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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, 2003

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.     o

          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 June 30, 2003, the aggregate market value of the registrant’s Class A Common Stock held by non-affiliates of the registrant was approximately $6,751,821, based on the closing price of the Company’s Class A Common Stock on the Nasdaq SmallCap Market on June 30, 2003 of $0.32 per share.

          As of March 24, 2004, 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 document 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.

TABLE OF CONTENTS

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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

ITEM 1.     Business

Overview

      Nextera Enterprises, Inc. (Nextera or the Company) was formed in 1997 and focused on building a portfolio of consulting companies through multiple acquisitions. The Company offered services in three practice areas: technology consulting, human capital consulting, and economic consulting. The technology consulting business was exited during the latter half of 2001 and the human capital consulting business was sold on January 30, 2002. On November 28, 2003, Nextera and its direct and indirect subsidiaries, Lexecon Inc., CE Acquisition Corp. and ERG Acquisition Corp., sold substantially all of the assets Lexecon and its subsidiaries used in their economic consulting business (Asset Sale) to FTI Consulting, Inc. and LI Acquisition Company, LLC, a wholly owned subsidiary of FTI Consulting, Inc. (collectively “FTI”) in accordance with the terms of an asset purchase agreement dated September 25, 2003 (Asset Purchase Agreement).

      Lexecon 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’s clients included major law firms and the corporations that they represented, government and regulatory agencies, public and private utilities and national and multinational corporations. Its services involved the application of economic, financial and public policy principles to marketplace issues in a large variety of industries. Their services fell into three broad areas: litigation support, public policy studies and business consulting. Litigation support was Lexecon’s most significant practice area in terms of total revenue, earnings and personnel.

      As a result of the Asset Sale, we ceased to have business operations. We are currently reviewing opportunities with the goal of maximizing our resources and increasing stockholder value. We believe that an increase in stockholder value will be best obtained through the acquisition of one or more on-going businesses or operations. To that end, we have retained an investment banking firm to assist in the identification and selection of appropriate acquisition and merger candidates.

Employees

      As of December 31, 2003, Nextera had nine employees, including four former Lexecon support personnel whose employment ceased in the first quarter of 2004. None of our employees are represented by a union or subject to a collective bargaining agreement. We believe that our relations with our employees are good.

Factors That May Affect Our Future Performance

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

      In accordance with the Asset Purchase Agreement, we agreed to indemnify FTI for a number of matters including the breach of our representations, warranties and covenants contained in the Asset Purchase Agreement. These representations, warranties and covenants related to organization, corporate, financial statement, business, operational, tax, legal, insurance, intellectual property, title to assets, employee, labor, leases, environmental, record keeping, contracts, permits, licenses, authorizations, solvency, cooperation and other matters. A breach or inaccuracy of any of these representations, warranties and covenants could lead to an indemnification claim by FTI against us. Any such indemnification claims could require us to pay substantial sums and incur related costs and expenses and have a material adverse effect on our liquidity, financial condition, future prospects and ability to acquire a new operating business.

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      As of December 31, 2003, we had approximately $19.8 million of deferred tax assets related principally to domestic net operating loss carryforwards that expire in 2022, for which a 100% valuation allowance has been recorded. The utilization of this asset in the future is dependent upon our having U.S. federal taxable income. Currently, we have no business operations and are unable to generate U.S. federal taxable income to utilize the net operating loss carryforwards. We will likely need to acquire an operating business in order to generate such taxable income. Even if we are able to acquire an operating business, there can be no assurance that we will be able to generate taxable income in the future. Furthermore, the likelihood of an annual limitation on our ability to utilize the net operating loss carryforward to offset future U.S. federal taxable income is increased by (1) the issuance of certain convertible preferred stock, options, warrants, or other securities exercisable for common stock, (2) changes in the equity ownership occurring in the last three years and (3) potential future changes in the equity ownership. The amount of an annual limitation can vary significantly based on factors existing at the date of an ownership change. A substantial portion of the net operating loss was used to offset our federal tax liability, other than alternative minimum tax, generated by the Asset Sale. If the net operating loss carryforward were to be determined to be subject to annual limitations prior to its utilization to offset the taxable gain from the Asset Sale, our federal tax liability and the net operating loss could be materially different and our financial position could be adversely affected. Such limitations could have a material adverse impact on our financial condition, results of operations and cash flows.

