of June 30, 2002 was approximately$177.8 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 and maintainprofitability, which would increase the possibility that the value of yourinvestment will decline.

** **

**Our inability to provide managed servicessuccessfully to existing and future clients would substantially reduce ourrevenues, increase our costs, hurt our reputation in our industry and adverselyaffect our business.**

 

As a critical element of our strategy, weintend to continue to provide managed services to our current and futureclients. These services range from providing operational management for asingle global trade process to managing a client’s worldwide trade operation.Accordingly, in July 2000, we established a relationship with Ford pursuant towhich we administer, automate and manage Ford’s global customs operations for aminimum of four years. In early 2001, we expanded the scope of the Global TradeManagement services provided to Ford by assuming responsibility foradministering and managing Ford’s global trade operations in Mexico and Canada.In August 2001, we entered into an agreement with Lucent Technologies to manageLucent’s U.S.-based global trade operations. In March 2002, we entered into an agreement with Nortel Networks tomanage Nortel’s global trade operations. In June 2002, we entered into an agreement with Lucent to manage itsEuropean-based global trade operations. 

 

We expect that, over time, the revenues thatwe receive from providing managed services to these and future clients willcontinue to represent the largest portion of our total revenues. Any inabilityto perform our agreements with Ford, Lucent and Nortel or to successfullyprovide managed services to our existing and future clients would significantlyreduce our revenues, increase our costs, hurt our reputation in our industryand adversely affect our business and results of operations.

** **

**We depend on Ford for a significant portionof our revenues.**

 

Beginning in July 2000, we established arelationship with Ford, pursuant to which we acquired Ford’s global customsoperations and will provide Ford with our managed services. Through thisrelationship, Ford became a significant stockholder, holding approximately 20%of our outstanding common stock as of June 30, 2002, and has become our singlelargest client. For the six months ended June 30, 2001 and 2002, we derivedapproximately 36% and 35%, respectively, of our total revenues from Ford. Weexpect that we will continue to derive a significant portion of our totalrevenues from Ford in the near future. Because our services agreement with Fordhas a ten-year term that may be terminated by either party for any reason afterAugust 2004, we cannot assure you that we will be able to maintain our currentagreement with Ford, or renew the services agreement with Ford after theinitial term of the agreement. The termination of, or failure to renew, theFord agreements would adversely affect our results of operations and financialcondition. In addition, if we are unable to expand into the additionalgeographic regions envisioned under the Ford agreements, or otherwise assumeresponsibility for Ford's customs operations in these geographic regions, suchevents would adversely affect our results of operations and financialcondition. Because the Ford contract is our largest contract to date, we cannotassure you that we have adequate resources to meet our obligations at Ford. Anyevents adversely affecting our relationship with Ford may also result in ourinability to achieve the full marketing benefit associated with having Ford asa principal client, which would reduce our revenues, increase our costs andharm our reputation in our industry.

** **

**Any restriction on our ability tocost-effectively and legally access a foreign country’s rules and regulationsthat are incorporated into our global trade content, Global Content, or anyfailure to update our Global Content timely to include changes in such rulesand regulations, may compromise the effectiveness of our solutions andadversely impact our revenues.**

 

The success of our Global Trade Managementsolutions for our clients depends on our ability to obtain or access thecomplex rules and regulations published by foreign governments governing aparticular country’s import and export of goods. The foundation of oursolutions, Global Content, is subject to rapid change at the initiative offoreign governments, based on factors beyond our control. Any changes in acountry’s rules and regulations relating to global trade that we are unable to

 

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include in our Global Contentlibrary may result in dissatisfied clients and possible litigation. Inaddition, to the extent a foreign government restricts our access to its rulesand regulations, charges a fee for such access or grants proprietary rights tosuch information to one or more of our competitors, our solutions may not beuseful to, or cost efficient for, our current and future clients and ourrevenues could decrease.

** **

**The market for our recently developedweb-native solutions is newly emerging and dependent on the growth of theInternet, and if the Internet does not grow as fast or is not as effective aswe anticipate, clients may not use our products and our revenues may decline.**

 

The market for our web-native solutions isnewly emerging, and we cannot be certain that this market will continue todevelop and grow or that companies will choose to use our solutions rather thanattempt to develop alternative platforms and applications internally or throughother means. The anticipated growth of the global trade market may depend onthe growth of the Internet. Increased use of the Internet largely depends uponavailable Internet security, bandwidth and reliability. If use of the Internetby businesses does not increase as fast and is not as effective as we currentlyanticipate, the market for our web-native solutions may not grow as we expectand our revenues would be adversely affected.

