**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 March 31, 2002**

 

**Commission File Number 000-31589**

 

**VASTERA, INC.**

(ExactName 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 number whether theregistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.

 

Yes     ý     No    o

 

At May 3, 2002 there were 40,151,107**** shares of the registrant’s common stock, $.01 par value per share,outstanding.

 

 

**VASTERA, INC.**

 

**TABLE OF CONTENTS**

 
| **PART  I – FINANCIAL INFORMATION**                                                                   |
|------------------------------------------------------------------------------------------------------------|
|                                                                                                       |   |   |
| ITEM 1 – Financial Statements                                                                         |
|                                                                                                       |   |   |
|                                                                                                       | Condensed  Consolidated Balance Sheets as of December 31, 2001 and March 31, 2002 |
|                                                                                                       |   |   |
|                                                                                                       | Condensed  Consolidated Statements of Operations for the Three Months Ended March 31,  2001 and 2002 |
|                                                                                                       |   |   |
|                                                                                                       | Condensed  Consolidated Statements of Cash Flows for the Three Months Ended March 31,  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****:           FinancialStatements**

 

**VASTERA, INC.**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

 
|                                                                                                                                                                 |   | **December 31,  2001** |    | **March 31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|---------|---------------------|--------|
|                                                                                                                                                                 |   |                   |    | **(Unaudited)**     |   |
| **Assets**                                                                                                                                                           |   |                   |    |                |   |
| Current assets:                                                                                                                                                      |   |                   |    |                |   |
| Cash and cash equivalents                                                                                                                                            |   | $                      | 10,982  |                | $      | 9,942 |   |
| Short-term investments                                                                                                                                               |   | 62,789                 |    | 55,014              |   |
| Accounts receivable, net of allowance for doubtful accounts of $632  and $669, respectively                                                                          |   | 14,294                 |    | 13,245              |   |
| Prepaid expenses and other current assets                                                                                                                            |   | 2,485                  |    | 2,551               |   |
| Total current assets                                                                                                                                                 |   | 90,550                 |    | 80,752              |   |
| Property and equipment, net                                                                                                                                          |   | 7,934                  |    | 9,466               |   |
| Intangible assets, net                                                                                                                                               |   | 2,331                  |    | 12,603              |   |
| Goodwill                                                                                                                                                             |   | 62,205                 |    | 65,713              |   |
| Deposits and other assets                                                                                                                                            |   | 840                    |    | 847                 |   |
|                                                                                                                                                                 |   |                   |    |                |   |
| Total assets                                                                                                                                                         |   | $                      | 163,860 |                | $      | 169,381 |   |
|                                                                                                                                                                 |   |                   |    |                |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                        |   |                   |    |                |   |
| Current liabilities:                                                                                                                                                 |   |                   |    |                |   |
| Line of credit and capital lease obligations, current                                                                                                                |   | $                      | 2,207   |                | $      | 3,668 |   |
| Accounts payable                                                                                                                                                     |   | 3,167                  |    | 2,260               |   |
| Accrued expenses                                                                                                                                                     |   | 5,313                  |    | 4,606               |   |
| Accrued compensation and benefits                                                                                                                                    |   | 4,588                  |    | 2,498               |   |
| Deferred revenue, current                                                                                                                                            |   | 6,936                  |    | 9,800               |   |
| Total current liabilities                                                                                                                                            |   | 22,211                 |    | 22,832              |   |
| Long-term liabilities:                                                                                                                                               |   |                   |    |                |   |
| Line of credit and capital lease obligations, net of current portion                                                                                                 |   | 2,344                  |    | 40                  |   |
| Deferred revenue, net of current portion                                                                                                                             |   | 1,487                  |    | 1,667               |   |
| Total liabilities                                                                                                                                                    |   | 26,042                 |    | 24,539              |   |
| Commitments and contingencies (See Note 5)                                                                                                                           |   |                   |    |                |   |
|                                                                                                                                                                 |   |                   |    |                |   |
| Stockholders’ equity:                                                                                                                                           |   |                   |    |                |   |
| Common stock, $0.01 par value; 100,000 shares authorized; 38,692 and  39,843 shares issued and outstanding as of December 31, 2001 and March 31,  2002, respectively |   | 387                    |    | 398                 |   |
| Additional paid-in capital                                                                                                                                           |   | 311,930                |    | 320,732             |   |
| Accumulated other comprehensive income (loss)                                                                                                                        |   | 240                    |    | (216                | )      |
| Deferred compensation                                                                                                                                                |   | (3,607                 | )       | (2,755              | )      |
| Accumulated deficit                                                                                                                                                  |   | (171,132               | )       | (173,317            | )      |
|                                                                                                                                                                 |   |                   |    |                |   |
| Total stockholders’ equity                                                                                                                                      |   | 137,818                |    | 144,842             |   |
|                                                                                                                                                                 |   |                   |    |                |   |
| Total liabilities and stockholders’ equity                                                                                                                      |   | $                      | 163,860 |                | $      | 169,381 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

3

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**VASTERA, INC.**

** **

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

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

 
|                                        |   | **Three Months Ended  March 31,** |    |
|---------------------------------------------|--------|-----------------------------------|---------|
|                                        |   | **2001**                          |    | **2002** |   |
| **Revenues:**                               |   |                              |    |   |   |
| Managed services revenues                   |   | $                                 | 6,239   |   | $ | 10,930 |   |
| Software revenues                           |   | 2,663                             |    | 3,519 |   |
| Services revenues                           |   | 4,168                             |    | 4,606 |   |
|                                        |   |                              |    |   |   |
| Total revenues                              |   | 13,070                            |    | 19,055 |   |
|                                        |   |                              |    |   |   |
| **Cost of revenues:**                       |   |                              |    |   |   |
| Cost of managed services revenues           |   | 3,324                             |    | 5,377 |   |
| Cost of software revenues                   |   | 508                               |    | 536 |   |
| Cost of services revenues                   |   | 3,244                             |    | 3,377 |   |
|                                        |   |                              |    |   |   |
| Total cost of revenues                      |   | 7,076                             |    | 9,290 |   |
|                                        |   |                              |    |   |   |
| **Operating expenses:**                     |   |                              |    |   |   |
| Sales and marketing                         |   | 4,319                             |    | 3,387 |   |
| Research and development                    |   | 3,534                             |    | 3,948 |   |
| General and administrative                  |   | 2,043                             |    | 2,554 |   |
| Depreciation                                |   | 713                               |    | 970 |   |
| Amortization                                |   | 4,975                             |    | 453 |   |
| In process research and development         |   | 6,901                             |    |   |   |
| Stock-based compensation                    |   | 1,676                             |    | 852 |   |
|                                        |   |                              |    |   |   |
| Total operating expenses                    |   | 24,161                            |    | 12,164 |   |
|                                        |   |                              |    |   |   |
| Loss from operations                        |   | (18,167                           | )       | (2,399 | ) |
| Other income, net                           |   | 887                               |    | 214 |   |
|                                        |   |                              |    |   |   |
| Net loss                                    |   | $                                 | (17,280 | ) | $ | (2,185 | ) |
|                                        |   |                              |    |   |   |
| Basic and diluted net loss per common share |   | $                                 | (.47    | ) | $ | (.06 | ) |
|                                        |   |                              |    |   |   |
| Weighted-average common shares outstanding  |   | 36,422                            |    | 39,282 |   |

 

 Theaccompanying notes are an integral part of these condensed consolidated financialstatements.

 

4

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**VASTERA, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

**(UNAUDITED)**

**(In thousands)**

 
|                                                                           |   | **Three Months Ended  March  31,** |    |
|--------------------------------------------------------------------------------|--------|-----------------------------------------|---------|
|                                                                           |   | **2001**                                |    | **2002** |   |
| **Cash flows from operating activities:**                                      |   |                                    |    |   |   |
| Net loss                                                                       |   | $                                       | (17,280 | ) | $ | (2,185 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities:   |   |                                    |    |   |   |
| Stock-based compensation                                                       |   | 1,676                                   |    | 852 |   |
| Depreciation and amortization                                                  |   | 5,688                                   |    | 1,426 |   |
| In process research and development                                            |   | 6,901                                   |    | — |   |
| Provision for allowance for doubtful accounts                                  |   | 375                                     |    | 11 |   |
| Amortization of revenue discount related to Ford contract                      |   | 75                                      |    | 75 |   |
|                                                                           |   |                                    |    |   |   |
| Changes in operating assets and liabilities:                                   |   |                                    |    |   |   |
| Accounts receivable                                                            |   | (479                                    | )       | 1,155 |   |
| Prepaid expenses and other current assets                                      |   | (496                                    | )       | (66 | ) |
| Deposits and other assets                                                      |   | (119                                    | )       | (7 | ) |
| Accounts payable and accrued expenses                                          |   | (1,166                                  | )       | (2,769 | ) |
| Accrued compensation and benefits                                              |   | (1,676                                  | )       | (2,083 | ) |
| Deferred revenue                                                               |   | (260                                    | )       | 2,201 |   |
| Net cash used in operating activities                                          |   | (6,761                                  | )       | (1,390 | ) |
|                                                                           |   |                                    |    |   |   |
| **Cash flows from investing activities:**                                      |   |                                    |    |   |   |
| Acquisition of subsidiaries                                                    |   | —                                  |    | (5,682 | ) |
| Net purchases (sales) of short-term investments                                |   | (1,809                                  | )       | 7,422 |   |
| Acquisition of property and equipment                                          |   | (593                                    | )       | (2,544 | ) |
| Net cash used in investing activities                                          |   | (2,402                                  | )       | (804 | ) |
|                                                                           |   |                                    |    |   |   |
| **Cash flows from financing activities:**                                      |   |                                    |    |   |   |
| Proceeds from the exercise of stock options and preferred stock  warrants      |   | 432                                     |    | 1,809 |   |
| Principal payments on long-term debt                                           |   | (639                                    | )       | (595 | ) |
| Net cash provided by (used in) financing activities                            |   | (207                                    | )       | 1,214 |   |
| Effect of foreign currency exchange rate changes on cash and cash  equivalents |   | (190                                    | )       | (60 | ) |
| Net decrease in cash and cash equivalents                                      |   | (9,560                                  | )       | (1,040 | ) |
| Cash and cash equivalents, beginning of period                                 |   | 19,693                                  |    | 10,982 |   |
| Cash and cash equivalents, end of period                                       |   | $                                       | 10,133  |   | $ | 9,942 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

5

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**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.          Basis of Presentation and Nature ofBusiness:**

 

Theaccompanying unaudited condensed consolidated financial statements of Vastera,Inc. and its subsidiaries (“Vastera” the “Company,” “we,” or “us”) have beenprepared on the same basis as audited financial statements and include alladjustments, including all normal recurring adjustments that are necessary fora fair presentation of the financial position, results of operations and cashflows for the interim periods presented. The results of operations for theinterim periods presented are not necessarily indicative of the results to beexpected for any subsequent quarter or for the entire year ending December 31,2002.  All significant intercompanybalances and transactions have been eliminated in consolidation. Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with generally accepted accounting principles have beencondensed or omitted pursuant to the Securities and Exchange Commission’s (the“SEC”) rules and regulations.  TheCompany’s interim financial statements should be read in conjunction with theCompany’s audited consolidated financial statements and notes thereto, as filedwith the SEC with the Company’s Annual Report on Form 10-K and otherreports filed with the SEC.

