** **

**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, 2003**                                   |
|                                                                       |
| **Commission File Number 000-31589**                                       |
|                                                                       |
| **VASTERA, INC.**                                                     |
| (Exact Name of Registrant as Specified in  its Charter)                    |
|                                                                       |   |                                                                                          |
| **Delaware**                                                               |   | **54-1616513**                                                                                |
| (State or Other Jurisdiction of  Incorporation or Organization)            |   | (I.R.S. Employer  Identification Number)                                                      |
|                                                                       |   |                                                                                          |
| **45025 Aviation Drive, Suite 300  Dulles, VA 20166  (703) 661-9006** |
| (Address and Phone Number of Principal  Executive Offices)                 |
|                                                                            |        |                                                                                               |  |  |

 

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Indicate by check number whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

Yes   ý   No  o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes ý No o

 

As of May 7, 2003 there were 40,824,656****shares of the registrant’s common stock, $.01 par value pershare, outstanding.

 

 

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**VASTERA, INC.**

** **

**TABLE OF CONTENTS**

 
| PART I -  FINANCIAL INFORMATION (UNAUDITED)           |
|-------------------------------------------------------|
|                                                  |   |
| Item 1:                                               | Financial Statements |
|                                                  |
| CONDENSED  CONSOLIDATED BALANCE SHEETS                |
|                                                  |
| CONDENSED  CONSOLIDATED STATEMENTS OF OPERATIONS      |
|                                                  |
| CONDENSED  CONSOLIDATED STATEMENTS OF CASH FLOWS      |
|                                                  |
| NOTES  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
|                                                  |
| Item 2:                                               | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
| Item 3:                                               | Qualitative and Quantitative Disclosures  About Market Risk |
| Item 4:                                               | Controls and Procedures |
|                                                  |   |
| Part II – Other Information                      |
|                                                  |
| Item 1:                                               | Legal Proceedings |
| Item 2:                                               | Changes in Securities and Use of Proceeds |
| Item 3:                                               | Defaults Upon Senior Securities |
| Item 4:                                               | Submission of Matters to a Vote of Security  Holders |
| Item 5:                                               | Other Information |
| Item 6:                                               | Exhibits and Reports on Form 8-K |
|                                                  |   |
| SIGNATURES                                            |
|                                                  |   |
| CERTIFICATIONS                                        |

 

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

# ** **

## **Item 1:**                                  Financial Statements

## ** **

**VASTERA, INC. AND SUBSIDIARIES**

** **

**CONDENSED CONSOLIDATED BALANCE SHEETS**

** **

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

 
|                                                                                                                      |   | **March 31,  2003** |    | **December 31,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|------------------------|--------|
|                                                                                                                      |   | **(Unaudited)**     |    |                   |   |
| **Assets**                                                                                                                |   |                |    |                   |   |
| Current assets:                                                                                                           |   |                |    |                   |   |
| Cash and cash equivalents                                                                                                 |   | $                   | 27,295  |                   | $      | 23,696 |   |
| Short-term investments                                                                                                    |   | 28,240              |    | 33,261                 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $1,040 and $948, respectively                             |   | 18,991              |    | 18,409                 |   |
| Prepaid expenses and other current assets                                                                                 |   | 2,643               |    | 2,535                  |   |
| Total current assets                                                                                                      |   | 77,169              |    | 77,901                 |   |
| Property and equipment, net                                                                                               |   | 12,604              |    | 11,934                 |   |
| Intangible assets, net                                                                                                    |   | 8,597               |    | 9,098                  |   |
| Goodwill                                                                                                                  |   | 65,657              |    | 65,657                 |   |
| Deposits and other assets                                                                                                 |   | 1,561               |    | 974                    |   |
|                                                                                                                      |   |                |    |                   |   |
| Total assets                                                                                                              |   | $                   | 165,588 |                   | $      | 165,564 |   |
|                                                                                                                      |   |                |    |                   |   |
| **Liabilities and  Stockholders’ Equity**                                                                            |   |                |    |                   |   |
| Current liabilities:                                                                                                      |   |                |    |                   |   |
| Line of credit and capital lease  obligations, current                                                                    |   | $                   | 2,632   |                   | $      | 2,150 |   |
| Accounts payable                                                                                                          |   | 2,857               |    | 4,277                  |   |
| Accrued expenses                                                                                                          |   | 7,172               |    | 6,937                  |   |
| Accrued compensation and benefits                                                                                         |   | 1,448               |    | 1,543                  |   |
| Deferred revenue, current                                                                                                 |   | 10,095              |    | 9,446                  |   |
| Total current liabilities                                                                                                 |   | 24,204              |    | 24,353                 |   |
| Long-term liabilities:                                                                                                    |   |                |    |                   |   |
| Line of credit and capital lease  obligations, net of current portion                                                     |   | 1,458               |    | 1,078                  |   |
| Deferred revenue, net of current portion                                                                                  |   | 2,143               |    | 2,476                  |   |
| Total liabilities                                                                                                         |   | 27,805              |    | 27,907                 |   |
| Commitments and contingencies (See Note 6)                                                                                |   |                |    |                   |   |
|                                                                                                                      |   |                |    |                   |   |
| Stockholders’ equity:                                                                                                |   |                |    |                   |   |
| Common stock, $0.01 par value; 100,000  shares authorized; 40,621 and 40,490 shares issued and outstanding,  respectively |   | 406                 |    | 405                    |   |
| Additional paid-in capital                                                                                                |   | 323,289             |    | 323,010                |   |
| Accumulated other comprehensive loss                                                                                      |   | (1,926              | )       | (2,280                 | )      |
| Deferred compensation                                                                                                     |   | (618                | )       | (988                   | )      |
| Accumulated deficit                                                                                                       |   | (183,368            | )       | (182,490               | )      |
|                                                                                                                      |   |                |    |                   |   |
| Total stockholders’ equity                                                                                           |   | 137,783             |    | 137,657                |   |
| Total liabilities and stockholders’ equity                                                                           |   | $                   | 165,588 |                   | $      | 165,564 |   |

 

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

 

1

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**VASTERA, INC. AND SUBSIDIARIES**

** **

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

** **

**(UNAUDITED)**

** **

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

 
|                                              |   | **Three  Months Ended  March 31,** |   |
|---------------------------------------------------|--------|------------------------------------|--------|
|                                              |   | **2003**                           |   | **2002** |   |
|                                              |   |                               |   |   |   |
| **Revenues:**                                     |   |                               |   |   |   |
| Managed services revenues                         |   | $                                  | 13,615 |   | $ | 10,930 |   |
| Software revenues                                 |   | 2,731                              |   | 3,519 |   |
| Services revenues                                 |   | 4,598                              |   | 4,606 |   |
|                                              |   |                               |   |   |   |
| Total revenues                                    |   | 20,944                             |   | 19,055 |   |
|                                              |   |                               |   |   |   |
| **Cost of revenues:**                             |   |                               |   |   |   |
| Cost of managed services revenues                 |   | 7,436                              |   | 5,377 |   |
| Cost of software revenues                         |   | 682                                |   | 536 |   |
| Cost of services revenues                         |   | 3,369                              |   | 3,377 |   |
|                                              |   |                               |   |   |   |
| **Operating expenses:**                           |   |                               |   |   |   |
| Sales and marketing                               |   | 2,244                              |   | 3,387 |   |
| Research and development                          |   | 3,037                              |   | 3,948 |   |
| General and administrative                        |   | 2,740                              |   | 2,554 |   |
| Depreciation                                      |   | 1,301                              |   | 970 |   |
| Amortization                                      |   | 680                                |   | 453 |   |
| Stock-based compensation                          |   | 370                                |   | 852 |   |
|                                              |   |                               |   |   |   |
| Total operating expenses                          |   | 10,372                             |   | 12,164 |   |
|                                              |   |                               |   |   |   |
| Loss from operations                              |   | (915                               | )      | (2,399 | ) |
|                                              |   |                               |   |   |   |
| Other income, net                                 |   | 188                                |   | 305 |   |
|                                              |   |                               |   |   |   |
| Loss before income taxes                          |   | (727                               | )      | (2,094 | ) |
|                                              |   |                               |   |   |   |
| Income taxes                                      |   | (151                               | )      | (91 | ) |
|                                              |   |                               |   |   |   |
| **Net loss  attributable to common stockholders** |   | $                                  | (878   | ) | $ | (2,185 | ) |
|                                              |   |                               |   |   |   |
| Basic and diluted net loss per common share       |   | $                                  | (0.02  | ) | $ | (0.06 | ) |
|                                              |   |                               |   |   |   |
| Weighted-average common shares outstanding        |   | 40,600                             |   | 39,282 |   |

 

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

 

2

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**VASTERA, INC. AND SUBSIDIARIES**

** **

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

** **

**(UNAUDITED)**

** **

**(In thousands)**

 
|                                                                           |   | **Three Months Ended  March 31,** |   |
|--------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                           |   | **2003**                          |   | **2002** |   |
| **Cash flows from  operating activities:**                                     |   |                              |   |   |   |
| Net loss                                                                       |   | $                                 | (878   | ) | $ | (2,185 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:   |   |                              |   |   |   |
| Stock-based compensation                                                       |   | 370                               |   | 852 |   |
| Depreciation and amortization                                                  |   | 1,981                             |   | 1,423 |   |
| Provision for allowance for doubtful  accounts                                 |   | 96                                |   | 11 |   |
| Amortization of revenue discount related to  Ford contract                     |   | 75                                |   | 75 |   |
| Amortization of capitalized internal-use  software costs                       |   | 123                               |   | — |   |
| Changes in operating assets and  liabilities:                                  |   |                              |   |   |   |
| Accounts receivable                                                            |   | (606                              | )      | 1,155 |   |
| Prepaid expenses and other current assets                                      |   | (105                              | )      | (66 | ) |
| Deposits and other assets                                                      |   | (540                              | )      | (7 | ) |
| Accounts payable and accrued expenses                                          |   | (1,267                            | )      | (2,766 | ) |
| Accrued compensation and benefits                                              |   | (94                               | )      | (2,083 | ) |
| Deferred revenue                                                               |   | 285                               |   | 2,201 |   |
| Net cash used in operating activities                                          |   | (560                              | )      | (1,390 | ) |
|                                                                           |   |                              |   |   |   |
| **Cash flows from  investing activities:**                                     |   |                              |   |   |   |
| Acquisition of subsidiaries                                                    |   | —                            |   | (5,682 | ) |
| Net sales of short-term investments                                            |   | 5,068                             |   | 7,422 |   |
| Acquisition of property and equipment                                          |   | (1,157                            | )      | (2,544 | ) |
| Net cash provided by (used) in investing  activities                           |   | 3,911                             |   | (804 | ) |
|                                                                           |   |                              |   |   |   |
| **Cash flows from  financing activities:**                                     |   |                              |   |   |   |
| Proceeds from the exercise of stock options                                    |   | 280                               |   | 1,809 |   |
| Principal payments on long-term debt                                           |   | (670                              | )      | (595 | ) |
| Proceeds from equipment line of credit                                         |   | 614                               |   | — |   |
| Net cash provided by financing activities                                      |   | 224                               |   | 1,214 |   |
| Effect of foreign currency exchange rate  changes on cash and cash equivalents |   | 24                                |   | (60 | ) |
| Net increase (decrease) in cash and cash  equivalents                          |   | 3,599                             |   | (1,040 | ) |
| Cash and cash equivalents, beginning of  period                                |   | 23,696                            |   | 10,982 |   |
| Cash and cash equivalents, end of period                                       |   | $                                 | 27,295 |   | $ | 9,942 |   |

 

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

 

3

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**VASTERA, INC. AND SUBSIDIARIES**

** **

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

** **

**(Unaudited)**

 

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

### ** **

Theaccompanying unaudited condensed consolidated financial statements of Vastera,Inc. and its subsidiaries (“Vastera” the “Company,” “we,” or “us”) have beenprepared on the same basis as audited financial statements and include alladjustments, including all normal recurring adjustments that are necessary fora fair presentation of the financial condition, 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 31,2003. All significant intercompany balances and transactions have beeneliminated in consolidation. Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with generallyaccepted accounting principles have been condensed or omitted pursuant to theSecurities 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.

