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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

For the fiscal year ended December 31, 2002

Commission file number 0-25995

Nextera Enterprises, Inc.

(617) 715-0200

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

          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 þ     No o

     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.     þ

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

          As of March 21, 2003, the aggregate market value of the registrant’s Class A voting stock held by non-affiliates of the registrant was approximately $5,899,723, based on the closing price of the Company’s Class A Common Stock on the Nasdaq SmallCap Market on March 21, 2003 of $0.28 per share.

          As of March 21, 2003, 30,025,441 shares of registrant’s Class A Common Stock, $0.001 par value, were outstanding and 3,844,200 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.

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PART I

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 leading economics consulting firms. For more than 25 years, Lexecon has provided law firms, corporations and regulatory agencies with expert analysis of complex economic issues in connection with legal and government proceedings, strategic planning and other business activities.

      Lexecon was founded in 1977. 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, public policy studies and business consulting.

      Litigation Support: Lexecon provides expert witness testimony, economic analyses, and other litigation-related services in adversarial proceedings in courts and before regulatory bodies, arbitrators and international trade organizations. 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. Antitrust is Lexecon’s traditional area of expertise within the litigation support arena where it provides expert advice and written and live testimony in antitrust proceedings. Litigation support also encompasses financial litigation where the analysis focus ranges from securities fraud to market manipulation and other areas as well. Litigation support is Lexecon’s most significant practice area in terms of total revenue, earnings and personnel.

      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.

      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, assessing the possible reaction of regulatory agencies, competitors and customers to potential 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 assess how competitors are likely to react and how these events would affect the nature of future competition.

Industry Background

      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.

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      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.

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, 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 that have retained the firm previously. In 2002, 92% of Lexecon’s net revenues were derived from previous clients.

      Lexecon’s staff includes over 150 professional consultants, analysts, and practice support, of which approximately half have a Ph.D. or master level degree. Lexecon’s staff and affiliate relationships also include many distinguished academics.

      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

      Lexecon’s clients include major law firms; domestic and foreign corporations; and governments and government agencies. Lexecon’s 10 largest clients accounted for approximately 35% of its net revenues for the year ended December 31, 2002 and 38% for the year ended December 31, 2001. One client accounted for 17% of Lexecon’s net revenues in 2001. No one client represented more than 10% of Lexecon’s net revenues in 2002.

Competition

      The economic and business consulting industry has a large number of competitors comprised of economic consulting firms, individual academics, 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. We also face competition in our efforts to recruit and retain professional staff.

Employees

      As of December 31, 2002, Nextera had 228 employees, including 156 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.

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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.

      Our success is highly dependent upon the efforts, abilities, business generation capabilities and project execution skills of a limited 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. Several of our senior consulting executives that are responsible for substantially all of our business are subject to employment and/or non-compete agreements. Additionally, there are some senior consulting executives whose contracts have already expired or will expire during 2003. 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 other than certain key management and consulting personnel.

      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.

      We have entered into employment and non-compete agreements with our two key service providers: Daniel Fischel, our Chief Executive Officer, and Dennis Carlton. These agreements currently expire on July 15, 2003. In order for us to extend these agreements through January 15, 2004, we will need to make aggregate payments to Messrs. Fischel and Carlton of approximately $3.5 million (including interest) by July 15, 2003 plus an additional $1.6 million prior to December 31, 2003. In order for us to further extend these agreements from January 16, 2004 through December 31, 2008, we will need to make aggregate payments to Messrs. Fischel and Carlton of $20.0 million by January 15, 2004. We will require additional financing in amounts that we cannot determine at this time in order to make all of the payments required to extend these agreements to December 31, 2008. We expect that we will need to raise funds through one or more public or private financing transactions.

      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 extend the employment and non-compete agreements and lose the continued services of Messrs. Fischel and Carlton. In such event, our operations and financial condition would be materially and adversely affected.

      We have very high levels of debt in relation to the size of our business. As of December 31, 2002, we had $27.2 million of outstanding indebtedness under our Senior Credit Facility, $4.7 million of which was

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      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 or other obligations, such as payments to employees, and may not be able to refinance any of our debt at maturity.

We may be unable to comply with certain covenants under our Senior Credit Facility which could result in an acceleration of amounts due and the commencement of foreclosure proceedings.

      The Company entered into the Second Amended and Restated Credit Agreement (Senior Credit Facility) on December 31, 2002, with its senior lenders. Under the Senior Credit Facility, the Company is required to make principal payments of $4.7 million in each of 2003 and 2004. The debt is due in full on January 1, 2005. Additionally, the Company is required to comply with certain financial and operational covenants. Borrowings under the Senior Credit Facility will bear interest at the lender’s base rate plus 2.0%, with the potential for the interest rate to be reduced 50 basis points upon Nextera achieving certain financial and operational milestones. If the Company fails to comply with the covenants contained in the Senior Credit Facility, the interest rate could increase 200 basis points. Additionally, such an event may permit the senior lenders to accelerate the maturity of the Senior Credit Facility and foreclose on the assets of the Company.

We face possible delisting from the Nasdaq SmallCap Market, which would result in a limited public market for our Class A Common Stock, and may adversely affect the price and trading volume of 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 expired on August 13, 2002. We received a further 180-day grace period to comply with the $1.00 minimum bid price requirement from the Nasdaq SmallCap Market, which extension expired on February 13, 2003. On March 19, 2003, we received a further 90-day extension, or until May 12, 2003, to regain compliance with the minimum bid price requirement. Nasdaq announced a proposal on January 30, 2003 that would extend the time for companies listed on the Nasdaq SmallCap Market to comply with the $1.00 minimum bid price requirement from 180 days to up to 540 days, provided that compliance with other listing requirements is maintained. This proposal is subject to the review and approval of the Securities and Exchange Commission.

      The Company believes that it may qualify for a further 270-day extension beyond May 12, 2003 to comply with the $1.00 minimum bid price requirement if the Nasdaq proposal is approved. However, there are no assurances that this proposal will be approved by the SEC or, if approved, that it will not be modified by the SEC in a manner that would shorten the proposed extension or prevent Nextera from qualifying for any

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      The Company currently believes that it is in the interest of shareholders to maintain listing on Nasdaq and for the share price of our common stock to increase so as to potentially increase its trading liquidity and attract investment by institutional funds and investors that are currently prevented from investing in our common stock at current price levels. An alternative which the Company may consider is the possibility of asking our shareholders to authorize a reverse stock split of the Company’s common stock. However, our shareholders may not approve a reverse stock split, or if a reverse stock split is approved and completed, it may not result in a sustained minimum bid price for our common stock sufficient to prevent delisting nor can there be any assurances that the price of our common stock after a reverse stock split will rise in proportion to the reduction in the number of shares of our common stock outstanding after a reverse stock split becomes effective. Additionally, even if a reverse stock split has the effect of increasing the price of our common stock, a broader or more liquid market for our stock may not develop. The lasting effects of a reverse stock split are unknown and the effects of reverse stock splits for companies in similar situations as ours is varied.

      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. Because our business involves the delivery of professional services, our success depends upon our ability to attract, retain, motivate and train highly skilled consultants. We also face competition in our efforts to recruit and retain professional staff. If Lexecon is not successful in competition with its rivals, including the retention of consultants, 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.

      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 69.0% 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. 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.

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      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.

      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 and net losses of $24.0 million and $117.5 million for the years ended December 31, 2000 and 2001.

      As a result, it is possible that we may not obtain net income in the future.

      Our client engagements often involve projects that are complex and critical to the operation of a client’s business and involve difficult analytical assignments that 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. 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 litigation against us and 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. Litigation alleging that we performed negligently or otherwise breached our obligations to the client could expose us to significant liabilities and tarnish our reputation.

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      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 accounted for approximately 35% and 38% of its net revenues for the years ended December 31, 2002 and 2001, respectively. No client represented greater than 10% of Lexecon’s net revenues for the year ended December 31, 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.

      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 and yearly financial results could be materially harmed.

      We derive a substantial amount of our net revenues from economic and litigation consulting services related to antitrust matters, public policy and regulatory matters, mergers and acquisitions and 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 a continued 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 and operating income.

      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

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      We have a substantial net operating loss carryforward that may be used in the future to reduce our federal tax liability. We established a full valuation allowance against the net operating loss carryforward, along with all other deferred tax assets, to reflect the uncertainty of the recoverability of this asset. The utilization of this asset in the future is dependent upon the Company having positive earnings. Furthermore, the likelihood of an annual limitation on our ability to utilize our net operating loss carryforward to offset future U.S. federal taxable income is increased by (i) the issuance of certain convertible preferred stock, options, warrants, or other securities exercisable for common stock, (ii) changes in our equity ownership occurring in the last three years and (iii) potential future changes in our equity ownership. The amount of an annual limitation can vary significantly based on certain factors existing at the date of an ownership change. If such limitations were imposed, they could have a material adverse impact on our results of operations and cash flows.

      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. Furthermore, potential clients may decline to request our services due to perceptions of loyalty, perceived conflicts of interests or other reasons based on matters we may be currently working on or may have worked on in the past. Accordingly, the number of both potential clients and potential engagements is limited, particularly in the economic consulting and litigation services markets.

      As of December 31, 2002, our intangible assets were approximately $77.5 million. Intangible assets at December 31, 2002, included $77.0 million of goodwill and $0.5 million for intangibles relating to personnel. Intangible assets had been amortized prior to 2002 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 are required to evaluate the recoverability of goodwill on an annual basis as well as when indications of possible impairment are present by reviewing the fair value of the goodwill and comparing such fair value 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 operating results.

      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;
	•	acquisitions of, or strategic alliances among, companies within our industry;

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	•	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 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.

      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.

Available Information

      Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments to those reports, are available free of charge on our internet website at http://www.nextera.com as soon as reasonably practicable after such reports are filed with, or furnished to, the Securities and Exchange Commission. Information contained on our website is not part of this Annual Report on Form 10-K.

      Our corporate headquarters is located in Cambridge, Massachusetts in a leased facility. We also occupy leased office space in Chicago, Illinois and a second office in Cambridge, Massachusetts. We have office 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. 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.

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      None

PART II

      Our Class A Common Stock, $0.001 par value per share, traded on the Nasdaq National Market from May 18, 1999 through June 2, 2002 and has traded on the Nasdaq SmallCap Market from and after June 3, 2002 under the symbol “NXRA.” The following table sets forth the high and low sale prices for our Class A Common Stock as reported by the Nasdaq National Market and the Nasdaq SmallCap Market in each of the four quarters of fiscal 2002 and 2001.

      As of March 21, 2003 there were 30,025,441 shares of Class A Common Stock outstanding held by approximately 262 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. Additionally, our Senior Credit Facility currently prohibits the payment of dividends on our Common Stock. We intend to retain any earnings for use in the operation and expansion of our business.

Item 6.     Selected Financial Data

      The following tables contain selected consolidated financial data as of December 31 for each of the years 1998 through 2002 and for each of the years in the five-year period ended December 31, 2002. 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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(1)	The 2002 results of operations include one month of the results of operations of Sibson & Company, which was sold in January 2002.
(2)	The 2001 results of operations include nine months of the results of operations of the technology consulting business, which was exited in October 2001.
(3)	The 2000 results of operations include eleven and one-half months of the results of operation of Cambridge Economics, Inc., which was acquired January 10, 2000.
(4)	The 1999 results of operations include the full year results of operations for Lexecon, Inc., which was acquired December 30, 1998, and seven months of the results of operations of the Economics Resource Group, Inc., which was acquired June 1, 1999.
(5)	The 1998 results of operations include four months of the results of operations of Sibson & Company, which was acquired August 31, 1998, nine months of the results of operations of Pyramid Imaging, Inc., which was acquired in March 1998, and the full year results of operations of Sigma Consulting LLC, which was acquired in January 1998.

      All years have been adjusted to reflect reimbursable expenses as net revenues and cost of sales in accordance with Emerging Issues Task Force Issue 01-14 “Income Statement Characterization of Reimbursement Received for “Out-of-Pocket Expenses” Incurred.”

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Overview

      The Company operates in one business segment, consulting services. 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. The Company currently consists of Lexecon, one of the world’s leading economics consulting firms.