 

Vasterais a leading provider of web-native solutions for Global Trade Management andwas incorporated in Virginia in November 1991 under the name ExportSoftware International, Inc. The Company was reincorporated in Delaware inJuly 1996 and changed its name to Vastera, Inc. in June 1997.The Company has operations in the United States, Brazil, Canada, Mexico, Japanand the United Kingdom.

 

TheCompany’s offerings include a library of global trade content, web-nativesoftware solutions and management consulting and managed services. Managedservices range from management of a specific global trade function to providingcomplete management of a client’s global trade operations. The Company’scustomers utilize these offerings to manage their global trade processes.Global trade involves the shipment of goods between countries and themanagement of information and business processes to complete shipment.

 

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

 

**2.          Summary of Significant AccountingPolicies:**

 

**Use ofEstimates**

 

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

 

**RevenueRecognition**

 

TheCompany’s revenues consist of managed services revenues, software revenues andservices revenues.

 

6

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*Managed Services Revenues*

 

Managedservices revenues are derived from agreements that provide for transaction feesbased on the performance of its managed services solutions. Managed servicessolutions include the processing of its clients’ custom entries and theclassification of its clients’ goods. Managed services transaction arrangementsare often subject to annual or quarterly minimum transaction thresholds, andrevenues have been recognized based on the lower of the cumulative actualtransactions processed using a weighted-average transaction rate or thecumulative 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 billableuntil the end of the related period. In addition, Vastera 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.

 

*Software Revenues*

 

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

 

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

 

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

 

Perpetualsoftware license revenues are derived from perpetual software license arrangementsand related maintenance contracts. Maintenance contracts include the right tounspecified enhancements on a when-and-if available basis, ongoing support andcontent update services. The content updates provided under maintenancearrangements are significant and frequent and thus the entire arrangement is insubstance a subscription. Revenues from perpetual software license sales arerecognized ratably over the estimated economic life of the product. The Companyhas estimated that the life of the product is three years, which is consistentwith the historical periods between major upgrades to the functionality andarchitecture of its products such that the Company would charge all customers anew fee to migrate to the new version. Revenues from maintenance contracts arerecognized ratably over the contract term, typically one year.

 

*Services Revenues*

 

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

 

**DeferredRevenues**

 

Deferredrevenues include amounts billed to clients for revenues that have not beenrecognized and generally result from billed, but deferredsubscription/transaction revenues and services not yet rendered. Deferredrevenues will be recognized on a monthly basis over the term or the remainingeconomic life of the product or when the services are performed.

 

7

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**Cost ofRevenues**

 

Costof revenues includes the cost of our managed services revenues, the costs ofour software revenues and the cost of our services revenues.

 

Costof managed services revenues and cost of software revenues include royaltiesowed to third parties for technology products integrated into our softwareproducts, as well as the cost of salaries and related expenses for ourtechnical support and managed services organizations.

 

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

 

**CapitalizedCosts**

 

Inaccordance with Statement of Position 98-1, “Accounting for the Costs ofComputer Software Developed or Obtained for Internal Use”, the Companycapitalized approximately $350,000 of costs associated with the implementationand integration related to migrating a managed services client to the Vasteratrade management platform.  These costswill be amortized as costs of managed services revenues over the remainingcontract life, but no longer than three years. Amortization will commence upon the completion of the client’s migrationto the Vastera platform.

 

**Concentrationsof Credit Risk**

 

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

 

Asof December 31, 2001, Ford accounted for approximately 32 percent of theCompany’s total accounts receivable and another customer accounted for 13percent of the Company’s total accounts receivable.  As of March 31, 2002, Ford accounted for 23 percent of the Company’stotal accounts receivable.

 

**UnauditedNet Loss Per Common Share**

 

Basicnet loss per common share is computed by dividing net loss applicable to commonstockholders by the weighted-average number of common shares outstanding forthe period. Diluted net loss per common share includes the potential dilutionthat could occur if securities or other contracts to issue common stock wereexercised or converted into common stock. As of March 31, 2001 and 2002,options to purchase approximately 8,411,000 and 8,165,000 shares of commonstock, were outstanding, respectively; warrants to purchase approximately12,000 and zero shares of common stock, were outstanding, respectively.  Due to the anti-dilutive effect of the options,warrants and redeemable convertible preferred stock, they have been excludedfrom on the calculation of weighted–average shares for diluted earningsper share. As a result, the basic and diluted loss per share amounts areidentical.

 

8

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**ComprehensiveIncome**

 

Asof December 31, 2001 and March 31, 2002, accumulated other comprehensive incomeincludes unrealized gains and losses on investments and foreign currencytranslation adjustments.

 

**RecentAccounting Pronouncements**

 

InJune 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No.141 “Business Combinations” and SFAS No. 142 “Goodwill and Other IntangibleAssets.” SFAS No. 141 requires business combinations initiated after June 30,2001 to be accounted for using the purchase method of accounting, and broadensthe criteria for recording intangible assets separate from goodwill. Recordedgoodwill and intangibles will be evaluated against these new criteria and mayresult in certain intangibles being subsumed into goodwill, or alternatively,amounts initially recorded as goodwill may be separately identified andrecognized apart from goodwill. SFAS No. 142 requires the use of anonamortization approach to account for purchased goodwill and certainintangibles. Under a nonamortization approach, goodwill and certain intangibleswill not be amortized into results of operations, but instead will be reviewedfor impairment and written down and charged to results of operations only inthe periods in which the recorded value of goodwill and certain intangibles ismore than its fair value. On January 1, 2002, in accordance with SFAS No. 141,the Company reclassified its assembled workforce intangible assets to goodwill.As of January 1, 2002, the Company had unamortized goodwill of approximately$62.2 million. On January 1, 2002, the Company adopted the nonamortizationapproach under SFAS No. 142 for our goodwill. For the three months ended March31, 2001, the amortization expense associated with goodwill and assembledworkforce was approximately $4.8 million. In the aggregate, amortization forfuture periods is expected to be approximately $580,000 for the years endingDecember 31, 2002 and 2003 and approximately $380,000 for the year endingDecember 31, 2004. SFAS No. 142 did not have a material impact on the Company’results of operations.

 

Therecoverability and useful lives of the Company’s intangible assets are based onestimates and are susceptible to change. Although the Company believes that itsintangible assets will be recoverable, changes in the economy, the business inwhich it operates and its own relative performance could change the assumptionsused to evaluate intangible asset recoverability. Management continues tomonitor these assumptions and their effect on the estimated recoverability. Anyresulting impairment loss could have a material adverse impact on the Company’sfinancial condition and results of operations.

 

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

 

**Reclassifications**

 

EffectiveJanuary 1, 2002, FASB’s Topic D-103 requires that reimbursed travel expenses tobe recognized as revenue.  Consequently,revenues for the three months ended March 31, 2001 and 2002 increased byapproximately $369,000 and $365,000, respectively.

 

Allprior periods have been reclassified to conform with the current period’spresentation.

 

9

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**3.          Acquisition**

 

**2002Acquisitions**

 

Inthe first quarter of 2002, the Company executed on its strategy to expand itsglobal presence to enhance its competitive position worldwide and its abilityto serve and support its clients.  Aspart of this strategy, the Company acquired companies in Mexico, Canada andBrazil, respectively.  The shares ofcommon stock issued by the Company were valued at the average of the closingprices for the three days before and the three days after the date eachacquisition’s definitive terms were finalized.

 

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

 

OnFebruary 12, 2002, Vastera, Inc. acquired Imanet, an Ontario Corporation forapproximately $2.4 million. Imanet is a provider of Global Trade Managementsolutions in Canada. The Company paid $850,000 in cash and issued approximately90,000 shares of its common stock valued at approximately $1.4 million.

 

OnMarch 8, 2002, Vastera Inc. acquired Bergen Informatica Ltda (“Bergen”) forapproximately $6.2 million.  Bergen is aprovider of Global Trade Management solutions in Brazil.  The Company paid $2.4 million in cash andissued approximately 223,000 shares of its common stock valued at approximately$3.1 million.

 

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

 

|                        |   | **Value** |   |
|-----------------------------|--------|-----------|--------|
| Fair value of common stock  |   | $         | 6,933  |   |
| Cash consideration          |   | 5,682     |   |
| Assumed liabilities         |   | 28        |   |
| Transaction costs and other |   | 1,127     |   |
| Aggregate purchase price    |   | $         | 13,770 |   |

 

Thepurchase price has been allocated on a preliminary basis as follows  (in thousands):

 

|                             |   | **Value** |   |
|----------------------------------|--------|-----------|--------|
| Current assets                   |   | $         | 121    |   |
| Property and equipment           |   | 205       |   |
| Acquired technology and know how |   | 10,400    |   |
| Acquired contracts               |   | 400       |   |
| Goodwill                         |   | 3,492     |   |
| Deferred revenue                 |   | (848      | )      |
|                             |   | $         | 13,770 |   |

 

Theamounts allocated to acquired technology and know how and acquired contractsare being amortized on a straight-line method over the estimated useful life ofthese assets, which are five years and one year, respectively.

 

Thepurchase price and the related allocation of the 2002 acquisitions arepreliminary as management is reviewing the activities and employees of theacquired companies. Costs associated with the possible termination of certainacquired employees or exiting other activities would be accounted for asliabilities assumed in the business combinations.

 

Thefollowing unaudited pro forma information (in thousands) has been prepared asif the 2002 Acquisitions had occurred as of January 1, 2001.

 
|                                              |   | **Pro Forma for the  Year Ended  December 31, 2001** |   | **Pro Forma for the****Three Months EndedMarch 31, 2002** |   |
|---------------------------------------------------|--------|------------------------------------------------------|--------|-----------------------------------------------------------|--------|
|                                              |   | **(Unaudited)**                                      |   | **(Unaudited)**                                           |   |
| Total revenues                                    |   | $                                                    | 69,715 |                                                      | $      | 19,682 |   |
| Net loss                                          |   | (48,704                                              | )      | (2,505                                                    | )      |
| Pro forma basic and diluted loss per common share |   | (1.28                                                | )      | (.06                                                      | )      |
|                                                   |        |                                                      |        |                                                           |        |  |  |

 

10

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**2001Acquisition**

 

OnMarch 29, 2001, the Company acquired Speed Chain Network, Inc. (“Speedchain”),a development stage company that generated no revenues since its inception in1999. Speedchain was a supply chain event management and global e-logisticssolutions provider. The acquisition was effected through the merger ofSpeedchain into one of Vastera’s wholly-owned subsidiaries, Vastera AcquisitionCorporation. The acquisition was accounted for under the purchase method ofaccounting and the operating results of Speedchain have been included in theaccompanying condensed consolidated financial statements from the date ofacquisition.

 

Underthe terms of the acquisition agreement, the Company issued an aggregate of944,485 shares of common stock in exchange for all of the outstanding preferredstock and common stock of Speedchain. The shares of common stock issued by theCompany were valued at $14.00 per share, which was the average of the closingprices for the three days before and three days after March 1, 2001, the datethe acquisition was announced. The Company also issued options to acquireapproximately 24,000 shares of its common stock in exchange for the vestedSpeedchain stock options assumed in the business combination. The options werevalued at approximately $328,000 using the Black-Scholes model assuming 128percent volatility, a risk-free interest rate of 6.19 percent, and an expectedlife of three years. On March 29, 2001, the Company also issued options toacquire approximately 64,000 shares of its common stock in exchange for theunvested Speedchain stock options assumed in the business combination.Accordingly, the Company recorded $465,000 of deferred compensation that willbe amortized on an accelerated basis over the remaining vesting period of theseoptions.