 

Vastera is aleading provider of solutions for Global Trade Management and was incorporatedin Virginia in November 1991 under the name Export SoftwareInternational, Inc. The Company reincorporated in Delaware in July 1996and changed its name to Vastera, Inc. in June 1997. The Company’sofferings include a library of global trade content, web-based softwaresolutions, trade management consulting, and managed services. Managed servicesrange in nature from management of a specific global trade function toproviding complete management of a client’s global trade operations. TheCompany has operations in the United States, Belgium, Brazil, Canada, France,Germany, Ireland, Japan, Mexico, the Netherlands, Poland, Spain, and the UnitedKingdom.

 

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

 

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

### ** **

**Use of Estimates**

 

Thepreparation of the consolidated financial statements in conformity withaccounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosures of contingent assets and liabilitiesas of 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.

 

**Revenue Recognition**

 

The Company’s revenues consist of managed services revenues, softwarerevenues and services revenues.

 

*Managed Services Revenues*

 

Managedservices revenues are derived from agreements that provide for transaction orservices fees based on the performance of the Company’s managed servicessolutions. Managed services solutions include the processing of a client’scustoms entries and the classifying of a clients’ goods. Managed servicestransaction arrangements are often subject to annual or quarterly minimumtransaction thresholds, and revenues are recognized based on the lower of thecumulative actual transactions processed during the period using a weighted-averagetransaction rate or the cumulative amounts billable. For those managed servicestransaction arrangements subject to annual minimums and for those arrangementswhere the amount billable for interim periods is limited to the pro rataportion of the annual minimum, transactions processed in excess of the minimumin each period are not billable,

 

4

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and, therefore, revenue is notrecognized until the end of the related year. Certain managed servicesarrangements are based upon a fixed services fee. Revenues associated withthese arrangements are recognized ratably over the term of the arrangement andlimited to the amounts billable. In addition, Vastera may receive annualgainsharing fees under certain managed services arrangements based on apercentage of the client’s annual cost savings, as defined in the managedservices arrangements. These fees are recognized when they become fixed anddeterminable.

 

*Software Revenues*

 

Softwarerevenues consist of term license revenues, perpetual software license revenues,and transaction-based revenues. The Company recognizes revenue from thesale of software products in accordance with Statement of Position (“SOP”)97-2, “Software Revenue Recognition.”

 

Term licenserevenues are derived from term software license arrangements in which theCompany’s clients license its software products and obtain the right tounspecified enhancements on a when-and-if-available basis and ongoing supportand content update services. Content updates are significant and frequent.Revenues are recognized ratably over the contract term. Term licensearrangements typically range from three to five years. To the extent theCompany hosts the software for its customers, the hosting fee is recognizedratably over the contract period in conjunction with the recognition of thelicense fee.

 

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, as a result,revenues from perpetual software license sales are recognized ratably over theestimated economic life of the product. The Company has estimated that the lifeof the product is three years, which is consistent with the historical periodsbetween major upgrades to the functionality and architecture of its products.Revenues from maintenance contracts are recognized ratably over the contractterm, which is typically one year. To the extent the Company hosts the softwarefor its customers, the hosting fee is recognized ratably over the contractperiod in conjunction with the recognition of the license fee.

 

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

 

The Companyrecognizes revenues from arrangements with resellers beginning when thesoftware product is sold to the end user. Any annual transaction minimumsrequired of the reseller but not sold by the reseller to end customers arerecognized as revenues upon the expiration of the annual minimum period.

 

*Services Revenues*

 

Servicesrevenues are derived from implementation, management consulting and trainingservices. Services are performed on a time and materials basis or under fixedprice arrangements. Revenues on time and materials contracts are recognizedbased on fixed billable rates for hours delivered, and revenues on fixed pricedcontracts are recognized as the services are performed or using the percentageof completion method of accounting based on the ratio of costs incurred tototal estimated costs to be incurred. Losses on arrangements are recognizedwhen known.

 

Formultiple-element arrangements where the Company provides both software andservices, the Company defers the service fee, based on vendor-specificobjective evidence, and recognizes the services as performed.

 

**Deferred Revenues**

 

Deferredrevenues include amounts paid by clients for revenues that have not beenrecognized and generally result from billed, but deferred term and perpetuallicense revenues and services not yet performed. Deferred revenues arerecognized on a monthly basis over the term of the agreement, the remainingeconomic life of the product, or when the services are performed.

 

5

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**Cost of Revenues**

 

Cost ofrevenues includes the cost of managed services revenues, the cost of softwarerevenues, and the cost of services revenues.

 

Cost ofmanaged services revenues consist of the cost of salaries and related expensesfor the Company’s managed services organization and the amortization ofcapitalized internal use software costs related to the implementation andintegration of the Company’s trade management platform to the managed servicesoperation.

 

Cost ofsoftware revenues includes royalties owed to third parties for technologyproducts integrated into the Company’s software products, as well as the costof salaries and related expenses for the technical support organization.

 

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 the Company’s clients.

 

**Internal Use Software**

 

In accordancewith Statement of Position 98-1, “Accounting for the Costs of Computer SoftwareDeveloped or Obtained for Internal Use,” the Company capitalizes costsassociated with the implementation and integration of its trade managementplatform to its managed services operations, related to certain capitalizabletasks including the technical design, system configuration and testing phasesof the integration process. The Company capitalized approximately $191,000 and$350,000 in the first quarters of 2003 and 2002, respectively. These costs areamortized as costs of managed services revenues over three years, andamortization commences upon the completion of the integration to the Vasteraplatform. The Company began amortizing these costs in the fourth quarter of2002. Total amortization expense in the first quarter of 2003 was approximately$123,000.  Net capitalized costs on thebalance sheets as of March 31, 2003 and December 31, 2002 wereapproximately $1.6 million and $1.5 million, respectively.

 

**Concentrations of Credit Risk**

 

Financialinstruments that potentially subject the Company to concentrations of creditrisk consist primarily of cash equivalents, short-term investments, andaccounts receivable. The Company limits the amount of investment exposure inany one financial instrument and does not have any foreign currencyinvestments. The Company sells products and services to customers acrossseveral industries throughout the world without requiring collateral. However,the Company routinely assesses the financial strength of its customers andmaintains allowances for anticipated losses.

 

As of March31, 2003 and December 31, 2002, Ford Motor Company accounted for 22% and16%, respectively, of total accounts receivable. Lucent Technologies accountedfor 14% and 19% of total accounts receivable as of March 31, 2003 andDecember 31, 2002, respectively.

 

**Net Loss Per Common Share**

 

Basic net lossper common share is computed by dividing net loss applicable to commonstockholders by the weighted-average number of common shares outstandingfor the period.  Diluted net loss percommon share includes the potential dilution that could occur if securities orother contracts to issue common stock were exercised or converted into commonstock. As of March 31, 2003 and December 31, 2002, options to purchaseapproximately 4,513,000 and 4,776,000 shares of common stock were outstanding,respectively. Due to the anti-dilutive effect of the options, they have been excludedfrom the calculation of weighted-average shares for diluted earnings pershare.  As a result, the basic anddiluted loss per share amounts are identical.

 

**Comprehensive Income (Loss)**

 

As of March31, 2003 and December 31, 2002, accumulated other comprehensive income(loss) includes unrealized gains and losses on investments and foreign currencytranslation adjustments. As of March 31, 2003, accumulated net unrealized gainson investments available for sale was approximately $227,000 and theaccumulated foreign currency translation adjustment was a loss of approximately$2.2 million.

 

6

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**Goodwill and Intangible Assets**

 

Goodwillrepresents the excess of costs over fair value of assets of businessesacquired. The Company adopted the provisions of SFAS No. 142, *Goodwill and Other Intangible Assets,* asof January 1, 2002. Goodwill and intangible assets acquired in a purchasebusiness combination and determined to have an indefinite useful life are notamortized, but instead tested for impairment at least annually in accordancewith the provisions of SFAS No. 142. SFAS No. 142 also requires thatintangible assets with estimable useful lives be amortized over theirrespective estimated useful lives to their estimated residual values, andreviewed for impairment in accordance with SFAS No. 144, *Accounting for Impairment or Disposal of Long-LivedAssets*.

 

OnJanuary 1, 2002, in accordance with SFAS No. 141, the Companyreclassified its assembled workforce intangible assets to goodwill. Prior toJanuary 1, 2002, assembled workforce intangibles were amortized on astraight-line basis over two or three years. The value assigned to theassembled workforce in the acquisition of Ford’s global customs operation wasallocated to each country in which the Company acquired Ford’s global customsoperations, based upon the number of employees in that country. The relatedamortization was recorded over three years from the date the Company assumedFord’s customs operations in that country.

 

All otherintangible assets are amortized on a straight-line basis over their expectedeconomic life, generally one to five years. The value assigned to the Fordcontract in connection with the Ford acquisition is being amortized as adiscount to revenue over the minimum term of the contract.

 

**Stock Options**

 

The Companyhas adopted the disclosure requirements of SFAS No. 123, “Accounting forStock-Based Compensation.” The Company applies Accounting Principles Board(“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” andrelated interpretations in accounting for its stock option plans.  Under the intrinsic-value method prescribedin APB No. 25, compensation expense is recorded on the date of grant only ifthe current market price of the underlying stock exceed the exerciseprice.  No options granted during thequarters ended March 31, 2003 and 2002 were granted with exercise prices thatwere less than the current market price.   Had compensation expense for the Company’s 1996 Plan, 2000 Plan andEmployee Stock Purchase Plan been determined based on the fair value at thegrant dates for awards under these plans consistent with the method of SFASNo. 123, the Company’s net loss would have been increased to the pro formaamounts indicated below (in thousands, except per share data). 

 

|                                                                                                |   | **Three Months Ended  March 31,** |   |
|-----------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                |   | **2003**                          |   | **2002** |   |
| Net loss applicable to common stockholders, as reported                                             |   | $                                 | (878   | ) | $ | (2,185 | ) |
| Add: stock-based compensation included in net loss, net of tax                                      |   | 370                               |   | 852 |   |
| Deduct: stock-based compensation determined under the fair value  method for all awards, net of tax |   | (2,074                            | )      | (5,041 | ) |
| Pro forma net loss                                                                                  |   | $                                 | (2,582 | ) | $ | (6,374 | ) |
| Pro forma net loss per share                                                                        |   | $                                 | (0.06  | ) | $ | (0.16 | ) |

 

**Income Taxes**

 

Deferred taxesare provided utilizing the asset and liability method as prescribed by SFASNo. 109, “Accounting for Income Taxes,” whereby deferred tax assets arerecognized for deductible temporary differences and operating loss and taxcredit carryforwards and deferred tax liabilities are recognized for taxabletemporary differences. Temporary differences are the differences between thereported amounts of assets and liabilities and their tax bases. Deferred taxassets and liabilities are adjusted for the effects of changes in tax laws andrates on the date of enactment. Deferred tax assets are reduced by a valuationallowance when, in the opinion of management, it is more likely than not thatsome portion or all of the deferred tax assets will not be realized.

 

For thequarters ended March 31, 2003 and 2002, the tax provision was comprised of astate and foreign taxes. No provision for federal income taxes has beenrecorded the quarters ended March 31, 2003 and 2002, due to accumulated netoperating losses. The Company has recorded a valuation allowance for the fullamount of its net deferred tax assets as a result of the uncertaintysurrounding the timing of the realization of these future tax benefits.