      The Company generates net revenues by providing economic consulting services primarily under time and materials (including charges for the 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 for the cumulative impact of any revision in estimates. We believe that the majority of our work will continue to be performed under time and materials billing arrangements. Net revenues include reimbursable expenses charged to clients. 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 rate less the consultant’s cost) and personnel utilization rates (billable hours divided by standard available hours). We monitor our engagements to manage billing and utilization rates. 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 gross 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, information technology, 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 operating income 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, state and local taxes and nondeductible meal expenses.

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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 $14.0 million in cash (subject to a working capital adjustment) and a potential future earnout based on 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, were classified as “Assets held for sale” on the December 31, 2001 balance sheet.

      The human capital consulting business had revenues of $1.9 million, $43.4 million, and $67.5 million in 2002, 2001, and 2000, respectively. Income (loss) from operations of the human capital consulting group was $(0.3) million, $(50.1) million, and $0.1 million in 2002, 2001, and 2000, respectively. Approximately $40.5 million of the 2001 loss was due to goodwill impairment charges.

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 $13.3 million and $47.4 million in 2001 and 2000, respectively. Loss from operations of the technology consulting business was $(51.2) million and $(24.1) million in 2001 and 2000, 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 $21.0 million 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.

      Effective July 23, 2002, the Company exchanged $20.0 million of Series A Preferred Stock into a debenture (the Exchange Debenture) with terms equivalent to 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, the Series A Preferred Stock was deemed to have accrued dividends at a rate equal to 12%, retroactive to December 14, 2000. Accordingly, the principal amount of the Exchange Debenture was $21.3 million on July 23, 2002. After the exchange of the Series A Preferred for the Exchange Debenture, $3.9 million of Series A Preferred Stock remained outstanding on July 23, 2002.

Acquisitions

      The Company was founded in February 1997 and focused on building its portfolio of practice areas primarily through selective acquisitions through January 2000 and, to a lesser extent, internal growth. Accordingly, our historical Consolidated Financial Statements include operating results of the acquired companies only from the effective date of each respective acquisition.

      Effective January 1, 2000, the Company acquired substantially all of the assets and certain liabilities of Cambridge Economics, Inc., 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 that has been paid.

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Results of Operations

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

      Net Revenues. Net revenues decreased 42.5% to $75.9 million for the year ended December 31, 2002 from $132.1 million for the year ended December 31, 2001. This decrease was attributable to a decrease in human capital and technology consulting revenues which declined $41.5 million and $13.3 million, respectively, due to the exiting of these two businesses. The economic consulting business also declined in 2002 by $1.4 million, or 1.9%, to $74.0 million from $75.4 million in 2001. The economic consulting business revenue decline is a function of the timing of the ending of existing project engagements and the beginning of new project engagements and the size of the respective engagements. Lexecon’s largest client in 2001, which accounted for 17% of Lexecon’s 2001 net revenues, only accounted for 3% of net revenues in 2002 due to the substantial completion of Lexecon’s work on this phase of the case. Work on additional phases may or may not occur. Revenues from new clients or increased revenues from existing clients offset the majority of the drop in net revenues from the prior year’s largest client. The utilization of economic consulting business consultants decreased to 68.5% in 2002 from 76.8% in 2001. Billing rates increased by approximately 7.9% in 2002 from 2001 and consultant headcount, the other component affecting net revenues other than utilization and billing rates, was fairly constant in 2002 and 2001. Lexecon’s annual revenue per professional in 2002 was $471,000 down 3.3% from $487,000 in 2001.

      Gross Profit. Gross profit decreased 34.3% to $30.0 million for the year ended December 31, 2002 from $45.7 million for the year ended December 31, 2001. Gross profit as a percentage of net revenues increased to 39.6% in 2002 from 34.6% in 2001. The decrease in gross profit was primarily due to the sale of the human capital consulting business in January 2002, which had generated gross profit of $15.9 million in 2001 compared to $0.8 million in 2002. The gross profit of the technology consulting business was $(0.8) in 2001. The gross profit of the economic consulting business decreased from $30.6 million in 2001 to $29.1 million in 2002, primarily due to lower net revenues in 2002 and higher fixed costs. The increase in gross profit as a percentage of net revenues was primarily attributed to the absence of the low gross margin technology consulting business in 2002. The economic consulting business gross profit as a percentage of net revenues decreased to 39.4% for the year ended December 31, 2002 from 40.6% for the year ended December 31, 2001 due to lower net revenues, as a result of lower utilization,in the year ended December 31, 2002, and increased fixed compensation costs.