 

Theaggregate purchase price was determined as 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 |   |

 

Theacquisition resulted in an allocation of the purchase price to the net tangibleand intangible assets of Speedchain, as well as, the write-off of the portionof the purchase price allocated to in-process research and development(“IPR&D”) projects. The Company has allocated the purchase price based uponthe fair values of the assets and the liabilities 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 |   |

 

Theamounts allocated to assembled workforce and goodwill are being amortized on astraight-line method over the estimated useful life of these assets, which aretwo years and four years, respectively. In accordance with SFAS No. 142 theseintangible assets are no longer being amortized after January 1, 2002.

 

TheCompany valued IPR&D projects acquired in the acquisition at approximately$6.9 million, based upon the results of an independent appraisal of thedevelopment projects for which technological feasibility has not been

 

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established and no alternative future usesexist. The acquired IPR&D projects are targeted at the supply chain eventmanagement and e-logistics market.

 

Thevalue of the IPR&D projects identified was determined by estimating the futurecash flows from each of the respective projects at the assumed date ofcommercial feasibility, discounting these net cash flows back to their presentvalue and then applying a percentage of completion to the calculated presentvalue. The percentage of completion for the projects were determined usingmilestones representing management’s estimate of effort, value added and degreeof difficulty of the portion of the projects completed as of March 29, 2001, ascompared to the remaining research and development to be completed to bring theprojects to technical feasibility. Speedchain’s projects started in February2000 and, as of March 29, 2001, the Company estimated the projects wereapproximately 70 percent complete.

 

Developmentof the technology remains a substantial risk to the Company due to factorsincluding the remaining effort necessary to achieve technical feasibility,rapidly changing customer needs and competitive threats from other companies.Failure to bring these products to market in a timely manner could adverselyaffect future sales and profitability of the combined company. Additionally,the value of the other intangible assets acquired may become impaired.

 

Inconnection with the Speedchain acquisition, the Company recognizedapproximately $550,000 in liabilities as the cost associated with closingredundant facilities and terminating certain employees. These activitiesresulted in the termination of the employment of eight employees in connectionwith the elimination of duplicative positions and the restructuring of certainoperations. Approximately $300,000 of this accrual was paid out in 2001 andmanagement expects the remaining accrual will be paid out in 2002.

 

Thefollowing unaudited pro forma information (in thousands) has been prepared asif the acquisition of Speedchain had occurred as of January 1, 2001, excludingthe one-time IPR&D charge of approximately $6.9 million.

 
|                                              |   | **Pro Forma for the  Three Months Ended  March 31, 2001** |   |
|---------------------------------------------------|--------|-----------------------------------------------------------|--------|
|                                              |   | **(Unaudited)**                                           |   |
| Total revenues                                    |   | $                                                         | 13,070 |   |
| Net loss                                          |   | (13,268                                                   | )      |
| Pro forma basic and diluted loss per common share |   | (.35                                                      | )      |
|                                                   |        |                                                           |        |  |

 

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.

 

**4.          Long-Term Debt:**

 

**Line ofCredit**

 

TheCompany has a secured revolving line of credit and an equipment line of creditwith PNC Bank. As of December 31, 2001 and March 31, 2002, the outstandingbalance under the equipment line of credit was approximately $4.2 million and$3.5 million, respectively, and there were no amounts outstanding under thesecured revolving line of credit. The revolving line of credit was scheduled toexpire on December 31, 2000 and was extended to April 30, 2001. In May2001, the Company renegotiated and amended its secured revolving line of creditand equipment line of credit. As amended, the Company may now borrow up to $10million under the revolving line of credit, with a $2.5 million sub-limit forthe issuance of letters of credit. Advances under the revolving line of creditare limited to the lesser of $10 million or 80 percent of eligible accountsreceivable, as defined in the loan

 

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agreement. The revolving line of credit bearsinterest at the greater of the bank’s prime rate or the overnight federal fundsrate (4.75 percent as of March 31, 2002). The revolving line of credit wasscheduled to mature in May  2002.  PNC Bank extended the term until November2002.  The Company plans to obtain acredit facility with a different financial institution.

 

TheCompany may borrow up to $6,439,649 under the equipment line of credit. Theequipment line of credit bears interest at the bank’s prime rate plus 50 basispoints (5.25 percent as of March 31, 2002). The equipment line of credit hastwo interest-only payment periods. Amounts borrowed until November 15, 2001 aresubject to interest-only payments. After this date, the Company is required tomake principal and interest payments to repay these borrowings over a period of30 months. The second interest-only payment period applies to borrowings madefrom November 16, 2001 to May 15, 2002. After May 15, 2002, the Company isrequired to make principal and interest payments to repay the borrowings fromthe second interest-only period over a period of 30 months, and no additionalborrowings may occur thereafter.

 

Theterms of the revolving line of credit and equipment line of credit require theCompany to comply with certain financial covenants including, but not limitedto, restrictions and limitations on future indebtedness, sale of assets andmaterial changes in the Company’s business. The financial covenants include aminimum quick ratio, as defined in the loan agreement, of 2.0 to 1.0 and amaximum ratio of total liabilities to tangible net worth of 1.0 to 1.0 for 2001and 1.5 to 1.0 for 2002 and thereafter. The most restrictive of the financialcovenants is that the Company’s negative operating income shall not be inexcess of the amounts specified below (in thousands): 

 

| **As of the  quarter ended,** |   | **Negative Operating  Income** |   |
|-------------------------------|--------|--------------------------------|--------|
| March 31, 2002                |   | $                              | 2,500  |   |
| June 30, 2002                 |   | 1,000                          |   |
| September 30, 2002            |   | 0                              |   |
| Thereafter                    |   | 0                              |   |
|                               |        |                                |        |  |

 

Negativeoperating income is defined in the loan agreement as loss from operations plus,to the extent they have been deducted in determining the loss from operations,the sum of non-cash expenses including amortization of goodwill, amortizationof intangibles and stock-based compensation expenses, less the sum of non-cashitems of income, plus net interest income/expense, as calculated in accordancewith generally accepted accounting principles.

 

**5.          Commitments and Contingencies:**

 

**Litigation**

 

TheCompany is periodically a party to disputes arising from normal businessactivities. In the opinion of management, resolution of these matters will nothave a material adverse effect upon the financial position or future operatingresults of the Company.

 

OnMarch 14, 2001, Expeditors International of Washington, Inc. and ExpeditorsTradewin, L.L.C. (collectively “Expeditors”) filed suit against the Company inthe United States District Court for the Eastern District of Michigan, SouthernDivision primarily alleging that the Company misappropriated certain ofExpeditors’ trade secrets in connection with its acquisition of Ford’s customsoperations, by utilizing systems and business processes that Expeditorsassisted in developing for Ford and through its employee hiring practices. The Companybelieves that the allegations contained in the complaint are without merit andthat there will be no material adverse impact to its operations from thislitigation. In connection with its acquisition of Ford’s customs operations,Ford agreed to indemnify the Company for intellectual property infringementclaims and Ford is currently indemnifying the Company in connection with thislitigation. Subsequent to Expeditors filing of its complaint, the Company fileda counterclaim against Expeditors for, among other things, trade libel andtortuous interference with a contractual relationship.

 

OnApril 16, 2002, the Court granted in part and denied in part our motion todismiss this case. Specifically, the Court dismissed Expeditors claims ofcommon law misappropriation of confidential information on the grounds thatsuch claims were preempted by the Michigan Uniform Trade Secrets Act("MUTSA"). The Court preserved Expeditors remaining claims, asdismissal was deemed to be premature as of the date of the Court's ruling.

 

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**6.          Segment Information:**

 

TheCompany has three reportable operating segments: managed services, software andservices. The managed services segment generates revenues from managed servicestransaction arrangements.  The softwaresegment generates revenues from subscription, transaction, and software licenseagreements of its Global Trade Management solutions. The services segmentprovides implementation, management consulting and training services for itscustomers. The Company evaluates its segments’ performance based on revenuesand gross profit. The Company’s unallocated costs include corporate and othercosts not allocated to the segments for management’s reporting purposes.

 

Thefollowing table summarizes the Company’s three segments (in thousands):

 

|                |   | **Three Months Ended  March 31,** |    |
|---------------------|--------|-----------------------------------|---------|
|                |   | **2001**                          |    | **2002** |   |
|                |   | **(unaudited)**                   |    | **(unaudited)** |   |
| Revenues:           |   |                              |    |   |   |
| Managed services    |   | $                                 | 6,239   |   | $ | 10,930 |   |
| Software            |   | 2,663                             |    | 3,519 |   |
| Services            |   | 4,168                             |    | 4,606 |   |
| Total revenues      |   | 13,070                            |    | 19,055 |   |
|                |   |                              |    |   |   |
| Gross profit:       |   |                              |    |   |   |
| Managed services    |   | 2,915                             |    | 5,553 |   |
| Software            |   | 2,155                             |    | 2,983 |   |
| Services            |   | 924                               |    | 1,229 |   |
| Gross profit        |   | 5,994                             |    | 9,765 |   |
|                |   |                              |    |   |   |
| Net loss:           |   |                              |    |   |   |
| Unallocated expense |   | (24,161                           | )       | (12,164 | ) |
| Interest income     |   | 1,044                             |    | 417 |   |
| Interest expense    |   | (157                              | )       | (203 | ) |
| Net loss            |   | $                                 | (17,280 | ) | $ | (2,185 | ) |

 

**Revenues**

 

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

 

|             |   | **Three Months Ended  March 31,** |   |
|------------------|--------|-----------------------------------|--------|
|             |   | **2001**                          |   | **2002** |   |
|             |   | **(unaudited)**                   |   | **(unaudited)** |   |
| Revenues:        |   |                              |   |   |   |
| Managed services |   | $                                 | 6,239  |   | $ | 10,930 |   |
| Software         |   | 2,663                             |   | 3,519 |   |
| Services         |   | 4,168                             |   | 4,606 |   |
| Total revenues   |   | 13,070                            |   | 19,055 |   |
|                  |        |                                   |        |  |  |  |  |

 

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**GeographicInformation**

 

TheCompany sells its products and services through its offices in the UnitedStates and through its subsidiaries in the United Kingdom, Brazil, Japan,Canada and Mexico. Information regarding revenues and long-lived assetsattributable to the United States and to all foreign countries is stated below.The geographic classification of product and services revenues was based uponthe location of the customer.

 

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

 

|                        |   | **Three Months Ended  March 31,** |   |
|-----------------------------|--------|-----------------------------------|--------|
|                        |   | **2001**                          |   | **2002** |   |
|                        |   | **(unaudited)**                   |   | **(unaudited)** |   |
| United States               |   | $                                 | 11,858 |   | $ | 15,979 |   |
| Europe and Asia             |   | 200                               |   | 828 |   |
| Other international regions |   | 1,012                             |   | 2,248 |   |
| Total revenues              |   | $                                 | 13,070 |   | $ | 19,055 |   |

 

Vastera’s tangible long-lived assets were locatedas follows:

 
|                        |   | **December 31,  2001** |   | **March 31,  2002** |   |
|-----------------------------|--------|------------------------|--------|---------------------|--------|
|                        |   |                   |   | **(unaudited)**     |   |
| United States               |   | $                      | 7,108  |                | $      | 8,453 |   |
| Europe and Asia             |   | 510                    |   | 518                 |   |
| Other international regions |   | 316                    |   | 495                 |   |
| Total long-lived assets     |   | $                      | 7,934  |                | $      | 9,466 |   |

 

**SignificantCustomers**

 

Forthe three months ended March 31, 2002, one customer accounted forapproximately 37 percent of total revenues.  For the three months ended March 31, 2001, two customers accountedfor approximately 34 percent and 10 percent of total revenues,respectively.

 

**7.          Transactions with Ford Motor Company:**

 

OnAugust 29, 2000, the Company acquired Ford’s global customs operations andmerged Ford’s global customs operations into its managed services operations.Ford received 8,000,000 shares of its common stock valued at approximately$79.2 million in consideration at the time of the transaction. As of March 31,2002, Ford owned 8,000,000 shares or approximately 20 percent of the Company.

 

InAugust 2000, the Company also entered into a managed services agreement wherebyVastera will manage Ford’s global trade operations. The agreement with FordU.S. has a minimum term of four years and may continue for a total of tenyears. In January 2001 and March 2001, the Company entered into a managedservices agreements with Ford Mexico and Ford Canada, respectively. Theagreements with Ford Mexico and Ford Canada also have minimum terms of fouryears and each may continue for a total of ten years. For the three monthsended March 31, 2001 and 2002 Ford Motor Company accounted forapproximately 34 percent and 37 percent of total revenues, respectively.As of March 31, 2002, Ford owed the Company approximately $3.0 million or 23percent of the Company’s total accounts receivable.

 

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InFebruary 2002, the Company amended our agreement with Ford U.S. to provide forquarterly minimum transaction levels instead of annual minimum transactionlevels. By amending this agreement, the Company can now bill on a quarterlybasis the transactions processed in excess of the minimum levels. In connectionwith the amendment, the Company agreed to reduce Ford’s U.S. aggregate annualminimum revenue guarantee from $11.6 million to $11.0 million. In December2001, the Company 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 months ended March 31, 2002,the Company derived approximately $1.5 million in revenue related totransactions in excess of the quarterly minimum.

 

TheCompany reimburses Ford for expenses incurred on its behalf by Ford for the useof facilities, the costs of leased employees, and the maintenance and expensesrelated to the acquired technology. For the three months ended March 31, 2001and 2002, the Company paid Ford approximately $1.5 million and $1.3 million,respectively. These payments are expected to decrease in the future as theCompany leverages its existing facilities and employees and deploys its owntechnology.

 

**8.          Stock-based Compensation**

 

TheCompany applies Accounting Principles Board (“APB”) Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations in accounting forit stock option plan.  Accordingly, theCompany has recorded deferred compensation cost of approximately$6.4 million in the last six months of 1999 and approximately$13.4 million in the first nine months of 2000. On March 29, 2001, theCompany also recorded approximately $465,000 of deferred compensation inconnection with the issuance of options to acquire 64,000 shares of its commonstock in exchange for the unvested Speedchain stock options it assumed in therelated business combination.  Thesedeferred compensation amounts represent the aggregate difference between theexercise price and the fair value for accounting purposes of the underlyingshares of common stock at the date of grant. This amount is included as acomponent of stockholders’ equity and is being amortized on an acceleratedbasis over the applicable vesting period. Stock-based compensation, which hasbeen separately identified in the accompanying condensed consolidated statementof operations has not been included in costs of revenues, sales and marketing,research and development, and general and administrative expense as indicatedbelow:

 

|                             |   | **Three Months Ended  March 31,** |   |
|----------------------------------|--------|-----------------------------------|--------|
|                             |   | **2001**                          |   | **2002** |   |
|                             |   | **(unaudited)**                   |   | **(unaudited)** |   |
| Cost of software  revenues  |   | $                                 | 7      |   | $ | 4 |   |
| Cost of managed services revenue |   | 48                                |   | 24 |   |
| Cost of services revenues        |   | 235                               |   | 119 |   |
| Sales and marketing              |   | 672                               |   | 342 |   |
| Research and development         |   | 163                               |   | 83 |   |
| General and administrative       |   | 551                               |   | 280 |   |
| Total stock-based compensation   |   | $                                 | 1,676  |   | $ | 852 |   |

 

**9.          Supplemental Information:**

 

**Cash FlowInformation**

 

Cashpaid for interest was $95,000, and $44,000 for the three months ended March 31,2001 and 2002, respectively. Noncash activities were as follows (in thousands):

 

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|                                                                                       |   | **Three Months Ended  March 31,  (unaudited)** |   |
|--------------------------------------------------------------------------------------------|--------|------------------------------------------------|--------|
|                                                                                       |   | **2001**                                       |   | **2002** |   |
| Capitalized lease obligations incurred                                                     |   | $                                              | 192    |   | $ | — |   |
| 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  |   | 5,166                                          |   | 1,677 |   |
|                                                                                            |        |                                                |        |  |  |  |  |

 

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

 

*The following discussion and analysis of our financialcondition and results of operations should be read in conjunction with ourcondensed consolidated financial statements and related notes appearing elsewherein this Report, which are deemed to be incorporated into this section. Ouractual results could differ materially from those anticipated in suchforward–looking statements due to various factors, including, but not limitedto, those set forth under “Risk Factors” and elsewhere in this Report.*

 

**Overview**

 

Weare a leading provider of web-native software products and services thatfacilitate international buying and selling of goods by streamlining andoptimizing global trade processes. Global trade involves the cross-bordershipment of goods and the management of the information and business processesrequired to complete these shipments. In 1992, we introduced EMS-2000, aU.S.-centric, DOS-based export management solution. In 1994, we introducedEMS-2000 Version 4, a multi-country, two-tier, Windows-based export managementsolution. In 1997, we introduced Global Passport, a multi-country, three-tier,client-server based, import/export management solution. In 2000, we introducedTradeSphere, a multi-country, multi-module suite of web-native Global TradeManagementGlobal Trade Management solutions and we introduced TradePrism.com, atrade portal that provides an Internet-based delivery mechanism for our GlobalTrade ManagementGlobal Trade Management capabilities. Since our inception, wehave continued to develop comprehensive solutions with features, functionalityand services that allow companies to manage the complexities of global trade.

 

Weprovide our products and services to over 200 clients from our offices in theUnited States, the United Kingdom, Brazil, Canada, Japan and Mexico. Ourclients typically acquire a limited number of server and user subscriptions orlicenses to implement in a division or department. As they expandimplementation of our products globally and to their clients, suppliers andbusiness partners, our clients acquire additional subscriptions or licenses. Wecurrently market our products and services on a global basis through our directsales force and other channels, such as strategic alliances and partners. Weexpect revenues from our international operations to increase as we continue toexpand our international sales and services organizations.

 

InJuly 2000, we entered into an agreement to acquire FordMotor Company’s globalcustoms operations and merged Ford’s global customs operations into our managedservices operations. The Ford operations that were merged into us consist ofFord personnel and technology utilized by Ford to manage its internationaltrade transactions. By combining our existing technology and intellectualcapital with that acquired from Ford, we intend to expand our managed servicesto companies of varying sizes on a global basis. Ford received 8,000,000 sharesof our common stock valued at approximately $79.2 million in consideration atthe time of the transaction. As of May 3, 2002, Ford owned approximately 20% ofour common stock.

 

InJanuary 2001 and March 2001, we expanded the Global Trade ManagementGlobalTrade Management services we provide to Ford by assuming responsibility for administering and managing Ford’s globaltrade operations in Mexico and Canada, respectively. The contractual termsrelating to negotiating managed services arrangements with other foreignoperations have not been finalized and are subject to negotiation based uponthe actual costs. These costs include personnel costs, administrative overheadand information technology processing costs.

 

Ouragreements with Ford have a minimum term of four years.  These agreements provide us with a guaranteed,predictable and recurring revenue stream from Ford over the next three years.We expect to derive at least $16.2 million in revenues in 2002 and 2003 fromour agreements with Ford U.S., Ford Mexico and Ford Canada. We believe ourclient relationship with Ford will have a significant impact on our totalrevenues and is expected to account for greater than 10% of revenues for theforeseeable future. For the three months ended March 31, 2001 and 2002, Fordaccounted for approximately 34% and 37% of our total revenues, respectively.

 

18

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InFebruary 2002, we amended our agreement with Ford U.S. to provide for quarterlyminimum transaction levels instead of annual minimum transaction levels. Byamending this agreement, we can now bill on a quarterly basis the transactionsprocessed in excess of the minimum levels. In connection with the amendment, weagreed to reduce Ford’s U.S. aggregate annual minimum revenue guarantee from$11.6 million to $11.0 million. In December 2001, we permitted Ford U.S. tocarry forward a portion of the transactions processed for Ford U.S. in 2001 inexcess of the contractual minimum in the event that transaction processed inthe first quarter of 2002 are less than the contractual minimum. For the threemonths ended March 31, 2002, we derived approximately $1.5 million in revenuerelated to transactions in excess of the quarterly minimum.  We are compensated for our services providedto Ford based on the number of transactions executed, subject to certainminimum transaction levels through 2004. A transaction, also known as a customsentry, or the equivalent in other geographic regions, is a declaration forgoods imported by Ford. Each request submitted for the shipment of goods becomesa customs entry at the time the shipment enters the commerce of a nation.Although Ford has a limited ability to manage the number of transactions weprocess, based on customs regulations and Ford’s just-in-time productionprocess, opportunities to combine multiple transactions into one customs entryare limited and not employed by Ford in the customs clearance of goods.

 

**Acquisitions**

 

Inthe first quarter of 2002, we executed on our strategy to expand our globalpresence to enhance our competitive position worldwide and our ability to serveand support our clients.  As part ofthis strategy, we acquired companies in Mexico, Canada and Brazil,respectively.  The shares of commonstock we issued were valued at the average of the closing prices for the threedays before and the three days after the date each acquisition’s definitiveterms were finalized.

 

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

 

OnFebruary 12, 2002, Vastera, Inc. acquired Imanet, an Ontario Corporation forapproximately $2.4 million. Imanet is a provider of Global Trade Managementsolutions in Canada. The Company paid $850,000 in cash and issued approximately90,000 shares of its common stock valued at approximately $1.4 million.

 

OnMarch 8, 2002, Vastera Inc. acquired Bergen Informatica Ltda (“Bergen”) forapproximately $6.2 million.  Bergen is aprovider of Global Trade Management solutions in Brazil.  The Company paid $2.4 million in cash andissued approximately 223,000 shares of its common stock valued at approximately$3.1 million.

 

Inaddition to the acquisition of the Ford’s global customs operations describedabove, on March 29, 2001, we acquired Speedchain, a development stage companywith no revenues since its inception in 1999. Speedchain is a supply chainevent management and global e-logistics solutions provider. The acquisition waseffected through the merger of Speedchain into one of our wholly ownedsubsidiaries, Vastera Acquisition Corporation. The acquisition was accountedfor under the purchase method of accounting and the operating results ofSpeedchain have been included in the accompanying condensed consolidatedfinancial statements from the date of acquisition.

 

Underthe terms of the acquisition agreement, we issued an aggregate of 944,485shares of common stock in exchange for all of the outstanding preferred stockand common stock of Speedchain. The shares of common stock issued by us werevalued at $14.00 per share, the average of the closing prices for the threedays before and three days after March 1, 2001. We also issued options toacquire approximately 24,000 shares of our common stock in exchange for thevested Speedchain stock options we assumed in the business combination. Theoptions were valued at approximately $328,000 using the Black-Scholes model,assuming 128% volatility, a risk free interest rate of 6.19%, and an exerciseperiod of three years. On March 29, 2001, we also issued options to acquireapproximately 64,000 shares of our common stock in exchange for the unvestedSpeedchain stock options assumed in the business combination. Accordingly, werecorded $465,000 of deferred compensation that will be amortized on an acceleratedbasis over the remaining vesting period of these options.

 

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Wevalued in-process research and development (“IPR&D”) projects acquired inthe acquisition at approximately $6.9 million, based on the results of anindependent appraisal of the development projects for which technologicalfeasibility has not been established and no alternative future uses exist. Theacquired IPR&D projects are targeted at the supply chain event managementand e-logistics market.

 

Thevalue of the IPR&D projects identified was determined by estimating thefuture cash flows from each of the respective projects at the assumed date ofcommercial feasibility, discounting these net cash flows back to their presentvalue and then applying a percentage of completion to the calculated presentvalue. The percentage of completion for the projects were determined usingmilestones representing management’s estimate of effort, value added and degreeof difficulty of the portion of the projects completed as of March 29, 2001, ascompared to the remaining research and development to be completed to bring theprojects to technical feasibility. Speedchain’s projects started in February2000 and, as of March 29, 2001, we estimated the projects were 70% complete.

 

Developmentof the Speedchain technology remains a substantial risk to us due to factorsincluding the remaining effort necessary to achieve technical feasibility,rapidly changing customer needs and competitive threats from other companies.Failure to bring these products to market in a timely manner could adverselyaffect future sales and profitability of the combined company. Additionally,the value of the other intangible assets acquired may become impaired.

 

Goodwilland identifiable intangibles have been amortized on a straight-line basis overthree to four years and resulted in charges to operations of approximately $5.0million and $453,000 for the three months ended March 31, 2001 and 2002. OnJanuary 1, 2002, in accordance with SFAS No. 141, we reclassified our assembledworkforce intangible assets to goodwill. As of January 1, 2002 we hadunamortized goodwill of approximately $62.2 million. 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$580,000 for the years ending December 31, 2002 and 2003 and approximately$380,000 for the year ending December 31, 2004.

 

**CriticalAccounting Policies**

 

Weconsider certain accounting policies related to revenue recognition, deferredrevenues and intangible assets to be critical to our business operations andthe understanding of our results of operations. The impact and any associatedrisks related to these policies on our business operations is discussedthroughout management’s Discussion and Analysis of Financial Condition andResults of Operations where such policies affect our reported and expectedfinancial results. For a detailed discussion on the application of these andother accounting policies, see the Notes to the Condensed ConsolidatedFinancial Statements in Item 1 of this Report on Form 10-Q. Note that ourpreparation of this Report on Form 10-Q requires us to make estimates andassumptions 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 ofRevenues and Revenue Recognition Policy**

 

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

 

*Managed Services Revenues*

 

Managedservices revenues are derived from agreements that provide for transaction feesbased on the performance of our managed services solutions. Managed servicessolutions include the processing of our clients’ custom entries and theclassification of its clients’ goods. Managed services transaction arrangementsare often subject to annual or quarterly minimum transaction thresholds andrevenues have been recognized based on the lower of the cumulative actualtransactions processed using a weighted-average transaction rate or the amountbillable for the period. For those managed services transaction arrangementsthat are subject to annual minimums and the amount billable for interim periodsis limited to the pro-rata portion of the annual minimum, transactionsprocessed in excess of the minimum in each period are not billable until theend of the related period. In addition, we may

 

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receive annual gainsharing fees under certainmanaged services transaction arrangements based on a percentage of the client’sannual cost savings, as defined in the managed services arrangements.  Such fees are recognized when they becomefixed and determinable.

 

*Software Revenues*

 

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

 

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

 

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

 

Perpetualsoftware license revenues are derived from perpetual software licensearrangements and related maintenance contracts. Maintenance contracts includethe right to unspecified enhancements on a when-and-if available basis, ongoingsupport and content update services. The content updates provided undermaintenance arrangements are significant and frequent and thus the entirearrangement is in substance a subscription. Revenues from perpetual softwarelicense sales are recognized ratably over the estimated economic life of theproduct. We have estimated that the life of the product is three years, whichis consistent with the historical periods between major upgrades to thefunctionality and architecture of its products such that we would charge allcustomers a new fee to migrate to the new version. Revenues from maintenancecontracts are recognized ratably over the contract term, typically one year.

 

*Services Revenues*

 

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

 

**DeferredRevenues**

 

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

 

**IntangibleAssets**

 

Asof March 31, 2002, we have intangible assets recorded of approximately $78.4million related to our 1999, 2000, 2001 and 2002 acquisitions. Goodwill relatedto the 1999 acquisitions is amortized using the straight-line method over fiveyears. Intangible assets from our acquisition of Ford’s global customs unit in2000 consists of goodwill, assembled workforce, acquired technology and theFord contract, and are amortized using the straight-line method over three tofour years. The value assigned to the Ford contract is being amortized as adiscount to revenue over the minimum term of the contract. The value assignedto the assembled workforce has been allocated to each

 

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country in which the Company will acquire Ford’sglobal customs operations, based on the number of employees in each country.The related amortization is recorded on a straight-line basis over three yearsfrom the date the Company assumes Ford’s customs operations in each country.Goodwill related to the Ford acquisition is amortized using the straight-linemethod over four years. The assembled workforce intangible asset and goodwillfrom our Speedchain acquisition in 2001 are amortized using the straight-linemethod over two and fours years, respectively.

 

Forthe three months ended March 31, 2001 and 2002, we recorded amortizationexpense related to our goodwill and intangibles of approximately $5.0 millionand $453,000, respectively. On January 1, 2002, in accordance with SFAS No.141, we reclassified our assembled workforce intangible assets to goodwill. Asof January 1, 2002, we had unamortized goodwill of approximately $62.2 million.On January 1, 2002, we adopted the nonamortization approach under SFAS No. 142for our goodwill. Under the nonamortization approach, goodwill will not beamortized into results of operations, but instead will be reviewed forimpairment and written down and charged to results of operations only in theperiods in which the recorded value of goodwill and certain intangibles is morethan its fair value. The implementation of SFAS No. 142 did not have a materialeffect on our results of operations.

 

Therecoverability and useful lives of our intangible assets are based on estimatesand are susceptible to change. Although we believe our intangible assets willbe recoverable, changes in the economy, the business in which we operate andour own relative performance could change the assumptions used to evaluateintangible asset recoverability. We continue to monitor these assumptions andtheir effect on the estimated recoverability. Any resulting impairment losscould have a material adverse impact on our financial condition and results ofoperations.

 

**Comparisonof the Three Months Ended March 31, 2001 to the Three Months Ended March 31,2002**

 

*Revenues*

 

**Total revenues.** Total revenuesincreased 46% from approximately $13.1 million for the three months endedMarch 31, 2001 to approximately $19.1 million for the three months endedMarch 31, 2002.

 

**Managed services revenues.** Managed servicesrevenues increased 75% from approximately $6.2 million for the threemonths ended March 31, 2001 to approximately $10.9 million for the threemonths ended March 31, 2002.  Weattribute this increase to the continued growth in our automotive and high-techmanaged services client base. For the three months ended March 31, 2002, wederived approximately $1.5 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 48% of our total revenues for thethree months ended March 31, 2001 and 57% of our total revenues for the threemonths ended March 31, 2002. In February 2002, our agreement with Ford U.S. wasamended to provide for quarterly minimums so that transactions processed inexcess of the minimum will be billable quarterly rather than at the end of theyear. We expect managed services revenues to account for at least 55% of ourtotal revenues for the near future.

 

**Software revenues.** Softwarerevenues increased 32% from approximately $2.7 million for the threemonths ended March 31, 2001 to approximately $3.5 million for the threemonths ended March 31, 2002.  Weattribute this increase to the growth in our software client base.  Revenues derived from our softwareagreements accounted for 20% of our total revenues for the three months endedMarch 31, 2001 and 19% of our total revenues for the three months ended March31, 2002. We expect software revenues to account for no more than 20% of ourtotal revenues for the near future.

 

**Services revenues.** Servicesrevenues increased 11% from approximately $4.2 million for the threemonths ended March 31, 2001 to approximately $4.6 million for the threemonths ended March 31, 2002. This increase resulted from our expansion  in our client base and increased softwaresales. Services revenues accounted for 32% of our total revenues for the threemonths ended March 31, 2001 and 24% for the three months ended March 31, 2002.We expect services revenues to continue to account for up to 25% of our totalrevenues for the near future.

 

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*Cost ofRevenues*

 

**Cost of managed services revenues.** Cost ofmanaged services revenues includes the cost of salaries and related expensesfor our managed services organizations. We expect the cost of managed servicesrevenues in absolute dollars to continue to increase as we expand our offeringsfurther, build out our managed services trade hubs and integrate othertechnology products into our product offerings.  The cost of managed services revenues increased 62% fromapproximately $3.3 million for the three months ended March 31, 2001 toapproximately $5.4 million for the three months ended March 31, 2002. Thisincrease was largely due to the growth of our managed services client base. Thecost of managed services revenues as a percentage of managed services revenueswas 53% for the three months ended March 31, 2001 and 49% for the three monthsended March 31, 2002.  This decrease asa percentage of managed services revenues reflected our ability to leverage ourmanaged services organization. We expect to realize productivity improvementsfrom our investment in our support infrastructure and the leveraging ofpersonnel in the performance of our managed services agreements. As we enterinto large multi-year managed services agreements in new industry verticals ornew geographic 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 as we realizeproductivity improvements from these infrastructure investments. Accordingly,we expect that our cost of managed services revenues may fluctuate on aquarterly basis as a percentage of managed services revenues.

 

**Cost of software revenues.** Cost ofsoftware revenues includes 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 organization. We expect the costof software revenues in absolute dollars to continue to increase as we furtherexpand our offerings and integrate other technology products into our productofferings.  The cost of softwarerevenues increased 6% from approximately $508,000 for the three months endedMarch 31, 2001 to approximately $536,000 for the three months ended March 31,2002.  This increase was largely due toour investment in our client support infrastructure. The cost of softwarerevenues as a percentage of software revenues was 19% for the three monthsended March 31, 2001 as compared to 15% for the three months ended March 31,2002.  This decrease as a percentage ofsoftware revenues reflected the productivity improvements from our investmentin our support infrastructure.  Weexpect the cost of software revenues as a percentage of software revenues to bein the range of 15% to 20% on an annual basis, but this percentage could fluctuateoutside this range in any given quarter.

 

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

 

Thecost of services revenues increased 4% from approximately $3.2 million forthe three months ended March 31, 2001 to approximately $3.4 million forthe three months ended March 31, 2002. This increase resulted from an increase in services revenues.  The cost of services revenues as apercentage of services revenues was 78% for the three months ended March 31,2001 and 73% for three months ended March 31, 2002.  This decrease reflects the productivity improvements that we havemade in our implementation and training organizations. We expect the cost ofservices revenues as a percentage of services revenues to be in the range of73% to 78% on an annual basis, but this percentage could fluctuate outside thisrange in any given quarter.

 

*OperatingExpenses*

 

**Sales and marketing.** Sales andmarketing expense consists primarily of salaries, commissions and bonusesearned by sales and marketing personnel, sales training events, publicrelations, advertising, trade shows, and travel expenses related to bothpromotional events and direct sales efforts. Sales and marketing decreased 22%from approximately $4.3 million for the three months ended March 31, 2001to approximately $3.4 million for the three months ended March 31, 2002.This decrease was primarily due to a reduction in bonuses and compensation paidto our employees.  Sales and marketingexpenses represented 33% of our total revenues for the three months ended March31, 2001 and 18% for the three months ended March 31, 2002. We anticipate thatsales and marketing expenses will continue to decrease as a percentage of totalrevenues in future years.

 

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**Research and development.** Research anddevelopment expense consists primarily of salaries, benefits and equipment forsoftware developers, quality assurance personnel, program managers andtechnical writers. Research and development expense increased 12% fromapproximately $3.5 million for the three months ended March 31, 2001 toapproximately $3.9 million for the three months ended March 31, 2002. Thisincrease resulted from an increase in the number of internal and contractsoftware developers and quality assurance personnel needed to support ourproduct development and testing activities. Research and development expensesrepresented 27% of our total revenues for the three months ended March 31, 2001and 21% for the three months ended March 31, 2002.  We believe that we must continue to invest in research anddevelopment in order to develop new products and services. As a result, weanticipate that research and development expenses will continue to increase inabsolute dollar amounts but decrease as a percentage of total revenues infuture years.

 

**General and administrative.** General andadministrative expense consists primarily of salaries, benefits and relatedcosts for executive, finance, administrative and information servicespersonnel. These expenses also include fees for legal, audit and accounting,and other professional services. General and administrative expense increased25% from approximately $2.0 million for the three months ended March 31,2001 to approximately $2.6 million for the three months ended March 31,2002.  This increase resulted from theaddition of legal and administrative personnel to support the growth of ourbusiness. General and administrative expenses represented 16% of our total revenuesfor the three months ended March 31, 2001 and 13% for the three months endedMarch 31, 2002. We believe our general and administrative expenses willcontinue to increase in absolute dollar amounts, but decrease as a percentageof total revenues as we expand our administrative staff, domestically andinternationally, and incur additional expenses associated with being a globalcompany. We expect these expenses to include legal, accounting and consultingfees.

 

**Depreciation.**Depreciationexpense increased 36% from approximately $713,000 for the three months endedMarch 31, 2001 to approximately $970,000 for the three months ended March 31,2002.  This increase resulted from thedepreciation of fixed assets purchased to build the infrastructure needed tosupport the growth of our business. Depreciation expense represented 5% of ourtotal revenues for each of the three months ended March 31, 2001 and 2002.

 

**Amortization.**Amortizationexpense decreased 91% from approximately $5.0 million for the three monthsended March 31, 2001 to approximately $453,000 for the three months ended March31, 2002.  This decrease resulted fromour adoption of the nonamortization approach under SFAS No. 142 for ourgoodwill.  Amortization expenserepresented 38% of our total revenues for the three months ended March 31, 2001and 2% for the three months ended March 31, 2002.  On January 1, 2002, in accordance with SFAS No. 141, wereclassified our assembled workforce intangible assets to goodwill. As ofJanuary 1, 2002, we had unamortized goodwill of approximately $62.2 million. Inthe aggregate, amortization for future periods is expected to be approximately$580,000 for the years ending December 31, 2002, 2003 and 2004 andapproximately $380,000 for the year ending December 31, 2005.

 

**In-process research and development.** For the yearended December 31, 2001, we incurred a one-time IPR&D charge ofapproximately $6.9 million associated with the acquisition of Speedchain. Wevalued IPR&D acquired in the Speedchain acquisition consummated on March29, 2001 at approximately $6.9 million based on an independent appraisal of thedevelopment project for which technological feasibility has not beenestablished and no alternative future uses exist. The acquired IPR&Dproject is targeted at the supply chain event management and e-logisticsmarket.

 

**Stock-based compensation.**We recordeddeferred compensation of approximately $6.4 million in the last six monthsof 1999 and approximately $13.1 million for the year ended December 31,2000. These amounts represent the aggregate difference between the exerciseprice and the fair value for accounting purposes of the underlying common stockat the date of grant. On March 29, 2001, we recorded $465,000 of deferredcompensation in connection with the unvested stock options that were assumed inconnection with the Speedchain acquisition. These amounts are included as acomponent of stockholders’ equity and are being amortized on an acceleratedbasis over the applicable vesting period. For the three months ended March 31,2001 and 2002, we amortized approximately

 

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$1.7 million and $852,000 of deferredcompensation.  We expect to amortizedeferred compensation of approximately $2.6 million, $941,000 and $45,000for the years ending December 31, 2002, 2003 and 2004. The amount of stockoption compensation expense to be recorded in future periods could decrease ifoptions are forfeited for which accrued but unvested compensation has beenrecorded.

 

**Other income (expenses), net.**Other income(expenses), net fluctuates based on the amount of cash balances available forinvestment, borrowings under our line of credit, interest and other expenserelated to our equipment borrowings and realized gains and losses oninvestments. Other income (expenses), net decreased from approximately $887,000for the three months ended March 31, 2001 to approximately $214,000 for thethree months ended March 31, 2002. This decrease resulted from the decrease ininterest income.  Interest incomedecreased due to our utilization of our cash resources to fund our operationsand to acquire companies.

 

**Income taxes.**No provisionfor income taxes has been recorded for either the three months ended March 31,2001 and 2002 due to accumulated net operating losses. We have recorded avaluation allowance for the full amount of our net deferred tax assets as aresult of the uncertainty surrounding the timing of the realization of thesefuture tax benefits.

 

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

 

**Liquidityand Capital Resources**

 

Wehad cash and cash equivalents and short-term investments of $64.9 million as ofMarch 31, 2002, a decrease of $8.9 million from $73.8 million as of December31, 2001.

 

Wehave a secured revolving line of credit and an equipment line of credit withPNC Bank. As of December 31, 2001 and March 31, 2002, the outstanding balanceunder the equipment line of credit was approximately $4.2 million and $3.5million, respectively, and there were no amounts outstanding under the securedrevolving line of credit. The revolving line of credit was scheduled to expireon December 31, 2000 and was extended to April 30, 2001. In May 2001, werenegotiated and amended our secured revolving line of credit and equipmentline of credit. As amended, we may now borrow up to $10 million under therevolving line of credit, with a $2.5 million sub-limit for the issuance of lettersof credit. Advances under the revolving line of credit are limited to thelesser of $10 million or the sum of 80% of eligible accounts receivable, asdefined in the loan agreement. The revolving line of credit bears interest atthe greater of the bank’s prime rate or the overnight federal funds rate (4.75%as of March 31, 2002). The revolving line of credit was scheduled to mature inMay  2002.  PNC Bank extended the term until November 2002.  The Company plans to obtain a creditfacility with a different financial institution.

 

Wemay borrow up to $6.4 million under the equipment line of credit. The equipmentline of credit bears interest at the bank’s prime rate plus 50 basis points(5.25% as of March 31, 2002). The equipment line of credit has two interest-onlypayment periods. Amounts borrowed until November 15, 2001 are subject tointerest-only payments. After this date, we are required to make principal andinterest payments to repay these borrowings over a period of 30 months. Thesecond interest-only payment period applies to borrowings made from November16, 2001 to May 15, 2002. After May 15, 2002, we are required to make principaland interest payments to repay the borrowings from the second interest-onlyperiod over a period of 30 months, and no additional borrowings may occurthereafter.

 

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Theterms of the revolving line of credit and equipment line of credit require usto comply with certain financial covenants including, but not limited to, restrictionsand limitations on future indebtedness, sale of assets and material changes inour business. The financial covenants include a minimum quick ratio, as definedin the loan agreement, of 2.0 to 1.0 and a maximum ratio of total liabilitiesto tangible 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 ournegative operating income shall not be in excess of the amounts specified below(in thousands): 

 

| **As of the  quarter ended** |   | **Negative Operating  Income** |   |
|------------------------------|--------|--------------------------------|--------|
| March 31, 2002               |   | $                              | 2,500  |   |
| June 30, 2002                |   | 1,000                          |   |
| September 30, 2002           |   | 0                              |   |
| Thereafter                   |   | 0                              |   |
|                              |        |                                |        |  |

 

Negativeoperating income is defined in the loan agreement as loss from operations plus,to the extent they have been deducted in determining the loss from operations,the sum of non-cash expenses including amortization of goodwill, amortizationof intangibles and stock-based compensation expenses, less the sum of non-cashitems of income, plus net interest and other income/other expense, ascalculated in accordance with generally accepted accounting principles.

 

Amountsborrowed from one lending institution for capital leases are due over 36 to48-month repayment periods and are collateralized by our intellectual property.As of December 31, 2001 and March 31, 2002, the outstanding balance underthis capital lease agreement was approximately $309,000 and $159,000,respectively.

 

Net cash used in operating activities totaledapproximately $6.7 million and $1.4 million for the three months ended March31, 2001 and 2002, respectively.  Netcash flows from operating activities reflect net losses of approximately $17.3million and $2.2 million for the three months ended March 31, 2001 and 2002,respectively,  are offset by thenon-cash expenses relating to depreciation and amortization, stock-basedcompensation and provision for doubtful accounts. In addition, the net cashused in operations increased due to the increase in accounts receivable and adecrease in accrued compensation and accounts payable and accrued expenses.

 

Netcash used in investing activities was approximately $2.4 million and $804,000for the three months ended March 31, 2001 and 2002, respectively.  Our investing activities reflect theadditions 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.

 

Netcash provided by (used in) financing activities was approximately $(207,000)and $1.2 million for the three months ended March 31, 2001 and 2002,respectively.  These financing cashflows primarily reflect the net proceeds from the exercise of stock options andpayments and principal payments on our debt.

 

Weintend to continue investing in the business, particularly in the areas ofresearch and development, sales and marketing. Our future liquidity and capitalrequirements will depend on numerous factors, including:

 

•              The costs and timing ofexpansion of sales and marketing activities;

 

•              The costs and timing ofproduct development efforts and the success of these development efforts;

 

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•              The extent to which ourexisting and new products and services gain market acceptance;

 

•              The level and timing ofrevenues;

 

•              The costs involved inmaintaining and enforcing intellectual property rights;

 

•              The timing of marketdevelopments; and

 

•              Available borrowings underline of credit and capital lease arrangements.

 

Inaddition, we may use cash resources to fund acquisitions of complementarybusinesses and technologies. We believe that our current cash resources will besufficient to meet our working capital and capital requirements for at leastthe next 12 months. Thereafter, we may find it necessary to obtainadditional equity or debt financing. In the event that additional financing isrequired, we may not be able to raise it on terms acceptable to us, if at all.

 

Wereimburse Ford for certain expenses in connection with the acquisition ofFord’s global customs operations. We expect to pay approximately $458,000 in fees to Ford each month for thereimbursement of expenses incurred by Ford for the use of facilities, the costsof leased employees and the maintenance and expenses related to the acquiredtechnology.  We expect these payments todecrease as we leverage our existing facilities and deploy our technology.

 

**RecentAccounting Pronouncements**

 

InJune 2001, FASB issued SFAS No. 141 “Business Combinations” and SFAS No. 142“Goodwill and Other Intangible Assets.” SFAS No. 141 requires businesscombinations initiated after June 30, 2001 to be accounted for using thepurchase method of accounting, and broadens the criteria for recordingintangible assets separate from goodwill. Recorded goodwill and intangibleswill be evaluated against these new criteria and may result in certainintangibles being subsumed into goodwill, or alternatively, amounts initiallyrecorded as goodwill may be separately identified and recognized apart fromgoodwill. 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. Inthe aggregate, amortization for the year ended December 31, 2001 wasapproximately $21.7 million.  In theaggregate, amortization for future periods is expected to be approximately$580,000 for the years ending December 31, 2002 and  2003 and approximately $380,000 for the year ending December 31,2004. The implementation of  SFAS No.142 did not have a material effect on our results of operations.

 

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

 

InAugust 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets,” which supersedes SFAS No. 121, and “Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to BeDisposed Of.”  SFAS No. 144 is effectivein the first quarter of 2002. We do not believe that SFAS No. 144 will have amaterial effect on our financial statements.

 

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EffectiveJanuary 1, 2002, FASB’s Topic D-103 requires that reimbursed travel expenses tobe recognized as revenue.  Accordingly,all prior periods have been reclassified to conform with the current period’spresentation.

 

**RisksRelating to Our Business**

 

*Before deciding to invest in us or to maintain or increaseyour investment, 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 ahistory of losses and expect to incur losses in the future.**

 

Weincurred net losses of approximately $8.3 million in 1998,$10.5 million in 1999, $35.8 million in 2000 and $45.8 million in2001. For the three months ended March 31, 2002, we incurred a net loss ofapproximately $2.2 million.  Ouraccumulated deficit as of March 31, 2002 was approximately $173.3 million.We expect to continue to incur net losses in the foreseeable future. We believethat the success of our business depends on our ability to significantlyincrease revenue and to limit our operating expenses. If our revenues fail togrow at anticipated rates or our operating expenses increase without acorresponding increase in our revenues, or we fail to adjust operating expenselevels appropriately, we may not be able to achieve and maintain profitability,which would increase the possibility that the value of your investment willdecline.

 

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

 

Asa critical element of our strategy, we intend to continue to provide managedservices to our current and future clients. These services range from providingoperational management for a single global trade process to managing a client’sworldwide trade operation. Accordingly, in July 2000, we established arelationship with Ford pursuant to which we will administer, automate andmanage Ford’s global customs operations for a minimum of four years. In early2001, we expanded the scope of the Global Trade Management services provided toFord by assuming responsibility for administering and managing Ford’s global tradeoperations in Mexico and Canada. In August 2001, we entered into an agreementwith Lucent Technologies to manage Lucent’s U.S.-based global tradeoperations.  In March 2002, we enteredinto an agreement with Nortel Networks to manage Nortel’s global tradeoperations.

 

Weexpect that, over time, the revenues that we receive from providing managedservices to these and future clients will continue to represent the largestportion of our total revenues. Any inability to perform our agreements withFord, Lucent and Nortel or to successfully provide managed services to ourexisting and future clients would significantly reduce our revenues, increaseour costs, hurt our reputation in our industry and adversely affect ourbusiness and results of operations.

 

**We dependon Ford for a significant portion of our revenues.**

 

Beginningin July 2000, we established a relationship with Ford, pursuant to which weacquired Ford’s global customs operations and will provide Ford with ourmanaged services. Through this relationship, Ford became a significantshareholder, holding approximately 20% of our outstanding common stock as ofMarch 31, 2002, and has become our single largest client For the three monthsended March 31, 2001 and 2002, we derived approximately 36% and 37% of ourtotal revenues, respectively, from Ford. We expect that we will continue toderive a significant portion of our total revenues from Ford in the nearfuture. Because our services agreement with Ford has a ten-year term that maybe terminated by either party for any reason after August 2004, we cannotassure you that we will be

 

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able to maintain our current agreement withFord, or renew the services agreement with Ford after the initial term of theagreement. The termination of, or failure to renew, the Ford agreements wouldadversely affect our results of operations and financial condition. Inaddition, 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.

 

**Anyrestriction on our ability to cost-effectively and legally access a foreigncountry’s rules and regulations that are incorporated into our global tradecontent, Global Content, or any failure to update our Global Content timely toinclude changes in such rules and regulations, may compromise the effectivenessof our solutions and adversely impact our revenues.**

 

Thesuccess of our Global Trade Management solutions for our clients depends on ourability to obtain or access the complex rules and regulations published byforeign governments governing a particular country’s import and export ofgoods. The foundation of our solutions, Global Content, is subject to rapidchange at the initiative of foreign governments, based on factors beyond ourcontrol. Any changes in a country’s rules and regulations relating to globaltrade that we are unable to include in our Global Content library may result indissatisfied clients and possible litigation. In addition, to the extent aforeign government restricts our access to its rules and regulations, charges afee for such access or grants proprietary rights to such information to one ormore of our competitors, our solutions may not be useful to, or cost efficientfor, our current and future clients and our revenues could decrease.

 

**The marketfor our recently developed web-native solutions is newly emerging and dependenton the growth of the Internet, and if the Internet does not grow as fast or isnot as effective as we anticipate, clients may not use our products and ourrevenues may decline.**

 

Themarket for our web-native solutions is newly emerging, and we cannot be certainthat this market will continue to develop and grow or that companies will chooseto use our solutions rather than attempt to develop alternative platforms andapplications internally or through other means. The anticipated growth of theglobal trade market may depend on the growth of the Internet. Increased use ofthe Internet largely depends upon available Internet security, bandwidth andreliability. If use of the Internet by businesses does not increase as fast andis not as effective as we currently anticipate, the market for our web-nativesolutions may not grow as we expect and our revenues would be adverselyaffected.

 

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

 

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

 

•              The loss of a significantcustomer;

 

•              Fluctuations in the demandfor our products and services;

 

•              Our ability to achievetargeted cost and expense reductions;

 

•              Price and solutioncompetition in our industry;

 

•              Changes in import/exportlaws;

 

•              Changes in general economicconditions that would adversely affect technology companies in our industry;

 

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•              The timing of orders and ourability to satisfy all contractual obligations in customer contracts;

 

•              Variability in the mix ofour managed services, software and our consulting revenues; and

 

•              Timing of new solutionintroductions and enhancements to our TradeSphere and TradePrism.com solutions.

 

Dueto the foregoing factors, our annual or quarterly results of operations may notmeet the expectations of securities analysts and investors, which could causethe price of our common stock to decline.

 

**Our abilityto achieve or maintain profitability will be constrained if we do not manageour rapid growth effectively.**

 

Wehave significantly increased our employee base to meet increasing demand forour client solutions. The number of our employees has increased by 109 employees from 464 as ofDecember 31, 2001 to 573 as of March 31, 2002.  As we expand our operations, we expect to continue to increasethe size of our employee base. Our management and operations have been strainedby this growth and will continue to be strained by our anticipated growth. Tocompete effectively and to manage future growth, we must continue to improveour financial and management controls, reporting systems and procedures on atimely basis. We must also expand, train and manage our employee base. If weare not successful in managing our growth, our ability to achieve and maintainprofitability may be harmed.

 

**We may beunable to attract and retain key personnel, which would adversely affect ourability to develop and effectively manage our business.**

 

Ourfuture performance will depend largely on the efforts and abilities of oursenior executives, key technical, professional services, sales and marketingand managerial personnel. This dependence is particular to our business becausepersonal relationships are a critical element of obtaining and maintainingclients. Our success will depend on our ability to attract and retain these keyemployees in the future. The employment of our key personnel, including ourexecutives, is at will. The market for such individuals is extremelycompetitive, and we may not find qualified replacements for personnel who leaveus. In the past, we have experienced difficulty 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 ourability to develop and effectively manage our business.

 

**If we areunable to obtain additional capital as needed or obtain additional capital onunfavorable terms in the future, our operations and growth strategy may beadversely affected and the market price for our common stock could decline.**

 

Historically,we have financed our operations primarily through the sale of our equitysecurities. As of March 31, 2002, we had cash and cash equivalents ofapproximately $9.9 million plus short-term investments of approximately $55.0million and an accumulated deficit of approximately $173.3 million. While webelieve that our current cash resources will be sufficient to meet our workingcapital needs and finance capital expenditures for at least 12 months, we mayneed to raise additional debt or equity capital to fund the expansion of ouroperations, to enhance our products and services, or to acquire or invest incomplementary products, services, businesses or technologies. If we raiseadditional funds through further issuances of convertible debt or equitysecurities, our existing stockholders could suffer significant dilution, andany new equity securities we issue could have rights, preferences andprivileges superior to those of holders of our common stock. Any debt financingsecured by us in the future could involve restrictive covenants relating to ourcapital raising activities and other financial and operational matters, whichmay make it more difficult for us to obtain additional capital and to pursuebusiness opportunities, including potential acquisitions. In addition, we maynot be able to obtain additional financing on terms favorable to us, if at all.If adequate funds are not available on terms favorable to us, our operationsand growth strategy may be adversely affected and the market price for ourcommon stock could decline.

 

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

 

Weintend to expand our international operations substantially and enter newinternational markets, including providing our services to divisions andsubsidiaries of Ford operating in foreign countries. This expansion willrequire significant management attention and financial resources to translatesuccessfully our software products into various languages, to developcompliance expertise relating to international regulatory agencies and todevelop direct and indirect international sales and support channels. We face anumber of risks associated with conducting our business internationally thatcould negatively impact our operating results, including:

 

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

 

•           Longer sales cycles associated witheducating foreign clients about the benefits of our products and services;

 

•           Currency fluctuations and exchangerates;

 

•           Longer collection time from foreignclients;

 

•           Multiple and possibly overlapping taxstructures and the burdens of complying with a wide variety of foreign laws;

 

•           The need to consider characteristicsunique to technology systems used internationally; and

 

•           Economic or political instability insome international markets.

 

Wemay not succeed in our efforts or we may experience delays in the execution ofour plan to enter new international markets, establish, maintain or increaseinternational demand for our solutions or expand our international operations,which may harm our growth strategy and could cause our operating results tosuffer.

 

**Our lengthyand variable sales cycle makes it difficult for us to predict when or if saleswill occur and, therefore, we may experience an unplanned shortfall in revenues.**

 

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

 

**Any loss ofour licensed third-party technology may result in increased costs of, or delaysin, providing our solutions, which would harm our operating results.**

 

Welicense technology from several companies on a non-exclusive basis that isintegrated into our TradeSphere product suite, including development tools andfacilities from IBM (WebSphere and MQ Series) and

 

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Forte, which was acquired by SunMicrosystems. We anticipate that we will continue to license technology fromthese and other third parties in the future. This software may not continue tobe available on commercially reasonable terms, or at all. Our license with SunMicrosystems expires on December 23, 2002, and our license with IBM expires onJune 30, 2006. These licenses would be difficult, expensive andtime-consuming to replace. The loss of any of these technology licenses couldresult in delays in the licensing of our TradeSphere products until equivalenttechnology, if any, is identified, licensed and integrated, and would adverselyaffect our operating results.

 

**The dynamicand complex nature of Global Content increases the likelihood that we may facecostly product liability claims.**

 

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

 

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

 

Wemay face unanticipated operating costs because of the current uncertaintysurrounding potential government regulation of the Internet and e-commerce. TheInternet has rapidly emerged as a commerce medium, and governmental agencieshave not yet been able to adapt all existing regulations to the Internetenvironment. Laws and regulations may be introduced and court decisions reachedthat affect the Internet or other online services, covering issues such as userpricing, user privacy, freedom of expression, access charges, content andquality of products and services, advertising, intellectual property rights andinformation security. The regulation of the Internet in the U.S. and in othercountries could decrease the demand for our products and increase the cost ofour solutions, which could have a material adverse effect on our business,financial condition and results of operations. As a company that delivers solutionsthrough the Internet, it is unclear in which jurisdictions we are actuallyconducting business. Our failure to qualify to do business in a jurisdictionthat requires us to do so could subject us to fines or penalties and couldresult in our inability to enforce contracts in that jurisdiction. Even if wewere able to ascertain correctly in which jurisdictions we conduct business,many of these jurisdictions have yet to determine the application of theirexisting laws to web-based global trade or develop laws that apply to suchtrade. Complying with new regulation would increase our operating costs.

 

**We may beunable to expand the import and export trade management services provided toFord into other geographic regions and other product lines in the manneranticipated.**

 

Underour agreement, we provide Ford with import and export trade management servicesusing a phased-in geographical approach, which started with the United States,and presently includes Mexico and Canada. Under the terms of the Ford agreements,we were to have assumed responsibilities for Ford’s European customs operationsin late 2001.  The transfer of Ford’sEuropean customs operations to us has been delayed beyond the originallyanticipated 2001 commencement date and may continue to be delayed into theforeseeable future.  If the transfer ofFord’s European customs operations to us continues to be delayed or if Ford isunable to, 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

 

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growth. Any failure to receive the requisitegovernment approvals in connection with providing Ford managed services wouldadversely impact our operating results.

 

**We may beunable to protect our proprietary rights adequately, which could result intheir unauthorized use by our competitors and have an adverse impact on ourrevenues.**

 

Oursuccess depends on our ability to protect our proprietary rights. We relyprimarily on:

 

•              Confidentiality agreementswith employees and third parties;

 

•              Protective contractualprovisions such as those contained in license agreements with consultants,vendors and clients, although we have not signed such agreements in every case;and

 

•              Copyright, trade secret andtrademark laws.

 

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

 

Wehave not secured registration of all our marks in the United States and havepursued only limited registration of our intellectual property in foreigncountries. The laws of some foreign countries do not protect our proprietaryrights to the same extent, as the laws of the United States. Effectivecopyright, trademark and trade secret protection may not be available in otherjurisdictions. If we cannot adequately protect our proprietary rights, ourcompetitors could benefit from the unauthorized use of such rights, adverselyimpacting our revenues and our business. Even if we are able to protect ourproprietary rights, we could incur significant costs to defend our rights.

 

**Our patentprotection strategy is in development currently and any inadequacy in theprotection of our technology could increase our operating costs.**

 

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

 

**We may haveto defend against intellectual property infringement claims, which could beexpensive, and if we are not successful, could result in substantial monetaryliability and disrupt our business.**

 

Wecannot be certain that our solutions do not or will not infringe valid patents,copyrights, trademarks or other intellectual property rights held by thirdparties. As a result, we may be subject to legal proceedings and claims fromtime to time relating to the intellectual property of others in the ordinarycourse of our business.

 

Wemay incur substantial expenses in defending against any third–partyinfringement claims, regardless of their merit. Successful infringement claimsagainst us may result in substantial monetary liability, may divert

 

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management’s attention from our core businessand 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.

 

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**Any futureacquisitions may be difficult to integrate and disruptive to ouroperations.  We may not realize the expectedbenefits from any such acquisitions, and our operating results may be harmed,if we cannot address the challenges presented by acquisitions.**

 

Inthe past we have acquired businesses to expand our operations or marketpresence and we intend to continue our expansion by acquiring or investing incompanies, assets or technologies that complement our business and offeropportunities for growth. These transactions involve many risks and challengesthat we might not successfully overcome, including:

 

•              Difficulties in assimilatingtechnologies, products, personnel and operations;

 

•              Disruption of our ongoingbusiness and diversion of management’s attention from other businessconcerns;

 

•              Risks of entering markets inwhich we have no or limited prior experience;

 

•              Issuances of equitysecurities that may dilute your ownership interest in our common stock;

 

•              Cash payments to, or theassumption of debt or other liabilities of, the companies we acquire; and

 

•              Large write-offs related togoodwill and other intangible assets and other adverse audit consequences.

 

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

 

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

 

Asof May 3, 2002, our officers, directors and affiliated entities, includingFord, together beneficially owned approximately 45% of the outstanding shares of our common stock. Thisconcentration of ownership may delay, deter or prevent acts that would resultin a change of control, which in turn could reduce the market price of ourcommon stock.  Accordingly, thesestockholders collectively may be able to control all matters requiringstockholder approval and, thereby, our management and affairs. In addition, Inaddition, Ford beneficially owns approximately 20% of the outstanding shares ofour common stock. As the single largest stockholder of Vastera, Ford mayexercise significant influence over corporate acts requiring stockholderapproval, including a merger or sale of Vastera for solong as Ford holds atleast 5% of our common stock, it has the right to appoint a non-voting observerto our board of directors. Our officers, directors and affiliated entities,including Ford, may have interests that differ from your interests and theirdecisions may negatively impact our future success.

 

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

 

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

 

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•              a staggered board ofdirectors, where stockholders elect only a minority of the board each year;

 

•              advance notificationprocedures for matters to be brought before stockholder meetings;

 

•     a limitation on who may call stockholdermeetings; and

 

•              a prohibition on stockholderaction by written consent.

 

Weare subject to provisions of Delaware law that prohibit us from engaging in anybusiness combination with any “interested stockholder,” meaning generally astockholder who beneficially owns more than 15% of our stock, for a period ofthree years from the date this person became an interested stockholder, unlessvarious conditions are met, such as approval of the transaction by our board.This could have the effect of delaying or preventing a change in control.Additionally, in connection with establishing our strategic relationship withFord, Ford acquired approximately 8,000,000 shares of our common stock. Becauseof Ford’s significant holdings, other companies may be deterred from acquiringus, even if being acquired would be in the best interest of our otherstockholders.

 

**The recentterrorist acts have negatively impacted the U.S. economy and may make it moredifficult to implement our growth strategy and to forecast future results ofoperations.**

 

Theterrorist acts of September 11, 2001 have negatively impacted an alreadydecelerating U.S. economy and caused U.S. businesses to stop spending on newproducts and services and to reduce costs. Accordingly, it may be moredifficult to market our solutions to new clients and derive additional revenuesfrom our existing clients. The unpredictability of future military action andother responses associated with a global war on terrorism has resulted ineconomic uncertainty that will negatively impact consumer as well as businessconfidence in the near term. This economic uncertainty may make it moredifficult to implement our growth strategy and negatively impact our revenuesin the future. We also may have more difficulty forecasting our future resultsof operations.

 

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

 

Wedevelop products in the United States and market our products in North America,and to a lesser extent, Europe, Canada, Mexico and the Asia-Pacific region. Ourfinancial results could be affected by factors such as changes in foreigncurrency exchange rates or weak economic conditions in foreign markets. As amajority of sales are currently made in U.S. dollars, a strengthening of thedollar could make our products less competitive in foreign markets. We do notexpect any material adverse effect on our consolidated financial position,results of operations or cash flows due to movements in any specific foreigncurrency.

 

Wecurrently do not use financial instruments to hedge operating expenses of ourEuropean, Mexican, Brazilian or Canadian subsidiaries. We intend to assess theneed to utilize financial instruments to hedge currency exposures on an ongoingbasis. We have existing obligations relating to amounts outstanding under ourequipment line of credit and amounts borrowed under capital lease arrangements.These financial instruments expose us to interest rate risk as our lendinginstitution changes its prime rate. As disclosed in Note 4 of our consolidatedfinancial statements, which are included as part of this Report, we haveapproximately $3.5 million in variable rate debt as of March 31, 2002. Thesignificant terms of our debt facilities are fully disclosed in Note 4 of theconsolidated financials statements. Our interest income is sensitive to changesin the general level of U.S. interest rates, particularly since the majority ofour investments are in short-term instruments. Due to the short-term nature ofour investments, we believe that there is no material risk exposure. We do nothold or issue derivative securities, derivative commodity instruments or otherfinancial instruments for trading purposes. Therefore, no quantitative tabulardisclosures are required.

 

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Wehave a substantial amount of intangible assets. Although as of March 31, 2002,we believe our intangible assets will be recoverable, changes in the economy,the business in which we operate and our own relative performance could changethe assumptions used to evaluate intangible asset recoverability. We continueto monitor these assumptions and their effect on the estimated recoverabilityof our intangible assets.

 

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**Part II –Other Information**

**Item 1:           Legal Proceedings**

 

Weare periodically a party to disputes arising from normal business activities.In the opinion of management, resolution of these matters will not have amaterial adverse effect upon our financial position or our future operatingresults.

 

OnMarch 14, 2001, Expeditors International of Washington, Inc. and ExpeditorsTradewin, L.L.C. (collectively “Expeditors”) filed suit against us in theUnited States District Court for the Eastern District of Michigan, SouthernDivision primarily alleging that we misappropriated certain of Expeditors’trade secrets in connection with our acquisition of Ford’s customs operations,by utilizing systems and business processes that Expeditors assisted indeveloping for Ford and through our employee hiring practices. We believe thatthe allegations contained in the complaint are without merit and that therewill be no material adverse impact to our operations from this litigation. Inconnection with our acquisition of Ford’s customs operations, Ford agreed toindemnify us for intellectual property infringement claims and Ford iscurrently indemnifying us in connection with this litigation. Subsequent toExpeditors filing of its complaint, we filed a counterclaim against Expeditorsfor, among other things, trade libel and tortuous interference with acontractual relationship.

 

OnApril 16, 2002, the Court granted in part and denied in part our motion todismiss this case. Specifically, the Court dismissed Expeditors claims ofcommon law misappropriation of confidential information on the grounds thatsuch claims were preempted by the Michigan Uniform Trade Secrets Act("MUTSA"). The Court preserved Expeditors remaining claims, asdismissal was deemed to be premature as of the date of the Court's ruling.

 

**Item 2:           Changes in Securities and Use ofProceeds**

 

Wereceived net offering proceeds from our initial public offering ofapproximately $86.1 million. We have used approximately $21.2 million of thenet proceeds from the initial public offering for general corporate purposes,principally working capital for increased domestic and international sales andmarketing expenditures, product development expenditures, expenditures relatedto the expansion of our consulting services organization and capitalexpenditures made in the ordinary course of business. 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.

 

Weissued 463,598 shares of common stock in the quarter ended March 31, 2002 in connectionwith our acquisition of Prisma, Imanet and Bergen.  In issuing these shares to the shareholders of Prisma, Imanet andBergen, we relied on Section 4(2) of the Securities Act and Rule 506 ofRegulation D promulgated thereunder for exemptions from the registrationrequirements of the Securities Act.  Allof the shareholders who received shares of our common stock were accreditedinvestors.

 

**Item 3:           Defaults Upon Senior Securities**

 

                        None.

 

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

 

                        None.

 

**Item 5:           Other Information**

 

                        None.

 

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

 

The following exhibits are included herein:

 

(a)         Exhibits.

 

None.

 

(b)        Reports on Form 8-K.

 

Wedid not file any reports on Form 8-K during the three months ended March 31,2002.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized in Dulles, Virginia on May 9, 2002.

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

 

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