 

7

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**Recent Accounting Pronouncements**

 

InNovember 2002, the EITF reached a Consensus on EITF Issue No. 00-21, *Revenue Arrangements With Multiple Deliverables,*as to when and how to allocate revenue from the sale of products and servicesdelivered separately in a bundled sales arrangement. The Consensus is effectiveprospectively for arrangements entered into in fiscal periods beginning afterJune 15, 2003. Companies, however, may elect to apply the Consensus toexisting arrangements as well and to record the income-statement impact of thechange as a cumulative effect of a change in accounting principle. The Companyis currently analyzing the impact of EITF No. 00-21on its financialstatements.

 

### **3.**                                      Restructuring

### ** **

The Companyrecorded approximately $2.0 million and $1.6 million of restructuringcosts, respectively, during the second and third quarters of 2002. The Companyreduced its restructuring reserve during the fourth quarter of 2002 byapproximately $274,000, based on differences between actual costs incurredcompared to its original estimates. Costs associated with the termination ofemployees totaled approximately $1.1 million. Costs associated with theclosing of redundant facilities, the cancellation of certain contracts, andother non-personnel related actions totaled approximately $2.2 million.   The balance of the restructuring reservewas approximately $1.3 million as of December 31, 2002.  The Company paid approximately $430,000 ofthese costs in the first quarter of 2003. The balance of the restructuring reserve was approximately $900,000 asof March 31, 2003.  The Company expectsto pay out the remainder of the restructuring reserve in 2003 and 2004.

 

### **4.**                                      Acquisitions

### ** **

In the firstquarter of 2002, the Company acquired companies in Mexico, Canada, and Brazil.The shares of common stock issued by the Company in connection with each ofthese acquisitions were valued at the average of the closing prices for thethree days before and the three days after the date each acquisition’sdefinitive terms were finalized.

 

OnJanuary 3, 2002, the Company entered into a definitive agreement toacquire Prisma Tecnologia Computacional, S.A. de C.V. (“Prisma”) forapproximately $5.3 million. Prisma was a provider of Global TradeManagement solutions in Mexico. The Company consummated this transaction onFebruary 1, 2002 and paid approximately $2.5 million in cash, issuedapproximately 150,000 shares of its common stock, valued at approximately$2.4 million, and paid approximately $400,000 in transaction and issuancecosts.

 

OnFebruary 12, 2002, the Company acquired Imanet, an Ontario corporation forapproximately $2.5 million. Imanet was a provider of Global TradeManagement solutions in Canada. The Company paid $850,000 in cash, issuedapproximately 90,000 shares of its common stock, valued at approximately$1.4 million, and paid approximately $300,000 in transaction and issuancecosts.

 

OnMarch 8, 2002, the Company acquired Bergen Informatica Ltda(“Bergen”) for approximately $6.4 million. Bergen was a provider of GlobalTrade Management solutions in Brazil. The Company paid $2.4 million incash, issued approximately 223,000 shares of its common stock, valued atapproximately $3.1 million, and incurred approximately $900,000 intransaction and issuance costs, including the issuance of 10,000 shares of commonstock valued at approximately $71,000 to an investment advisor.

 

The followingunaudited pro forma information has been prepared as if the 2002 acquisitionshad occurred as of January 1, 2001(in thousands, except per share data).

 

|                                              |   | **Pro Forma for the  Three Months Ended  March 31, 2002** |   | **Pro Forma for the  Year Ended  December 31, 2001** |   |
|---------------------------------------------------|--------|-----------------------------------------------------------|--------|------------------------------------------------------|--------|
|                                              |   | **(unaudited)**                                           |   | **(unaudited)**                                      |   |
| Total revenues                                    |   | $                                                         | 19,682 |                                                 | $      | 69,715 |   |
| Net loss                                          |   | (2,505                                                    | )      | (48,704                                              | )      |
| Pro forma basic and diluted loss per common share |   | (0.06                                                     | )      | (1.28                                                | )      |
|                                                   |        |                                                           |        |                                                      |        |  |  |

 

The unauditedpro forma information is not necessarily indicative of the results ofoperations that would have occurred had the acquisition been made at thebeginning of the periods presented or the future results of the combinedoperations.

 

8

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

### ** **

**Line of Credit**

 

InJuly 2002, the Company refinanced $3.9 million of outstanding debtunder its former credit facility with a new facility from Comerica Bank. Theterm loan matures in June 2004 and bears interest at the bank’s prime rateplus 50 basis points (5.25% as of March 31, 2003). The balance outstandingunder the term loan was approximately $2.5 million as of March 31, 2003.The Company also obtained a secured revolving line of credit (“Line of Credit”)and an equipment line of credit (“Equipment Line of Credit”) with ComericaBank.

 

The Companymay borrow up to $10 million under the Line of Credit, with a$2.5 million sub-limit for the issuance of letters of credit. Advancesunder the Line of Credit are limited to the lesser of $10 million or 80%of eligible accounts receivable, as defined in the loan agreement. The Line ofCredit bears interest at the bank’s prime rate (4.75% as of March 31, 2003). The Line of Credit matures inJuly 2004. There was no outstanding balance under the Line of Credit as ofMarch 31, 2003.

 

The Companymay borrow up to $5 million under the Equipment Line of Credit that bearsinterest at the bank’s prime rate plus 50 basis points (5.25% as of March 31,2003). The Equipment Line of Credit has two interest-only payment periods andmatures in July 2005.  In the firstquarter of 2003, the Company borrowed approximately $614,000 against theEquipment Line of Credit.  Theoutstanding balance under the Equipment Line of Credit was approximately$593,000 as of March 31, 2003.

 

The terms ofthe Line of Credit and Equipment Line of Credit require the Company to complywith certain financial covenants, including, restrictions and limitations onfuture indebtedness, sales of assets and material changes in the business. Thefinancial covenants include a minimum modified quick ratio, as defined in theloan agreement, of 2.0 to 1.0 and a maximum ratio of total liabilities totangible net worth of 1.5 to 1.0. Under the most restrictive of the financialcovenants, the Company’s pro forma income cannot be less than $0 for the threemonths ended March 31, 2003 or quarterly thereafter. Through March 31, 2003,the Company was in compliance with these covenants.

 

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

 

**Capital Lease Obligations**

 

In March 2003,the Company obtained a new equipment leasing arrangement with a vendor forapproximately $886,000.  Amountsborrowed are payable over 36 months. Total capital lease obligations outstanding as of March 31, 2003, wereapproximately $921,000.

 

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

### ** **

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

 

On March 14,2001, Expeditors International of Washington, Inc. and Expeditors Tradewin,L.L.C. (collectively “Expeditors”) filed suit against the Company in the UnitedStates District Court for the Eastern District of Michigan, Southern Divisionprimarily alleging that the Company misappropriated certain of Expeditors’ tradesecrets in connection with its acquisition of Ford’s customs operations, byutilizing systems and business processes that Expeditors assisted in developingfor Ford and through its employee hiring practices. Trial in this matter is scheduled to commence in August 2003. Inconnection with its acquisition of Ford’s customs operations, Ford agreed toindemnify the Company for intellectual property infringement claims, and Fordis currently indemnifying the Company in connection with this litigation.

 

In certain of its softwarelicense arrangements, the Company has agreed to indemnify customers fordamages, if any, they might incur as a result of a claim brought against forintellectual property infringement.  The Company is unable to estimate themaximum exposure of such indemnifications due to the inherent uncertainty andthe varying nature of the contractual terms.

 

9

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**7.**                                      **Segment Information:**

 

The Companyhas three reportable operating segments: managed services, software, andservices. The managed services segment generates revenues from managed servicestransaction and service arrangements. The software segment generates revenuesfrom term license, perpetual license, and transaction license agreements of itsGlobal Trade Management solutions. The services segment generates revenues bycharging its customers for implementation, management consulting and trainingservices.

 

The Companyevaluates the performance of each segment based on revenues and gross profit.The Company’s unallocated costs include corporate and other costs not allocatedto the segments for management’s reporting purposes.

 

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

 
|                      |   | **Three Months Ended  March 31,** |   |
|---------------------------|--------|-----------------------------------|--------|
|                      |   | **2003**                          |   | **2002** |   |
|                      |   | **(unaudited)**                   |   | **(unaudited)** |   |
| Revenues:                 |   |                              |   |   |   |
| Managed services          |   | $                                 | 13,615 |   | $ | 10,930 |   |
| Software                  |   | 2,731                             |   | 3,519 |   |
| Services                  |   | 4,598                             |   | 4,606 |   |
| Total revenues            |   | 20,944                            |   | 19,055 |   |
|                      |   |                              |   |   |   |
| Gross Profit:             |   |                              |   |   |   |
| Managed services          |   | 6,179                             |   | 5,553 |   |
| Software                  |   | 2,049                             |   | 2,983 |   |
| Services                  |   | 1,229                             |   | 1,229 |   |
| Gross profit              |   | 9,457                             |   | 9,765 |   |
|                      |   |                              |   |   |   |
| Net loss:                 |   |                              |   |   |   |
| Unallocated expense       |   | (10,372                           | )      | (12,164 | ) |
| Interest and other income |   | 229                               |   | 417 |   |
| Interest expense          |   | (41                               | )      | (112 | ) |
| Income tax                |   | (151                              | )      | (91 | ) |
| Net loss                  |   | $                                 | (878   | ) | $ | (2,185 | ) |

 

**Geographic Information**

 

The Companysells its products and services through its offices in the United States,Brazil, Canada, Mexico, Germany, Japan and the United Kingdom. Informationregarding revenues and long-lived assets attributable to the United States andto all foreign countries is stated below. The geographic classification ofproduct and services revenues was based upon the location of the customer.Vastera’s product and services revenues were generated in the following geographicregions (in thousands): 

 
|                          |   | **Three Months Ended  March 31, 2003,** |   |
|-------------------------------|--------|-----------------------------------------|--------|
|                          |   | **2003**                                |   | **2002** |   |
|                          |   | **(unaudited)**                         |   | **(unaudited)** |   |
| United States                 |   | $                                       | 15,937 |   | $ | 15,979 |   |
| Other North America           |   | 2,097                                   |   | 2,067 |   |
| Europe                        |   | 1,776                                   |   | 204 |   |
| Other international locations |   | 1,134                                   |   | 805 |   |
| Total revenues                |   | $                                       | 20,944 |   | $ | 19,055 |   |

 

10

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The Company’stangible long-lived assets were located as follows (in thousands): 

 
|                          |   | **March 31,  2003** |   | **December 31,  2002** |   |
|-------------------------------|--------|---------------------|--------|------------------------|--------|
|                          |   | **(unaudited)**     |   |                   |   |
| United States                 |   | $                   | 11,392 |                   | $      | 10,729 |   |
| Other North America           |   | 866                 |   | 839                    |   |
| Europe                        |   | 252                 |   | 278                    |   |
| Other international locations |   | 94                  |   | 88                     |   |
| Total long-lived assets       |   | $                   | 12,604 |                   | $      | 11,934 |   |

 

**Significant Customers**

 

For thequarters ended March 31, 2003 and 2002, Ford accounted for 30% and 37% of totalrevenues, respectively.    For thequarter ended March 31, 2003, Lucent Technologies accounted for 15% of totalrevenues.   There were no othercustomers that accounted for greater than 10% of the Company’s revenues for thequarters ended March 31, 2003 and 2002. For the quarters ended March 31, 2003and 2002, the Company derived approximately 66% and 62%, respectively, of totalrevenues from its top five customers.

 

### **8.**                                      Transactionswith 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 the Company’s common stock valued atapproximately $79.2 million in consideration at the time of thetransaction. As of March 31, 2003, Ford owned 8,000,000 shares, orapproximately 19.7% of the Company’s common stock.