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      Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $25.9 million, or 58.7%, to $18.2 million for the year ended December 31, 2002 from $44.1 million for the year ended December 31, 2001. As a percentage of net revenues, such expenses decreased to 24.0% in 2002 from 33.3% in 2001. The decrease is attributable to the following components: a decrease of $4.6 million in selling and marketing expense; a $6.1 million 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 $6.1 million in general office expense, primarily bad debt expense ($2.6 million), legal and audit expenses ($1.0 million), and costs associated with equipment leases ($0.7 million); a $7.9 million decrease in facility cost, attributed to the exiting of certain leased properties; and a $1.2 million decrease in development expenses, primarily recruiting expenses associated with the technology and human capital consulting businesses.

      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. No goodwill impairment was recorded in 2002.

      Amortization Expense. Amortization expense decreased from $4.8 million in 2001 to zero in 2002. The Company 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”.

      Special Charges. During the year ended December 31, 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 second quarter of 2002 and for the year ended December 31, 2002.

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

(1)	In connection with the sale of the human capital consulting business, 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.

      Of the $1.5 million of restructuring reserves recorded at December 31, 2002, approximately $1.0 million of cash is expected to be expended over the next twelve months, primarily related to real estate rental obligations and lease commitments, with the majority of the remainder expected to be paid over the following two years.

      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

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      During the quarter ended June 30, 2001, the Company decided 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 retention 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 was $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 (primarily fixed assets) and leasehold improvements, and an employee retention incentive-related expense of $0.2 million.

      During the quarter ended December 31, 2001, the Company recorded $1.3 million of special charges. Included within this charge was $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 (fixed assets).

      Interest Expense. Interest expense decreased 33.4% to $6.7 million for the year ended December 31, 2002 from $10.1 million for the year ended December 31, 2001. This decrease was primarily due to lower outstanding debt under the Company’s senior credit facility, which declined from an average balance of $44.2 million in 2001 to $29.4 million in 2002 as a result of debt repayments, coupled with steadily decreasing interest rates and lower associated bank fees.

      Other Expense. During 2002, the Company recorded an expense of $0.6 million to write down an investment in a company affiliated with Knowledge Universe to fair value which was offset in full by a $0.6 million gain relating to the reversal of reserves established as part of the Company’s sale of it’s human capital consulting business. Other expense was $7.1 million for the year ended December 31, 2001 relating to charges associated with the write down to fair value of certain investments. These investments were reviewed and written down to fair value when they were judged to be permanently impaired.

      Income taxes. The Company recorded income tax expense of $0.1 million for the year ended December 31, 2002 compared to $1.1 million for the year ended December 31, 2001. The 2002 expense relates to state and local taxes. The 2001 expense related to foreign and state taxes and an adjustment to the prior year tax accrual. Valuation allowances have been established at December 31, 2002 and 2001 relating to all deferred tax assets that must be realized through the generation of taxable income in future periods.

      Subsequent Events. In connection the execution of employment and non-compete contracts with Messrs. Fischel and Carlton, the Company anticipates incurring approximately $4.2 million in amortization charges during the first two quarters of 2003 and further anticipates incurring an additional $5.0 million in amortization charges in the last two quarters of 2003 if the Company elects to extend these agreements from July 16, 2003 to January 15, 2004.

      In connection with the resignation of David Schneider, the Company’s former Chief Executive Officer, in February 2003, the Company will incur a $1.9 million charge in the first quarter of 2003. Approximately $0.8 million relates to salary continuance until February 2004 and approximately $1.1 million relates to a non-cash charge for fully vested options, with an exercise price of $2.00 per share, which were previously being expensed over the anticipated service period. In accordance with his original employment agreement, Mr. Schneider was to be granted a bonus, if and only if the above mentioned options vested and became exercisable, equal to the exercise price of the options at the time of the exercise of the options. The portion of the option exercise price bonus not expensed at the time of Mr. Schneider’s resignation is required to be expensed immediately due to the accelerated vesting of the options which occurred as a result of Mr. Schneider’s resignation.