** **

**Fluctuations in our operating results and thecomposition of our revenues, particularly compared to the expectations ofmarket analysts and investors, may cause the price of common stock to decline.**

 

Our operating results have varied in the pastand could fluctuate significantly in the future. We expect that our operatingresults 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 the foregoing factors, our annual orquarterly results of operations may not meet the expectations of securitiesanalysts and investors, which could cause the price of our common stock to decline.

** **

**Our ability to achieve or maintainprofitability will be constrained if we do not manage our rapid growtheffectively.**

 

We have significantly increased our employeebase to meet increasing demand for our client solutions. The number of ouremployees has increased by 117 employeesfrom 464 as of December 31, 2001 to 581 as of June 30, 2002.  As we expand our operations, we expect tocontinue to increase the size of our employee base. Our management andoperations have been strained by this growth and will continue to be strainedby our anticipated growth. To compete effectively and to manage future growth,we must continue to improve our financial and management controls, reportingsystems and procedures on a timely basis. We must also expand, train and manageour employee base. If we are not successful in managing our growth, our abilityto achieve and maintain profitability may be harmed.

 

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**We may be unable to attract and retain keypersonnel, which would adversely affect our ability to develop and effectivelymanage our business.**

 

Our future performance will depend largely onthe efforts and abilities of our senior executives, key technical, professionalservices, sales and marketing and managerial personnel. This dependence isparticular to our business because personal relationships are a criticalelement of obtaining and maintaining clients. Our success will depend on ourability to attract and retain these key employees in the future. The employmentof our key personnel, including our executives, is at will. The market for suchindividuals is extremely competitive, and we may not find qualifiedreplacements for personnel who leave us. In the past, we have experienceddifficulty in hiring qualified technical, professional services, sales,marketing and managerial personnel. The loss of, or the inability to attract,any one or more of our key personnel may harm our ability to develop andeffectively manage our business.

** **

**If we are unable to obtain additional capitalas needed or obtain additional capital on unfavorable terms in the future, ouroperations and growth strategy may be adversely affected and the market pricefor our common stock could decline.**

 

Historically, we have financed our operationsprimarily through the sale of our equity securities. As of June 30, 2002, wehad cash and cash equivalents of approximately $18.0 million plus short-terminvestments of approximately $45.5 million and an accumulated deficit ofapproximately $178.8 million. While we believe that our current cash resourceswill be sufficient to meet our working capital needs and finance capitalexpenditures for at least 12 months, we may need to raise additional debt orequity capital to fund the expansion of our operations, to enhance our productsand services, or to acquire or invest in complementary products, services,businesses or technologies. If we raise additional funds through furtherissuances of convertible debt or equity securities, our existing stockholderscould suffer significant dilution, and any new equity securities we issue couldhave rights, preferences and privileges superior to those of holders of ourcommon stock. Any debt financing secured by us in the future could involverestrictive covenants relating to our capital raising activities and otherfinancial and operational matters, which may make it more difficult for us toobtain additional capital and to pursue business opportunities, includingpotential acquisitions. In addition, we may not be able to obtain additionalfinancing on terms favorable to us, if at all. If adequate funds are notavailable on terms favorable to us, our operations and growth strategy may beadversely affected and the market price for our common stock could decline.

** **

**Our international operations and plannedexpansion expose us to business risks that could limit the effectiveness of ourgrowth strategy and cause our operating results to suffer.**

 

We intend to expand our internationaloperations substantially and enter new international markets, includingproviding our services to divisions and subsidiaries of Ford operating inforeign countries. This expansion will require significant management attentionand financial resources to translate successfully our software products intovarious languages, to develop compliance expertise relating to internationalregulatory agencies and to develop direct and indirect international sales andsupport channels. We face a number of risks associated with conducting ourbusiness internationally that could negatively impact 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.

 

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We may not succeed in our efforts or we mayexperience delays in the execution of our plan to enter new internationalmarkets, establish, maintain or increase international demand for our solutionsor expand our international operations, which may harm our growth strategy andcould cause our operating results to suffer.