      We intend to use our cash to acquire a new operating business. We do not intend to distribute to our stockholders any portion of our current net assets. No assurance can be given that we will be successful in acquiring or operating a new business. If we cannot successfully acquire such a business we may be forced to liquidate. If we decide to liquidate, no assurance can be given that funds will be available to distribute to our stockholders at that time, whether from the proceeds of the Asset Sale or elsewhere.

      Our Class A Common Stock was delisted from the Nasdaq SmallCap Market on November 28, 2003 due to our failure to have an operating business after the Asset Sale. As a result of the delisting, our common stock may be more difficult to trade and we may suffer harm to our general business reputation and have greater difficulty in the future raising funds in the capital markets. Each of these consequences could have a material adverse effect on our business, results of operations and financial condition. We currently do not meet Nasdaq’s initial listing requirements to be re-listed on the Nasdaq SmallCap Market because we do not have business operations and do not satisfy the minimum bid price requirement.

      Knowledge Universe, LLC owns 8,810,000 shares of Class A Common Stock, 3,844,200 shares of Class B Common Stock, and 42,554 shares of our Series A Preferred Stock, which combined represents approximately 71.6% of the voting power of our outstanding common and preferred 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. Accordingly, Knowledge Universe, LLC 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, Knowledge Universe,

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      Knowledge Universe, LLC 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, LLC. 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 direct or indirect control of Knowledge Universe, LLC independently of us. Potential conflicts of interest between Knowledge Universe, LLC 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 Knowledge Universe, LLC of our Class A, Class B Common Stock or Series A Preferred Stock and the exercise by Knowledge Universe, LLC 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 Knowledge Universe, LLC. Lawrence J. Ellison, Michael R. Milken and Lowell J. Milken may each be deemed to have the power to control Knowledge Universe, LLC. 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 Knowledge Universe, LLC.

      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.

      Currently, we have no business operations and are not profitable. There is no assurance that if even if we are able to acquire business operations that we will be profitable in the future.

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

	•	quarter-to-quarter variations in operating results;
	•	market conditions in 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.

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      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 Boston, Massachusetts in a 3,000 square foot leased facility. We also have office space in Toronto, Canada, which we are subletting. 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.

      On November 14, 2003, a special meeting of the stockholders of Nextera was held in Cambridge, Massachusetts. The stockholders of the Company were asked to vote on the following item and voted as follows:

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PART II

      Our Class A Common Stock, $0.001 par value per share, traded under the symbol “NXRA” on the Nasdaq National Market from May 18, 1999 through June 2, 2002 and traded on the Nasdaq SmallCap Market from June 3, 2002 until it was delisted on November 28, 2003. 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 2003 (through November 28) and 2002.

      From November 29, 2003 to the present our Class A Common Stock was traded on the over-the-counter market pink sheets under the symbol “NXRA.PK”. During the period from November 29, 2003 through December 31, 2003, the high bid quotation was $0.55 per share and the low bid quotation was $0.26 per share, as quoted by the Pink Sheets LLC. Such over-the counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

      As of March 15, 2004 there were 30,025,441 shares of Class A Common Stock outstanding held by approximately 237 holders of record and 3,844,200 shares of Class B Common Stock outstanding held by one holder of record.

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

      The following tables contain selected consolidated financial data as of December 31 for each of the years 1999 through 2003 and for each of the years in the five-year period ended December 31, 2003. The selected consolidated financial data have been derived from our audited consolidated financial statements with the years 1999 through 2002 restated to reflect the presentation of the consulting business as discontinued operations.

      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

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(1)	The 2003 results of continuing operations include an expense of approximately $1.9 million related to salary continuance costs and a non-cash compensation charge due to the acceleration of options, both related to our former Chief Executive Officer’s termination of employment.
(2)	The 2002 results of continuing operations include income of $0.7 million related to the reversal of restructuring reserves due to the favorable settlement of real estate obligations.
(3)	The 2001 results of continuing operations include an expense of approximately $4.5 million related to special charges primarily related to expected costs of exiting or reducing certain leased premises.
(4)	The 2000 results of continuing operations include an expense of approximately $1.9 million related primarily to provide for the expected costs of exiting or reducing certain leased premises along with certain termination and compensation charges. Additionally, the 2000 results of continuing operations include $5.0 million related to the write-down of certain equity investments to fair value.
(5)	The 1999 results of continuing operations include an expense of approximately $1.3 million related primarily to employment termination charges.

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Overview

      Nextera was formed in 1997 and focused on building a portfolio of consulting companies through multiple acquisitions. The Company offered services in three practice areas: technology consulting, human capital consulting, and economic consulting. The technology consulting business was exited during the latter half of 2001 and the human capital consulting business was sold on January 30, 2002. On November 28, 2003, Nextera and its direct and indirect subsidiaries, Lexecon Inc., CE Acquisition Corp. and ERG Acquisition Corp., sold substantially all of the assets Lexecon and its subsidiaries used in their economic consulting business to FTI.

      We are currently reviewing opportunities with the goal of maximizing our resources and increasing stockholder value. We believe that an increase in stockholder value will be best obtained through the acquisition of one or more on-going businesses or operations. To that end, we have retained an investment-banking firm to assist in the identification and selection of appropriate acquisition and merger candidates.

      As a result of the Asset Sale, Nextera ceased to have business operations. All results from consulting operations have been classified as discontinued operations. The continuing operations in the financial statements consist of operating expenses incurred in operating the corporate entity. Selling, general and administrative expenses consist primarily of salaries and benefits of certain senior management and other administrative personnel and facility, information technology, insurance, legal and professional, marketing and promotional costs. These expenses are associated with our efforts to identify and develop new business operations and with our management, finance, marketing and administrative activities.

      Our tax provision has historically varied from the federal statutory rate of 34% predominately due to deferred tax valuation allowance adjustments, the utilization of net operating losses, and state and local taxes.

Sale of Economic Consulting Business

      Effective November 28, 2003, we sold substantially all of the assets and certain liabilities of our economic consulting business to FTI for a total of $129.2 million in cash. All consultants and substantially all support staff of the economic consulting business became employees of FTI.

      The economic consulting business had revenues of $64.7 million (through the Asset Sale date), $74.0 million, and $75.3 million in 2003, 2002, and 2001, respectively. Income from operations of the economic consulting business was $12.5 million (through the Asset Sale date), $16.3 million, and $18.3 million in 2003, 2002, and 2001, respectively.

Sale of Human Capital Consulting Business

      Effective January 30, 2002, we sold substantially all of the assets and certain liabilities of our human capital consulting business to a privately-held benefits, compensation and human resources consulting firm, for a total of $14.0 million in cash, net of working capital and other adjustments. All consultants and support staff of the human capital consulting business were transferred to the acquiring company.

      The human capital consulting business had revenues of $1.9 million for the one month ended January 2002 and $43.4 million in 2001. Income (loss) from operations of the human capital consulting business was $(0.3) million for the one-month ended January 2002, and $(50.1) million in 2001. 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 no longer had any contracts or consultants related to this business.

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      The technology consulting business had revenues of $13.3 million in 2001. Income (loss) from operations of the technology consulting business was $(51.2) million in 2001. 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. To date, all Series A Preferred Stock dividends have been accrued in the form of additional nonassessable shares.

      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. The principal amount of the outstanding Series A Preferred Stock increased to $4.3 million as of December 31, 2003 due to the accrual of dividends in the form of additional shares of Series A Preferred Stock.

Results of Operations

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

      Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $0.3 million, or 6.4%, to $4.2 million for the year ended December 31, 2003 from $4.5 million for the year ended December 31, 2002. The decrease is attributable to the following components: a decrease of $0.2 million in travel and promotional expenses; a $0.6 million decrease in compensation due to the resignation of the former Chief Executive Officer offset in part by compensation paid to the Company’s vice-chairman, a newly formed position, and its directors, due to a shift to a cash compensation model in late 2002; and an increase of $0.5 million in insurance costs. Additionally legal and audit expenses increased $0.2 million in

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      The Company anticipates that selling, general and administrative expenses will approximate $0.7 million per quarter in 2004 under the Company’s current structure. The decrease in expenses is primarily due to lower insurance costs and a reduction in sales and marketing activities and legal and audit expenses. If the Company acquires a business during 2004, it is expected that the selling, general and administrative expenses will materially exceed the $0.7 million per quarter estimate.

      Special Charges. During the year ended December 31, 2003, the Company recorded a special charge of $1.9 million in connection with the resignation of the Company’s former Chief Executive Officer in the first quarter of 2003. Approximately $0.8 million of the charge related to salary continuance until February 2004 and approximately $1.1 million related 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 was 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.

      The restructuring charges and their utilization during 2003 are summarized as follows (in thousands):

      The remaining $0.2 million restructuring accrual is expected to be fully expended in the first half of 2004.

      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.

      Other Expense. During 2003, the Company recorded a valuation allowance for the full amount of a note receivable. The total value of the loan and related allowance was $0.3 million each. In 2002, the Company recorded an expense of $0.6 million to write down an equity investment to fair value.

      Income taxes. The Company recorded income tax expense of $0.2 million for the year ended December 31, 2003 compared to $0.1 million for the year ended December 31, 2002. The 2003 expense relates to state and local taxes coupled with an adjustment to the prior year tax receivable. The 2002 expense related to state and local taxes. Valuation allowances have been established at December 31, 2003 and 2002 relating to all deferred tax assets that must be realized through the generation of taxable income in future periods.

      Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 39.6% to $4.5 million for the year ended December 31, 2002 from $7.4 million for the year ended December 31, 2001. The decrease in selling, general, and administrative expenses resulted primarily from a $1.0 million decrease in sales and marketing expenses which was split between $0.4 million in lower corporate marketing spending and a decrease of $0.6 million in marketing department salaries, both due to the sale of

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      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.

      During 2001, the Company approved actions to re-align and re-size the Company’s cost structure as a result of softening market conditions and reduced demand for technological services. The Company recorded $4.6 million of special charges to provide primarily for the expected costs of exiting or reducing certain leased premises.

      Other Expense. During 2002, the Company recorded an expense of $0.6 million to write down an investment to fair value. Other expense was $5.0 million for the year ended December 31, 2001 related 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 $0.2 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.

Liquidity and Capital Resources

      Consolidated working capital was $18.3 million on December 31, 2003, compared with working capital of $83.9 million on December 31, 2002. Working capital at December 31, 2002 included goodwill of $77.5 million which was eliminated upon the Asset Sale on November 28, 2003. Included in working capital were cash and cash equivalents of $20.1 million and $1.6 million on December 31, 2003 and 2002, respectively.

      Net cash provided by operating activities was $0.5 million for the year ended December 31, 2003. The primary components of net cash provided by operating activities were net income of $4.5 million; an increase in accounts payable of $2.4 million due primarily to the Company’s tax liability from the Asset Sale and liquidity shortages, prior to the Asset Sale, that led to an increase in trade payables; and $16.4 million of non-

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      Net cash provided by investing activities was $97.8 million for the year ended December 31, 2003, which was comprised of proceeds of $127.7 million received from the Asset Sale and a $2.7 million reduction in restricted cash offset by cash payments of $31.5 million related to non-compete agreements with certain senior consultants, including the former Chief Executive Officer, Daniel R. Fischel, and capital expenditures of $1.1 million. The Company anticipates that its capital expenditures for 2004 will be immaterial, unless it acquires business operations. In such case, capital expenditures may be materially increased.

      Net cash used in financing activities was $79.8 million for the year ended December 31, 2003. The primary components of net cash used in financing activities were $27.2 million of repayments under the Company’s Senior Credit Facility described below, $52.2 million of net repayments of debentures due to affiliates, and $0.3 million of payments of other debt and capital leases obligations. The Senior Credit Facility and debentures were paid in full on November 28, 2003 in conjunction with the closing of the Asset Sale.

      Effective December 31, 2002, the Company entered into a Second Amended and Restated Credit Agreement (Senior Credit Facility), which amended the First Amended and Restated Credit Agreement. As part of the Senior Credit Facility, Knowledge Universe, Inc., an affiliate of the Company, 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 Daniel R. Fischel and Dennis W. Carlton, a former key service provider. The Senior Credit Facility required that $4.7 million of outstanding borrowings be permanently reduced in each of 2003 and 2004. The maturity of the Senior Credit Facility was January 1, 2005. Borrowings bore interest at the lender’s base rate plus 1.5%. An affiliate of Knowledge Universe agreed to continue to guarantee $2.5 million of the Company’s obligations under the Senior Credit Facility.

      In July 2003, the Company entered into the First and Second Amendments (the Amendments) to the Senior Credit Facility. Under the Amendments, Knowledge Universe, Inc. purchased a $2.5 million junior participation in the Senior Credit Facility. The Amendments also eliminated financial covenants for the June 30, 2003 period and reset the financial covenants for the periods ending September 30, 2003, December 31, 2003, March 31, 2004 and June 30, 2004. Additionally, warrants previously issued to the senior lenders to purchase 1,818,351 shares of the Company’s Class A Common Stock were modified reducing the senior lender’s put rights from $0.3525 per share to $0.23 per share, which reduced the monetary value of the put rights from approximately $640,000 to approximately $418,000. As part of the Amendments, the Company was required to pay quarterly fees aggregating $125,000 annually.

      The Company made a payment of $30.3 million to repay the Senior Credit Facility in full in connection with the closing of the Asset Sale. Additionally, the Company and its senior lenders agreed to modify the put right on warrants previously issued to the senior lenders to purchase 1,818,351 shares of the Company’s Class A Common Stock from $0.23 per share to $0.12 per share. This put right was exercised by the senior lenders at the closing and the Company made a payment of $0.2 million in full satisfaction of the put right. Furthermore, the requirement to pay $0.9 million of bank fees due at the maturity of the Senior Credit Facility was waived as a result of the Senior Credit Facility being repaid prior to maturity.

      The Company’s primary source of liquidity is cash on hand. Under the Company’s current structure, it is expected that approximately $0.7 million of cash will be expended each quarter. The Company believes that its current cash on hand is sufficient to meet all expenditures over the next twelve months. The Company is in the process of identifying opportunities to acquire one or more operating businesses and expects that it will use a combination of cash on hand, third party debt, and the Company’s equity securities to acquire any such on-

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

(1)	Represents an unsecured note issued by a predecessor of a subsidiary of Nextera Enterprises, Inc., which has ceased operations. Nextera Enterprises, Inc. has advised the noteholder of its position that it is not obligated under the note.

      The Company has no other commitments.

Off Balance Sheet Arrangements

      We have not entered into any off-balance sheet transactions, arrangements or obligations (including contingent obligations) that have, or are reasonably likely to have, a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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 the realizability of outstanding accounts receivable and deferred tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Results may differ from these estimates under different assumptions or conditions.

      The Company has identified the following critical accounting policies based on significant judgments and estimates used in determining the amounts reported in its consolidated financial statements and has discussed the development and selection of such critical accounting policies with the Audit Committee of the Board of Directors.

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      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 allowance for doubtful accounts against amounts due to the Company to reduce the net recognized receivable to the amount we reasonably believe will be collected. 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, 2003, the Company had approximately $19.8 million of deferred tax assets related principally to domestic net operating 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. A full valuation allowance against the net operating loss carryforward, along with all other deferred tax assets, has been established to reflect the uncertainty of the recoverability of this asset. The valuation allowance will be reviewed periodically to determine its appropriateness. The utilization of this asset in the future is dependent upon our having U.S. federal taxable income. Currently, the Company has no operations and does not generate any U.S. taxable income to utilize the net operating loss carryforwards. Even if the Company acquires an operating business, there can be no assurance that the Company will be able to generate taxable income. Furthermore, the likelihood of an annual limitation on the Company’s ability to utilize the net operating loss carryforward to offset future U.S. federal taxable income is increased by (1) the issuance of certain convertible preferred stock, options, warrants, or other securities exercisable for common stock, (2) changes in the equity ownership occurring in the last three years and (3) potential future changes in the equity ownership. The amount of an annual limitation can vary significantly based on factors existing at the date of an ownership change. A substantial portion of the net operating loss has been used to offset the Company’s U.S. federal tax liability, other than alternative minimum tax, generated by the Asset Sale.

Interest Rate Risk

      We are not currently exposed to changes in interest rates because we repaid our Senior Credit Facility in connection with the closing of the Asset Sale and we do not have any other borrowings.

Foreign Currency Risk

      We are not currently exposed to foreign currency risk because we do not currently have business operations and related sales and expenses.

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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, 2003 and 2002, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements 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, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States.

      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

Boston, Massachusetts

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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

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

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NEXTERA ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

										Series A
										Cumulative				Class A
		Class A				Class B				Convertible				Common				Additional				Retained
		Common				Common				Preferred				Treasury				Paid-in				Earnings
		Stock				Stock				Stock				Stock				Capital				(Deficit)
		(Dollar amounts in thousands)
Balance at December 31, 2000		$	31			$	4			$	21,098			$	(947	)		$	163,263			$	(41,077	)
Net loss			—				—				—				—				—				(117,523	)
Foreign currency translation adjustment			—				—				—				—				—				—
Unrealized holding loss on certain investments (net of reclassification adjustments)			—				—				—				—				—				—
Total comprehensive loss
Purchases of Class A Common Stock			—				—				—				(323	)			—				—
Issuance of treasury stock in connection with restricted stock issuances			—				—				—				976				192				—
Issuance of Class A Common Stock in connection with Employee Stock Purchase Plan			1				—				—				—				98				—
Value of warrants issued in connection with Senior credit facility			—				—				—				—				880				—
Conversion of debentures into Series A Preferred Stock			—				—				—				—				(83	)			—
Cumulative dividend on Series A Preferred Stock			—				—				1,846				—				(1,846	)			—
Balance at December 31, 2001			32				4				22,944				(294	)			162,504				(158,600	)
Net income			—				—				—				—				—				5,668
Foreign currency translation adjustment			—				—				—				—				—				—
Unrealized holding gain on certain investments (net of reclassification adjustments)			—				—				—				—				—				—
Total comprehensive income
Issuance of 228,303 shares of treasury stock in connection with restricted stock issuances			—				—				—				294				(294	)			—
Issuance of 238,256 of Class A Common Stock in connection with restricted stock issuances			—				—				—				—				—				—
Value of warrants issued in connection with Senior Credit Facility			—				—				—				—				192				—
Conversion of Series A Preferred Stock into debentures (including $328 put premium)			—				—				(20,328	)			—				—				—
Cumulative dividend on Series A Preferred Stock			—				—				1,347				—				(1,347	)			—
Balance at December 31, 2002			32				4				3,963				—				161,055				(152,932	)
Net income			—				—				—				—				—				4,487
Foreign currency translation adjustment			—				—				—				—				—				—
Unrealized holding gain on certain investments (net of reclassification adjustments)			—				—				—				—				—				—
Total comprehensive income
Option and warrant activity			—				—				—				—				1,782				—
Surrender of 1,885,825 shares of Class A Common Stock			(2	)			—				—				—				(790	)			—
Cumulative dividend of 2,924 shares on Series A Preferred Stock			—				—				292				—				(292	)			—
Balance at December 31, 2003		$	30			$	4			$	4,255			$	—			$	161,755			$	(148,445	)