 

InAugust 2000, the Company also entered into a managed services agreementunder which Vastera manages Ford’s global trade operations. InJanuary 2001 and March 2001, the Company entered into a managedservices agreements with Ford Mexico and Ford Canada, respectively. InNovember 2002, the Company entered into a managed services agreement withFord Europe to manage Ford’s global trade operations in the United Kingdom,Spain, Belgium, and Germany. The agreements with Ford initially had minimumterms of four years, and each may continue for a total of ten years.

 

InFebruary 2002, the Company amended its agreement with Ford U.S. to providefor quarterly minimum transaction levels in lieu of annual minimum transactionlevels. By amending the agreement in this manner, the Company was able to billFord on a quarterly basis for the transactions processed in excess of theminimum levels. In connection with the amendment, the Company agreed to reduceFord’s U.S. aggregate annual minimum revenue guarantee from $11.6 millionto $11.0 million. For the quarter ended March 31, 2002, the Companyderived approximately $1.5 million in revenues related to transactions inexcess of the quarterly minimum.

 

InJuly 2002, the Company further amended its agreement with Ford U.S. toprovide for billing Ford at a fixed annual rate of $11.8 million for theremaining life of the agreement, beginning January 1, 2003. By amendingthe agreement in this manner, the Company bills Ford a fixed annual service feeinstead of on a per transaction processed basis. In connection with thisamendment, the Company and Ford agreed that the Company would bill Ford$4.9 million ratably over the remainder of 2002.

 

For thequarters ended March 31, 2003 and 2002, Ford Motor Company accounted for 30%and 37% of total revenues, respectively. As of March 31, 2003 and 2002, Fordowed the Company approximately $4.1 million and $3.0 million, or 22%and 23%, of the Company’s total accounts receivable, respectively.

 

The Companyreimburses Ford for expenses incurred by Ford for the Company’s use of Ford’sfacilities, the costs of leased employees, and the maintenance and expensesrelated to the acquired technology. For the quarters ended March 31, 2003 and2002, the Company paid Ford approximately $2.0 million, and$1.3 million, respectively. These payments increased beginning inDecember 2002 when the Company assumed responsibility for managing Ford’soperations in Europe. However, the Company expects payments to decrease in thefuture as the Company leverages its existing facilities and employees anddeploys its own technology.

 

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

### ** **

InOctober 2002, the Company offered each employee an opportunity to cancelcertain stock options (the “Options Exchange”) in exchange for the right toreceive a future stock option grant for the same number of shares six monthsand one day from the date of cancellation with a strike price equal to themarket price on the new grant date. Options to purchase approximately 3.8million shares were cancelled pursuant to the Options Exchange.  In April 2003, the Company issuedreplacement options to employees to purchase approximately 3.6 million sharesof common stock at an exercise price of $4.06 per share in exchange for theoptions previously canceled. The Company deferred the issuance of annual optiongrants to employees during this six-month period, and accordingly, in April2003, the Company issued additional options to purchase 930,000 shares ofcommon stock to these employees at an exercise price of $4.06 per share.   Subsequent to these issuances, options topurchase approximately 9,072,000 shares of common stock were outstanding as ofApril 3, 2003.

 

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

 
|                              |   | **Three Months Ended  March 31,** |   |
|-----------------------------------|--------|-----------------------------------|--------|
|                              |   | **2003**                          |   | **2002** |   |
|                              |   | **(unaudited)**                   |   | **(unaudited)** |   |
| Cost of managed services revenues |   | $                                 | 10     |   | $ | 4 |   |
| Cost of software revenues         |   | 2                                 |   | 24 |   |
| Cost of services revenues         |   | 52                                |   | 119 |   |
| Sales and marketing               |   | 148                               |   | 342 |   |
| Research and development          |   | 36                                |   | 83 |   |
| General and administrative        |   | 122                               |   | 280 |   |
| Total stock-based compensation    |   | $                                 | 370    |   | $ | 852 |   |

 

### **10.**                               SupplementalInformation:

### ** **

**Cash Flow Information**

 

Cash paid forinterest was $43,000 and $44,000 for the quarter ended March 31, 2003 and 2002,respectively. Noncash activities were as follows (in thousands):

 
|                                                                                                           |   | **Three Months Ended  March 31,** |   |
|----------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                           |   | **2003**                          |   | **2002** |   |
|                                                                                                           |   | **(unaudited)**                   |   |
| Increase in capital lease obligations                                                                          |   | $                                 | 886    |   | $ | — |   |
| Issuance of common stock and stock options  in acquisitions                                                    |   | —                            |   | 6,933 |   |
| Assumed liabilities, transaction costs and  other, net of assets and deferred revenue acquired in acquisitions |   | —                            |   | 1,677 |   |
|                                                                                                                |        |                                   |        |  |  |  |  |

 

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

## ** **

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

 

Some of thestatements we make in “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and elsewhere in this Report constituteforward-looking statements within the meaning of Section 21E of the Securitiesand Exchange Act of 1934.  Thesestatements involve known and unknown risks, uncertainties and other factorsthat may cause our actual results, levels of activity, performance orachievements as expressed or implied by such forward-looking statements not tobe achieved fully.  Theseforward-looking statements relate to future events and our future financialperformance.  In some cases, you canidentify forward-looking statements by words such as “may,” “should,” “expect,”“plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” and“continue,” or the negative of such terms or other comparable words.  These statements are only predictions andincluded risks and uncertainties particularly those described in this Reportunder the caption “Risks Relating to Our Business.”  Consequently, our actual results may differ materially from thoseexpressed or implied by these forward-looking statements.

 

**Overview**

 

Vastera is theworldwide leading provider of solutions for Global Trade Management. Vasteraprovides solutions that manage the information flow associated with the crossborder component of an international shipment for its clients, therebyaccelerating the flow of goods through the global supply chain. Global trade isregulated by dynamic, country-specific rules and involves a complexnetwork of trade participants, including exporters, forwarders, carriers,brokers, importers, financial institutions and customs and regulatory agencies.Since our inception, we have continued to develop comprehensive solutions withfeatures, functionality, and services that allow companies to manage thecomplexities of global trade.

 

We provide oursolutions to over 400 clients from our offices in the United States, Belgium,Brazil, Canada, France, Germany, Ireland, Japan, Mexico, the Netherlands,Poland, Spain, and the United Kingdom. Our clients typically acquire softwareor purchase managed services for a division or department. As they expand theutilization of our solutions globally and to their clients, suppliers andbusiness partners, our clients often acquire additional software licenses orexpand managed services arrangements. We currently market our products andservices on a global basis through our direct sales force and other channels,such as strategic alliances and partners. We expect revenues from ourinternational operations to increase as we continue to expand our internationalsales and services organizations.  Althoughour customer base spans several diverse industries, a significant portion ofour revenues are generated by customers in the automotive and high-technologyindustries.

 

**Relationship with Ford Motor Company**

 

InAugust 2000, we entered into an agreement to acquire Ford Motor Company’sglobal customs operations and merged Ford’s global customs operations into ourmanaged services operations. The Ford operations that were merged into usconsisted of Ford personnel and technology utilized by Ford to manage itsinternational trade transactions. By combining our existing technology andintellectual capital with that acquired from Ford, we intend to expand ourmanaged services to companies of varying sizes on a global basis. Ford received8,000,000 shares of our common stock, valued at approximately$79.2 million at the time of the transaction. As of March 31, 2003, Fordowned approximately 19.7% of our common stock.

 

InAugust 2000, we also entered into a Global Trade Management servicesagreement, under which we manage Ford’s global trade operations. InJanuary 2001 and March 2001, we expanded the Global Trade Managementservices we provide to Ford by assuming responsibility for administering andmanaging Ford’s global trade operations in Mexico and Canada, respectively. InNovember 2002, we further expanded the Global Trade Management services weprovide to Ford by assuming responsibility for administering and managingFord’s global trade operations in the United Kingdom, Germany, Belgium, andSpain (collectively, “Ford Europe”). Our agreements with Ford initially had aminimum term of four years.

 

Theseagreements provide us with a guaranteed, predictable, and recurring revenuestream from Ford. We expect to derive at least $25 million in revenues onan annual basis from our agreements with Ford U.S., Ford Mexico, Ford Canada,and Ford Europe. We believe our client relationship with Ford will have asignificant impact on our total revenues and is expected to account for greaterthan 10% of revenues for the foreseeable future.   For the quarters ended March 31, 2003 and 2002, Ford MotorCompany accounted

 

13

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for 30% and 37% of our totalrevenues, respectively. As of March 31, 2003 and 2002, Ford owed usapproximately $4.1 million and $3.0 million, or 22% and 23%, of ourtotal accounts receivable, respectively.

 

InFebruary 2002, we amended our agreement with Ford U.S. to provide forquarterly minimum transaction levels in lieu of annual minimum transactionlevels. By amending the agreement in this manner, we were able to bill on aquarterly basis the transactions processed in excess of the minimum levels. Inconnection with the amendment, we agreed to reduce Ford’s U.S. aggregate annualminimum revenue guarantee from $11.6 million to $11.0 million. Forthe quarter ended March 31, 2002, we derived approximately $1.5 in revenuerelated to transactions in excess of the quarterly minimum.

 

InJuly 2002, we further amended our agreement with Ford U.S. to provide thatwe bill Ford U.S. at a fixed annual service fee rate of $11.8 million forthe remaining life of the agreement. By amending the agreement in this manner,we bill Ford U.S. a fixed annual service fee instead of on a per transactionprocessed basis. In connection with this amendment, Ford U.S. agreed that wewould bill Ford U.S. $4.9 million ratably over the remainder of 2002.

 

**Acquisitions**

 

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

 

OnJanuary 3, 2002, we entered into a definitive agreement to acquire PrismaTecnologia Computacional, S.A. de C.V. (“Prisma”) for approximately$5.3 million. Prisma was a provider of Global Trade Management solutionsin Mexico. We consummated this transaction on February 1, 2002 and paidapproximately $2.5 million in cash, issued approximately 150,000 shares ofits common stock, valued at approximately $2.4 million, and paidapproximately $400,000 in transaction and issuance costs.

 

OnFebruary 12, 2002, we acquired Imanet, an Ontario corporation forapproximately $2.5 million. Imanet was a provider of Global TradeManagement solutions in Canada. The Company paid $850,000 in cash, issuedapproximately 90,000 shares of its common stock, valued at approximately$1.4 million, and paid approximately $300,000 in transaction and issuancecosts.

 

OnMarch 8, 2002, we acquired Bergen Informatica Ltda. (“Bergen”) forapproximately $6.4 million. Bergen was a provider of Global TradeManagement solutions in Brazil. The Company paid $2.4 million in cash,issued approximately 223,000 shares of its common stock, valued atapproximately $3.1 million, and incurred approximately $900,000 in transactionand issuance costs, including the issuance 10,000 shares of common stock valuedat approximately $71,000 to an investment advisor.

 

All of theseacquisitions were accounted for under the purchase method of accounting. Theexcess of the consideration over the fair value of the acquired assets andliabilities and identified intangibles were accounted for as goodwill. Werecorded in the aggregate approximately $10.8 million and$4.0 million of identified intangibles and goodwill, respectively, in 2002in connection with the Prisma, Imanet, and Bergen acquisitions.

 

Identifiableintangibles are amortized on a straight-line basis over one to five years,resulting in charges to operations of $680,000 and $453,000 for the quartersended March 31, 2003 and 2002, respectively. Amortization of our identified intangibles for future periods isexpected to be approximately $2.6 million, $2.4 million,$1.8 million, $1.8 million and $495,000 for 2003, 2004, 2005, 2006and 2007, respectively.

 

**Critical Accounting Policies**

 

We considerour accounting policies related to revenue recognition, deferred revenues,internal use software and intangible assets to be critical to our businessoperations and the understanding of our results of operations. The impact andassociated risks related to these policies on our business operations isdiscussed throughout Management’s Discussion and Analysis of FinancialCondition and Results of Operations where such policies affect our reported andexpected financial results. For a summary of significant accounting policiesused in the preparation of the consolidated financial statements, see the Notesto our Consolidated Financial Statements in Item 1 of this Report. Ourpreparation of this Report requires us to make estimates and assumptions thataffect the reported amount of assets and liabilities, disclosure of contingentassets and liabilities at the date of our financial statements, and

 

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the reported amounts of revenueand expenses during the reporting period. We cannot be sure that actual resultswill not differ from those estimates.

 

**Source of Revenues and Revenue RecognitionPolicy**

 

*Managed Services Revenues*

 

Managedservices revenues are derived from agreements that provide for transaction orservices fees based on the performance of our managed services solutions.Managed services solutions include the processing of our clients’ customsentries and the classifying of clients’ goods. Managed services transactionarrangements are often subject to annual or quarterly minimum transactionthresholds and revenues are recognized based on the lower of the cumulativeactual transactions processed during the period using a weighted-averagetransaction rate or the amount billable for the period. For those managedservices transaction arrangements subject to annual minimums and for thosearrangements where the amount billable for interim periods is limited to thepro-rata portion of the annual minimum, transactions processed in excess of theminimum in each period are not billable, and, therefore, revenue is notrecognized until the end of the related year. Certain managed servicesarrangements are based upon a fixed services fee. Revenues associated withthese arrangements are recognized ratably over the term of the arrangement andlimited to the amounts billable. In addition, we may receive annual gainsharingfees under certain managed services arrangements based on a percentage of theclient’s annual cost savings, as defined in the managed services arrangements.These fees are recognized when they become fixed and determinable. Managedservices transaction minimums and fixed service fees are typically billedmonthly.

 

*Software Revenues*

 

Softwarerevenues consist of term license revenues, perpetual software license revenues,and transaction-based revenues. We recognize revenue from the sale of softwareproducts in accordance with Statement of Position (“SOP”) 97-2, “SoftwareRevenue Recognition.”

 

Term licenserevenues are derived from term software license arrangements in which ourclients license our software products and obtain the right to unspecifiedenhancements on a when-and-if-available basis and ongoing support and contentupdate services. Content updates are significant and frequent. Revenues arerecognized ratably over the contract term. Term license arrangements typicallyrange from three to five years. To the extent we host the software for ourcustomers, the hosting fee is recognized ratably over the contract period inconjunction with the recognition of the license fee. Term license fees aretypically billed annually, quarterly or monthly.

 

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, as a result,revenues from perpetual software license sales are recognized ratably over theestimated economic life of the product. We have estimated that the life of theproduct is three years, which is consistent with the historical periods betweenmajor upgrades to the functionality and architecture of our products. Revenuesfrom maintenance contracts are recognized ratably over the contract term,typically one year. To the extent we host the software for our customers, thehosting fee is recognized ratably over the contract period in conjunction withthe recognition of the license fee.

 

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.

 

We recognizerevenues from arrangements with resellers beginning when the software productis sold to the end user. Any annual minimums required of the reseller but notsold by the reseller to end customers are recognized as revenues upon theexpiration of the annual minimum period.

 

*Services Revenues*

 

Servicesrevenues are derived from implementation, management consulting and trainingservices. Services are performed on a time and materials basis or under fixedprice arrangements. Revenues on time and materials contracts are recognizedbased on fixed billable rates for hours delivered, and revenues on fixed pricedcontracts are recognized as the services are performed using the

 

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percentage of completion methodof accounting based on the ratio of costs incurred to total estimated costs tobe incurred. Losses on arrangements are recognized when known.

 

Formultiple-element arrangements where we provide both software and services, wedefer the service fee, based on vendor-specific objective evidence, andrecognize the services as performed.

 

**Deferred Revenues**

 

Deferredrevenues include amounts paid by clients for revenues that have not beenrecognized and generally result from billed, but deferred term and perpetuallicense revenues and services not yet performed. Deferred revenues will berecognized on a monthly basis over the term of the agreement, the remainingeconomic life of the product, or when the services are performed. As wecontinue to increase our term license and transaction-based revenues relativeto our perpetual licenses, we expect our deferred revenues to fluctuate sinceterm license and transaction-based customers are billed and paid ratably(usually either annually, monthly or quarterly). We do not consider deferredrevenue to be an indicator of future revenues.

 

**Internal Use Software**

 

In accordancewith Statement of Position 98-1, “Accounting for the Costs of Computer SoftwareDeveloped or Obtained for Internal Use,” we capitalize costs associated withthe implementation and integration of our trade management platform to ourmanaged services operations, related to certain capitalizable tasks includingthe technical design, system configuration and testing phases of theintegration process. Judgment is involved in determining which developmenttasks associated with the platform integration are capitalizable pursuant toSOP 98-1.  We capitalized approximately$191,000 and $350,000 in the first quarters of 2003 and 2002, respectively.These costs are amortized as costs of managed services revenues over threeyears, and amortization commences upon the completion of the integration to theVastera platform. Total amortization expense in the first quarter of 2003 wasapproximately $123,000.  We beganamortizing these costs in the fourth quarter of 2002.   Net capitalized costs as of March 31, 2003 and December 31,2002 were approximately $1.6 million and $1.5 million, respectively.

 

**Goodwill and Intangible Assets**

 

As of March31, 2003, we had recorded goodwill and intangible assets of approximately$74.3 million related to our acquisitions.

 

Goodwillrepresents the excess of costs over the fair value of assets of businessesacquired. We adopted the provisions of SFAS No. 142, *Goodwill and Other Intangible Assets,* asof January 1, 2002. Goodwill and intangible assets acquired in a purchasebusiness combination and determined to have an indefinite useful life are notamortized, but instead tested for impairment at least annually in accordancewith the provisions of SFAS No. 142. SFAS No. 142 also requires thatintangible assets with estimable useful lives be amortized over theirrespective estimated useful lives to their estimated residual values, andreviewed for impairment in accordance with SFAS No. 144, *Accounting for Impairment or Disposal of Long-LivedAssets*.

 

As ofJanuary 1, 2002, we had unamortized goodwill of approximately$62.2 million. Prior to January 1, 2002, goodwill was amortized on astraight-line basis over its expected economic life, generally four or fiveyears, and assessed for recoverability by determining whether the amortizationof the goodwill balance over its remaining life could be recovered through theundiscounted future operating cash flows of the acquired operation.  In the aggregate, amortization of goodwillin 2001 and 2000, prior to the adoption of SFAS 142, was approximately$20.3 million and $6.3 million, respectively.

 

OnJanuary 1, 2002, in accordance with SFAS No. 141, we reclassified ourassembled workforce intangible assets to goodwill. Prior to January 1,2002, assembled workforce intangibles were amortized on a straight-line basisover two or three years. The value assigned to the assembled workforce in theacquisition of Ford’s global customs operation was allocated to each country inwhich we acquired Ford’s global customs operations, based upon the number ofemployees in that country. The related amortization was to be recorded overthree years from the date we assumed Ford’s customs operations in that country.

 

All otherintangible assets are amortized on a straight-line basis over their expectedeconomic lives, generally one to five years. The value assigned to the Fordcontract is being amortized as a discount to revenue over the minimum term ofthe contract. In the aggregate, amortization of intangible assets for thequarters ended March 31, 2003 and 2002 was approximately $680,000 and

 

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$698,000, respectively.   In the aggregate, amortization of theseidentified intangibles in future periods is expected to be approximately$2.6 million, $2.4 million, $1.8 million, $1.8 million and$495,000 in 2003, 2004, 2005, 2006 and 2007, respectively.

 

Therecoverability and useful lives of our intangible assets are based on estimatesand are susceptible to change. Although we believe our intangible assets willbe recoverable, changes in the economy, the business in which we operate andour own relative performance could change the assumptions used to evaluateintangible asset recoverability. We continue to monitor these assumptions andtheir effect on the estimated recoverability.

 

**Management’s Disclosure of Non-GAAP FinancialMeasures**

 

From time totime, management makes public disclosures, other than through its financialfilings on Form 10-Q or Form 10-K, of certain financial measures such aspro forma earnings (loss) and EBITDA (as defined below) that are not consideredGAAP financial measures.   To assessfully the Company’s financial operating results, management believes that proforma earnings (loss) is an appropriate measure of evaluating operatingperformance and liquidity of the Company, because it more accurately reflectsoperating performance of the Company for the reporting period by excludingthose charges associated with past events that are not related to currentoperations or, in the case of income taxes, amounts that are not used tomeasure operating performance but rather are derived from it.  The excluded amortization is associated withidentifiable intangible assets from prior acquisitions.  The excluded stock-based compensationpertains to deferred compensation charges recorded in connection with theCompany’s initial public offering of its shares of common stock and from prior acquisitions.  EBITDA (earnings before interest, taxes,depreciation and amortization) excludes amortization, stock-based compensation,income taxes, depreciation, and other income, net.  Management considers EBITDA to be an appropriate measure ofevaluating operating performance and liquidity of the Company, because itreflects the resources available from the current reporting period’s operationsfor operating and strategic opportunities including, among others, investing inthe business, meeting financing obligations, making strategic acquisitions, andpaying other cash obligations.  Thesefinancial measures, however, should be considered in addition to, not as asubstitute for or as being superior to, operating losses, cash flows, or othermeasures of financial performance prepared in accordance with U.S. generallyaccepted accounting principles.

 

**Comparison of the Quarter Ended March 31,2003 to the Quarter Ended March 31, 2002**

 

*Revenues*

 

**Total revenues.**  Total revenues increased 10% toapproximately $20.9 million for the quarter ended March 31, 2003 fromapproximately $19.1 million for the quarter ended March 31, 2002.

 

**Managed services revenues.**  Managed services revenues increased 25% toapproximately $13.6 million for the quarter ended March 31, 2003 fromapproximately $10.9 million for the quarter ended March 31, 2002. For thequarter ended March 31, 2002, we derived approximately $1.5 million in revenueunder our Ford U.S. global managed services agreement related to transactionsin excess of the quarterly minimum.  InJuly 2002, we amended our agreement with Ford U.S. to provide for billingFord at a fixed annual rate instead of on a per transaction processed basis;therefore, excess transactions are no longer billable.  Excluding the $1.5 million revenue relatedto excess transaction billings to Ford for the quarter ended March 31, 2002,managed services revenue increased for the quarter ended March 31, 2003 by 44%from the quarter ended March 31, 2002. We attribute this increase to the continued growth in our automotive andhigh-tech managed services client base and expansion of our responsibilitieswith existing customers, primarily Ford, Lucent, and Nortel.   Revenues derived from our managed servicesagreements accounted for 65% of our total revenues for the quarter ended March31, 2003 and 62% of our total revenues for the quarter ended March 31, 2002. Weexpect managed services revenues to account for approximately 60% to 65% of ourtotal revenues for the foreseeable future.

 

**Software revenues.**  Software revenues decreased 22% toapproximately $2.7 million for the quarter ended March 31, 2003 fromapproximately $3.5 million for the quarter ended March 31, 2002.  We attribute this decrease to the conversionof several customers to manage services, the drop-off of revenue related toperpetual licenses sold in prior years and maintenance cancellations.  Revenues derived from our softwareagreements accounted for 13% of our total revenues for the quarter ended March31, 2003 and 18% of our total revenues for the quarter ended March 31, 2002. Weexpect software revenues to account for approximately 10% to 15% of our totalrevenues for the foreseeable future.

