Back to GetFilings.com

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

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 March 31, 2003

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.

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

(617) 715-0200
(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  [  ]

     Indicate by check mark whether registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act).

Yes   [  ]   No  [X]

     As of April 30, 2003 there were 30,025,441 shares of $.001 par value Class A Common Stock outstanding and 3,844,200 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 March 31, 2003

INDEX

2

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Nextera Enterprises, Inc.

Condensed Consolidated Balance Sheets
(Dollar amounts in thousands, except per share data)

See Notes to Condensed Consolidated Financial Statements

3

Table of Contents

Nextera Enterprises, Inc.

Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share amounts; unaudited)

See Notes to Condensed Consolidated Financial Statements

4

Table of Contents

Nextera Enterprises, Inc.

Condensed Consolidated Statements of Cash Flows
(Dollar amounts in thousands, unaudited)

See Notes to Condensed Consolidated Financial Statements

5

Table of Contents

NEXTERA ENTERPRISES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

The accompanying unaudited condensed 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-month period ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

The balance sheet as of December 31, 2002 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 March 31, 2003.

Reclassification

Certain reclassifications were made to the 2002 financial statements in order that they may be consistent with the 2003 presentation.

Restricted Cash

Restricted cash relates to cash deposits held by the Company’s senior lenders, in accordance with the Second Amended and Restated Credit Agreement dated December 31, 2002 (Senior Credit Facility), to finance working capital requirements related to employment compensation that was paid in December 2002 and January 2003. The terms of the Senior Credit Facility require the Company to restrict such amounts on a monthly basis based on earned bonus amounts so that a certain percentage of the projected earned bonus is escrowed or paid at specific times. At December 31, 2002, $2.7 million was escrowed in a restricted account for bonuses earned. The Company will continue to escrow funds for bonus payments for 2003 beginning in the second quarter.

Concentration of Credit Risk

The Company provides its services to customers in diversified industries, primarily in the United States. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses and such losses have been within management’s expectations. No customer accounted for more than 10% of net revenues for the three months ended March 31, 2003 and 2002. One customer represented more than 5% of accounts receivable as of March 31, 2003.

6

Table of Contents

NEXTERA ENTERPRISES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Recent Accounting Pronouncements

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Stock-Based Compensation – Transition and Disclosure- an amendment of FASB Statement No 123” (“SFAS No. 148”), which provides optional guidance for those companies electing to voluntarily adopt the accounting provisions of SFAS No. 123. In addition, the statement mandates certain new disclosures that are incremental to those required by SFAS No. 123. Since the Company will continue to record stock-based compensation in accordance with APB No. 25, no material impact on the condensed Consolidated financial position or results of operations is expected. The Company has adopted the disclosure provisions of this statement.

Note 2. Other Assets

On December 31, 2002, the Company entered into employment and non-compete agreements with the Company’s two key service providers: Daniel Fischel, the Company’s Chief Executive Officer, and Dennis Carlton. These agreements contain covenants not to compete over specified periods in return for cash compensation. The agreements became effective on January 7, 2003 upon payment of the first installment. Under the terms of the agreements, Nextera made aggregate payments of $5.0 million on January 7, 2003 to extend these agreements through July 15, 2003. Messrs. Fischel and Carlton surrendered approximately 1.8 million shares of the Company’s Class A Common Stock worth approximately $0.8 million in connection with the extension of the non-compete provisions. Accordingly, an asset of approximately $4.2 million was recorded in 2003 to recognize the non-compete agreements and is being amortized through July 15, 2003. Amortization expense of $1.9 million was recorded in the first quarter of 2003.

The Company has the option of extending the non-compete provisions through January 15, 2004 by paying Messrs. Fischel and Carlton an aggregate payment of $3.5 million, including interest, on or before July 15, 2003 and approximately $1.6 million, plus interest at 3.5% per annum from January 15, 2003 through the date paid, within 5 business days of the collection of a specified accounts receivable, but in no event later than December 31, 2003, whether or not the receivable is collected by that date. The Company has the option of extending these agreements from January 15, 2004 to December 31, 2008 by making an additional aggregate payment of $20.0 million to Messrs. Fischel and Carlton on or before January 15, 2004.

7

Table of Contents

NEXTERA ENTERPRISES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 3. Income (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 income (loss) per share were calculated as follows:

Note 4. Senior Credit Facility

Effective March 29, 2002, the Company entered into an Amended and Restated Credit Agreement (Prior Credit Agreement) with the senior lenders. Under the Prior Credit 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 Prior Credit Agreement was scheduled to mature on January 2, 2004. Borrowings under the facility bore 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 Prior Credit Agreement, the Company paid annual administrative fees of $0.3 million, payable monthly, and was scheduled to pay $0.9 million in aggregate fees upon maturity of the Prior Credit Agreement. Additionally, the senior lenders were issued 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 Prior Credit Agreement. The senior lenders can elect in their sole discretion to require the Company to redeem the warrants for a $0.2 million cash payment after December 31, 2004. An affiliate of Knowledge Universe, an entity that indirectly controls Nextera, agreed to guarantee $2.5 million of the Company’s obligations under the Prior Credit Agreement. The Prior Credit Agreement also contained covenants related to the maintenance of financial ratios, operating restrictions, restrictions on

8

Table of Contents

NEXTERA ENTERPRISES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

the payment of dividends and disposition of assets. The revised covenants were based on the Company’s operating plan for 2002 and 2003.

Effective December 31, 2002, the Company entered into a Second Amended and Restated Credit Agreement (Senior Credit Facility), which amended the Prior Credit Agreement. As part of the Senior Credit Facility, Knowledge Universe, 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 bear interest at the lender’s base rate plus 1.5%, which was 5.7% at March 31, 2003. The Company will continue to pay annual administrative fees of $0.3 million, payable monthly, and the $0.9 million in aggregate back-end fees will continue to 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 are 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 also contains covenants related to the maintenance of financial ratios, operating restrictions, restrictions on the payment of dividends and disposition of assets. The revised covenants were based on the Company’s operating plan for 2003 and 2004. As of March 31, 2003, the Company was in compliance with all of its financial covenants.

Note 5. Stock-Based Compensation and Other Equity Instruments

As allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) the Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related Interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company’s employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized.

The Company accounts for equity instruments issued to non-employees in exchange for goods or services using the fair value method. Accordingly, warrants issued to Knowledge Universe, Inc. in connection with an acquisition and warrants issued to the senior lenders and other creditors have been recorded at their fair value on the date of grant.

9

Table of Contents

NEXTERA ENTERPRISES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

If the Company had adopted the optional recognition provisions of SFAS 123 for its stock option plans, net income (loss) and net income (loss) per common share would have been changed to the pro forma amounts indicated below:

The weighted average fair value of options granted during 2003 and 2002 was $0.36 and $0.54, respectively, at the date of the grants. As recommended by SFAS No. 123, the fair values of options were estimated using the Black-Scholes option pricing model assuming expected volatility of 120% in 2003 and 130% in 2002, a risk free interest rate of 4.70% in 2003 and 2002, and an expected life of 6 years in 2003 and 2002.

Other Equity

In conjunction with the non-compete agreements with certain key service providers entered into December 31, 2002, the key service providers surrendered 1,885,827 shares of Class A Common Stock to the Company. The closing bid price on the Nasdaq SmallCap Market on January 7, 2003, the date the shares were surrendered, was $0.42 per share. As a result, stockholders' equity decreased $0.8 million.

10

Table of Contents

NEXTERA ENTERPRISES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 6. Special Charges

The restructuring charges and their utilization as of March 31, 2003 are summarized as follows (in thousands):

In connection with the resignation of the Company’s former chief executive officer in 2003, the Company incurred 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 was previously being expensed over the anticipated service period. In accordance with the original employment agreement, the former chief executive officer 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 the resignation of the former chief executive officer is required to be expensed immediately and recorded in equity due to the accelerated vesting of the options which occurred as a result of the resignation.

Approximately $1.7 million of cash is expected to be expended over the next twelve months, primarily related to real estate rental obligations and employment contracts, and the remainder is expected to be paid through December 2005.

Note 7 Comprehensive Income (Loss)

Comprehensive income combines net income (loss) and “other comprehensive items,” which represents certain amounts, substantially foreign currency translation adjustments, that are reported as components of stockholders’ equity in the accompanying balance sheet. During the first quarter of 2003 comprehensive loss totaled $3.1 million and during the first quarter ended 2002 comprehensive income was $2.7 million.

Note 8. Income Taxes

No federal tax benefit was recorded for the three months ended March 31, 2003 due to the Company’s uncertainty associated with utilizing its net operating losses. The Company did record de minimis state tax expense. No federal tax expense was recorded during the three months ended March 31, 2002 due to the existence of net operating losses available to be carried forward to offset taxable income.

11

Table of Contents

NEXTERA ENTERPRISES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 9. 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 that 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.

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 (economic consulting business), 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 regulatory 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.

13

Table of Contents

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 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 assess how competitors are likely to react and how these events would affect the nature of future competition.

COMPARISON OF THREE MONTHS ENDED MARCH 31, 2003 AND THREE MONTHS ENDED MARCH 31, 2002

     Net Revenues. Net revenues decreased $2.0 million, or 10.6%, to $18.8 million for the three months ended March 31, 2003 from $20.8 million for the three months ended March 31, 2002. Approximately $1.9 million of this decrease was attributable to the sale of our human capital consulting business in January 2002. Net revenues from our economic consulting business were $18.9 million for the quarter ended March 31, 2002, $0.1 million higher than the first quarter of 2003. Utilization of professionals in the economic consulting business was 67.2% for the quarter ended March 31, 2003 compared to 74.6% in the first quarter of 2002. The drop in utilization from the prior year was offset in part by a 6.4% increase in billing rates. Annualized revenue per professional in the quarter ended March 31, 2003 was $504,000 compared to $488,000 for the quarter ended March 31, 2002.

     Gross Profit. Gross profit decreased 17.9% to $6.9 million for the three months ended March 31, 2003 from $8.4 million for the three months ended March 31, 2002. The decrease in gross profit was due to the sale of the human capital consulting business in January 2002 and an increase in the cost of services for the economic consulting business. The human capital consulting business gross profit in the first quarter of 2002 was $0.8 million. Gross profit as a percentage of net revenues decreased to 36.6% for the three months ended March 31, 2003 from 40.3% for the three months ended March 31, 2002. The economic consulting business gross profit as a percent of net revenues for the three months ended March 31, 2002 was 40.0%. The drop in economic consulting business gross profit as a percentage of net revenues is primarily attributed to an increase in overall compensation due to yearly annual base compensation increases and, to a lesser extent, recently hired consultants who have not achieved targeted utilization.

     Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 23.1% to $4.0 million for the three months ended March 31, 2003 from $5.2 million for the three months ended March 31, 2002. As a percentage of revenues, such expenses decreased to 21.5% for the three months ended March 31, 2003 from 24.8% for the three months ended March 31, 2002. The decrease in selling, general and administrative expenses from the first quarter of 2002 is primarily attributed to the following components: a decrease of $0.5 million in compensation expenses and a decrease of $0.4 million in facility cost, both attributed to the absence of the human capital consulting business, which was sold in January 2002, and lower corporate costs.

     Amortization Expense. The Company recorded $1.9 million of amortization expense related to the amortization of non-compete agreements entered into with certain key service providers in conjunction with employment agreements dated December 31, 2002.

14

Table of Contents

Special Charges. The restructuring charges and their utilization as of March 31, 2003 are summarized as follows (in thousands):

In connection with the resignation of the Company’s former chief executive officer in 2003, the Company incurred 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 was previously being expensed over the anticipated service period. In accordance with the original employment agreement, the former chief executive officer 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 the resignation of the former chief executive officer is required to be expensed immediately and recorded in equity due to the accelerated vesting of the options which occurred as a result of the resignation.

Approximately $1.7 million of cash is expected to be expended over the next twelve months, primarily related to real estate rental obligations and employment contracts, and the remainder is expected to be paid over the next two years.

     Interest Expense, Net. Interest expense, net increased to $2.0 million for the three months ended March 31, 2003 from $1.4 million for the three months ended March 31, 2002. The increase is primarily a result of a higher principal amount of debentures outstanding in the quarter. The average balance of debentures outstanding for the quarter ended March 31, 2003 was $47.7 million compared to $23.1 million for the quarter ended March 31, 2002 due primarily to the exchange of preferred stock to debentures in July of 2002.

