Back to GetFilings.com

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to _______

Commission File Number 0-25995

NEXTERA ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)

4 Cambridge Center, 3^rd Floor, Cambridge, Massachusetts 02142
(Address of principal executive office, including zip code)

(617) 494-0844
(Registrant’s telephone number, including area code)

     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 and 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   [   ]

     As of July 31, 2002 there were 31,885,896 shares of $.001 par value Class A Common Stock outstanding and 3,869,570 shares of $.001 par value Class B Common Stock outstanding.

Table of Contents

NEXTERA ENTERPRISES, INC.
Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 2002

INDEX

					Page No.
PART I.  FINANCIAL INFORMATION
		Item 1.		Financial Statements
				Consolidated Balance Sheets as of June 30, 2002   and December 31, 2001		3
				Consolidated Statements of Operations for the   Three Months Ended June 30, 2002 and 2001		4
				Consolidated Statements of Operations for the   Six Months Ended June 30, 2002 and 2001		5
				Consolidated Statements of Cash Flows for the   Six Months Ended June 30, 2002 and 2001		6
				Notes to Consolidated Financial Statements		7
		Item 2.		Management’s Discussion and Analysis of Financial Condition   and Results of Operations		13
		Item 3.		Quantitative and Qualitative Disclosures About Market Risk		26
PART II. OTHER INFORMATION
		Item 1.		Legal Proceedings		27
		Item 6.		Exhibits and Reports on Form 8-K		27
				Signatures		28

2

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Nextera Enterprises, Inc.

Consolidated Balance Sheets
(In thousands, except share data)

			June 30, 2002				December 31, 2001
			(unaudited)
Assets
Current assets:
	Cash and cash equivalents		$	2,193			$	4,465
	Restricted cash			372				—
	Accounts receivable, net of allowance for doubtful accounts of $3,073 and $2,976 at June 30, 2002 and December 31, 2001, respectively			21,270				19,526
	Due from affiliates			—				65
	Assets held for sale			—				11,509
	Prepaid expenses and other current assets			1,187				895
Total current assets				25,022				36,460
Property and equipment, net				3,204				4,003
Intangible assets, net of accumulated amortization of $6,225 at June 30, 2002 and December 31, 2001				77,504				77,504
Other assets				2,416				3,215
Total assets			$	108,146			$	121,182
Liabilities and Stockholders’ Equity
Current liabilities:
	Accounts payable and accrued expenses		$	15,621			$	22,744
	Accrued restructuring costs, current portion			2,103				1,738
	Senior credit facility, current portion			7,300				14,500
	Current portion of long-term debt and capital lease obligations			617				2,618
Total current liabilities				25,641				41,600
Long-term debt and capital lease obligations				1,045				1,224
Senior credit facility, net of current portion				21,328				23,928
Debentures due to affiliates, including accrued interest				24,257				23,093
Accrued restructuring costs, net of current portion				1,957				4,404
Other long-term liabilities				3,258				1,434
Stockholders’ equity:
	Preferred Stock, $0.001 par value, 10,000,000 shares authorized, 600,000 authorized shares designated Series A, 210,000 Series A issued and outstanding			23,745				22,944
	Class A Common Stock, $0.001 par value, 95,000,000 shares authorized, 31,885,896 and 31,647,640 shares issued at June 30, 2002 and December 31, 2001, respectively			32				32
	Class B Common Stock, $0.001 par value, 4,300,000 shares authorized, 3,869,570 shares issued and outstanding at June 30, 2002 and December 31, 2001			4				4
	Additional paid-in capital			161,601				162,504
	Treasury Stock, at cost, 228,303 shares Class A Common Stock at December 31, 2001			—				(294	)
	Retained earnings (deficit)			(154,512	)			(158,600	)
	Accumulated other comprehensive income (loss)			(210	)			(1,091	)
Total stockholders’ equity				30,660				25,499
Total liabilities and stockholders’ equity			$	108,146			$	121,182

See Notes to Consolidated Financial Statements

3

Table of Contents

Nextera Enterprises, Inc.

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

		Three Months Ended June 30
		2002				2001
Net revenues		$	18,166			$	35,771
Cost of revenues			11,122				22,314
Gross profit			7,044				13,457
Selling, general and administrative expenses			3,820				10,919
Amortization expense			—				1,361
Goodwill Impairment			—				26,650
Special charges/(credits)			(740	)			8,045
Income (loss) from operations			3,964				(33,518	)
Interest expense, net			(1,554	)			(2,550	)
Other expense			—				(551	)
Income (loss) before income taxes			2,410				(36,619	)
Provision for income taxes			50				361
Net income (loss)			2,360				(36,980	)
Preferred stock dividends			(407	)			(539	)
Net income (loss) applicable to common stockholders		$	1,953			$	(37,519	)
Net income (loss) per common share, basic		$	0.05			$	(1.08	)
Net income (loss) per common share, diluted		$	0.04			$	(1.08	)
Weighted average common shares outstanding, basic			35,756				34,704
Weighted average common shares outstanding, diluted			64,777				34,704

See Notes to Consolidated Financial Statements

4

Table of Contents

Nextera Enterprises, Inc.

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

		Six Months Ended June 30
		2002				2001
Net revenues		$	39,015			$	73,293
Cost of revenues			23,577				49,659
Gross profit			15,438				23,634
Selling, general and administrative expenses			8,997				26,026
Amortization expense			—				2,719
Goodwill Impairment			—				26,650
Special charges/(credits)			(740	)			13,454
Income (loss) from operations			7,181				(45,215	)
Interest expense, net			(2,993	)			(4,313	)
Other expense			—				(1,196	)
Income (loss) before income taxes			4,188				(50,724	)
Provision for income taxes			100				442
Net income (loss)			4,088				(51,166	)
Preferred stock dividends			(802	)			(1,057	)
Net income (loss) applicable to common stockholders		$	3,286			$	(52,223	)
Net income (loss) per common share, basic		$	0.09			$	(1.50	)
Net income (loss) per common share, diluted		$	0.06			$	(1.50	)
Weighted average common shares outstanding, basic			35,705				34,789
Weighted average common shares outstanding, diluted			64,486				34,789

See Notes to Consolidated Financial Statements

5

Table of Contents

Nextera Enterprises, Inc.

Consolidated Statements of Cash Flows
(In thousands, unaudited)

				Six Months Ended June 30
				2002				2001
Operating activities
Net income (loss)				$	4,088			$	(51,166	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
	Depreciation and amortization				930				5,356
	Goodwill write-off				—				26,650
	Provision for bad debts				—				1,566
	Interest paid-in-kind				1,164				2,110
	Non-cash charges, other				27				1,284
	Change in operating assets and liabilities:
		Accounts receivable			(1,744	)			913
		Due from affiliate			65				(165	)
		Prepaid expenses and other assets			296				3,100
		Accounts payable and accrued expenses			(10,604	)			6,221
		Other			1,824				341
Net cash used in operating activities					(3,954	)			(3,790	)
Investing activities
Purchase of property and equipment					(482	)			(2,673	)
Proceeds from sale of business					14,720				—
Changes in restricted cash					(372	)
Net cash provided by (used in) investing activities					13,866				(2,673	)
Financing activities
Due from officers					—				30
Repayments under senior credit facility					(9,800	)			(1,050	)
Proceeds from debentures due to affiliates					—				7,500
Repurchases of Class A Common Stock					—				(323	)
Repayments of long-term debt and capital lease obligations					(2,369	)			(2,707	)
Other					—				(294	)
Net cash provided by (used in) financing activities					(12,169	)			3,156
Effects of exchange rates on cash and cash equivalents					(15	)			27
Net decrease in cash and cash equivalents					(2,272	)			(3,280	)
Cash and cash equivalents at beginning of period					4,465				4,322
Cash and cash equivalents at end of period				$	2,193			$	1,042

See Notes to Consolidated Financial Statements

6

Table of Contents

NEXTERA ENTERPRISES, INC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

The accompanying unaudited consolidated financial statements of Nextera Enterprises, Inc. (“Nextera” or the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six-month periods ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.

The balance sheet as of December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

These financial statements should be read in conjunction with the financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations, contained in the Company’s Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission on April 1, 2002.

Restricted Cash

Restricted cash relates to cash deposits held by the Company’s Senior Lenders, in accordance with the Amended and Restated Credit Agreement dated March 29, 2002, to finance working capital requirements related to employment compensation that is primarily payable in early 2003. The terms of the Amended and Restated Credit Agreement require the Company to restrict such amounts on a monthly basis based on the earned bonus amounts so that a certain percentage of the projected earned bonus is escrowed or paid by the end of year. An additional $1.5 million was escrowed to a restricted account subsequent to June 30, 2002 for bonuses earned through June 30, 2002. Payment of certain portions of the restricted cash is predicated upon extending employment agreements for certain key employees. Failure to extend the employment agreements for certain key employees by January 1, 2003 will be an event of default by the Company under its senior credit facility. Under an event of default, the Senior Lenders would be able to exercise any remedy available to them, including using all amounts on deposit to offset credit obligations.

Reclassification

Certain reclassifications were made to the 2001 financial statements in order that they may be consistent with the 2002 presentation.

Recent Accounting Pronouncements

In November 2001, the Emerging Issues Task Force (“EITF”) of the FASB issued Topic D-103 regarding “Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred”. Under this pronouncement, it was concluded that reimbursements received for “out-of-pocket” expenses should be classified as revenue, and correspondingly cost of revenues, in the income statement. Upon application of the pronouncement, comparative financial statements for prior periods must also be reclassified in order to ensure consistency among all periods presented. The Company has adopted this pronouncement as of January 1, 2002 and has included reimbursements for “out-of-pocket” expenses within net revenues and costs of revenue for all periods presented.

7

Table of Contents

NEXTERA ENTERPRISES, INC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 2. Earnings (Loss) per Share

Basic net income (loss) per share (“Basic EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted net income (loss) per common share (“Diluted EPS”) is computed by dividing net income available to common stockholders by the weighted average number of common shares and dilutive common share equivalents then outstanding.

Basic and diluted earnings (loss) per share were calculated as follows:

(In thousands, except per share amounts; unaudited)

		Three Months Ended								Six Months Ended
		June 30								June 30
		2002				2001				2002				2001
Basic net income (loss) per Common Share
Net income (loss)		$	2,360			$	(36,980	)		$	4,088			$	(51,166	)
Preferred stock dividends			(407	)			(539	)			(802	)			(1,057	)
Net income (loss) available to common stockholders		$	1,953			$	(37,519	)		$	3,286			$	(52,223	)
Weighted average common shares outstanding—basic			35,756				34,704				35,705				34,789
Basic net income (loss) per common share		$	0.05			$	(1.08	)		$	0.09			$	(1.50	)
Diluted net income (loss) per Common Share
Net income (loss)		$	2,360			$	(36,980	)		$	4,088			$	(51,166	)
Preferred stock dividends			—				(539	)			—				(1,057	)
Net income (loss) available to common stockholders		$	2,360			$	(37,519	)		$	4,088			$	(52,223	)
Weighted average common shares outstanding—basic			35,756				34,704				35,705				34,789
Dilutive effect of convertible preferred stock			26,832				—				26,832				—
Dilutive effect of options and warrants			2,189				—				1,949				—
Weighted average common shares outstanding—diluted			64,777				34,704				64,486				34,789
Diluted net income (loss) per common share		$	0.04			$	(1.08	)		$	0.06			$	(1.50	)

8

Table of Contents

NEXTERA ENTERPRISES, INC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 3. Comprehensive Income (Loss)

Comprehensive income combines net income (loss) and “other comprehensive items,” which represents certain amounts that are reported as components of stockholders’ equity in the accompanying balance sheet, including foreign currency translation adjustments and unrealized gains and losses on available-for-sale investments, net of taxes and reclassification adjustments. During the second quarter of 2002 and 2001, the Company’s comprehensive income totaled $2.3 million and a comprehensive loss of $36.8 million, respectively. For the six months ended June 30, 2002 and 2001, the Company’s comprehensive income was $5.0 million and a comprehensive loss of $51.5 million.

Note 4. Senior Credit Facility and Debentures Due to Affiliates

Senior Credit Facility

Effective March 29, 2002, the Company entered into an Amended and Restated Credit Agreement (Senior Credit Facility) with the Company’s 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 agreed to pay a $0.9 million fee to the Senior Lenders over the next two years and issued 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 a $0.2 million cash payment. 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, extending employment agreements with certain key personnel (which begin to expire on December 31, 2002) by January 1, 2003, operating restrictions, restrictions on the payment of dividends, restrictions on cash (see note 1), and disposition of assets. The covenants were based on the Company’s operating plan for 2002 and 2003. As of June 30, 2002, the Company is in compliance with all of its financial covenants.

Debentures due to affiliates

In July 2002, the Company has approved an exchange of $20.0 million of outstanding Series A Cumulative Convertible Preferred Stock for additional debentures due to affiliates. The exchange will increase the indebtedness of debentures due to affiliates to approximately $45.1 million, including approximately $0.8 million of additional interest as part of the exchange provision.

9

Table of Contents

NEXTERA ENTERPRISES, INC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 5. Special Charges

The restructuring charges and their utilization as of June 30, 2002 are summarized as follows (in thousands):

		Utilized
																						Reserves
		Balance at				Q1				Q2												established with
		December				2002				2002												the sale of				Balance at
		31, 2001				charge				charge/credit				Non-Cash				Cash				business unit*				June 30, 2002
Severance		$	(255	)		$	—			$	—			$	—			$	(255	)		$	—			$	—
Facilities			5,579				—				(740	)			—				(1,431	)			285				3,693
Fixed Assets and other asset write-downs			308				—				—				—				(391	)			450				367
		$	6,142			$	—			$	(740	)		$	—			$	(2,077	)		$	735			$	4,060

*

In connection with the sale of the human capital consulting business (see note 7), a portion of the proceeds received in excess of the net assets acquired were used to establish restructuring reserves for liabilities and obligations relating to the human capital business that were not assumed by the buyer.

During the quarter ended June 30, 2002, the Company recorded a net reversal of $0.7 million of previously recorded restructuring reserves due to the favorable settlement of real estate rental obligations (see note 10). The reversal had the effect of increasing diluted earnings per share by $0.01 for the three and six-month periods ended June 30, 2002. Of the $4.1 million of restructuring reserves recorded at June 30, 2002, approximately $2.1 million of cash is expected to be expended over the next twelve months, primarily related to real estate rental obligations and lease commitments, and the remainder is expected to be paid over the following two years.

During the quarter ended March 31, 2001, the Company undertook actions to re-align and re-size the Company’s cost structure, primarily within the technology consulting business, 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 second quarter ended June 30, 2001, the Company recorded special charges totaling $8.0 million, consisting of a $1.8 million severance charge associated with a headcount reduction of 60 professional and support personnel, primarily in the technology consulting services group; 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.

Note 6. Other Expense

During the quarter ended June 30, 2001, the Company recorded Other Expense of $0.6 million associated with the write down to fair market value of certain investments. For the six months ended June 30, 2001, the write down of investments to fair market was $1.2 million.

10

Table of Contents

NEXTERA ENTERPRISES, INC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 7. 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. The sales price was $14.7 million in cash with potential additional consideration based on the operating performance of the human capital consulting business over the next two years. The sales price is also subject to a working capital adjustment based on the working capital at the time of the closing. Such adjustment has not yet been finalized. All consultants and support staff of the human capital consulting business were transferred to the acquiring company. In connection with the anticipated sale, a goodwill impairment charge of $7.5 million was recorded in the fourth quarter of 2001.

Note 8. Goodwill

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 142 (SFAS 142), “Goodwill and Other Intangible Assets,” which became effective for the Company January 1, 2002. Under the new standard, goodwill and other intangible assets with indefinite useful lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statement.

Based on the Company’s review, the Company does not believe that the currently existing goodwill is impaired. At June 30, 2002, total goodwill related to the Company’s economic consulting business was $77.5 million. Total goodwill amortization for the second quarter 2001 was $1.4 million and the total goodwill amortization for the six months ended June 30, 2001 was $2.7 million. The following unaudited schedule reconciles net income (loss) per share amounts for the period ended June 30, 2001 adjusted for SFAS 142 (in thousands, except per share data):

			Three Months Ended				Three Months Ended				Six Months Ended				Six Months Ended
			June 30, 2002				June 30, 2001				June 30, 2002				June 30, 2001
Net income (loss) as reported			$	2,360			$	(36,980	)		$	4,088			$	(51,166	)
Add back: Goodwill amortization				—				1,361				—				2,719
Adjusted net income (loss)			$	2,360			$	(35,619	)		$	4,088			$	(48,447	)
Basic earnings per common share:
	Net Income (loss)		$	0.05			$	(1.08	)		$	0.09			$	(1.50	)
	Goodwill amortization			—				0.04				—				0.08
Adjusted net income (loss) per common share, basis			$	0.05			$	(1.04	)		$	0.09			$	(1.42	)
Diluted earnings per common share:
	Net Income (loss)		$	0.04			$	(1.08	)		$	0.06			$	(1.50	)
	Goodwill amortization			—				0.04				—				0.08
Adjusted net income (loss) per common share, diluted			$	0.04			$	(1.04	)		$	0.06			$	(1.42	)

11

Table of Contents

NEXTERA ENTERPRISES, INC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 9. Income taxes

The Company recorded no federal income tax expense for the three months ended June 30, 2002 due to the availability of net operating loss carryforwards from prior years which are fully reserved. The Company did record $0.1 million in state tax expense.

Note 10. Commitments and Contingencies

The Company is subject to certain asserted claims arising in the ordinary course of business. The Company intends to vigorously assert its rights and defend itself in any litigation which may arise from such claims. While the ultimate outcome of these matters could affect the results of operations of any one quarter or year when resolved in future periods, and while there can be no assurance with respect thereto, management believes that after final disposition, any financial impact to the Company would not be material to the Company’s financial position and results of operations or liquidity.

In April 2002, Intercontinental Fund II 343 Congress Street (“Intercontinental”) filed a lawsuit against the Company in the Commonwealth of Massachusetts Trial Court alleging that the Company was in default for failure to pay rent under a ten-year lease for the Company’s prior corporate headquarters located at 343 Congress Street, Boston, Massachusetts. Intercontinental sought relief in the amount of $4,366,180.61, which consisted of back rent, reletting costs, operating expenses and the excess of present value over fair market value for the remainder of the lease. On July 19, 2002, Intercontinental and the Company entered into a lease termination agreement whereby in exchange for mutual releases of all claims, liabilities and obligations arising under the lease, the Company agreed to pay Intercontinental $2.0 million in cash through April 2003, $0.6 million of which was paid in June 2002, and grant Intercontinental warrants to purchase one million shares of the Company’s Class A Common Stock at an exercise price of $0.20 per share, exercisable at Intercontinental’s sole discretion at any time prior to December 31, 2004. Intercontinental can elect in their sole discretion to require the Company to redeem the warrants for a $0.65 million cash payment.

12

Table of Contents

NEXTERA ENTERPRISES, INC.

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The disclosure and analysis in this quarterly report contain “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 quarterly 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 disclosed below under the heading “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.

Overview

Nextera Enterprises exited the technology consulting business during the latter 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.

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.

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.

13

Table of Contents

COMPARISON OF THREE MONTHS ENDED JUNE 30, 2002 AND THREE MONTHS ENDED JUNE 30, 2001

     Net Revenues. Net revenues decreased $17.6 million, or 49.2%, to $18.2 million for the three months ended June 30, 2002 from $35.8 million for the three months ended June 30, 2001. This decrease was primarily attributable to the sale of our human capital consulting business in January 2002 and, to a lesser extent, to the exiting of the technology consulting business in the second half of 2001. Net revenues from our economic consulting business decreased $1.7 million from $19.8 million in the quarter ended June 30, 2001 due to lower utilization of the professional staff due to the timing of project commencements and completions.

     Gross Profit. Gross profit decreased 47.7% to $7.0 million for the three months ended June 30, 2002 from $13.4 million for the three months ended June 30, 2001. Gross profit as a percentage of net revenues increased to 38.8% for the three months ended June 30, 2002 from 37.6% for the three months ended June 30, 2001. The decrease in gross profit was primarily due to the sale of the human capital consulting group in January 2002, which had generated gross profit of $4.7 million in the second quarter of 2001. The gross profit of the economic consulting business decreased from $8.2 million in the second quarter of 2001 to $7.0 million in the second quarter of 2002, primarily due to lower net revenues in the second quarter of 2002. The increase in gross profit as a percentage of net revenues was primarily attributed to the absence of the low gross margin from the technology consulting business. The economic consulting business gross profit as a percentage of net revenues declined to 38.8% for the three months ended June 30, 2002 from 41.5% in the second quarter of 2001, due to lower net revenues in the 2002 period.

     Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 65.0% to $3.8 million for the three months ended June 30, 2002 from $10.9 million for the three months ended June 30, 2001. As a percentage of revenues, such expenses decreased to 21.0% for the three months ended June 30, 2002 from 30.5% for the three months ended June 30, 2001. The decrease is attributable to the following components: a decrease of $1.4 million in selling and marketing expense, primarily travel; a $1.8 decrease in compensation, primarily relating to reduced support infrastructure due to exiting the technology consulting business in the second half of 2001 and the sale of the human capital consulting business in January 2002; a decrease of $1.0 million in general office expense, primarily legal and audit expenses and costs associated with equipment leases; a $2.4 million decrease in facility cost, attributed to the exiting of certain leased properties; and a $0.5 million decrease in development expenses, primarily recruiting expenses associated with the technology and human capital consulting businesses.

     Goodwill Impairment. During the three months ended June 30, 2001, the Company recorded a $26.7 million goodwill impairment charge substantially related to the technology consulting business.

14

Table of Contents

     Special Charges. The restructuring charges and their utilization as of June 30, 2002 are summarized as follows (in thousands):

		Utilized
																						Reserves
		Balance at				Q1				Q2												established with
		December				2002				2002												the sale of				Balance at
		31, 2001				charge				charge/credit				Non-Cash				Cash				business unit*				June 30, 2002
Severance		$	255			$	—			$	—			$	—			$	(255	)		$	—			$	—
Facilities			5,579				—				(740	)			—				(1,431	)			285				3,693
Fixed Assets and other asset write-downs			308				—				—				—				(391	)			450				367
		$	6,142			$	—			$	(740	)		$	—			$	(2,077	)		$	735			$	4,060

*

In connection with the sale of the human capital consulting business (see note 7), a portion of the proceeds received in excess of the net assets acquired were used to establish restructuring reserves for liabilities and obligations relating to the human capital business that were not assumed by the buyer.

During the quarter ended June 30, 2002, the Company recorded a net reversal of $0.7 million of previously recorded restructuring reserves due to the favorable settlement of real estate rental obligations. The reversal had the effect of increasing diluted earnings per share by $0.01 for the three and six-month periods ended June 30, 2002. Of the $4.1 million of restructuring reserves recorded at June 30, 2002, approximately $2.1 million of cash is expected to be expended over the next twelve months, primarily related to real estate rental obligations and lease commitments, and the remainder is expected to be paid over the following two years.

During the quarter ended March 31, 2001, the Company undertook actions to re-align and re-size the Company’s cost structure, primarily within the technology consulting business, 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 second quarter ended June 30, 2001, the Company recorded special charges totaling $8.0 million, consisting of a $1.8 million severance charge associated with a headcount reduction of 60 professional and support personnel, primarily in the technology consulting services group; 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.

     Interest Expense, Net. Interest expense, net decreased to $1.6 million for the three months ended June 30, 2002 from $2.6 million for the three months ended June 30, 2001. The decrease is primarily a result of lower outstanding debt under the Company’s senior credit facility and lower associated bank fees.

     Other Expense. During the three months ended June 30, 2001, the Company recorded Other Expense of $0.6 million associated with the write down to fair market value of certain investments.

     Income taxes. No federal tax expense was recorded for the three months ended June 30, 2002 due to the existence of net operating loss carryforwards from prior years which are fully reserved. The Company did record $0.1 million in state tax expense. No benefit was recorded during the three months ended June 30, 2001 due to the Company’s uncertainty associated with utilizing its net operating losses.

15

Table of Contents

COMPARISON OF SIX MONTHS ENDED JUNE 30, 2002 AND SIX MONTHS ENDED JUNE 30, 2001

     Net Revenues. Net revenues decreased 46.8% to $39.0 million for the six months ended June 30, 2002 from $73.3 million for the six months ended June 30, 2001. This decrease was primarily attributable to the sale of our human capital consulting business in January 2002 and, to a lesser extent, to the exiting of the technology consulting business in the second half of 2001. Net revenues from our economic consulting business decreased $1.6 million from $38.7 million in the six months ended June 30, 2001 due to lower utilization of the professional staff due to the timing of project commencements and completions.

     Gross Profit. Gross profit decreased 34.7% to $15.4 million for the six months ended June 30, 2002 from $23.6 million for the six months ended June 30, 2001. The decrease in gross profit was primarily due to the sale of the human capital consulting group in January 2002. The human capital consulting group gross profit decline in the first six months of 2002 from the first six months of 2001 was $7.8 million. The gross profit of the economic consulting business decreased from $15.8 million in the first six months of 2001 to $14.6 million in the first six months of 2002, primarily due to lower net revenues in the first six months of 2002. Gross margin as a percentage of sales increased to 39.2% for the six months ended June 30, 2002 from 32.2% for the six months ended June 30, 2001. The increase in gross profit as a percentage of net revenues was primarily attributed to the absence of the low gross margin from the technology consulting business. The economic consulting business gross profit as a percentage of net revenues declined to 39.3% for the six months ended June 30, 2002 from 40.9% in the first six months of 2001 due to lower net revenues in the 2002 period.

     Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 65.4% to $9.0 million for the six months ended June 30, 2002 from $26.0 million for the six months ended June 30, 2001. As a percentage of revenues, such expenses decreased to 23.0% for the six months ended June 30, 2002 from 35.5% for the six months ended June 30, 2001. The decrease is attributable to the following components: a decrease of $3.9 million in selling and marketing expense, primarily travel; a $3.9 decrease in compensation, primarily relating to reduced support infrastructure due to the exiting of the technology consulting business in the second half of 2001 and the sale of the human capital consulting business in January 2002; a decrease of $3.5 million in general office expense, primarily bad debt expense, legal and audit expenses, and costs associated with equipment leases; a $4.6 million decrease in facility cost, attributed to the exiting of certain leased properties; and a $1.1 million decrease in development expenses, primarily recruiting expenses associated with the technology and human capital consulting businesses.

     Goodwill Impairment. During the six months ended June 30, 2001, the Company recorded a $26.7 million goodwill impairment charge substantially related to the technology consulting business.

16

Table of Contents

     Special Charges. The restructuring charges and their utilization as of June 30, 2002 are summarized as follows (in thousands):

		Utilized
																						Reserves
		Balance at				Q1				Q2												established with
		December				2002				2002												the sale of				Balance at
		31, 2001				charge				charge/credit				Non-Cash				Cash				business unit*				June 30, 2002
Severance		$	(255	)		$	—			$	—			$	—			$	(255	)		$	—			$	—
Facilities			5,579				—				(740	)			—				(1,431	)			285				3,693
Fixed Assets and other asset write-downs			308				—				—				—				(391	)			450				367
		$	6,142			$	—			$	(740	)		$	—			$	(2,077	)		$	735			$	4,060

*

In connection with the sale of the human capital consulting business (see note 7), a portion of the proceeds received in excess of the net assets acquired were used to establish restructuring reserves for liabilities and obligations relating to the human capital business that were not assumed by the buyer.

During the quarter ended June 30, 2002, the Company recorded a net reversal of $0.7 million of previously recorded restructuring reserves due to the favorable settlement of real estate rental obligations. The reversal had the effect of increasing diluted earnings per share by $0.01 for the three and six-month periods ended June 30, 2002. Of the $4.1 million of restructuring reserves recorded at June 30, 2002, approximately $2.1 million of cash is expected to be expended over the next twelve months, primarily related to real estate rental obligations and lease commitments, and the remainder is expected to be paid over the following two years.

During the quarter ended March 31, 2001, the Company undertook actions to re-align and re-size the Company’s cost structure, primarily within the technology consulting business, 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 second quarter ended June 30, 2001, the Company recorded special charges totaling $8.0 million, consisting of a $1.8 million severance charge associated with a headcount reduction of 60 professional and support personnel, primarily in the technology consulting services group; 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.

     Interest Expense, Net. Interest expense, net decreased to $3.0 million for the six months ended June 30, 2001 from $4.3 million for the six months ended June 30, 2001. This decrease was primarily due to lower outstanding debt under the Company’s senior credit facility and lower associated bank fees.

     Other Expense. During the six months ended June 30, 2001, the Company recorded Other Expense of $1.2 million associated with the write down to fair market value of certain investments.

     Income taxes. No federal tax expense was recorded for the six months ended June 30, 2002 due to the existence of net operating loss carryforwards from prior years which are fully reserved. The Company did record $0.1 million in state tax expense. No benefit was recorded during the six months ended June 30, 2001 due to the Company’s uncertainty associated with utilizing its net operating losses.

17

Table of Contents

LIQUIDITY AND CAPITAL RESOURCES

Consolidated working capital deficit was $0.6 million on June 30, 2002, compared to a working capital deficit of $5.1 million on December 31, 2001. Included in working capital were cash and cash equivalents of $2.2 million and $4.5 million on June 30, 2002 and December 31, 2001, respectively.

Net cash used in operating activities was $4.0 million for the six months ended June 30, 2002. The primary components of net cash used in operating activities was a decrease of $10.6 million in accounts payable and accrued expenses, due primarily to bonus payments, and an increase of $1.7 million of accounts receivable. These cash outflows were offset in part by net income of $4.1 million, an increase in other long-term liabilities of $1.8 million and non-cash items relating to depreciation and interest paid-in-kind of $2.1 million.

Net cash provided by investing activities was $13.9 million for the six months ended June 30, 2002, substantially representing proceeds received from the sale of the human capital consulting business.

Net cash used in financing activities was $12.2 million for the six months ended June 30, 2002. The primary components of net cash used in financing activities were $9.8 million of repayments under the Company’s senior credit facility and $2.4 million of payments of other long-term debt and capital leases obligations.

Effective March 29, 2002, the Company entered into an Amended and Restated Credit Agreement (Senior Credit Facility) with the Company’s 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 agreed to pay a $0.9 million fee to the Senior Lenders over the next two years and issued 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 a $0.2 million cash payment. 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, extending employment agreements with certain key personnel (which begin to expire on December 31, 2002) by January 1, 2003, operating restrictions, restrictions on the payment of dividends, restrictions on cash and disposition of assets. The covenants were based on the Company’s operating plan for 2002 and 2003. As of June 30, 2002, the Company is in compliance with all of its financial covenants.

There is no assurance that the Company will be able to meet all future financial covenants or obtain extensions of the employment agreements of certain key personnel by January 1, 2003. Failure to achieve either of the above will place the Company in default of its bank covenants and could have a material adverse effect on the financial position of the Company. Moreover, if we are able to obtain extension of these employment contracts, the cost associated with the extensions could have a material adverse impact on the financial performance of the Company.

The terms of the Amended and Restated Credit Agreement require the Company to restrict a portion of cash on a monthly basis based on the earned bonus amounts so that a certain percentage of the projected earned bonus is escrowed or paid by the end of year. Such restrictions on cash reduce the Company’s liquidity.

18

Table of Contents

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 heavily depend on a small number of senior consulting executives and other key personnel, and the loss of any of them may damage or result in the loss of 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 a material adverse effect on our reputation and our ability to secure and complete engagements. A number of our senior consulting executives that are responsible for substantially all 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.

Under our amended and restated Senior Credit Facility, by January 1, 2003, we must obtain extensions of employment agreements of certain key employees through December 31, 2004. Negotiations with certain of the key employees have occurred and are continuing, but no agreement regarding the terms of any such extension have been reached. Failure to extend the employment agreements constitutes an event of default under the Senior Credit Facility and the Senior Lenders would be entitled to exercise any remedy available to them, including acceleration of amounts due. Such an occurrence would materially and adversely affect our operations and financial condition. Moreover, if we are able to obtain extension of these employment contracts, the cost associated with the extensions could have a material adverse impact on the financial performance of the Company.

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.

19

Table of Contents

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 rate could increase 200 basis points. Additionally, failure of the Company to maintain its financial covenants, obtaining extensions of employment agreements with certain key personnel (which begin to expire on December 31, 2002), 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 I, Item 2 — 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 June 30, 2002, we had $28.6 million of outstanding indebtedness under our Senior Credit Facility, $7.3 million of which was classified as a current liability. In addition, as of June 30, 2002, we had $24.3 million of outstanding indebtedness under debentures due to affiliates. We have also approved the exchange of $20 million of outstanding Series A Preferred Stock for additional debentures due to affiliates. The exchange will increase the indebtedness of debentures due to affiliates to approximately $45.1 million, including approximately $0.8 million of additional interest as part of the exchange provision.

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;
	•		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 SmallCap Market, which would result in a limited public market for our Class A Common Stock.

There are several requirements for the continued listing of our Class A Common Stock on the Nasdaq SmallCap Market including, but not limited to, a minimum stock bid price of $1.00 per share. On February 14, 2002, we received notification from the Nasdaq National Stock Market (“Nasdaq”) that we had failed to maintain a minimum bid price of $1.00 for 30 consecutive days and would be delisted from the Nasdaq National Market unless by May 15, 2002 we complied with the minimum bid price requirement for at least 10 consecutive days. Prior to May 15, 2002, we submitted an application to trade on the Nasdaq SmallCap Market, and on June 3, 2002, we began trading on the Nasdaq SmallCap Market. The Nasdaq SmallCap Market extended us a 180-day grace period to comply with the $1.00 minimum bid price requirement, which is set to expire on August 13, 2002. Upon expiration of this grace period, Nasdaq will conduct a review to evaluate whether we meet other criteria for listing on the Nasdaq SmallCap Market and to determine if we are entitled to an additional 180-day grace period through February 13, 2003. We believe that we meet the criteria for this additional grace period. If we are unable to satisfy the $1.00 minimum bid price requirement by February 13, 2003, our common stock will be subject to delisting by Nasdaq.

20

Table of Contents

In addition, due to the resignation of Richard Sandor for our board of directors in July 2002, we have two remaining independent directors on our board and audit committee. Nasdaq rules require that we have an audit committee comprised solely of independent directors and having at least three members. Nasdaq has granted us an extension through September 23, 2002 to regain compliance with this rule.

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, 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. Lexecon’s 10 largest clients in 2001 accounted for approximately 38% of its net revenues. One client accounted for 17% of its net revenues in 2001. No client represented greater than 10% of net revenues for six months ended June 30, 2002.

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 67.2% 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 67.2% 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.

21

Table of Contents

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.

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.

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.

22

Table of Contents

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 operating profitability since being acquired by Nextera Enterprises, it is possible that we may not obtain net income in the future.

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.

We derive substantially all of our net revenues from economic and litigation consulting services related to antitrust matters, public policy and regulatory matters, mergers and acquisitions and other securities matters. 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.

23

Table of Contents

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 June 30, 2002, our intangible assets, net of accumulated amortization, were approximately $77.5 million. Intangible assets at June 30, 2002, 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 ceased amortizing 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,

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.

24

Table of Contents

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.

25

Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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 June 30, 2002.

Foreign Currency Risk

Currently, substantially all 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.

26

Table of Contents

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

In April 2002, Intercontinental Fund II 343 Congress Street (“Intercontinental”) filed a lawsuit against the Company in the Commonwealth of Massachusetts Trial Court alleging that the Company was in default for failure to pay rent under a ten-year lease for the Company’s prior corporate headquarters located at 343 Congress Street, Boston, Massachusetts. Intercontinental sought relief in the amount of $4,366,180.61, which consisted of back rent, reletting costs, operating expenses and the excess of present value over fair market value for the remainder of the lease. On July 19, 2002, Intercontinental and the Company entered into a lease termination agreement whereby in exchange for mutual releases of all claims, liabilities and obligations arising under the lease, the Company agreed to pay Intercontinental $2.0 million in cash through April 2003, $0.6 million of which was paid in June 2002, and grant Intercontinental warrants to purchase one million shares of the Company’s Class A Common Stock at an exercise price of $0.20 per share, exercisable at Intercontinental’s sole discretion at any time prior to December 31, 2004. Intercontinental can elect in their sole discretion to require the Company to redeem the warrants for a $0.65 million cash payment.

Item 6. Exhibits and Reports on Form 8-K

	(a)		Exhibits
	4.5		Letter Agreement between Knowledge Universe, Inc. and Nextera Enterprises, Inc. dated March 29, 2002
	4.6		Letter Agreement between Knowledge Universe, Inc. and Nextera Enterprises, Inc. dated June 14, 2002
	(b)		Reports on Form 8-K

The Company did not file any reports on Form 8-K during the three months ended June 30, 2002.

27

Table of Contents

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

NEXTERA ENTERPRISES, INC. (Registrant)

28