** **

**Our lengthy and variable sales cycle makes itdifficult for us to predict when or if sales will occur and, therefore, we mayexperience an unplanned shortfall in revenues.**

 

Our products have a lengthy and unpredictablesales cycle that contributes to the uncertainty of our operating results.Clients typically view the purchase of our solutions as a significant andstrategic decision. As a result, clients and potential clients generallyevaluate our solutions and determine their impact on existing infrastructureover a lengthy period of time. Our sales cycle has averaged approximately sixto nine months for software sales and nine to 12 months for managed servicesagreements, depending on a particular client’s implementation requirements andwhether the client is new or is extending an existing implementation. Thelicense of our software products may be subject to delays if the client haslengthy internal budgeting, approval and evaluation processes. We may incursignificant selling and marketing expenses during a client’s evaluation period,including the costs of developing a full proposal and completing a rapid proofof concept or custom demonstration, before the client engages us. Largerclients may purchase our solutions as a part of multiple simultaneouspurchasing decisions, which may result in additional unplanned administrativeprocessing and other delays. In addition, any prolonged decline in the demandfor technology products and services could reduce the market for our solutions,making sales more difficult. If revenues forecasted from a specific client fora particular quarter are not realized or are delayed to another quarter, we mayexperience an unplanned shortfall in revenues, which could adversely affect ouroperating results.

** **

**Any loss of our licensed third-partytechnology may result in increased costs of, or delays in, providing oursolutions, which would harm our operating results.**

 

We license technology from several companieson a non-exclusive basis that is integrated into our TradeSphere product suite,including development tools and facilities from IBM (WebSphere and MQ Series)and Forte, which was acquired by Sun Microsystems. We anticipate that we willcontinue to license technology from these and other third parties in thefuture. This software may not continue to be available on commerciallyreasonable terms, or at all. Our license with Sun Microsystems expires onDecember 23, 2002, and our license with IBM expires on June 30, 2006.These licenses would be difficult, expensive and time-consuming to replace. Theloss of any of these technology licenses could result in delays in thelicensing of our TradeSphere products until equivalent technology, if any, isidentified, licensed and integrated, and would adversely affect our operatingresults.

** **

**The dynamic and complex nature of GlobalContent increases the likelihood that we may face costly product liabilityclaims.**

 

The foundation of our software solutions andmanaged services, Global Content, is a rules-based application that providescomprehensive management of government trade regulations and programs acquired,interpreted, and updated by Vastera’s in-country trade experts. Because of thedynamic and complex nature of Global Content, we may face product liabilityclaims in connection with our current products and future products. Anyprovisions in our agreements with our clients designed to limit our exposure topotential product liability claims and any product liability insurance may notbe adequate to protect us from such claims under our agreements. A successfulproduct liability claim brought against us could harm our financial condition.Even if unsuccessful, any product liability claim could result in costlylitigation and divert management’s attention and resources. In addition, theeffective implementation of our products may depend upon the successfuloperation of third-party licensed products in conjunction with our productsand, therefore, any undetected errors in these licensed products may preventthe implementation or impair the functionality of our products, delay newproduct introductions and harm our reputation.

** **

**The uncertainty of future governmentregulation of the Internet and global trade may add to our operating costs.**

 

We may face unanticipated operating costsbecause of the current uncertainty surrounding potential government regulationof the Internet and e-commerce. The Internet has rapidly emerged as a commercemedium, and governmental agencies have not yet been able to adapt all existingregulations to the Internet environment. Laws and regulations may be introducedand court decisions reached that affect the Internet or other online services,covering issues such as user pricing, user privacy, freedom of expression,access charges, content and quality of products and services, advertising,intellectual property rights and information security. The regulation of theInternet in the U.S. and in other countries could decrease the

 

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demand for our products andincrease the cost of our solutions, which could have a material adverse effecton our business, financial condition and results of operations. As a companythat delivers solutions through the Internet, it is unclear in whichjurisdictions we are actually conducting business. Our failure to qualify to dobusiness in a jurisdiction that requires us to do so could subject us to finesor penalties and could result in our inability to enforce contracts in thatjurisdiction. Even if we were able to ascertain correctly in whichjurisdictions we conduct business, many of these jurisdictions have yet todetermine the application of their existing laws to web-based global trade ordevelop laws that apply to such trade. Complying with new regulation wouldincrease our operating costs.