     Income taxes. No federal tax benefit was recorded for the three months ended March 31, 2003 due to the Company’s uncertainty associated with utilizing its net operating losses. The Company did record de minimis state tax expense. No federal tax expense was recorded during the three months ended March 31, 2002 due to the existence of net operating losses available to be carried forward to offset taxable income.

LIQUIDITY AND CAPITAL RESOURCES

Consolidated working capital was $6.1 million on March 31, 2003, compared to a working capital of $5.2 million on December 31, 2002. Included in working capital were cash and cash equivalents of $0.6 million and $1.6 million on March 31, 2003 and December 31, 2002, respectively.

Net cash used in operating activities was $8.4 million for the three months ended March 31, 2003. The primary components of net cash used in operating activities was an increase of $5.0 million of prepaid and other assets (relating to Messrs. Fischel and Carlton’s non-compete agreements), an increase of $4.4 million of accounts receivable, a $1.6 million decrease of accounts payables and accrued expenses (primarily bonus payments), and a net loss of $3.1 million. These cash outflows were offset in part by $5.2 million of non-cash items relating to depreciation, provision for doubtful accounts, amortization of non-compete agreements, non-cash compensation charges, and interest paid-in-kind.

15

Table of Contents

Net cash provided by investing activities was $2.6 million for the three months ended March 31, 2003, almost entirely representing decreases in restricted cash.

Net cash provided by financing activities was $4.8 million for the three months ended March 31, 2003. The primary component of net cash provided by financing activities was $5.0 million of borrowings under the Company’s Senior Credit Facility.

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 if it is successful in reducing its current days sales outstanding level and achieving its forecasted profitability, it will have sufficient cash 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, by reducing its current days sales outstanding level and achieving its forecasted profitability, 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 approximately $1.6 million, plus interest at 3.5% per annum from January 15, 2003 through the date paid, within five days of collection of a specified receivable but in no case later than December 31, 2003, whether or not the receivable is collected by that date. The Company hopes to exercise such option from cash flows from operations, however, such funding from operations is dependent upon reducing current days sales outstanding and achieving forecasted profitability. To the extent that cash flows from operations are not sufficient, the Company will need to obtain alternative financing sources. 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 entered into a Second Amended and Restated Credit Agreement (Senior Credit Facility), which amended the Prior Credit Agreement. As part of the Senior Credit Facility, Knowledge Universe, 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 bear interest at the lender’s base rate plus 1.5%. The Company will continue to pay annual administrative fees of $0.3 million, payable monthly, and the $0.9 million in aggregate back-end fees will continue to 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 are 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 financial ratios, operating restrictions, restrictions on the payment of dividends and disposition of assets. The covenants are measured quarterly and have been set at varying rates, the most restrictive at approximately 15% below the Company’s projected operating results. If the results of operations significantly decline below projected results and we are unable to obtain a waiver from the Company’s senior lenders, the Company’s debt would be in default and callable by the senior lenders. If our projections of future operating results are not achieved and our debt is placed in default, we would experience a material adverse impact on our reported financial position and results of operations.

16

Table of Contents

Critical Accounting Policies

Our condensed Consolidated financial statements have been prepared with accounting principles generally accepted in the United States of America. Preparation of these financial statements requires management to make judgments and estimates. Some accounting policies have significant impact on amounts reported in these financial statements. A summary of significant accounting polices and a description of accounting policies that are considered critical may be found in our 2002 Annual Report on Form 10-K, filed on March 31, 2003, in the Notes to the Consolidated Financial Statements, Note 2 and the Critical Accounting Policies Section.

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 business and reputation to suffer.

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 may not be able to obtain the additional capital necessary for us to fund the payments necessary for us to be able to extend the employment and non-compete agreements with two key service providers, including our Chief Executive Officer. In addition, if we are able to raise additional capital, the terms of any additional capital may be unfavorable to Nextera or our stockholders.

We have entered into employment and non-compete agreements with two of our 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 and approximately $1.6 million, plus interest at 3.5% per annum beginning January 15, 2003 though the date paid, within five days of collection of a specified receivable but in no case later than December 31, 2003, whether or not the receivable is collected by that date. 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.

17

Table of Contents

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.

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 March 31, 2003, we had $32.2 million of outstanding indebtedness under our Senior Credit Facility, $4.7 million of which was classified as a current liability. In addition, as of March 31, 2003, we had $48.9 million of outstanding indebtedness under debentures payable to affiliates.

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 currently bear interest at the lender’s base rate plus 1.5%. 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 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.

18

Table of Contents

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 extension. Additionally, even if the extension is approved and we are able to qualify for it, we may be unable to comply with the other requirements for continued listing. If we are unable to satisfy the $1.00 minimum bid price requirement within the time set by Nasdaq or if we are unable to meet the other requirements for continued listing, our common stock will be subject to delisting by Nasdaq. If our common stock is delisted, trading our stock may become more difficult and our stock price could decrease even further. If our common stock is not listed on Nasdaq, many potential investors will not purchase our common stock, which would further limit the trading market for our common stock.

The Company currently believes that it is in the interest of shareholders to maintain listing on Nasdaq and to increase the share price of our common stock to potentially increase its trading liquidity stock and attract investment by institutional funds and investors that are currently prevented from investing in our common stock at current price levels. Accordingly, we will ask our shareholders to authorize a reverse stock split of the Company’s common stock at the next annual meeting of shareholders in June, 2003. However, our shareholders may not approve the reverse stock split, or if the 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 the 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.

We may not successfully compete with our competitors, including the retention of our professional consultants, 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, 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

19

Table of Contents

Nextera Enterprises Holdings owns 71.5% 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, 3,844,200 shares of Class B Common Stock, and 40,375 shares of our Series A Preferred Stock, which combined represents approximately 71.5% 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. Holders of Series A Preferred Stock are entitled to 145 votes per share, which equals the number of whole shares of Class A Common Stock into which one share of Series A Preferred Stock is convertible at March 31, 2003. 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.

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 have a history of losses and there is no assurance that we can achieve or sustain profitability in the future.

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

It is possible that we may not obtain net income in the future.

20

Table of Contents

If we fail to meet our clients’ expectations, we could damage our reputation and have difficulty attracting new business and our engagements may result in professional liability.

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 either our client’s expectations or those of law firms that engage 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.

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. Our 10 largest clients accounted for approximately 33% of our net revenues for the three months ended March 31, 2003. No client represented greater than 10% of net revenues for the three months ended March 31, 2003.

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 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 and yearly financial results could be materially harmed.

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 and operating income.

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.

21

Table of Contents

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.

If a large client project or a significant number of other client projects are terminated or reduced, or if we do not attract a sufficient number of new projects, 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.

Loss of or limitations on our net operating loss carryforward.

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.

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. 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.

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

As of March 31, 2003, our intangible assets were approximately $77.5 million and 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".

22

Table of Contents

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.

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;
	•		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 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 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.

23

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 March 31, 2003.

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.

Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Within 90 days prior to the filing date of this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date of the evaluation referred to above.

24

Table of Contents

PART II – OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

	10.1*		Amendment to Agreement among Nextera Enterprises, Inc., Lexecon, Inc. and Daniel R. Fischel dated as of April 24, 2003.
	10.2*		Amendment to Agreement among Nextera Enterprises, Inc., Lexecon, Inc. and Dennis W. Carlton dated as of April 18, 2003.
	99		Additional Exhibits

(b) Reports on Form 8-K

	1.		A Current Report on Form 8-K filed on January 3, 2003 disclosing the Second Amended and Restated Credit Agreement, Service Agreements with key employees and related documents.
	2.		A Current Report on Form 8-K filed on February 6, 2003 regarding a press release announcing management changes within the Company and the resignation of the chief executive officer.
	3.		A Current Report on Form 8-K filed on February 11, 2003 regarding a press release issued with earnings information for the year ended December 31, 2002.

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.

25

Table of Contents

26

Table of Contents

I, Daniel R. Fischel, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Nextera Enterprises, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

		a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
		b)evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
		c)presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

		a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
		b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.     The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 12, 2003

27

Table of Contents

I, Michael P. Muldowney, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Nextera Enterprises, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

		a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
		b)evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
		c)presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

		a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
		b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.     The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 12, 2003

28