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      Net Revenues. Net revenues decreased 25.5%, or $45.2 million, to $132.1 million for the year ended December 31, 2001 from $177.3 million for the year ended December 31, 2000. This decrease was attributable to a decrease in technology and human capital consulting revenues which declined $34.1 million and $24.2 million, respectively, due to decreased demand for such services. The decline in technology and human capital revenues were partially offset by a $13.1 million increase in economic consulting revenues.

      Gross Profit. Gross profit decreased 27.0% to $45.7 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 34.6% in 2001 from 35.3% in 2000. The decrease in gross profit directly correlates with the 25.5% 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 27.8% to $44.1 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 33.3% in 2001 from 34.4% in 2000. The decrease in spending resulted primarily from $6.8 million in lower sales and marketing spending, $4.8 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 retention incentives. The headcount reductions included 48 consultants and 7 administrative personnel.

      During the quarter ended June 30, 2001, the Company decided 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 retention 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 was $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 (primarily fixed assets), and an employee retention incentive-related expense of $0.2 million.

      During the quarter ended December 31, 2001, the Company recorded $1.3 million of special charges. Included within this charge was $0.5 million of severance associated with headcount reductions in the quarter,

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

      In the fourth quarter 2000, the Company awarded to certain employees special retention 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.

      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 technology consulting business.

      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.

      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 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.

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Liquidity and Capital Resources

      Consolidated working capital was $5.2 million on December 31, 2002, compared with working capital of a negative $5.1 million on December 31, 2001. Included in working capital were cash and cash equivalents of $1.6 million and $4.5 million on December 31, 2002 and 2001, respectively.

      Net cash used in operating activities was $0.4 million for the year ended December 31, 2002. The primary components of net cash used in operating activities were $8.6 million resulting from a decrease in accounts payable (primarily due to $4.2 million of variable compensation paid in December of 2002 along with a $3.1 million lower overall variable compensation accrual), and $3.4 million resulting from a decrease in restructuring accruals substantially offset by net income of $5.7 million and non-cash charges of $5.0 million (primarily non-cash interest expense and depreciation).

      Net cash provided by investing activities was $11.4 million for the year ended December 31, 2002, which was comprised of proceeds of $14.7 million received from the sale of the human capital consulting business offset by restricted cash of $2.6 million and the purchase of property and equipment of $0.7 million. The Company anticipates that its capital additions for 2003 will be slightly higher than 2002 levels.

      Net cash used in financing activities was $13.8 million for the year ended December 31, 2002. The primary components of net cash used in financing activities were $11.2 million of repayments under the Company’s Senior Credit Facility and $2.6 million of payments of other debt and capital leases obligations.

      The Company’s primary sources of liquidity are cash on hand, restricted cash (for bonus payments only) and cash flow from operations. 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 that the Company’s actual cash needs will not exceed anticipated levels, that the Company will generate sufficient operating cash flows to fund its operations in the absence of other sources or that acquisition opportunities will not arise requiring resources in excess of those currently available. In particular, the Company has the option of extending the employment and non-compete agreements with Messrs. Fischel and Carlton from their current expiration of July 16, 2003 to January 15, 2004. In order to exercise such option, the Company must pay Messrs. Fischel and Carlton an aggregate amount of approximately $3.5 million, including interest, on or before July 15, 2003 and an aggregate amount of $1.6 million within five days of collection of a specified receivable but in no case later than December 31, 2003. The Company currently intends to exercise such option from cash flows from operations. In order for the Company to further extend these agreements from January 16, 2004 through December 31, 2008, the Company will need to make aggregate payments to Messrs. Fischel and Carlton of $20.0 million by January 15, 2004. We will require additional financing in amounts that we cannot determine at this time in order to make all of the payments required to extend these agreements to December 31, 2008. We expect that we will need to raise funds through one or more public or private financing transactions.