 

**Services revenues.**  Services revenues remained relativelyconstant at approximately $4.6 million for the quarters ended March 31,2003 and 2002.  Services revenuesaccounted for 22% of our total revenues for the quarter ended March 31, 2003and 23%

 

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for the quarter ended March 31,2002. We expect services revenues to continue to account for approximately 20%to 25% of our total revenues for the foreseeable future.

 

*Cost of Revenues*

 

**Cost of managed services revenues.**  Cost of managed services revenues consistsof salaries and related expenses for our managed services organizationincluding payments to Ford for our use of Ford’s facilities, the costs ofleased employees, and the maintenance and expenses related to the acquiredtechnology, and the amortization of capitalized internal use software costsrelated to the implementation and integration of our trade management platformto our managed services operation.

 

Cost ofmanaged services revenues increased 38% to approximately $7.4 million forthe quarter ended March 31, 2003 from approximately $5.4 million for thequarter ended March 31, 2002. This increase was largely due to the growth ofour managed services operations to support our growing client base and ourEuropean expansion. Cost of managed services revenues as a percentage ofmanaged services revenues was 55% for the quarter ended March 31, 2003 and 49%for the quarter ended March 31, 2002. This increase as a percentage of managedservices revenues resulted from our additional personnel and infrastructurecosts related to our European expansion and the $1.5 million of non-recurringrevenue related to the excess transaction billing to Ford for the quarter endedMarch 31, 2002. Over time, we expect to realize productivity improvements fromour investment in our support infrastructure and the leveraging of personnel inthe performance of our managed services agreements. As we enter into largemulti-year managed services agreements in new industry sectors or newgeographic regions that may require significant investments in the relatedinfrastructure, the costs associated with these managed services agreements maybe greater in the initial year than in the later years when we realizeproductivity improvements from these infrastructure investments. Accordingly,we expect that our cost of managed services revenues may fluctuate on aquarterly or annual basis as a percentage of managed services revenues.

 

**Cost of software revenues.**  Cost of software revenues includes royaltiesowed to third parties for technology products integrated into our software products,as well as the cost of salaries and related expenses for our technical supportorganization.

 

Cost ofsoftware revenues increased 27% to approximately $682,000 for the quarter endedMarch 31, 2003 from approximately $536,000 million for the quarter endedMarch 31, 2002. This increase was largely due to our investment in our clientsupport infrastructure.  Cost ofsoftware revenues as a percentage of software revenues was 25% for the quarterended March 31, 2003 compared to 15% for the quarter ended March 31, 2002. Thisincrease as a percentage of software revenues reflects our additionalinvestment in our client support infrastructure to support our new productofferings. We expect the cost of software revenues as a percentage of softwarerevenues to remain in this range for the foreseeable future, but thispercentage may fluctuate in any given quarter or year.

 

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

 

Cost ofservices revenues remained relatively constant at approximately$3.4 million for the quarters ended March 31, 2003 and 2002. Cost ofservices revenues as a percentage of services revenues was 73% for the quartersended March 31, 2003 and 2002. We expect the cost of services revenues as apercentage of services revenues to be approximately 70% to 75% on an annualbasis, but this percentage may fluctuate outside this range in any givenquarter or year.

 

*Operating Expenses*

 

**Sales and marketing.**  Sales and marketing expense consistsprimarily of salaries, commissions and bonuses earned by sales and marketingpersonnel, sales training events, public relations, advertising, trade showsand travel expenses related to both promotional events and direct salesefforts.

 

Sales andmarketing expense decreased 34% to approximately $2.2 million for thequarter ended March 31, 2003 from approximately $3.4 million for thequarter ended March 31, 2002. This decrease was primarily due to a reduction inpersonnel and a reduction in promotional expenses. Sales and marketing expensesrepresented 11% of our total revenues for the quarter ended March 31, 2003 and18% for the quarter ended March 31, 2002. We anticipate that sales andmarketing expenses will remain relatively stable as a percentage of totalrevenues for the foreseeable future.

 

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**Research and development.**  Research and development expense consistsprimarily of salaries, benefits, and equipment for software developers, qualityassurance personnel, program managers, and technical writers.

 

Research anddevelopment expense decreased 23% to approximately $3.0 million for thequarter ended March 31, 2003 from approximately $3.9 million for thequarter ended March 31, 2002. This decrease was primarily due to a reduction inpersonnel, and a reduction in the number of internal and contract softwaredevelopers and quality assurance personnel needed to support our productdevelopment and testing activities. Research and development expensesrepresented 15% of our total revenues for the quarter ended March 31, 2003 and21% for the quarter ended March 31, 2002. We believe that we must continue toinvest in research and development in order to develop new products andservices. We anticipate that research and development expenses will continue todecrease as a percentage of total revenues for the future.

 

**General and administrative.**  General and administrative expense consistsprimarily of salaries, benefits, and related costs for executive, finance,administrative and information services personnel.

 

General andadministrative expense increased 7% to approximately $2.7 million for thequarter ended March 31, 2003 from approximately $2.6 million for thequarter ended March 31, 2002. This increase resulted from the addition ofpersonnel and technology infrastructure to support the growth of our business,legal and professional fees relating to our international expansion, andincreased costs associated with the new public company regulations. General andadministrative expenses represented 13% of our total revenues for the quartersended March 31, 2003 and  2002. Webelieve our general and administrative expenses will decrease as a percentageof total revenues, but remain relatively consistent in absolute dollars whencompared to the quarter ended March 31, 2003.

 

**Depreciation.**  Depreciation expense increased 34% toapproximately $1.3 million for the quarter ended March 31, 2003 fromapproximately $970,000 for the quarter ended March 31, 2002. This increaseresulted from the depreciation of fixed assets purchased to build theinfrastructure needed to support the growth of our business. Depreciationexpense represented 6% and 5% of our total revenues for the quarters endedMarch 31, 2003 and 2002, respectively. We believe our depreciation expense willincrease in absolute dollar amounts as we continue to invest ourinfrastructure.

 

**Amortization.**  Amortization expense increased 50% toapproximately $680,000 for the quarter ended March 31, 2003 from approximately$453,000 for the quarter ended March 31, 2002. This increase resulted from thefull quarter effect of the amortization from the identified intangible assetsacquired in the three acquisitions completed in the first quarter of 2002.Amortization expense represented 3% of our total revenues for the quarter endedMarch 31, 2003 and 2% for the quarter ended March 31, 2002.

 

**Restructuring.**  We recorded approximately $2.0 millionand $1.6 million of restructuring costs, respectively, during the secondand third quarters of 2002. We reduced the restructuring reserve during thefourth quarter of 2002 by approximately $274,000, based on differences betweenactual costs incurred compared to our original estimates. Costs associated withthe termination of approximately 74 employees totaled approximately $1.1 million.Costs associated with the closing of redundant facilities, the cancellation ofcertain contracts, and other non-personnel related actions totaledapproximately $2.2 million. The balance of the restructuring reserve wasapproximately $1.3 million as of December 31, 2002.  We paid approximately $430,000 of thesecosts in the first quarter of 2003.  Thebalance of the restructuring reserve was approximately $900,000 as of March 31,2003.  We expect to pay out theremainder of the restructuring reserve in 2003 and 2004.

 

**Stock-based compensation.**  We recorded deferred compensation ofapproximately $6.4 million in the last nine months of 1999 andapproximately $13.1 million in 2000. These amounts represent the aggregatedifference between the exercise price and the fair value for accountingpurposes of the underlying common stock at the date of grant. On March 29,2001, we recorded $465,000 of deferred compensation in connection with theunvested stock options that were assumed in connection with the Speedchainacquisition. These amounts are included as a component of stockholders’ equityand are being amortized on an accelerated basis over the applicable vestingperiod. For the quarter ended March 31, 2003 and 2002, we amortizedapproximately $370,000 and $852,000, respectively, of deferred compensation. Weexpect to amortize deferred compensation of approximately $941,000 and $45,000for the years ending December 31, 2003 and 2004, respectively. The amountof stock option compensation expense to be recorded in future periods coulddecrease if options for which accrued but unvested compensation has beenrecorded are forfeited.

 

InOctober 2002, we offered each employee an opportunity to cancel certainstock options (the “Options Exchange”) in exchange for the right to receive afuture stock option grant for the same number of shares six months and one dayfrom the date of cancellation with a strike price equal to the market price onthe new grant date. Options to purchase approximately 3.8 million shares werecancelled pursuant to the Options Exchange. In April 2003, we issued replacement options to employees to purchaseapproximately 3.6 million shares of common stock at an exercise price of $4.06per share in exchange for the options previously

 

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canceled. We deferred theissuance of annual option grants to employees during this six-month period, andaccordingly, in April 2003, we issued additional options to purchase 930,000shares of common stock to these employees at an exercise price of $4.06 pershare.   Subsequent to these issuances,options to purchase approximately 9,072,000 shares of common stock wereoutstanding as of April 2, 2003.

 

**Other income (expenses), net.**  Other income (expenses), net fluctuates,based on the amount of cash balances available for investment, borrowings underour lines of credit, interest and other expenses related to our equipmentborrowings and realized gains and losses on investments.  Other income (expenses), net decreased toapproximately $188,000 for the quarter ended March 31, 2003 from approximately$305,000 million for the quarter ended March 31, 2002. This decreaseresulted from lower interest rates and lower cash and investment balances.

 

**Income taxes.**  For the quarters ended March 31, 2003 and2002, the tax provision was comprised of state and foreign taxes.  For the quarter ended March 31, 2003, thetax provision was greater than in previous quarters due to income-based withholdingtaxes incurred from foreign services revenue and the disallowance of netoperating loss carryforwards in certain states where we do business. Noprovision for federal income taxes has been recorded for the quarters endedMarch 31, 2003 or 2002 due to our accumulated net operating losses. We haverecorded a valuation allowance for the full amount of our net deferred taxassets as a result of the uncertainty surrounding the realization of thesefuture tax benefits.

 

As of December31, 2002, we had net operating loss carry-forwards for federal tax purposes ofapproximately $67.6 million. These loss carry-forwards are available toreduce future taxable income and begin to expire in 2011. Under  provisions of the Internal Revenue Code,certain substantial changes in our ownership have occurred, and as a result,our future utilization of these net operating loss carryforwards that weaccumulated prior to the change in ownership will be subject to annuallimitations. We have also generated foreign net operating losses ofapproximately $16.2 million that are available for carryforward. We maygenerate additional net operating loss carry-forwards in the future.

 

**Liquidity and Capital Resources**

 

We had cashand cash equivalents and short-term investments of $55.5 million as ofMarch 31, 2003, a decrease of $1.4 million from $56.9 million as ofDecember 31, 2002.

 

InJuly 2002, we refinanced $3.9 million of outstanding debt under ourformer credit facility with a new facility from Comerica Bank. The term loanmatures in June 2004 and bears interest at the bank’s prime rate plus 50basis points (5.25% as of March 31, 2003). The balance outstanding under theterm loan was approximately $3.0 million as of December 31, 2002. Wealso obtained a secured revolving line of credit and an equipment line ofcredit with Comerica Bank.

 

We may borrowup to $10 million under the revolving line of credit, with a$2.5 million sub-limit for the issuance of letters of credit. Advancesunder the revolving line of credit are limited to the lesser of$10 million or 80% of eligible accounts receivable, as defined in the loanagreement. The revolving line of credit bears interest at the bank’s prime rate(4.75% as of March 31, 2003) and matures in July 2004. There was nooutstanding balance under the revolving line of credit as of March 31, 2003.

 

We may borrowup to $5 million under the equipment line of credit that bears interest atthe bank’s prime rate plus 50 basis points (5.25% as of March 31, 2003). Theequipment line of credit has two interest-only payment periods and matures inJuly 2005. In the first quarter of 2003 we borrowed approximately $614,000against the equipment line of credit. The outstanding balance under the equipment line of credit wasapproximately $593,000 as of March 31, 2003

 

The terms ofthe revolving line of credit and equipment line of credit require us to complywith certain financial covenants, including, restrictions and limitations onfuture indebtedness, sale of assets and material changes in our business. Thefinancial covenants include a minimum modified quick ratio, as defined in theloan agreement, of 2.0 to 1.0 and a maximum ratio of total liabilities totangible net worth of 1.5 to 1.0. Under our most restrictive of the financialcovenants, our pro forma loss can not exceed $1.5 million for the threemonths ended September 30, 2002, and pro forma income cannot be less than$0 for the three months ended December 31, 2002 or quarterly thereafter.Through March 31, 2003, we were in compliance with these covenants and expectto be in compliance for the next 12 months.

 

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

 

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charges), and cashrestructuring charges (not to exceed $5.0 million in the aggregate), lessinterest income and any one-time or non-recurring revenue.

 

We havevarious capital leases due over 36-month to 48-month repayment periods that arecollateralized by our intellectual property. In March 2003, we obtained a new equipment leasing arrangement with avendor for approximately $886,000. Amounts borrowed are due over 36 months.  Total capital lease obligations outstanding as of March 31, 2003,was approximately $921,000.

 

We reimburseFord for certain expenses incurred by Ford for our use of Ford’s facilities,the costs of leased employees, and the maintenance and expenses related to theacquired technology. We expect to pay approximately $680,000 in fees to Fordeach month for reimbursement of these expenses. For the quarters ended March31, 2003 and 2002, the Company paid Ford approximately $2.0 million, and$1.3 million, respectively. These payments increased beginning inDecember 2002 when we assumed responsibility for managing Ford’soperations in Europe.  However, weexpect payments to decrease in the future as we leverage our existingfacilities and employees and deploy our own technology.

 

Net cash usedin operating activities totaled approximately $683,000 for the quarter endedMarch 31, 2003 compared to $1.4 million for the quarter ended March 31, 2002.Net cash flows used in operating activities reflect the net losses of approximately$878,000 and $2.2 million for the quarters ended March 31, 2003 and 2002,respectively, and were partially offset by non-cash expenses relating tostock-based compensation, depreciation and amortization, and the provision fordoubtful accounts. In addition, the net cash used in operating activitiesdecreased for the quarter ended March 31, 2003 due to increases in accountsreceivable, prepaid expenses and other assets and decreases in accounts payableand accrued expenses, partially offset by an increase in deferred revenue.

 

Net cashprovided by investing activities was approximately $4.0 million for thequarter ended March 31, 2003 compared to net cash used in investing activitiesof approximately $804,000 for the quarter ended March 31, 2002.  Our investing activities reflect ouracquisitions, additions of property and equipment and sales of short-terminvestments. We anticipate that our capital expenditures will be relativelyconstant in the near term. We may also utilize our cash to acquire othercompanies.

 

Net cashprovided by financing activities was approximately $224,000 and$1.2 million for the quarters ended March 31, 2003 and 2002, respectively.These financing cash flows reflect the net proceeds from the exercise ofemployee stock options, proceeds from our equipment line of credit andprincipal payments on our debt.

 

We expect topay approximately $2.5 million, $1.6 million, $490,000 and $80,000 on our termloan, equipment line of credit, and capital lease obligations in 2003, 2004, 2005and 2006, respectively.  We will fundthese commitments through our current cash resources and our future cash flowfrom operations.

 

We intend tocontinue investing in the expansion of our business, particularly in the areathe buildout of our global platform and infrastructure. Our future liquidityand capital requirements will depend on numerous factors, including:

 

•                       The costsand timing of expansion of sales and marketing activities;

 

•                       The costsand timing of expansion of our operating capabilities;

 

•                       The costsand timing of product development efforts and the success of these developmentefforts;

 

•                       The extentto which our existing and new products and services gain market acceptance;

 

•                       The leveland timing of revenues;

 

•                       The costsinvolved in maintaining and enforcing our intellectual property rights; and

 

•                       Availableborrowings under line of credit and capital lease arrangements.

 

Accordingly,until we generate more profit from our operations to fund these investmentsfully, we expect our cash, cash equivalents, and short-term investments tocontinue to decline in the foreseeable future. In addition, we may use cashresources to fund acquisitions of complementary businesses and technologies. Webelieve that our current cash resources will be sufficient to meet our workingcapital and capital requirements for at least the next 12 months.Thereafter, we may find it necessary to obtain additional

 

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equity or debt financing. Inthe event that additional financing is required, we may not be able to raise iton terms acceptable to us, if at all.

 

**Recent Accounting Pronouncements**

 

InNovember 2002, the EITF reached a Consensus on EITF Issue No. 00-21, *Revenue Arrangements With Multiple Deliverables,*on when and how to allocate revenue from the sale of products and servicesdelivered separately in a bundled sales arrangement. The Consensus is effectiveprospectively for arrangements entered into in fiscal periods beginning afterJune 15, 2003. Companies, however, may elect to apply the Consensus toexisting arrangements as well and to record the income-statement impact of thechange as a cumulative effect of a change in accounting principle. The Companyis currently analyzing the impact of EITF No. 00-21 on its financialstatements.

 

**Risks Relating to Our Business**

 

Beforedeciding to invest in us or to maintain or increase your investment, you shouldcarefully consider the risks described below, in addition to the otherinformation contained in this report and in our other filings with the SEC,including our subsequent reports on Forms 10-K, 10-Q and 8-K. The risks anduncertainties described below are not the only ones facing us. Additional risksand uncertainties not presently known to us or that we currently deemimmaterial may also affect our business operations. If any of these risksactually occur, our business, financial condition or results of operationscould be seriously harmed. The market price for our common stock could declineand you may lose all or part of your investment.

 

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

 

We incurrednet losses of approximately $11.4 million, $45.8 million,$35.8 million, $10.5 million and $8.3 million in 2002, 2001,2000, 1999, and 1998, respectively. Our accumulated deficit as of March 31,2003 was approximately $183.4 million. We believe that the success of ourbusiness depends on our ability to significantly increase revenue and to limitincreases in our operating expenses. If our revenues fail to grow atanticipated rates or our operating expenses increase without a correspondingincrease in our revenues, or we fail to adjust operating expense levelsappropriately, we may not be able to achieve and maintain profitability, whichwould increase the possibility that the value of your investment will decline.

 

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

 

As a criticalelement of our strategy, we intend to continue providing managed services toour current and future clients. These services range from providing operationalmanagement for a single global trade process to managing a client’s worldwidetrade operation. We expect that, over time, the revenues that we receive fromproviding managed services to these and future clients will continue torepresent the largest portion of our total revenues. Any inability to perform ouragreements with Ford, Lucent Technologies and Nortel Networks or to providemanaged services successfully to our other clients would significantly reduceour revenues, increase our costs, hurt our reputation in our industry andadversely affect our business and results of operations.

 

**There exists a significant concentration ofour revenues among a few material customers.**

 

In 2002, 2001,and 2000, we derived approximately 59%, 67% and 38%, respectively, of our totalrevenues from our top five customers in each of those years. In 2002, 2001 and2000, Ford accounted for 30%, 35%, and 17% of total revenues,respectively.  In 2002, LucentTechnologies accounted for 11% of total revenues. We expect such customerconcentration of revenues to exist for the foreseeable future. There were noother customers that accounted for greater than 10% of the Company’srevenue.  As we continue to expand ourrelationships with existing managed services customers and as we continue to signcontracts of a large magnitude with new customers, each such relationship willbe of added significance to us. Additionally, we expect that we will continueto derive a significant portion of our total revenues from Ford and such othercustomers in the near future. Certain of our agreements permit our customers toterminate for convenience after a specified period of time. We cannot assureyou that we will be able to maintain or renew these agreements. If any of theseevents occur, our results of operations and financial condition would be adverselyaffected.

 

**Certain of our customers operate inindustries that have been experiencing greater than normal difficulties in adeclining economy. If the industries in of which these companies are a partcontinue to experience economic difficulties, our business would be adverselyaffected.**

 

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During thepast few years, there has been a decline in the economies of the U.S. and othercountries worldwide. In addition, some of our customers operate in industriesthat have experienced greater difficulties than the overall economy. If theseindustries continue to experience difficulties, it could adversely affect ourbusiness and our ability to collect receivables from these customers.

 

**Any restriction on our ability to accesscost-effectively and legally a foreign country’s rules and regulations that areincorporated into our global trade content, Global Content, or any failure toupdate our Global Content timely to include changes in such rules and regulations,may compromise the effectiveness of our solutions and adversely impact ourrevenues.**

 

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

 

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

 

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

 

•                       The loss ofa significant customer;

 

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

 

•                       Fluctuationsin the demand for our products and services;

 

•                       Our abilityto achieve targeted cost and expense reductions;

 

•                       Ourability, and the associated timing, to transition from the Ford technologyplatform;

 

•                       Price andsolution competition in our industry;

 

•                       Changes inimport/export laws;

 

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

 

•                       The timingof orders and our ability to satisfy all contractual obligations in customercontracts;

 

•                       Variabilityin the mix of our managed services, software and our consulting revenues; and

 

•                       Timing ofnew solution introductions and enhancements to our TradeSphere andTradePrism.com solutions.

 

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

 

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

 

We havesignificantly increased our employee base to meet increasing demand for ourclient solutions. The number of our employees has increased by 9, from 586 asof December 31, 2002 to 595 as of March 31, 2003. As we expand our operations,we expect to continue to increase the size of our employee base. Our managementand operations have been strained by this growth and will continue to bestrained by our anticipated growth. To compete effectively and to manage futuregrowth, we must continue to improve our financial and management controls,reporting systems and procedures on a timely basis. We must also expand, train,and

 

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manage our employee base. If weare not successful in managing our growth, our ability to achieve and maintainprofitability may be harmed.

 

**We may be unable to attract and retain keypersonnel, which would adversely affect our ability to develop and manage ourbusiness effectively.**

 

Our futureperformance will depend largely on the efforts and abilities of our seniorexecutives, key technical, professional services, sales and marketing andmanagerial personnel. This dependence is greatly important to our businessbecause personal relationships are a critical element of obtaining andmaintaining clients. Our success will depend on our ability to attract andretain these key employees in the future. The employment of our key personnel,including our executives, is at will. The market for such individuals isextremely competitive, and we may not find qualified replacements for personnelwho leave us. The loss of, or the inability to attract, any one or more of ourkey personnel may harm our ability to develop and manage our businesseffectively.

 

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

 

Historically,we have financed our operations primarily through the sale of our equitysecurities. As of March 31, 2003, we had cash and cash equivalents ofapproximately $27.3 million plus short-term investments of approximately$28.2 million and an accumulated deficit of approximately $183.4 million.While we believe that our current cash resources will be sufficient to meet ourworking capital needs and finance capital expenditures for at least the next12 months, we may need to raise additional debt or equity capital to fundexpansion of our operations, to enhance our products and services, or toacquire or invest in complementary products, services, businesses ortechnologies. If we raise additional funds through further issuances ofconvertible debt or equity securities, our existing stockholders could suffersignificant dilution, and any new equity securities we issue could have rights,preferences, and privileges superior to those of holders of our common stock.Any debt financing secured by us in the future could involve restrictive covenantsrelating to our capital raising activities and other financial and operationalmatters, which may make it more difficult for us to obtain additional capitaland to pursue business opportunities, including potential acquisitions. Inaddition, we may not be able to obtain additional financing on terms favorableto us, if at all. If adequate funds are not available on terms favorable to us,our operations and growth strategy may be adversely affected and the marketprice for our common stock could decline.

 

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

 

We intend tocontinue to expand our international operations substantially and enter newinternational markets. This expansion will require significant managementattention and financial resources to translate successfully our softwareproducts into various languages, to develop compliance expertise relating tointernational regulatory agencies and to develop direct and indirectinternational sales and support channels. We face a number of risks associatedwith conducting our business internationally that could negatively impact ouroperating results, including:

 

•        Language barriers, conflictinginternational business practices and other difficulties related to themanagement and administration of a global business;

 

•                       Longersales cycles associated with educating foreign clients about the benefits ofour products and services;

 

•                       Currencyfluctuations and exchange rates;

 

•                       Difficultyin  repatriating cash from certainforeign jurisdictions;

 

•                       Longercollection time from foreign clients;

 

•                       Multipleand possibly overlapping tax structures and the burdens of complying with a widevariety of foreign laws;

 

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

 

•                       Economic orpolitical instability in some international markets.

 

24

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We may not succeedin our efforts or we may experience delays in the execution of our plan toenter new international markets, establish, maintain or increase internationaldemand for our solutions or expand our international operations, which may harmour growth strategy and could cause our operating results to suffer.

 

**Aswe expand globally, we may establish operations in countries that becomepolitically or economically unstable, which may put the capital we haveinvested in such operations at a risk of loss and cause our business to beadversely affected.**

 

We intend tocontinue expanding our operations and serving our existing clientsinternationally. As we do so, we may establish operations in certain countriesthat may become politically or economically unstable. If a country in which wecommence operations becomes politically or economically unstable, the money andresources we have invested to establish such operations may be put at risk ofloss, and if such money and resources are lost, our business may be adverselyaffected.

 

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

 

Our solutionshave 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 to12 months for managed services agreements, depending on a particularclient’s implementation requirements and whether the client is new or isextending an existing implementation. The license of our software products maybe subject to delays if the client has lengthy internal budgeting, approval,and evaluation processes. Additionally, in the current economic environment,many companies have reduced their budgets for information technology spending.As companies continue reducing the spending on information technology assets,we may be subject to additional delays and corresponding reductions in sales ofour software products. Additionally, we may incur significant selling andmarketing expenses during a client’s evaluation period, including the costs ofdeveloping a full proposal and completing a rapid proof of concept or customdemonstration, before the client engages us. Larger clients may purchase oursolutions as a part of multiple simultaneous purchasing decisions, which mayresult in additional unplanned administrative processing and other delays. Inaddition, any prolonged decline in the demand for technology products andservices could reduce the market for our solutions, making sales moredifficult. If revenues forecasted from a specific client for a particularquarter are not realized or are delayed to another quarter, we may experiencean unplanned shortfall in revenues, which could adversely affect our operatingresults.

 

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

 

We licensetechnology from several companies on a non-exclusive basis that we haveintegrated into our TradeSphere product suite, including development tools andfacilities from IBM (WebSphere and MQ Series) and Forte, which was acquired bySun Microsystems. Our license with Sun Microsystems expires onDecember 31, 2005 and our license with IBM expires on June 30, 2006.If we cannot renew these technology licenses, we likely would face delays inthe licensing of our TradeSphere products until equivalent technology, if any,is identified, licensed and integrated, and would adversely affect ouroperating results.

 

**If we interpret and analyze incorrectly thevarious laws and regulations contained in our Global Content, we may facecostly product liability claims.**

 

The foundationof our software solutions and managed services, Global Content, is a rules-basedapplication that provides comprehensive management of government traderegulations and programs acquired, interpreted, and updated by Vastera’sin-country trade experts. Because of the legalistic and complex nature ofGlobal Content, our inability to interpret and analyze accurately the rules andregulations upon which our Global Content is based may expose us to productliability claims from our clients in connection with our current products andfuture products. Any provisions in our agreements with our clients designed tolimit our exposure to potential product liability claims and any productliability insurance may not be adequate to protect us from such claims underour agreements. A successful product liability claim brought against us couldharm our financial condition. Even if unsuccessful, any product liability claimcould 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.

 

25

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**The market for our Global Trade Managementmanaged services offering is a nascent one, and if companies fail to adopt our managedservices offerings, our business will be adversely affected.**

 

For mostcompanies, Global Trade Management is a critical but non-core businessfunction. Because the market for third-party Global Trade Management is anascent one, many companies may be reluctant or unwilling to utilize athird-party service provider to manage their global trade, and will retainthese functions in-house. If companies fail to adopt managed service offerings,our business will be adversely affected.

 

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

 

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

 

•                       Confidentialityagreements with employees and third parties;

 

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

 

•                       Copyright,trade secret, and trademark laws.

 

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

 

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

 

We may alsorely on patents to protect our proprietary rights in the future. Any patentstrategy we attempt to implement may not be successful and could harm ourbusiness by disclosing unpatentable trade secrets. The laws that apply to thetypes of patents we may seek are evolving and are subject to change. We presentlyhave filed provisional patent applications in the United States. Theseapplications may not result in patents or may take longer than we expect toresult in patents. We may also decide not to 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 patentprotection strategy is likely to increase our operating costs.

 

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

 

We cannot be certainthat our solutions do not or will not infringe valid patents, copyrights,trademarks, or other intellectual property rights held by third parties, insideand outside the U.S. As a result, we may be subject to legal proceedings andclaims from time to time relating to the intellectual property of others in theordinary course of our business.

 

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

 

26

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

 

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

 

•                       Difficultiesin assimilating technologies, products, personnel and operations;

 

•                       Disruptionof our ongoing business and diversion of management’s attention from otherbusiness concerns;

 

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

 

•                       Issuancesof equity securities that may dilute your ownership interest in our commonstock;

 

•                       Cashpayments to, or the assumption of debt or other liabilities of, the companieswe acquire; and

 

•                       Largewrite-offs related to goodwill and other intangible assets and other adverse auditconsequences.

 

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

 

As of March31, 2003, our officers, directors and affiliated entities, together with Ford,beneficially owned approximately 59.4% of the outstanding shares of our commonstock. This concentration of ownership may delay, deter, or prevent acts thatwould result in a change of control, which in turn could reduce the marketprice of our common stock. Accordingly, these stockholders collectively may beable to control all matters requiring stockholder approval and, thereby, our managementand affairs. Ford beneficially owns approximately 19.7% of the outstandingshares of our common stock. As the single largest stockholder of Vastera, Fordmay exercise significant influence over corporate acts requiring stockholderapproval, including a merger or sale of Vastera. Also, so long 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,together with Ford, may have interests that differ from your interests, andtheir decisions may negatively impact our future success.

 

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

 

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

 

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

 

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

 

•                       alimitation on who may call stockholder meetings; and

 

•                       aprohibition on stockholder action by written consent.

 

We are subjectto provisions of Delaware law that prohibit us from engaging in any businesscombination with any “interested stockholder,” meaning generally a stockholderwho beneficially owns more than 15% of our stock, for a period of three yearsfrom the date this person became an interested stockholder, unless variousconditions are met, such as approval of the transaction by our board. Thiscould have the effect of delaying or preventing a change in control.Additionally, in connection with establishing our strategic relationship withFord, Ford acquired 8,000,000 shares of our common stock. Because of Ford’ssignificant

 

27

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holdings, other companies maybe deterred from acquiring us, even if being acquired would be in the bestinterest of our other stockholders.

 

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

## ** **

We developsolutions in the United States and market them in North America, and to alesser extent, in Europe, Latin America, and the Asia-Pacific regions of theworld. Our financial results could be affected by factors such as changes inforeign currency exchange rates or weak economic conditions in foreign markets.With most of our sales being generated in U.S. dollars, a strengthening of thedollar could make our products less competitive in foreign markets.

 

Currently wedo not use financial instruments to hedge operating expenses of our foreignsubsidiaries. We intend to assess the need to utilize financial instruments tohedge currency exposures on an ongoing basis. Amounts outstanding under ourterm loan and equipment line of credit arrangements expose us to interest raterisk if the prime rate increases. We had approximately $3.1 million invariable rate debt as of March 31, 2003. 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 market risk. We do nothold or issue derivative securities, derivative commodity instruments, or otherfinancial instruments for trading purposes. Therefore, no quantitative tabulardisclosures are required.

 

## **Item 4:**                                  Controls and Procedures

## ** **

Within the90-day period prior to the filing of this report, an evaluation was carried outunder the supervision and with the participation of management, including ourChief Executive Officer and Chief Financial Officer, of the effectiveness ofthe design and operation of our disclosure controls and procedures (as definedin Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934).Based upon that evaluation, the Chief Executive Officer and Chief FinancialOfficer concluded that those disclosure controls and procedures were adequateto ensure that information required to be disclosed by us in the reports thatwe file or submit under the Exchange Act is recorded, processed, summarized andreported, within the time periods specified in the Commission’s rules andforms.

 

There havebeen no significant changes in our internal controls or in other factors thatcould significantly affect these controls subsequent to the date of ourevaluation, including no corrective actions with regard to significantdeficiencies or material weaknesses.

 

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# **PART II – OTHER INFORMATION**

# ** **

## **Item 1:**                             Legal Proceedings

## ** **

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

 

## **On March 14, 2001, ExpeditorsInternational of Washington, Inc. and Expeditors Tradewin, L.L.C.(collectively “Expeditors”) filed suit against us in the United States DistrictCourt for the Eastern District of Michigan, Southern Division primarilyalleging that we misappropriated certain of Expeditors’ trade secrets inconnection with our acquisition of Ford’s customs operations, by utilizingsystems and business processes that Expeditors assisted in developing for Fordand through our employee hiring practices. Trial in this matter is scheduled tocommence in August 2003.  In connectionwith our acquisition of Ford’s customs operations, Ford agreed to indemnify usfor intellectual property infringement claims, and Ford is currentlyindemnifying us in connection with this litigation.**

## ** **

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

## ** **

We receivednet offering proceeds from our initial public offering in September 2000 ofapproximately $86.1 million. As of March 31, 2003 we have usedapproximately $48.6 million of the net proceeds from the initial publicoffering for general corporate purposes, principally working capital for ourinternational acquisitions, 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 expect to use a portion of the remaining net proceeds to expandinternationally and to possibly acquire or invest in additional businesses,products, and technologies that we believe will complement our current orfuture business.

 

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

## ** **

None.

 

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

## ** **

None.

 

## **Item 5:**                             Other Information

## ** **

None.

 

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

 
| The following exhibits are included herein: |
|---------------------------------------------|
|                                        |
| (a)                                         |   | Exhibits. |
|                                        |   |   |
| 99.1                                        |   |   | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002, by the Chief Executive  Officer, dated May 12, 2003. |
|                                        |   |   |   |
| 99.2                                        |   |   | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002, by the Chief Financial  Officer, dated May 12, 2003. |
|                                        |   |   |
| (b)                                         |   | Reports on Form 8-K. |

 

On April 24,2003, we filed a Form 8-K furnishing a press release that announced ourfinancial results for the quarter ended March 31, 2003 and presenting certainother information.

 

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**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized in Dulles, Virginia on May 12, 2003.

 

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

 

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**CERTIFICATIONS**

 

I, Mark J. Ferrer, certify that:

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

 
| May 12, 2003                          |   |
|---------------------------------------|--------|
|                                  |   |
| /s/ Mark J. Ferrer                    |   |
| Mark J. Ferrer                        |   |
| President and Chief Executive Officer |   |

 

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I, Maria Henry, certify that:

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

 
| May 12, 2003            |
|-------------------------|
|                    |
| /s/ Maria Henry         |   |
| Maria Henry             |
| Chief Financial Officer |

 

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**EXHIBITS**

 
| 99.1   |   | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002, by the Chief Executive  Officer, dated May 12, 2003. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                          |
| 99.2   |   | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002, by the Chief Financial  Officer, dated May 12, 2003. |

 

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