** **

**We may be unable to expand the import andexport trade management services provided to Ford into other geographic regionsand other product lines in the manner anticipated.**

 

Under our agreement, we provide Ford withimport and export trade management services using a phased-in geographicalapproach, which started with the United States, and presently includes Mexicoand Canada. Under the terms of the Ford agreements, we were to have assumedresponsibilities for Ford’s European customs 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 foreseeablefuture.  If the transfer of Ford’sEuropean customs operations to us continues to be delayed or if Ford is unableto, incorporate our services into many of its operations in other geographicregions and product lines,  our futurerevenue growth and profitability would be adversely impacted. Additionally, inthe past Ford may not have complied fully with all of the regulatoryrequirements established by foreign governments, which may impede our abilityto establish and leverage our operations under the Ford agreements in othergeographic regions and which in turn would reduce our future revenue growth.Any failure to receive the requisite government approvals in connection withproviding Ford managed services would adversely impact our operating results.

** **

**We may be unable to protect our proprietaryrights adequately, which could result in their unauthorized use by ourcompetitors and have an adverse impact on our revenues.**

 

Our success depends on our ability to protectour 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 our efforts to protect ourproprietary rights, unauthorized parties may copy aspects of our products andobtain and use information we regard as proprietary. Other parties may breachconfidentiality agreements and other protective contracts. We may not becomeaware of these breaches or have adequate remedies available. We may need tolitigate claims against third parties who infringe our intellectual propertyrights, which could be costly, time-consuming and would divert management’sattention and resources.

 

We have not secured registration of all ourmarks in the United States and have pursued only limited registration of ourintellectual property in foreign countries. The laws of some foreign countriesdo not protect our proprietary rights to the same extent, as the laws of theUnited States. Effective copyright, trademark and trade secret protection maynot be available in other jurisdictions. If we cannot adequately protect ourproprietary rights, our competitors could benefit from the unauthorized use ofsuch rights, adversely impacting our revenues and our business. Even if we areable to protect our proprietary rights, we could incur significant costs todefend our rights.

** **

**Our patent protection strategy is indevelopment currently and any inadequacy in the protection of our technologycould increase our operating costs.**

 

We may also rely on patents to protect ourproprietary rights in the future. Any patent strategy we attempt to implementmay not be successful and could harm our business by disclosing unpatentabletrade secrets. The laws that apply to the types of patents we may seek areevolving and are subject to change. We presently have filed provisional patentapplications in the United States. These applications may not result in patentsor may take longer than we expect to result in patents. We may also decide tonot file patent applications in all the countries in which we operate or intendto operate. Our

 

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decision to do so may inhibitour ability to protect our proprietary rights in those countries. Even if weare issued patents, we cannot assure you that they will provide us anymeaningful 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 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.

** **

**We may have to defend against intellectualproperty infringement claims, which could be expensive, and if we are notsuccessful, could result in substantial monetary liability and disrupt ourbusiness.**

 

We cannot be certain that our solutions donot or will not infringe valid patents, copyrights, trademarks or otherintellectual property rights held by third parties. As a result, we may besubject to legal proceedings and claims from time to time relating to theintellectual property of others in the ordinary course of our business.

 

We may incur substantial expenses indefending against any third–party infringement claims, regardless oftheir merit. Successful infringement claims against us may result insubstantial monetary liability, may divert management’s attention from our corebusiness and may disrupt our business. In addition, if we are not successful indefending such claims, we may need to obtain a license to the technology, whichmay not be available on acceptable terms or at all.

** **

**Any future acquisitions may be difficult tointegrate and disruptive to our operations. We may not realize the expected benefits from any such acquisitions, andour operating results may be harmed, if we cannot address the challengespresented by acquisitions.**

 

In the past we have acquired businesses toexpand our operations or market presence and we intend to continue ourexpansion by acquiring or investing in companies, assets or technologies thatcomplement our business and offer opportunities for growth. These transactionsinvolve many risks and challenges that we might not successfully 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 inability to address these risks couldnegatively impact our operating results. In addition, in connection with ouracquisition of Ford’s global customs operations, we acquired, or are receivingfull-time services from, a number of Ford employees. Any failure tosuccessfully integrate these employees into our operations will increase ouroperating expenses and may adversely impact our revenues. Moreover, any futureacquisitions or investments, even if successfully completed, may not generateany additional revenue or provide any benefit to our business.

** **

**Your ability to influence corporate mattersmay be limited because our officers, directors and affiliates will be able tocontrol, and Ford will be able to influence, matters requiring stockholderapproval and these parties may have interests that differ from yours.**

 

As of August 9, 2002, our officers, directorsand affiliated entities, including Ford, together beneficially ownedapproximately 38% of theoutstanding shares of our common stock. This concentration of ownership maydelay, deter or prevent acts that would result in a change of control, which inturn could reduce the market price of our common stock.  Accordingly, these stockholders collectivelymay be able to control all matters requiring stockholder approval and, thereby,our management and affairs. In addition, Ford beneficially owns approximately20% of the outstanding shares of our

 

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common stock. As the singlelargest stockholder of Vastera, Ford may exercise significant influence overcorporate acts requiring stockholder approval, including a merger or sale ofVastera for so long as Ford holds at least 5% of our common stock, it has theright to appoint a non-voting observer to our board of directors. Our officers,directors and affiliated entities, including Ford, may have interests thatdiffer from your interests and their decisions may negatively impact our futuresuccess.

** **

**Because of provisions in our corporatecharter and bylaws, Delaware law and Ford’s significant ownership position,other companies may have difficulty acquiring us, even if doing so wouldbenefit our stockholders.**

 

Provisions in our certificate ofincorporation, in our bylaws and under Delaware law could make it moredifficult for other companies to acquire us, even if doing so would benefit ourstockholders. Our certificate of incorporation and bylaws contain the followingprovisions, among others, which may inhibit an acquisition of our company by athird 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 subject to provisions of Delaware lawthat prohibit us from engaging in any business combination with any “interestedstockholder,” meaning generally a stockholder who beneficially owns more than15% of our stock, for a period of three years from the date this person becamean interested stockholder, unless various conditions are met, such as approvalof the transaction by our board. This could have the effect of delaying orpreventing a change in control. Additionally, in connection with establishingour strategic relationship with Ford, Ford acquired approximately 8,000,000shares of our common stock. Because of Ford’s significant holdings, othercompanies may be deterred from acquiring us, even if being acquired would be inthe best interest of our other stockholders.

** **

**The recent terrorist acts have negativelyimpacted the U.S. economy and may make it more difficult to implement ourgrowth strategy and to forecast future results of operations.**

 

The terrorist acts of September 11, 2001 havenegatively impacted an already decelerating U.S. economy and caused U.S.businesses to stop spending on new products and services and to reduce costs.Accordingly, it may be more difficult to market our solutions to new clientsand derive additional revenues from our existing clients. The unpredictabilityof future military action and other responses associated with a global war onterrorism has resulted in economic uncertainty that will negatively impactconsumer as well as business confidence in the near term. This economicuncertainty may make it more difficult to implement our growth strategy andnegatively impact our revenues in the future. We also may have more difficultyforecasting our future results of operations.

## ** **

## **Item 3:**                                                          Qualitativeand Quantitative Disclosures About Market Risk

 

We develop products in the United States andmarket our products in North America, and to a lesser extent, Europe, Canada,Mexico, Latin America and the Asia-Pacific region. Our financial results couldbe affected by factors such as changes in foreign currency exchange rates orweak economic conditions in foreign markets. With a majority of our sales beinggenerated in U.S. dollars, a strengthening of the dollar could make ourproducts less competitive in foreign markets. We do not expect any materialadverse effect on our consolidated financial position, results of operations orcash flows due to movements in any specific foreign currency.

 

We currently do not use financial instrumentsto hedge operating expenses of our European, Mexican, Brazilian or Canadiansubsidiaries. We intend to assess the need to utilize financial instruments tohedge currency exposures on an ongoing basis. We have existing obligationsrelating to amounts outstanding under our equipment line of credit and amountsborrowed under capital lease arrangements. These financial instruments exposeus to interest rate risk as our lending institution changes its prime rate. Asdisclosed in Note 4 of our consolidated financial statements, which areincluded as part of this Report, we have approximately $4.1 million in variablerate debt as of June 30, 2002. The significant terms of our debt facilities arefully disclosed in Note 4 of the consolidated financials statements. Ourinterest income is sensitive to changes in the general level of

 

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U.S. interest rates,particularly since the majority of our investments are in short-terminstruments. Due to the short-term nature of our investments, we believe thatthere is no material risk exposure. We do not hold or issue derivativesecurities, derivative commodity instruments or other financial instruments fortrading purposes. Therefore, no quantitative tabular disclosures are required.

 

We have a substantial amount of intangibleassets. Although as of June 30, 2002, we believe our intangible assets will berecoverable, changes in the economy, the business in which we operate and ourown relative performance could change the assumptions used to evaluateintangible asset recoverability. We continue to monitor these assumptions andtheir effect on the estimated recoverability of our intangible assets.

** **

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**Part II – Other Information**

## ** **

## **Item 1:**                                                          LegalProceedings

 

We are periodically a party to disputesarising from normal business activities. In the opinion of management,resolution of these matters will not have a material adverse effect upon ourfinancial position or our future operating results.

 

On March 14, 2001, Expeditors Internationalof Washington, Inc. and Expeditors Tradewin, L.L.C. (collectively “Expeditors”)filed suit against us in the United States District Court for the EasternDistrict of Michigan, Southern Division primarily alleging that wemisappropriated certain of Expeditors’ trade secrets in connection with ouracquisition of Ford’s customs operations, by utilizing systems and businessprocesses that Expeditors assisted in developing for Ford and through ouremployee hiring practices. We believe that the allegations contained in thecomplaint are without merit and that there will be no material adverse impactto our operations from this litigation. In connection with our acquisition ofFord’s customs operations, Ford agreed to indemnify us for intellectualproperty infringement claims and Ford is currently indemnifying us inconnection with this litigation. Subsequent to Expeditors filing of itscomplaint, we filed a counterclaim against Expeditors for, among other things,trade libel and tortious interference with a contractual relationship.

 

On April 16, 2002, the Court granted in partand denied in part our motion to dismiss this case. Specifically, the Courtdismissed Expeditors claims of common law misappropriation of confidentialinformation on the grounds that such claims were preempted by the MichiganUniform Trade Secrets Act (“MUTSA”). The Court preserved Expeditors remainingclaims, as dismissal was deemed to be premature as of the date of the Court’sruling.

## ** **

## **Item 2:**                                                          Changes inSecurities and Use of Proceeds

 

We received net offering proceeds from ourinitial public offering of approximately $86.1 million. We have usedapproximately $22.7 million of the net proceeds from the initial publicoffering for general corporate purposes, principally working capital forincreased domestic and international sales and marketing expenditures, productdevelopment expenditures, expenditures related to the expansion of ourconsulting services organization and capital expenditures made in the ordinarycourse of business and certain business acquisitions. The remaining portions ofthe net proceeds have been invested in cash, cash equivalents and short-terminvestments. We may also use a portion of the remaining net proceeds to expandinternationally and to acquire or invest in additional businesses, products andtechnologies that we believe will complement our current or future business.

 

We issued 463,598 shares of common stock inthe quarter ended March 31, 2002 in connection 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 shareholderswho received shares of our common stock were accredited investors or off shoreforeign nationals.

## ** **

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

 

None.

## ** **

## **Item 4:**                                                          Submissionof Matters to a Vote of Security Holders

 

None.

## ** **

## **Item 5:**                                                          OtherInformation

 

None.

## ** **

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

 

The following exhibits are included herein:

 

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(a)                   Exhibits.

 

10.1                                           AmendmentNo. 13 to Global Trade Services Agreement with Ford Motor Company, dated July22, 2002.

 

10.2                                           Loan andSecurity Agreement with Comerica Bank-California, dated July 30, 2002.

 

99.1                                           CertificationPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002, by the Chief Executive Officer, dated August 14,2002.

 

99.2                                           CertificationPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002, by the Chief Financial Officer, dated August 14,2002.

** **

**FORD CONTRACT AMENDMENT**

** **

**LINE OF CREDIT**

 

(b)      Reportson Form 8-K.

 

On May 14, 2002, we filed a Form 8-K in whichwe reported a change in our independent public accountants from Arthur AndersenLLP to KPMG LLP.

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized in Dulles, Virginiaon August 14, 2002.

 
|   | VASTERA,  INC. |
|--------|----------------|
|   |           |   |
|   | By:            | /s/ Philip  J. Balsamo |   |
|   |           | Philip J.  Balsamo, |
|   |           | Chief  Financial Officer |
|   |           | (Principal  Financial and Accounting Officer) |

 

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**EXHIBITS**

 
| 10.1   |   | Amendment No. 13 to Global  Trade Services Agreement with Ford Motor Company, dated July 22, 2002.                                                                               |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                             |
| 10.2   |   | Loan and Security Agreement  with Comerica Bank-California, dated July 30, 2002.                                                                                                 |
|   |   |                                                                                                                                                                             |
| 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 August 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 August 14, 2002. |

 

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