      Effective December 31, 2002, the Company and its senior lenders amended the Senior Credit Facility. In connection with this amendment to the Senior Credit Facility, Knowledge Universe, Inc., an affiliate of our controlling shareholder Nextera Enterprises Holdings, Inc., purchased a $5.0 million junior participation in the Senior Credit Facility. On January 7, 2003, the Company borrowed $5.0 million under the Senior Credit Facility to fund the first payment required under the employment and non-compete agreements entered into with Messrs. Fischel and Carlton. The Company’s outstanding liability under the Senior Credit Facility after the borrowing of the above mentioned $5.0 million was $32.2 million. The Senior Credit Facility requires that $4.7 million of outstanding borrowings be permanently reduced in each of 2003 and 2004. The maturity of the Senior Credit Facility was extended to January 1, 2005. Borrowings will continue to bear interest at the lender’s base rate plus 2.0%, with the borrowing rate potentially being reduced 50 basis points upon achieving certain financial and operational milestones. The Company will pay annual administrative fees of $0.3 million, payable monthly, and $0.9 million of aggregate back-end fees will be payable upon the maturity of the Senior Credit Facility. The back-end fees can be waived if the Company repays the Senior Credit Facility prior to maturity. All administrative fees paid to the senior lenders is recorded by the Company as interest expense. An affiliate of Knowledge Universe has agreed to continue to guarantee $2.5 million of the Company’s obligations under the Senior Credit Facility. The Senior Credit Facility contains covenants related to the maintenance of

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

(1)	The Senior Credit Facility obligation includes $5.0 million of the Junior Participation in the Senior Credit Facility. The $5.0 million was used on January 7, 2003 to fund the Company’s exercise of its option to extend the employment and non-compete agreements with Messrs. Fischel and Carlton from January 16, 2003 through July 15, 2003.

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

New Accounting Standards

      Please 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.

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

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      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 and has discussed the development and selection of such critical accounting policies with the audit committee of the Board of Directors.

      Restructuring charges. The Company has recorded significant restructuring charges over the past year and as of December 31, 2002, has $1.5 million of restructuring reserves recorded on the balance sheet. Substantially all of these reserves relate to the cost of exiting certain leased facilities. During 2002, the Company reversed $0.7 million of restructuring reserves as a result of a favorable lease termination. 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, which could include our sub-tenants defaulting on their lease commitments, 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 situations where we are aware of circumstances regarding a specific customer’s ability or intention to 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 percentage. 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, 2002, the Company had approximately $44.8 million of deferred tax assets related principally to domestic loss carryforwards that expire in 2022, 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, 2002 under generally accepted accounting principles. The valuation allowance will be reviewed periodically to determine its appropriateness.

      Intangible Assets. In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, the Company ceased amortizing goodwill arising from acquisitions completed prior to July 1, 2001. In lieu of amortization, the Company performs an impairment review of goodwill and intangible assets. Impairment tests are performed annually, or more frequently if there are other indicators of impairment. As a result of the Company’s annual review, it was determined that there was no impairment of goodwill and intangible assets as of December 31, 2002. In the future, the Company will conduct an annual impairment review. If it were determined through the impairment review process that goodwill has been impaired, the Company would record an impairment charge in the statement of operations.

      The Company assesses the impairment of identifiable intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable. When it is determined that the carrying value of intangibles may not be recoverable, the Company measures any impairment based on an estimated fair value of the Company. The fair value of the Company is determined based on (i) a projected discounted cash flow using a discount rate determined by management to be commensurate with the risk inherent in the Company’s business model, and (ii) the market comparables of similar companies.

      Goodwill and intangible assets amounted to $77.5 million as December 31, 2002.

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

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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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Item 8.     Financial Statements and Supplementary Data

REPORT OF INDEPENDENT AUDITORS

Board of Directors

      We have audited the accompanying consolidated balance sheets of Nextera Enterprises, Inc. (the “Company”) as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15(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, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, 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.

      As disclosed in Note 2 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

	/s/ ERNST & YOUNG LLP

Providence, Rhode Island

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NEXTERA ENTERPRISES, INC.

CONSOLIDATED BALANCE SHEETS

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

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NEXTERA ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS