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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
Commission file number 0-25995

NEXTERA ENTERPRISES, INC.
(Name of Registrant as Specified in its Charter)

(617) 603-3100
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $0.001 par value
(Title of Class)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [x] NO [  ]

     Indicate by check mark if disclosure of delinquent filer pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

     As of March 22, 2002, the aggregate market value of the registrant’s Class A voting stock held by non-affiliates of the registrant was approximately $13,102,893, based on the closing price of the Company’s Class A Common Stock on the Nasdaq National Market on March 22, 2002 of $0.57 per share.

     As of March 22, 2002, 31,885,896 shares of registrant’s Class A Common Stock, $0.001 par value, were outstanding and 3,869,570 shares of registrant’s Class B Common Stock, $0.001 par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the following documents are incorporated into this report by reference:

     1. Part III. Registrant’s definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year.

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Forward Looking Statements

     The following discussion contains “forward-looking statements.” Forward-looking statements give our current expectations or forecasts of future events. These statements can be identified by the fact that they do not relate strictly to historic or current facts. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these forward-looking statements include statements relating to future actions or the outcome of financial results. From time to time, we also may provide oral or written forward-looking statements in other materials released to the public. Any or all of the forward-looking statements in this annual report and in any other public statements may turn out to be incorrect. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual results may vary materially.

     Forward-looking statements are based on many factors that may be outside our control, causing actual results to differ materially from those suggested. These factors include, but are not limited to, those discussed under the caption “Item 1. Business – Factors That May Affect Our Future Performance.” New factors emerge from time to time, and it is not possible for us to predict all these factors nor can we assess the impact of these factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, you should not place undue reliance on forward-looking statements as a prediction of actual results.

PART I

Overview

Nextera Enterprises exited the technology consulting business during the later half of 2001 and sold its human capital consulting business (Sibson) on January 30, 2002. After the January 30, 2002 sale, Nextera Enterprises consists of Lexecon, one of the world’s preeminent economics consulting firms. For nearly 25 years, Lexecon has provided law firms, corporations and regulatory agencies with expert analysis of complex economic issues in connection with legal and regulatory proceedings, strategic planning and other business activities. The firm provides thorough theoretical analysis of issues that face its clients and subjects theoretical analysis to rigorous and creative empirical evaluation of the evidence. Lexecon’s successes in the courtroom and before regulatory agencies have demonstrated the value of its assistance.

Lexecon was founded in 1977. Its professional staff of economists includes many well-known academics and three Nobel laureates. Lexecon’s clients include major law firms and the corporations that they represent, government and regulatory agencies, public and private utilities and national and multinational corporations.

Lexecon’s services involve the application of economic, financial and public policy principles to marketplace issues in a large variety of industries. The firm’s services fall into three broad areas: litigation support, business consulting and public policy studies.

Litigation Support: Lexecon provides expert witness testimony and other litigation-related services in adversarial proceedings in courts and before regulatory bodies and arbitrators. The firm applies economic principles in understanding the specific features of its client’s business and the competitive and regulatory context in which it operates.

Business Consulting: Lexecon assists corporate clients in analyzing business and strategic issues outside the context of litigation or regulation. Lexecon consults on the likely competitive impact of proposed mergers, predicting the likely reaction of regulatory agencies, competitors and customers to possible business combinations. Lexecon also advises on pricing and other strategic decisions, such as entry into new business areas, addition of new production capacity, and by helping firms predict how competitors are likely to react and how these events would affect the nature of future competition.

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Public Policy Studies: Lexecon has performed numerous public policy studies on behalf of individual companies, trade associations and governmental agencies in the United States and internationally. Lexecon’s studies have been submitted to such agencies as the U.S. Department of Transportation, the Securities and Exchange Commission, the National Association of Securities Dealers, the Federal Communications Commission, and the U.S. Department of Commerce.

Industry Background

Driven by an increasingly complex and litigious regulatory and legal environment and by consolidation in various industries, the litigation and regulatory economics consulting market continues to grow and diversify. Testimony from economic experts plays a crucial role in a wide variety of judicial and regulatory proceedings. The role of economists in antitrust cases illustrates the importance of economic testimony. Economists are used in antitrust cases to define relevant markets, to assess competition in relevant markets, to examine the competitive effects of various contractual arrangements and business practices, to calculate damages, and to address other related issues. Economists testify in court on antitrust issues; they also routinely make presentations to government agencies in connection with government investigations of antitrust issues.

Antitrust is not the only area of litigation or regulation in which economics plays a central role. Economic testimony and analysis is also routine and critically important in areas such as securities fraud litigation, intellectual property damages, contract damages, and allegations of market manipulation. Economic analysis is also central in policy debates and regulatory rule making; Lexecon for example has been actively involved in policy and regulatory matters in the telecommunication, energy and financial services industries.

Because of the importance of economic analysis in litigation and regulatory proceedings, an industry of specialized consulting firms has developed to meet this need. Lexecon and the other firms in this niche of the consulting industry feature highly qualified testifying experts, who are supported by a professional staff of consultants (many of whom themselves hold doctorates in economics and other advanced degrees). In many cases, Lexecon’s direct client is a law firm that represents a company or organization involved in a legal or regulatory proceeding.

Economic analysis is also valuable in helping businesses make pricing and other strategic decisions, such as entry into new areas and anticipating competitor reactions. However, because these are areas in which a number of consulting firms compete, including the major accounting firms and management consulting firms, most of our business consulting work is follow-on work that comes after a successful engagement on a litigation support project.

Our Advantage

Lexecon has been a leader in the application of economic theory to legal, regulatory and business issues since the firm’s founding in 1977. Since that time, Lexecon has expanded its service offerings from traditional antitrust litigation to include a broad range of issues including securities, public policy matters, employment issues, damage analysis, and business strategy.

Lexecon’s continued success is due to its ability to produce, high quality economic analysis on a timely basis and its ability to present and defend this analysis effectively. Lexecon’s staff are experts at identifying the key issues in a case; analyzing these issues using the appropriate methods (which frequently involves the use of sophisticated statistical techniques); and presenting the results of the analysis in a clear and coherent manner. Lexecon’s reputation for high quality economic analysis is reflected in the fact that a high percentage of its new projects are from law firms and corporations who have retained the firm previously.

Lexecon’s staff includes 158 professional consultants, analysts, and practice support, of which 81 have a PhD or master level degree. Lexecon’s staff and affiliate relationships include many distinguished academics, including three recipients of the Nobel Memorial Prize in economics.

As a result of years of experience, Lexecon has developed a sophisticated knowledge of the economics and institutional structures in a variety of industries and array of legal and regulatory matters.

Client Profile

As of January 30, 2002, Nextera Enterprises, Inc. consists only of Lexecon. Lexecon’s clients include major law firms; domestic and foreign corporations; and governments and government agencies. Lexecon’s 10 largest clients in 2001 accounted for approximately 38% of its net revenues for the year ended December 31, 2001 and 35% for the year ended December 31, 2000. One client accounted for 17% and 11% of Lexecon’s net revenues in 2001 and 2000, respectively.

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Competition

The economic and business consulting industry has a large number of competitors comprised of economic consulting firms, individual academics, Big Five and other accounting firm consulting practices, and general management consulting firms. We believe the principal competitive factors in our industry are reputation, analytical ability of our professional staff, client service, and industry expertise. We believe that we compete favorably with respect to these factors. However, some of our competitors have significantly greater financial, and marketing resources and greater name recognition than Lexecon. In addition, some of these competitors have been operating for a longer period of time than has Lexecon and have established long-term client relationships. We also face competition in our efforts to recruit and retain professional staff.

Employees

As of December 31, 2001, Nextera had 391 employees, including 264 consultants. After the January 30, 2002 sale of the human capital consulting business, Nextera had 234 employees and 158 consultants, analysts and practice support. None of our employees are represented by a union or subject to a collective bargaining agreement. We believe that our relations with our employees are good.

Factors That May Affect Our Future Performance

You should carefully consider the following risk factors in your evaluation of our company. If any of the following risks actually occur it could materially harm our business and impair the price of our stock.

We may be unable to comply with certain covenants under our Senior Credit Facility

The Company signed an amended and restated credit agreement in March 29, 2002. Under the amended and restated Senior Credit Facility, the Company is required to make an aggregate of $6.5 million and $8.0 million in principal payments in 2002 and 2003, respectively. The debt is due in full on January 2, 2004. The Company is required to maintain certain financial covenants. Borrowings under the facility will bear interest at the lender’s base rate plus 2.0%, with the potential for the borrowing rate to be reduced 100 basis points upon achieving certain financial and operational milestones. If the Company fails to comply with the financial covenants, the interest could increase 200 basis points. Additionally, failure of the Company to maintain its financial covenants, extend employment agreements with certain key personnel, or make all principal and interest payments to the Senior Lenders as they become due and payable would be events of default under the Senior Credit Facility and the Senior Lenders would be entitled to exercise any remedy available to them, including a possible acceleration of amounts due. Such an occurrence would materially and adversely affect our operations and financial condition. Please see Part II, Item 7 – Liquidity and Capital Resources.

High Levels of Debt Could Adversely Affect Our Business and Financial Condition

We have very high levels of debt in relation to the size of our business. As of December 31, 2001, we had $38.4 million of outstanding indebtedness under our Senior Credit Facility, $14.5 million of which was classified as a current liability. In addition, as of December 31, 2001, we had $23.1 million of outstanding indebtedness under debentures payable to affiliates. We have also approved the exchange of outstanding Series A Preferred Stock for additional debentures. If converted in full, stockholders’ equity would decrease by $22.9 million and debentures due to affiliates would increase by approximately $23.5 million.

     Our high leverage could have important consequences, including the following:

		•		a substantial portion of our future cash flows from operations must be dedicated to the servicing of our debt, thus reducing the funds available for operations and investments;
		•		our ability to obtain additional financing may be impaired;

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		•		our leverage may reduce our ability to adjust rapidly to changing market conditions and may make us more vulnerable to future downturns in the general economy; and
		•		high levels of debt may reduce the value of stockholders’ investments in Nextera because debt holders have priority regarding our assets in the event of a bankruptcy or liquidation.

We may not have sufficient future cash flows to meet our debt payments, and may not be able to refinance any of our debt at maturity.

We face possible delisting from the Nasdaq National Market which would result in a limited public market for our Class A Common Stock.

There are several requirements for the continued listing of the Company’s Class A Common Stock on the Nasdaq National Market including, but not limited to, a minimum stock price of one dollar per share. On February 14, 2002, the Company received notification from the Nasdaq Stock Market (“Nasdaq”) that the Company had failed to maintain a minimum bid price of $1.00 for 30 consecutive days and will be delisted from the Nasdaq National Market unless by May 15, 2002 the Company can comply with the minimum bid price requirement for at least 10 consecutive days. If Nasdaq decides to delist the Class A Common Stock, the Company would have the right to appeal this decision, however, there can be no assurances that such an appeal would be successful. If a decision to delist the Company’s Class A Common Stock is made, the Company may apply for listing on the Nasdaq Smallcap Market, subject to Nasdaq’s approval. The listing requirements for the Nasdaq Smallcap Market also include a $1.00 minimum bid price requirement, subject to designated grace periods. Accordingly, we cannot assure you that the Company could obtain or maintain a listing on the Nasdaq Smallcap Market. Delisting from the Nasdaq National Market could adversely affect the liquidity and price of the Class A Common Stock and it could have a long-term impact on the Company’s ability to raise future capital.

We heavily depend on a small number of senior consulting executives and other key personnel, and the loss of any of them may damage client relationships and cause our reputation to suffer.

Our success is highly dependent upon the efforts, abilities, business generation capabilities and project execution skills of a small number of senior consulting executives and other key personnel. This dependence is particularly important to our business because personal relationships and reputations are a critical element of obtaining and maintaining client engagements. The loss of the services of any of these persons for any reason could have an adverse effect on our reputation and our ability to secure and complete engagements. Most of our consultants are not subject to employment or non-compete agreements. A number of our senior consulting executives that are responsible for a substantial amount of our business are subject to employment and/or non-compete agreements, some of which begin to expire on or about December 31, 2002. We may not be able to retain these persons or to attract suitable replacements or additional personnel if necessary. We generally do not maintain key person life insurance coverage for our employees.

In addition, if any of these key employees joins a competitor or forms a competing business, some of our clients might choose to use the services of that competitor or new company. Further, in the event of the loss of any such personnel, we may not be able to prevent the unauthorized disclosure or use of our technical knowledge, practices or procedures by these personnel. As a result, we might lose existing or potential clients.

If we fail to attract, retain and train skilled consultants, our reputation will suffer and our revenues and operating profits could decline.

Because our business involves the delivery of professional services, our success depends upon our ability to attract, retain, motivate and train highly skilled consultants. If we fail to do so it could impair our ability to effectively manage and complete our client projects and secure future client engagements, and as a result our reputation could suffer and our future revenues and operating profits could decline.

Even if we are able to retain our current consultants and expand the number of our qualified consultants, the resources required to attract, retain, motivate and train these consultants could adversely affect our operating profits.

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If we fail to meet our clients’ expectations, we could damage our reputation and have difficulty attracting new business.

Our client engagements often involve projects that are complex and critical to the operation of a client’s business. Our failure or inability to meet a client’s expectations, or the law firm that engaged us, in the performance of our services could result in damage to our reputation, which could adversely affect our ability to attract new business from that client or others. In addition, if we fail to perform adequately on a project, a client could refuse to pay or sue us for economic damages which could further damage our reputation or cause a reduction in future revenues and operating profits.

We may not successfully compete with our competitors, which could result in reduced revenues and operating profits.

The economic and business consulting industry has a large number of competitors comprised of economic consulting firms, individual academics, Big Five and other accounting firm consulting practices, and general management consulting firms. We believe the principal competitive factors in our industry are reputation, the analytical ability of our professional staff, client service, and industry expertise. We believe that we compete favorably with respect to these factors. However, some of our competitors have greater financial and marketing resources and greater name recognition than Lexecon. In addition, some of these competitors have been operating for a longer period of time than has Lexecon and have established long-term client relationships. We also face competition in our efforts to recruit and retain professional staff. If Lexecon is not successful in competition with its rivals, its future revenues and operating profits could decline.

We have relied and may continue to rely on a limited number of clients and industries for a significant portion of our revenues and, as a result, the loss of or a significant reduction in work performed for any of them could result in reduced revenues.

We have in the past derived, and may in the future derive, a significant portion of our net revenues from a relatively limited number of clients. To the extent that any client or industry uses less of our services or terminates its relationship with us, our revenues could decline accordingly. For example, for the year ended December 31, 2001, our ten largest clients accounted for approximately 28% of our net revenues. For the year ended December 31, 2001, our largest client accounted for approximately 9% of our net revenues. Further, clients in the (1) financial services; (2) information technologies, communications and entertainment; and (3) consumer products and retail industries accounted for approximately 20%, 15%, and 15%, respectively, of our net revenues for the year ended December 31, 2001. These figures include the operations of our technology and human capital consulting businesses, which have been discontinued or sold.

Lexecon had a slightly higher level of concentration among clients. Lexecon’s 10 largest clients in 2001 accounted for approximately 38% of its net revenues for the year ended December 31, 2001 and 35% for the year ended December 31, 2000. One client accounted for 17% and 11% of its net revenues in 2001 and 2000, respectively

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The volume of work we perform for a specific client is likely to vary from year to year, and a significant client in one year may not use our services in another year. Further, the failure to collect a large account receivable from any of these clients could result in significant financial exposure. In addition, any economic conditions or other factors adversely affecting any of the industries or any increase in the size or number of competitors within the industries we service could cause our revenues to decline.

Nextera Enterprises Holdings owns 67.6% of our voting stock and can control matters submitted to our stockholders and its interests may be different from yours.

Nextera Enterprises Holdings owns 8,810,000 shares of Class A Common Stock and 3,844,200 shares of Class B Common Stock, which together represent approximately 67.6% of the voting power of our outstanding common stock. The Class A Common Stock entitles its holders to one vote per share, and the Class B Common Stock entitles its holders to ten votes per share, on all matters submitted to a vote of our stockholders, including the election of the members of the Board of Directors. Accordingly, Nextera Enterprises Holdings will be able to determine the disposition of all matters submitted to a vote of our stockholders, including mergers, transactions involving a change in control and other corporate transactions and the terms thereof. In addition, Nextera Enterprises Holdings will be able to elect all of our directors, except for one director to be elected in accordance with the terms of a stockholders agreement. This control by Nextera Enterprises Holdings could materially adversely affect the market price of the Class A Common Stock or delay or prevent a change in control of our company.

Nextera Enterprises Holdings is indirectly controlled by Knowledge Universe, Inc. Knowledge Universe, Inc. was formed by Lawrence J. Ellison, Michael R. Milken and Lowell J. Milken to build, through a combination of internal development and acquisitions, leading companies in a broad range of areas relating to career management, technology and education and the improvement of individual and corporate performance. Knowledge Universe, Inc. may form, invest in or acquire other businesses which are involved in these and related areas, among others, which businesses may be operated under the control of Knowledge Universe, Inc. independently of us. Potential conflicts of interest between Knowledge Universe and us may arise and may not be resolved in our favor. These potential conflicts of interest include competitive business activities, indemnity arrangements, registration rights, sales or distributions by Nextera Enterprises Holdings of our Class A and Class B Common Stock and the exercise by Nextera Enterprises Holdings of its ability to control our management and affairs. This control and the potential conflicts of interest it creates could limit our future independence and harm our reputation.

We were formed in February 1997 by entities which were under the direct or indirect control of Lawrence J. Ellison, Michael R. Milken and Lowell J. Milken. After our formation, ownership of our common stock originally held by our founding entities was transferred to Nextera Enterprises Holdings. Lawrence J. Ellison, Michael R. Milken and Lowell J. Milken may each be deemed to have the power to control Knowledge Universe, Inc. As a result, Lawrence J. Ellison, Michael R. Milken and Lowell J. Milken may each be deemed to have the power to direct the voting and disposition of, and to share beneficial ownership of, any shares of common stock owned by Nextera Enterprises Holdings. On February 24, 1998, without admitting or denying any liability, Michael R. Milken consented to the entry of a final judgment in the U.S. District Court for the Southern District of New York in Securities and Exchange Commission v. Michael R. Milken et al., which judgment was entered on February 26, 1998, restraining and enjoining Michael R. Milken from associating with any broker, dealer, investment advisor, investment company, or municipal securities dealer and from violating Section 15(a) of the Exchange Act.

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Our quarterly revenues and operating results have varied significantly and, if they continue to do so, the market price of our stock could decline.

Our operating results have varied significantly from quarter to quarter and may continue to do so in the future. Our quarterly financial results could be impacted significantly by the timing, mix and number of active client projects commenced and completed during a quarter, the variations in utilization rates and average billing rates for our consultants and the accuracy of our estimates of resources required to complete our ongoing projects. Our operating expenses are based on anticipated revenue levels in the short-term, are relatively fixed, and are incurred throughout the quarter. As a result, if expected revenues are not realized as anticipated, our quarterly financial results could be materially harmed. As a result, we believe that period-to-period comparisons of our operating results are not necessarily meaningful, and you should not rely on them as an indication of our future performance.

Our engagements may result in professional liability

Our services typically involve difficult analytical assignments and carry risks of professional and other liability. Many of our engagements involve matters that could have a severe impact on the client’s business, cause the client to lose significant amounts of money, or prevent the client from pursuing desirable business opportunities. Accordingly, if a client is dissatisfied with our performance, the client could threaten or bring litigation in order to recover damages or to contest its obligation to pay our fees. Litigation alleging that we performed negligently or otherwise breached our obligations to the client could expose us to significant liabilities and tarnish our reputation. These liabilities could harm our business.

We have a history of losses

Since our inception in February 1997, we have incurred, on an historical basis, net losses of $3.0 million and $17.2 million for the years ended December 31, 1997 and 1998, net income of $3.1 million for the year ended December 31, 1999 and net losses of $24.0 million and $117.5 million for the years ended December 31, 2000 and 2001.

As a result, even though Lexecon has a history of profitability since being acquired by Nextera Enterprises, it is possible that we may not obtain net income in the future.

We may not be able to obtain the additional capital necessary for us to carry out our business strategy, which could hinder our growth. In addition, the terms of any additional capital may be unfavorable to us or our stockholders.

For us to expand or to pursue other business opportunities, we would likely require access to capital. We may require additional financing in amounts that we cannot determine at this time. If our plans or assumptions change or are inaccurate, we may be required to seek capital sooner than anticipated. We may need to raise funds through public or private debt or equity financings.

If funds are raised through the issuance of equity securities, the percentage ownership of our then-current stockholders may be reduced and the holders of new equity securities may have rights, preferences or privileges senior to those of the holders of our common stock. If additional funds are raised through a bank credit facility or the issuance of debt securities, the holder of this indebtedness would have rights senior to the rights of the holders of our common stock and the terms of this indebtedness could impose restrictions on our operations. If we need to raise additional funds, we may not be able to do so on terms favorable to us, or at all. If we cannot raise adequate funds on acceptable terms, we may be unable to continue to fund our operations.

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Government regulation and legal uncertainty relating to our markets could result in decreased demand for our services, increased costs or otherwise harm our business causing a reduction in revenues.

For the year ended December 31, 2001 we derived approximately 60% of our net revenues from economic and litigation consulting services related to antitrust matters, regulatory matters, mergers and acquisitions and other securities matters. On an ongoing basis, substantially all of our net revenues will be derived from such services. A substantial portion of these net revenues were derived from engagements relating to United States antitrust and securities laws. Changes in these laws, changes in judicial interpretations of these laws or less vigorous enforcement of these laws by the United States Department of Justice, the United States Federal Trade Commission or other federal agencies as a result of changes in philosophy, political decisions, priorities or other reasons could materially reduce the magnitude, scope, number or duration of engagements available to us in these areas.

In addition, adverse changes in general economic conditions or conditions influencing merger and acquisition activity could have an adverse impact on engagements in which we assist clients in connection with these types of transactions. Any reductions in the number of our securities, antitrust and mergers and acquisitions consulting engagements could cause a reduction in our revenues.

If a large client project or a significant number of other client projects are terminated or reduced, we may have a large number of employees who are not generating revenue.

Our clients engage us on a project-by-project basis, primarily without a written contract, and a client can generally terminate an engagement with little or no notice to us and without penalty. When a client defers, modifies or cancels a project, we must be able to rapidly deploy our consultants to other projects in order to minimize the underutilization of our employees. In addition, our operating expenses are relatively fixed and cannot be reduced on short notice to compensate for unanticipated variations in the number or size of projects in progress. Thus, any termination, significant reduction or modification of our business relationships with any of our significant clients or with a number of smaller clients would have an adverse impact on our ability to generate revenue. As a result, we believe that the number of our clients or the number and size of our existing projects may not be reliable indicators or measures of future net revenues.

Potential conflicts of interests reduce the number of both potential clients and engagements.

We provide economic and litigation consulting services primarily in connection with significant or complex transactions, disputes or other matters that are usually adversarial or that involve sensitive client information. Our engagement by a client to provide such services frequently precludes us from accepting engagements with other entities involved in the same matter. In addition, we may decide to decline engagements due to clients’ expectations of loyalty, perceived conflicts of interests or other reasons. Accordingly, the number of both potential clients and potential engagements is limited, particularly in the economic consulting and litigation services markets.

Potential write-off of goodwill and other intangible assets relating to personnel could reduce our operating results.

As of December 31, 2001, our intangible assets, net of accumulated amortization, were approximately $77.5 million. Intangible assets at December 31, 2001, net of accumulated amortization, included $77.0 million of goodwill and $0.5 million for intangibles relating to personnel. Intangible assets had been amortized by us on a straight-line basis principally over 40 years for goodwill and over five years for intangibles relating to personnel. We will cease to amortize goodwill and intangible assets relating to personnel commencing January 1, 2002 in accordance with Statements of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets,

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In accordance with accounting guidelines, we periodically evaluate the recoverability of goodwill when indications of possible impairment are present by reviewing the anticipated undiscounted future cash flows from operations and comparing such cash flows to the carrying value of the associated goodwill. If goodwill becomes impaired, we will be required to write down the carrying value of the goodwill and incur a related charge to our operations. A write down of goodwill would result in a reduction in our net income.

Our stock price may be volatile and you could lose all or part of your investment.

We expect that the market price of our common stock will be volatile. Stock prices in our and similar industries have risen and fallen in response to a variety of factors, including:

•		quarter-to-quarter variations in operating results;
•		entering into, or failing to enter into or renew, a material contract or order;
•		acquisitions of, or strategic alliances among, companies within our industry;
•		changes in investor perceptions of the acceptance or profitability of consulting. and
•		market conditions in the industry and the economy as a whole.

The market price for our common stock may also be affected by our ability to meet investors’ or securities analysts’ expectations. Any failure to meet these expectations, even slightly, may result in a material decline in the market price of our common stock. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of these companies. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against that company. If similar litigation were instituted against us, it could result in substantial costs and a diversion of our management’s attention and resources.

We could lose money on our fixed-price or capped-fee contracts.

We have undertaken and expect in the future to undertake certain projects under fixed-price or capped-fee billing arrangements, which are distinguishable from our principal method of utilizing time and materials billing arrangements. To achieve profitability from fixed-price or capped-fee contracts, we must, among other things:

•		accurately estimate the resources required to perform these contracts;
•		complete our clients’ projects on a timely basis;
•		effectively manage our clients’ expectations; and
•		complete the projects within budget and to our clients’ satisfaction.

If we are unable to accomplish these goals, we could be exposed to cost overruns and penalties. If this occurs in connection with a large project or a sufficient number of projects, our revenues would decline.

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Provisions in our charter documents and Delaware law may delay or prevent an acquisition of us, which could decrease the value of our common stock

Provisions of our certificate of incorporation and bylaws and provisions of Delaware law could delay, defer or prevent an acquisition or change of control of us or otherwise decrease the price of our common stock. These provisions include:

•		authorizing our board of directors to issue additional preferred stock;
•		prohibiting cumulative voting in the election of directors;
•		limiting the persons who may call special meetings of stockholders;
•		prohibiting stockholder actions by written consent; and
•		establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

Our corporate headquarters is located in Boston, Massachusetts in a leased facility consisting of 28,646 square feet, under a 10-year lease that expires in April 2011. We also occupy leased office space in Chicago, Illinois and Cambridge, Massachusetts. We have space in New York, New York; San Francisco, California; Rochester, New York, and Toronto, Canada, for which we are either subletting or attempting to sublet. Effective January 30, 2002, we assigned our lease obligations in Los Angeles, California; Raleigh, North Carolina; and Princeton, New Jersey to the acquiring company of the Sibson business. We believe that our existing facilities are adequate to meet our current requirements and that suitable space will be available as needed on terms acceptable to us.

From time to time we are involved in legal proceedings, claims and litigation arising in the ordinary course of business, the outcome of which, in the opinion of management, would not have a material adverse effect on us.

No matters were submitted to a vote of our security holders during the year ended December 31, 2001.

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PART II

Our Class A Common Stock, $0.001 par value per share, has traded on the Nasdaq National Market under the symbol “NXRA” since May 18, 1999. The following table sets forth the high and low sale prices for our Class A Common Stock as reported by the Nasdaq National Market in each of the four quarters of fiscal 2001 and 2000.

As of March 22, 2002 there were 31,885,896 shares of Class A Common Stock outstanding held by approximately 279 holders of record.

We have never paid or declared any cash dividends on our Common Stock and do not intend to pay dividends on our Common Stock in the foreseeable future. We intend to retain any earnings for use in the operation and expansion of our business.

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The following tables contain selected consolidated financial data as of December 31 for each of the years 1997 (February 26, 1997 inception) through 2001 and for each of the years in the five year period ended December 31, 2001. The selected consolidated financial data have been derived from our audited consolidated financial statements.

When you read this summary, it is important that you read along with it the financial statements and related notes in our annual and quarterly reports filed with the Securities and Exchange Commission, as well as the section of our annual and quarterly reports titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Overview

During 2001, the Company enacted a restructuring plan to exit the technology consulting business and human capital consulting business and to focus on the strength of its economic consulting business. The technology consulting business was completely exited in the second half of 2001, primarily through the termination of consultants upon the completion of existing contracts and, to a lesser extent, the assignment of contracts and the workforce associated with those contracts to a third party. The human capital consulting business was sold to a third party on January 30, 2002. Upon the disposition of the human capital consulting business, the Company consists of Lexecon, one of the world’s preeminent economics consulting firms.

The Company generates net revenues by providing economic consulting services primarily under time and materials (including charges for use of its computer system), and to a much lesser extent, fixed-price or capped-fee billing arrangements. Under time and materials billing arrangements, revenues are recognized as the services are performed. Revenues on fixed-price and capped-fee contracts are recognized using the percentage of completion method of accounting and are adjusted monthly for the cumulative impact of any revision in estimates. We determine the percentage of completion of our contracts by comparing costs incurred to date to total estimated costs. Contract costs include direct labor and expenses related to performance of the contract. We believe that the majority of our work will continue to be performed under time and materials billing arrangements. Net revenues exclude reimbursable expenses charged to clients, however, due to recently issued accounting guidance, reimbursable expenses will be included in net revenues effective January 1, 2002. We typically bill on a monthly basis to monitor client satisfaction and manage our outstanding accounts receivable balances. Our net revenues are substantially derived from clients located in the United States.

Gross profit is derived from net revenues less the cost of revenues, which includes salaries, bonuses and benefits paid to consultants. Our financial performance is primarily based upon billing margin (billable daily rate less the consultant’s daily cost) and personnel utilization rates (billable days divided by paid days). We monitor our engagements to manage billing and utilization rates. We derive a substantial majority of our net revenues from engagements billed on a time and materials basis. Generally, clients are billed for expenses incurred by us on the clients’ behalf. In addition, we closely monitor and attempt to control expenses that are not passed through to our clients. Incentive compensation expenses paid to consultants have a large variable component relating to net revenues and profit and, therefore, vary based upon our ability to achieve our operating objectives.

Selling, general and administrative expenses consist of salaries and benefits of certain senior management and other administrative personnel and training, marketing and promotional costs. These expenses are associated with our development of new business and with our management, finance, recruiting, marketing and administrative activities. Incentive compensation expenses for certain senior management also have a significant variable component relating to net revenues and profit and, therefore, vary based upon our ability to achieve our operating objectives.

Our tax provisions historically vary from the federal statutory rate of 34% predominately due to valuation allowance adjustments, nondeductible goodwill amortization, state and local taxes and nondeductible meal expenses.

Sale of Human Capital Consulting Business

Effective January 30, 2002, the Company sold substantially all of the assets and certain liabilities of its human capital consulting business to a privately-held benefits, compensation and human resources consulting firm, for a total of $14.7 million in cash (excluding $1.3 million subject to a working capital adjustment) and the potential for up to an additional $13.3 million based on future operating results over the next two years. All consultants and support staff of the human capital consulting business were transferred to the acquiring company. The net assets sold, including unimpaired goodwill, have been classified in the balance sheet at December 31, 2001 as Assets held for sale.

The human capital consulting business had revenues of $37.8 million, $58.9 million, and $63.3 million for 2001, 2000 and 1999, respectively. Income (loss) from operations of the human capital consulting group was $(50.1) million, $0.1 million, and $3.4 million for 2001, 2000 and 1999, respectively. Approximately $40.5 million of the 2001 loss was due to goodwill impairment charges.

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Exiting of the Technology Consulting Business

During 2001, with the erosion of the demand for technology services, the technology consulting business was substantially reduced primarily through workforce reduction. Effective October 1, 2001, the Company assigned the remaining significant technology contracts to a third party which also assumed the workforce associated with those contracts. With this assignment, the Company effectively exited the technology consulting business and as of December 31, 2001 had no contracts or consultants related to this business.

The technology consulting business had revenues of $11.6 million, $41.2 million, and $49.3 million for 2001, 2000 and 1999, respectively. Income (loss) from operations of the technology consulting group was $(51.2) million, $(24.1) million, and $1.7 million for 2001, 2000 and 1999, respectively. Approximately $32.0 million of the 2001 loss was due to goodwill impairment charges.

Series A Cumulative Convertible Preferred Stock

On December 14, 2000, the Company entered into a Note Conversion Agreement with Knowledge Universe, Inc. (the Note Conversion Agreement). Under the terms of the Note Conversion Agreement, Knowledge Universe, Inc. converted $21,000,000 of debentures into 210,000 shares of $0.001 par value Series A Cumulative Convertible Preferred Stock (Series A Preferred Stock). The Series A Preferred Stock bears dividends at a 10% rate from issuance through June 30, 2001 and at a 7% rate thereafter. Such dividends are payable quarterly in arrears in cash or, at the option of the Company, in additional nonassessable shares of Series A Preferred Stock.

For the period through June 30, 2001, the Company could, at its option, exchange the Series A Preferred Stock into a debenture (the Exchange Debenture) with equivalent terms as those contained in the debentures exchanged for the Series A Preferred Stock on December 14, 2000. Solely for purposes of determining the principal amount of the Exchange Debenture, in the event of such an exchange, the Series A Preferred Stock will be deemed to have accrued dividends at a rate equal to 12%, retroactive to December 14, 2000.

On June 29, 2001, the Company’s Board of Directors approved the exchange of the Series A Preferred Stock to the Exchange Debenture subject to the approval of the Lenders under the Senior Credit Facility. Knowledge Universe, Inc. has agreed to allow the Company to extend its right to exchange the Series A Preferred Stock into the Exchange Debenture until June 15, 2002. If converted, Stockholders equity would decrease by $22.9 million and Debentures due to affiliates would increase by approximately $23.5 million. The Debentures would accrue interest at 10% and would be due on January 2, 2004. Principal and interest amounts due under the Debentures would be subordinated to borrowings under the Senior Credit Facility.

NASDAQ Listing

There are several requirements for the continued listing of the Company’s Class A Common Stock on the Nasdaq National Market including, but not limited to, a minimum stock price of one dollar per share. On February 14, 2002, the Company received notification from the Nasdaq Stock Market (“Nasdaq”) that the Company had failed to maintain a minimum bid price of $1.00 for 30 consecutive days and will be delisted from the Nasdaq National Market unless by May 15, 2002 the Company can comply with the minimum bid price requirement for at least 10 consecutive days. If Nasdaq decides to delist the Class A Common Stock, the Company would have the right to appeal this decision, however, there can be no assurances that such an appeal would be successful. If a decision to delist the Company’s Class A Common Stock is made, the Company may apply for listing on the Nasdaq Smallcap Market, subject to Nasdaq’s approval. The listing requirements for the Nasdaq Smallcap Market also include a $1.00 minimum bid price requirement, subject to designated grace periods. Accordingly, we cannot assure you that the Company could obtain or maintain a listing on the Nasdaq Smallcap Market. Delisting from the Nasdaq National Market could adversely affect the liquidity and price of the Class A Common Stock and it could have a long-term impact on the Company’s ability to raise future capital.

Acquisitions

The Company was founded in February 1997 and focused on building its portfolio of practice areas primarily through selective acquisitions through December 31, 1998 and, to a lesser extent, internal growth. The Company pursued an acquisition strategy

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resulting in the acquisitions detailed below. Accordingly, our historical Consolidated Financial Statements include operating results of the acquired companies only from the effective date of each respective acquisition.

2000 Acquisition

Effective January 1, 2000, the Company acquired substantially all of the assets and certain liabilities of Cambridge Economics, Inc. (“Cambridge Economics”), a Massachusetts-based consulting firm that provides strategic, economic and business transformation and other services to a diverse group of domestic and international clients. Cambridge Economics was acquired for $8.4 million of cash and a $2.1 million promissory note due January 2002 which has been paid.

1999 Acquisitions

Effective September 30, 1999, the Company, through Sibson AP, LLC, a newly formed acquisition subsidiary of the Company, acquired substantially all of the assets of SCCAP Pty Limited (“SCCAP”), an Australian human resources consulting firm, for $1.7 million in cash.

Effective June 1, 1999, the Company acquired substantially all of the assets and certain liabilities of The Economics Resource Group, Inc. (“ERG”), a Massachusetts-based consulting firm that provides economic and strategic services primarily to energy and other regulated industries. ERG was acquired for $9.6 million of cash and a $2.4 million promissory note that was paid in 2001.

Effective May 18, 1999, the Company acquired NeoEnterprises, Inc. (“NeoEnterprises”), a Connecticut-based electronic commerce, or “e-commerce,” consulting and development company. NeoEnterprises was acquired for 170,000 shares of Class A Common Stock.

Effective January 29, 1999, the Company acquired the stock of The Alexander Corporation Limited (“Alexander”), a United Kingdom-based human resources consulting firm. Alexander was acquired for £360,000 (approximately $590,000) and 150,000 shares of Class A Common Stock, including the payment of £60,000 (approximately $100,000) in final satisfaction of amounts payable under an earnout arrangement.

1998 Acquisitions

Effective December 31, 1998, the Company acquired Lexecon Inc. (“Lexecon”), an Illinois-based economic consulting firm. Lexecon was acquired for $31.1 million in cash and 4,266,240 shares of Class A Common Stock, including 1,450,240 shares of Class A Common Stock which were determined based upon the price per share in the initial public offering of the Company’s Class A common stock.

Effective August 31, 1998, Nextera acquired substantially all the assets and assumed certain liabilities of Sibson & Company, L.P. and acquired Sibson Canada, Inc., (collectively “Sibson”) human resources consulting firms based in New Jersey and Toronto, Canada, respectively. Sibson was acquired for $37.4 million in cash, 2,613,087 shares of Class A Common Stock and 197,813 exchangeable shares of Sibson Canada Co., a newly formed wholly-owned subsidiary of Nextera, that may be converted at the option of the holders into 197,813 shares of Class A Common Stock. The shares were converted in 2000.

Effective March 31, 1998, Nextera acquired substantially all of the assets and assumed certain liabilities of The Planning Technologies Group, Inc. (“PTG”), a Massachusetts-based strategy and management consulting firm. PTG was acquired for $6.7 million in cash and 214,000 shares of Class A Common Stock.

Effective March 31, 1998, Nextera acquired Pyramid Imaging, Inc. (“Pyramid”), a California-based consulting and technology firm. Pyramid was acquired for $10.0 million in cash and 640,000 shares of Class A Common Stock, including $0.8 million in cash and 53,333 shares of Class A Common Stock issued during 1999 as a result of the achievement of certain revenue and pretax earnings targets related to the performance of Pyramid during the twelve months ended March 31, 1999.

Effective January 5, 1998, Nextera acquired substantially all of the assets and assumed certain liabilities of SiGMA Consulting, LLC (“SiGMA”), a New York-based management consulting firm. SiGMA was acquired for $10.0 million in cash and 669,000 shares of Class A Common Stock.

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Results of Operations

The following table sets forth our results of operations for the year ended December 31:

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Comparison of the Year Ended December 31, 2001 and the Year Ended December 31, 2000

     Net Revenues. Net revenues decreased 24.1% to $122.3 million for the year ended December 31, 2001 from $161.0 million for the year ended December 31, 2000. This decrease was attributable to a decrease in technology and human capital consulting revenues which declined $29.6 million and $21.1 million, respectively, due to decreased demand for such services. The decline in technology and human capital revenues were partially offset by a $12.0 million increase in economic consulting revenues. With the sale of the human capital consulting business and the exiting of the technology consulting business, the Company’s net revenues for 2002 are expected to decrease although revenues for the remaining economic consulting business are expected to increase from 2001.

     Gross Profit. Gross profit decreased 27.5% to $45.4 million for the year ended December 31, 2001 from $62.6 million for the year ended December 31, 2000. Gross profit as a percentage of net revenues decreased to 37.1% in 2001 from 38.9% in 2000. The decrease in gross profit directly correlates with the 24.1% decline in net revenues in 2001 from 2000. The decrease in gross profit as a percentage of net revenues was due primarily to the wind down and eventual exiting of the technology consulting business and due to higher compensation cost related to the economic consulting business.

     Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 28.3% to $43.7 million for the year ended December 31, 2001 from $61.1 million for the year ended December 31, 2000. As a percentage of net revenues, such expenses decreased to 35.8% in 2001 from 38.0% in 2000. The decrease in spending resulted primarily from $6.8 million in lower sales and marketing spending, $4.5 million in lower general office expenses, $2.7 million in lower support staff compensation, and $2.9 million in lower spending in development, primarily recruiting. Substantially all of the above reductions were made in the technology and human capital consulting business in connection with the exiting of the technology consulting business and cost reductions in the human capital business due to the decline in the demand for such services.

     Goodwill Impairment. During 2001, the Company recorded a $72.5 million goodwill impairment charge. The technology consulting services goodwill charge was $32.0 million due to the exiting of the technology consulting business and the human capital consulting business charge was $40.5 million due to the decline in the value of the business directly related to the downturn in the economy. The impairment of the human capital services business was based on the sale price of the business excluding any contingent consideration that may be achieved in the future based on the performance of the human capital consulting business.

     Special Charges. During the quarter ended March 31, 2001, the Company approved actions to re-align and re-size the Company’s cost structure, primarily within the technology consulting services group, as a result of softening market conditions and reduced demand for technological services. As a result, the Company recorded special charges totaling $5.4 million, consisting of $1.6 million for severance, $0.6 million for the termination of certain Company initiatives, $0.8 million related to the costs of exiting or reducing certain leased premises, and $2.4 million related to certain employee incentives. The headcount reductions included 48 consultants and 7 administrative personnel.

During the quarter ended June 30, 2001, the Company recorded special charges to re-align and re-size the Company’s cost structure. As a result, the Company recorded charges totaling $8.0 million, consisting of a $1.8 million severance charge associated with the second quarter’s headcount reduction of 60 professional and support personnel, primarily in the technology consulting business; a $5.1 million charge to provide for the expected costs of exiting or reducing certain leased premises and an employee incentive-related expense of $1.1 million.

During the quarter ended September 30, 2001, the Company recorded $8.8 million of special charges for continued restructuring efforts. Included within this charge is $1.1 million of severance associated with headcount reductions in the quarter, $3.5 million to provide for the expected costs of exiting and reducing certain leased premises, a $4.0 million write-down of assets, substantially fixed assets, and an employee incentive-related expense of $0.2 million.

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During the quarter ended December 31, 2001, the Company recorded $1.3 million of special charges. Included within this charge is $0.5 million of severance associated with headcount reductions in the quarter, $0.3 million to provide for the expected costs of exiting and reducing certain leased premises, and a $0.5 million write-down of assets, substantially fixed assets.

Cash outlays during 2001 under the Company’s various restructuring efforts were $13.8 million. Approximately $1.7 million of cash is expected to be expended over the next twelve months, primarily related to real estate rental obligations and severance, and the remainder is expected to be paid over the next ten years.

The restructuring charges and their utilization as of December 30, 2001 are summarized as follows (in thousands):

In the fourth quarter 2000, the Company awarded to certain employees special incentive-related compensation awards. Such awards totaled $6.7 million and were payable in cash and restricted stock during 2001, subject to employees remaining employed by the Company on the dates of the payments. The Company recorded a special charge of $2.3 million in 2000 associated with the pro rata share of such payments over the associated vesting period.

In October and December 2000, the Company implemented a plan to reduce its consulting and administrative staffs, resulting in severance costs of approximately $2.4 million. Approximately $1.7 million of this charge was paid in the fourth quarter of 2000 and the remainder of the accrual was paid in the first quarter of 2001. In total, 108 consultants and administrative personnel were terminated. In June 2000, the Company recorded a charge of $1.9 million as a result of severance costs incurred for seven individuals in connection with management changes at the Company’s Technologies Services Group. Approximately $1.2 million of this charge was paid in 2000 and the remainder is expected to be paid ratably through January of 2002. As of December 31, 2000, approximately $1.3 million was accrued.

Primarily as a result of the fourth quarter workforce reduction described above, the Company identified and made plans to vacate certain portions of its leased facilities. The Company recorded a charge of $1.5 million associated with the cost of exiting these facilities, net of estimated sublease income, all of which was accrued as of December 31, 2000.

     Interest Expense. Interest expense increased 29.5% to $10.1 million for the year ended December 31, 2001 from $7.8 million for the year ended December 31, 2000. This increase was primarily due to fees associated with the March 30, 2001 amendment to the Senior Credit Facility coupled with a higher average bank debt during 2001.

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     Other Expense. Other expense increased by 31.6% to $7.1 million for the year ended December 31, 2001 from $5.4 million for the year ended December 31, 2000. The 2001 charges were associated with the write down to fair market value of certain investments. The 2000 charges also related to a write down to fair market value of certain investments. The write-downs were substantially related to the downturn in the technology sector that began in the middle of 2000 and continued into 2001. As the downturn progressed, the valuation of the Company’s equity investments were reviewed and the investments were written down to fair value when they were judged to be permanently impaired.

     Income taxes. The Company recorded an income tax expense of $1.1 million for the year ended December 31, 2001 compared to a tax benefit of $1.3 million for the year ended December 31, 2000. The 2001 expense related to foreign and states taxes and an adjustment to the prior year tax accrual. The 2000 benefit related to the ability to carryback the 2000 loss to prior years. Valuation allowances have been established at December 31, 2001 and 2000 relating to all deferred tax assets that must be realized through the generation of taxable income in future periods.

Comparison of the Year Ended December 31, 2000 and the Year Ended December 31, 1999

     Net Revenues. Net revenues increased 3.2% to $161.0 million for the year ended December 31, 2000 from $156.0 million for the year ended December 31, 1999. This increase was primarily attributable to an increase in economic consulting revenues, due in part to the inclusion of revenues relating to the acquisition of ERG effective June 30, 1999 and Cambridge Economics effective January 1, 2000. Offsetting this increase was a decrease in revenues primarily from the Company’s technology consulting business due principally to an industry-wide decrease in demand for such services during the second half of 2000 and, to a lesser extent, a decrease in revenues in our human capital consulting business.

     Gross Profit. Gross profit decreased 8.1% to $62.6 million for the year ended December 31, 2000 from $68.1 million for the year ended December 31, 1999. Gross profit as a percentage of net revenues decreased to 38.9% in 2000 from 43.7% in 1999. The decrease in gross profit as a percentage of net revenues was due primarily to lower chargeability in the Company’s technology consulting business. As a result of the decreased demand for technology services, the Company reduced its workforce by 100 consultants in the fourth quarter of 2000, most of whom work within the technology consulting business group. Annualized cost savings resulting from the workforce reduction actions is anticipated to be approximately $16.5 million.

     Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 35.8% to $61.0 million for the year ended December 31, 2000 from $45.0 million for the year ended December 31, 1999. As a percentage of revenues, such expenses increased to 38.0% in 2000 from 28.8% in 1999. The increase in spending resulted primarily from higher sales and marketing spending and an increase in reserves for bad debts in the Company’s technology consulting business. As a result of the decreased demand for technology services, the Company reduced its workforce principally in this sector by 32 administrative personnel in the fourth quarter of 2000. The increase in selling general and administrative expenses also resulted in part from the acquisitions of ERG and Cambridge Economics.

     Interest Expense. Interest expense decreased to $7.8 million for the year ended December 31, 2000 from $9.4 million for the year ended December 31, 1999 due principally to the repayment of a portion of the Company’s outstanding indebtedness with the proceeds from the Company’s initial public offering of Class A Common Stock, which was completed on May 21, 1999. Offsetting this reduction in borrowings and interest expense were borrowings and expense incurred in connection with the acquisitions of ERG and Cambridge Economics and with working capital requirements.

     Other Expense. Other expense for 2000 includes a $5.4 million non-cash charge associated with the write down to fair market value of certain equity investments.

     Special Charges. In the fourth quarter 2000, the Company awarded to certain employees special incentive-related compensation awards. Such awards totaled $6.7 million and were paid in cash and restricted stock during 2001, subject to employees remaining employed by the Company on the dates of the payments. The Company recorded a special charge of $2.3 million in 2000 associated with the pro rata share of such payments over the associated vesting period.

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In October and December 2000, the Company implemented a plan to reduce its consulting and administrative staffs, resulting in severance costs of approximately $2.4 million. Approximately $1.8 million of this charge was paid in the fourth quarter of 2000 and the remainder of the charge was paid in the first quarter of 2001. In June 2000, the Company recorded a charge of $1.9 million as a result of severance costs incurred in connection with management changes at the Company’s technologies consulting business. Approximately $1.2 million of this charge was paid in 2000 and the remainder was paid in 2001.

Primarily as a result of the fourth quarter workforce reduction described above, the Company identified and made plans to vacate certain portions of leased facilities. The Company recorded a charge of $1.5 million associated with the cost of exiting these facilities.

The Company granted to certain non-employee consultants options to purchase 445,245 of its Class A Common Stock at an exercise price of $14.00 per share in 1999. Such options were fully-vested upon grant. The Company recorded a non-cash compensation expense of $4.4 million, which represented the estimated fair value of the options calculated using the Black-Scholes model.

The Company recorded a non-cash compensation expense of $1.7 million, principally representing the difference between the fair value of 197,760 fully-vested options granted in 1999 to certain non-stockholder employees on the date of grant of $10.00 per share and the $1.50 exercise price of the options. Such options were granted in final satisfaction of an agreement entered into in December 1998 under which payments totaling $4.2 million in cash and fully-vested options to purchase 384,000 of Class A Common Stock at a purchase price of $1.50 per share were granted during 1998.

In November 1999, in connection with a change in senior management, the Company implemented a plan to reduce its administrative staff, resulting in severance costs of approximately $1.3 million.

     Income taxes. The Company recorded an income tax benefit of $1.3 million for the year ended December 31, 2000. Valuation allowances have been established during 2000 relating to all deferred tax assets that must be realized through the generation of taxable income in future periods.

Liquidity and Capital Resources

Consolidated working capital was a negative $5.1 million on December 31, 2001, compared with working capital of $11.5 million on December 31, 2000. Included in working capital were cash and cash equivalents of $4.5 million and $4.3 million on December 31, 2001 and 2000, respectively.

Net cash provided by operating activities was $6.7 million for the year ended December 31, 2001. The primary components of net cash provided by operating activities were a net loss of $117.5 million substantially offset by non-cash charges of $102.0 million (including a goodwill impairment charge of $72.5 million, investment write-downs of $7.1 million, depreciation and amortization of $9.4 million, and other asset write-downs, primarily fixed assets, of $6.2 million), a $9.1 million decrease in accounts receivable, a $7.3 million increase in accounts payable, and a $4.5 million decrease in income tax receivable.

Net cash used in investing activities was $3.2 million for the year ended December 31, 2001. The component of cash used in investing activities was $3.2 million for furniture, equipment and leasehold improvements.

Net cash used in financing activities was $3.4 million for the year ended December 31, 2001. The primary components of cash used in financing activities were $7.6 million of repayments on the senior credit facility, $3.1 million of cash payments for other debt and capital lease obligations, offset by $7.5 million of cash received from an affiliate of Knowledge Universe in exchange for debentures.

The Company’s primary sources of liquidity are cash on hand, cash flow from operations, and the sale of the human capital consulting business which was consummated on January 30, 2002 and resulted in approximately $14.7 million of proceeds (excluding 1.3 million subject to a working capital adjustment), $8.0 million of which was used to reduce the Senior Credit Facility and $8.0 million which was used for working capital needs. The Company believes that the available capacity from these sources will be sufficient to meet its operating and capital requirements for the next twelve months. However, there can be no assurances the Company’s actual cash needs will not exceed anticipated levels, the Company will generate sufficient operating cash flows to fund its operations in the absence of other sources or acquisition opportunities will not arise requiring resources in excess of those currently available.

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Effective March 29, 2002, the Company entered into an Amended and Restated Credit Agreement (Senior Credit Facility) with the Senior Lenders. Under the new agreement, the Company agreed to permanently reduce the borrowings outstanding under the facility by $6.5 million in 2002 and by $8.0 million in 2003. The amended Senior Credit Facility matures on January 2, 2004. Borrowings under the facility will bear interest at the lender’s base rate plus 2.0%, with the potential for the borrowing rate to be reduced 100 basis points upon achieving certain financial and operational milestones. In connection with the amended Senior Credit Facility, the Company will pay a $0.9 million fee to the Senior Lenders over the next two years and will issue the Senior Lenders additional warrants to purchase 400,000 shares of the Company’s Class A Common Stock at an exercise price of $0.60 per share, exercisable at the Senior Lenders’ sole discretion at any time prior to 18 months after payment in full of all of the Company’s obligations due under the amended Senior Credit Facility. The Senior Lenders can elect in their sole discretion to require the Company to redeem the warrants for $0.2 million cash payment (except to the extent prohibited by a non-waiveable applicable law or regulation). An affiliate of Knowledge Universe, an entity that indirectly controls Nextera, has agreed to continue to guarantee $2.5 million of the Company’s obligations under the amended Senior Credit Facility. The amended Senior Credit Facility contains covenants related to the maintenance of financial ratios, operating restrictions, restrictions on the payment of dividends and disposition of assets. The revised covenants were based on the Company’s operating plan for 2002 and 2003.

The following summarizes the company’s significant contractual obligations and commitments that impact its liquidity.

The Senior Credit Facility, Debentures due to affiliates, long-term debt and capital leases, and operating leases are explained in detail in notes 6, 8 and 9 of the Notes to Consolidated Financial Statements.

New Accounting Standards

Refer to note 2 of the Notes to Consolidated Financial Statements for a discussion of new accounting pronouncements and the potential impact to the Company’s consolidated results of operations and consolidated financial position.

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Critical Accounting Policies

The Company’s significant accounting policies are described in Note 2 to the Consolidated Financial Statements. The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to restructuring charges, the realizability of outstanding accounts receivable, deferred tax assets, debt covenants, and intangible assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Results may differ from these estimates under different assumptions or conditions.

The Company has identified the following critical accounting policies, based on significant judgments and estimates used in determining the amounts reported in its consolidated financial statements

     Restructuring charges. The Company has recorded significant restructuring charges over the past year and as of December 31, 2001, has $6.1 million of restructuring reserves recorded on the balance sheet. Substantially most of these reserves relate to the cost of exiting certain leased facilities. The reserves have been estimated based on the remaining term of the leases and assumptions as to the Company’s ability to sublease the space at current market rates or enact a buyout of the Company’s obligation. Should the Company be successful in exiting the lease obligations prior to their scheduled expiration date or if subleasing assumptions change due to economic conditions in the real estate market, the restructuring reserves could vary significantly.

     Allowance for doubtful accounts. The Company evaluates the collectibility of accounts receivable based on a combination of factors. In circumstances where we are aware of circumstances regarding a specific customer’s ability or intention to not meet its financial obligations to us, we record a specific reserve for bad debts against amounts due to the Company to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we recognize reserves for bad debts based on a three-year historical experience. If circumstances change, our estimates of the recoverability of amounts due us could be reduced by a material amount.

     Deferred tax assets. As of December 31, 2001, we have approximately $53 million of deferred tax assets related principally to domestic loss carryforwards that expire in 2021, for which a 100% valuation allowance has been recorded. The realization of these assets is based upon estimates of future taxable income. Due to the Company’s three-year cumulative loss position, the Company is unable to recognize such assets as of December 31, 2001 under generally accepted accounting principles. The valuation allowance will be reviewed periodically to determine its appropriateness.

     Debt Covenants. The Company’s debt agreements require the Company to maintain certain financial ratios as discussed in Note 6 to the consolidated financial statements. The covenants are measured quarterly and have been set at varying rates, the most restrictive at approximately 10% below the Company’s projected operating results. If the results of operations significantly decline below projected results and we are unable to obtain a waiver from the Company’s Senior Lenders, the Company’s debt would be in default and callable by the senior lenders. It is the Company’s belief that the results of operations will achieve projections for the year ending December 31, 2002 and thereafter and the likelihood of our defaulting on our debt covenants is unlikely, absent any material negative event affecting the U.S. economy as a whole. We also believe our lenders would provide us waivers if necessary. However, our expectations of future operating results and continued compliance with our debt covenants cannot be assured and our lenders’ actions are not controllable by us. If our projections of future operating results are not achieved and our debt is placed in default, we would experience a material adverse impact on our reported financial position and results of operations.

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     Intangible Assets. We have significant intangible assets related to goodwill and other acquired intangibles. The determination of whether or not these assets are impaired involves significant judgments. Changes in strategy and/or market conditions could significantly impact these judgments and require adjustments to recorded asset balances.

Interest Rate Risk

The Company is exposed to changes in interest rates primarily from our Senior Credit Facility. We do not currently use interest rate derivative instruments to manage exposure to interest rate changes. A hypothetical 100 basis point adverse move in interest rates along the interest rate yield curve would not have a material adverse effect on interest sensitive financial instruments at December 31, 2001.

Foreign Currency Risk

Currently, the majority of the Company’s sales and expenses are denominated in U.S. dollars and as a result we have not experienced significant foreign exchange gains and losses to date. While the Company is conducting some transactions in foreign currencies, no significant foreign exchange gains or losses are anticipated. The Company has not engaged in foreign currency hedging activities to date.

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Board of Directors
Nextera Enterprises, Inc.

We have audited the accompanying consolidated balance sheets of Nextera Enterprises, Inc. (the “Company”) as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Nextera Enterprises, Inc. at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ ERNST & YOUNG LLP

Providence, Rhode Island
February 7, 2002, except for Note 6, as to which the date
is March 29, 2002

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Nextera Enterprises, Inc.

Consolidated Balance Sheets
(In thousands, except share data)

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

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Nextera Enterprises, Inc.

Consolidated Statements of Operations
(In thousands, except per share amounts)

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

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NEXTERA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY