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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NUMBER 0-25995
NEXTERA ENTERPRISES, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4700410
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
343 CONGRESS STREET, SUITE 2100, BOSTON, MASSACHUSETTS 02210-1215
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(617) 603-3100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
CLASS A COMMON STOCK, $0.001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filer pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of April 12, 2001, the aggregate market value of the registrant's
Class A voting stock held by non-affiliates of the registrant was approximately
$18,993,269 based on the closing price of the Company's Class A Common Stock on
the Nasdaq National Market on April 12, 2001 of $0.86 per share.
As of April 12, 2001, 31,396,789 shares of registrant's Class A Common
Stock, $0.001 par value, were outstanding and 3,848,560 shares of registrant's
Class B Common Stock, $0.001 par value, were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated into this report
by reference:
1. Part III. Registrant's definitive Proxy Statement to be filed with
the Securities and Exchange Commission within 120 days after the close of the
fiscal year.
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FORWARD LOOKING STATEMENTS
The following discussion contains "forward-looking statements."
Forward-looking statements give our current expectations or forecasts of future
events. These statements can be identified by the fact that they do not relate
strictly to historic or current facts. They use words such as "anticipate,"
"estimate," "expect," "project," "intend," "plan," "believe," and other words
and terms of similar meaning in connection with any discussion of future
operating or financial performance. In particular, these forward-looking
statements include statements relating to future actions or the outcome of
financial results. From time to time, we also may provide oral or written
forward-looking statements in other materials released to the public. Any or all
of the forward-looking statements in this annual report and in any other public
statements may turn out to be incorrect. They can be affected by inaccurate
assumptions or by known or unknown risks and uncertainties. Consequently, no
forward-looking statement can be guaranteed. Actual results may vary materially.
Forward-looking statements are based on many factors that may be outside our
control, causing actual results to differ materially from those suggested. These
factors include, but are not limited to, those discussed under the caption "Item
1. Business - Factors That May Affect Our Future Performance." New factors
emerge from time to time, and it is not possible for us to predict all these
factors nor can we assess the impact of these factors on our business or the
extent to which any factor or combination of factors may cause actual results to
differ materially from those contained in any forward-looking statements. Given
these risks and uncertainties, you should not place undue reliance on
forward-looking statements as a prediction of actual results.
PART I
ITEM 1. BUSINESS
OVERVIEW
Nextera Enterprises is a distinctive consulting firm with deep expertise in
economics, business strategy, organizational structure, human capital and
technology. We understand how to leverage the intricate relationship of
knowledge, people and technology to drive corporate value, delivering powerful,
end-to-end solutions - from strategy through implementation. In our
highly-collaborative environment, our experienced, accomplished consultants work
closely with clients to develop and implement innovative, impactful solutions
for managing the complex network relationships companies have with customers and
employees. Through our CUSTOMER RELATIONSHIP MANAGEMENT (CRM) SOLUTIONS and our
TALENT RELATIONSHIP/HUMAN CAPITAL MANAGEMENT (TR/HCM) SOLUTIONS approaches--we
have the insights and capabilities needed to strengthen anything and everything
that touches our clients' customers and talent.
Our approach integrates the deep competencies and industry experience of our
four central business groups:
- LEXECON CONSULTING GROUP: Cutting-edge economic and financial analysis
and litigation support to board-level clientele on a myriad of complex
business and transactional issues. Lexecon consultants -- comprising
renowned economists, academics, and Nobel laureates -- provide
unparalleled economic insights, industry points-of-view and
strategies.
- STRATEGIC SERVICES GROUP: Provides clients with solutions to their
most complex corporate-level and business-unit strategy problems,
developing comprehensive frameworks that incorporates both external
market perspectives and internal organizational perspectives. Our
approach couples deep expertise in human capital strategies, channel
and market strategies, pricing and customer loyalty with on-the-ground
management and operations experience.
- SIBSON CONSULTING GROUP: The global leader in motivating and
mobilizing people and aligning their actions toward strategic goals,
Sibson has been providing human capital management services for more
than 40 years. With a client list that has included more than half of
the Fortune 500, Sibson has a powerful presence in key practice areas
such as talent
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management, employee performance and rewards, management performance
and rewards, sales force effectiveness and change management.
- TECHNOLOGY SOLUTIONS GROUP: High value-added technology consulting
that emphasizes proven software packages in managing customers and
talent, among other applications. Our technology consultants are
experts with proven track records assembling, customizing and
executing a wide range of software solutions, as well as developing
web-based applications and systems and technical architecture design.
Nextera's integrated approach to relationship management blends aspects of all
of its core competencies:
ECONOMICS
- Identifying the potential value and impact of relationship
management solutions on the business
- Conducting pricing and cost structure analysis
STRATEGY
- Developing effective corporate, business unit and channel
strategies
- Aligning relationship management structures and models with
overall business strategy
HUMAN CAPITAL
- Developing programs that motivate and reward employees to
maximize new solutions
- Aligning sales forces with incentive and structure strategies
- Creating appropriate behavior-driven employee communication
and leadership initiatives to ensure that new processes are
adopted across the organization
TECHNOLOGY
- Defining appropriate systems specifications and strategies
- Integrating best-in-class package solutions into existing
organizational structures and processes
- Designing and supporting call centers
The breadth of Nextera's practice portfolio also allows it to assist clients
across a broad spectrum of industries, while providing specific focus and depth
in financial services, insurance, utilities, professional services, capital
services, high technology, pharmaceuticals and hospitality.
In addition to the practice areas and service offerings noted above, Nextera has
made selective minority investments in independently managed companies that it
believes are well positioned to take advantage of opportunities created by the
connected economy. It has co-invested in these companies with other well-known
early-stage investors.
INDUSTRY BACKGROUND
In today's connected economy, the challenges are more complex than ever.
Information is ubiquitous, and speed and agility are critical. And more than
ever, success is dependent on how a company manages and leverages all of its
network relationships - with customers, employees, investors, suppliers and
alliance partners. Businesses that are poised to succeed in this new era need
thought partners -- seasoned specialists with a strategic focus and deep skills
that can help them maximize the bottom-line impact of all of these
relationships.
While the consulting industry has grown rapidly to rival other large, more
established industries, most current consulting models are not meeting today's
changing marketplace needs. The typical consulting model has not fully addressed
the business need for comprehensive, integrated and collaborative consultancy
with deep expertise in economics, strategy, organizational design, human capital
and technology -- and the ability to tie it all together cohesively.
The firms with broad services/solutions are not typically addressing the most
complex, high-impact issues, while those that focus deeply on one or two key
issues typically do not have the integrated, end-to-end solution approach needed
to effectively execute new strategy. Few providers have offered the depth of
expertise or breadth of services needed to address today's most complex business
problems.
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OUR ADVANTAGE
Nextera boasts deep expertise, a superior reputation, cutting-edge thought
leadership and attractive client-side relationships in each of its competency
markets. Its collaborative, team-oriented environment provides consulting
services and integrated solutions to hundreds of loyal blue-chip clients. We
have expertise across a full spectrum - economics, strategy, organizational
management, human capital and technology - enabling us to deliver high-impact
work. Nextera's core assets include a cadre of exceptional talent -- nearly 500
consultants with deep skills that cover a broad set of services and deliver an
integrated, seamless product. Over half of our professionals have advanced
degrees, and we count among our ranks numerous PhDs and three Nobel laureates.
Through our Sibson and Lexecon business units, we have the long-standing
reputation necessary to continually attract and retain great talent. Our
top-flight executive management team has decades of experience in consulting and
industry alike. The firm has a global presence, with key offices in Boston,
Chicago, New York, San Francisco, Princeton, Cambridge, Raleigh, Rochester,
Atlanta, Los Angeles, London, Sydney and Toronto.
CLIENT PROFILE
Nextera's clients primarily consist of Global 2000 companies in targeted
industries including: financial services and insurance, capital services,
utilities, professional services, technology, hospitality, pharmaceuticals and
media and entertainment. Nextera also continues to expand its global reach,
benefiting from offices in Australia, Great Britain, and Canada. Nextera's 10
largest clients accounted for approximately 33 % of net revenues for the year
ended December 31, 2000 and 29% for the year ended December 31, 1999. No client
in either of these periods accounted for 10% or more of net revenues.
COMPETITION
The consulting industry includes a large number of competitors, is subject to
rapid change, and is highly competitive. The principal competitive factors in
consulting are reputation, thought leadership, industry expertise, analytical
ability, service, price, delivery capacity, and ability to attract and retain
top talent, we believe that we compete favorably with respect to these factors.
However, there are some factors outside of our control, including the ability of
competitors to hire, retain and compensate consultants, offer lower-priced
services, respond to client requirements and develop advanced services or
technology.
Consulting is a crowded business in which firms continually seek points of
competitive differentiation. There are literally thousands of consulting
companies that have grown from diverse backgrounds. We believe that there is a
void in the consulting space for providing integrated remedies for complex
business challenges. Boutique consultancies are often strong strategists, but do
not need to meet clients' needs for integrated solutions. The "Big Five"
accounting/consulting firms can offer end-to-end solutions, but typically at the
expense of depth of expertise in people, process and technology. Nextera's
primary competitors include participants from a variety of market segments,
including general management consulting companies, boutique management
consulting firms that provide specialized services or focus on certain
industries, "Big Five" and other accounting firms, economic consulting firms,
technical and economic advisory firms, individual academics, systems consulting
and implementation firms, application software firms, service groups of computer
equipment companies, outsourcing companies and systems integration companies.
Many of these competitors have significantly greater financial, technical, and
marketing resources and greater name recognition than Nextera does. In addition,
many of these competitors have been operating for a significantly longer period
of time than has Nextera and have established long-term client relationships.
Nextera also competes with its clients' internal resources, particularly where
the resources represent a fixed cost to the client. This competition may impose
additional pricing pressures on Nextera. In addition, we face intense
competition in our efforts to recruit and retain qualified consultants.
INTELLECTUAL PROPERTY RIGHTS
Our success has resulted, in part, from our analytical templates,
application frameworks, software objects and customizable applications. We rely
upon a combination of nondisclosure, confidentiality, license and other
contractual arrangements and trade secret, copyright and trademark laws to
protect our proprietary rights and the proprietary rights of third parties from
whom we license intellectual property. In addition, we generally limit the
distribution of our proprietary
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information. The steps we have taken to protect our intellectual property may
not be adequate to deter misappropriation of our proprietary information, detect
unauthorized use, enforce our intellectual property rights or ensure that
competitors will not be able to develop similar or functionally equivalent
methodologies. Furthermore, effective copyright and trade secret protection may
be unavailable or limited in certain foreign countries, and foreign copyright
and trade secret laws may be inadequate to protect our intellectual property
rights. Although we believe that our services do not infringe on the
intellectual property rights of others and that we have all rights necessary to
utilize the intellectual property we employ in our business, our employees may
misappropriate the intellectual property of others. Accordingly, we are subject
to the risk of claims alleging infringement of third-party intellectual property
rights. Any such claims could require us to spend significant sums in
litigation, pay damages, develop non-infringing intellectual property or acquire
licenses to the intellectual property that is the subject of asserted
infringement. We presently hold no patents or registered copyrights.
EMPLOYEES
As of December 31, 2000, Nextera had 685 employees, including 488 consultants.
None of our employees is represented by a union or subject to a collective
bargaining agreement. We believe that our relations with our employees are good.
FACTORS THAT MAY AFFECT OUR FUTURE PERFORMANCE
You should carefully consider the following risk factors in your evaluation of
our Company. If any of the following risks actually occur it could materially
harm our business and impair the price of our stock.
WE HAVE A HISTORY OF LOSSES AND WE MAY NOT SUSTAIN OR INCREASE PROFITABILITY.
Since our inception in February 1997, we have incurred, on an historical
basis, net losses of $3.0 million and $17.2 million for the years ended December
31, 1997 and 1998, net income of $3.1 million for the year ended December 31,
1999 and a net loss of $24.0 for the year ended December 31, 2000. We intend to
continue to make significant investments in:
- the development of our infrastructure;
- marketing and sales; and
- geographic expansion.
As a result, it is possible that we may not sustain or increase our
profitability in the future even if our revenues increase.
OUR LENDERS HAVE GRANTED WAIVERS OF NON-COMPLIANCE PURSUANT TO CERTAIN COVENANTS
UNDER OUR SENIOR CREDIT FACILITY
We are currently not in compliance with certain covenants contained in our
senior credit facility. Our lenders have granted waivers of non-compliance
through January 2, 2002. Under the terms of these waivers, we may not borrow
additional amounts under this facility without our lenders' consent.
Additionally, we are required to make an aggregate of $8.05 million in principal
payments by December 31, 2001, comply with additional covenants and restrictions
and pay $900,000 in waiver fees. Moreover, we may be required to pay a higher
interest rate if all obligations under the credit facility are not repaid in
full on or before December 15, 2001. We will also be required to make a partial
payment of our excess Consolidated EBITA and on January 15, 2002 we will be
required to deliver cash collateral for all outstanding letters of credit ($2.9
million as of March 30, 2001). If we fail to make these payments or fail to
comply with the other terms of the waivers, the lenders under the senior credit
facility would be entitled to exercise any remedy available to them, including a
possible acceleration of all amounts due. Such an occurrence would materially
and adversely affect our operations and financial condition. Please see Part II,
Item 7 - Liquidity and Capital Resources.
WE FACE POSSIBLE DELISTING FROM THE NASDAQ NATIONAL MARKET WHICH COULD RESULT IN
A LIMITED PUBLIC MARKET FOR OUR CLASS A COMMON STOCK
There are several requirements for continued listing of our Class A Common
Stock on the Nasdaq National Market including, but not limited to, $4.0 million
in net tangible assets and a minimum stock price of one dollar per share. Our
net tangible assets as of December 31, 2000 were ($14.1) million dollars. As of
April 16, 2001, the last reported sales price of our Class A Common Stock had
been less than one dollar per share for 18 consecutive trading days. We may
receive notification from the Nasdaq Stock Market ("Nasdaq") that our stock will
be delisted from the Nasdaq National Market unless our net tangible assets
increase to at least $4.0 million. Additionally, if our Class A Common Stock
price closes below one dollar per share for 30 consecutive days, we may receive
notification from Nasdaq that our Common Stock will be delisted from the Nasdaq
National Market unless the stock closes at or above one dollar per share for at
least ten consecutive days during the 90-day period following such notification.
If Nasdaq, in its discretion, decides to delist our Class A Common Stock we
would have the right to appeal this decision, however, there can be no
assurances that such an appeal would be successful. If our Class A Common Stock
is delisted, then we may apply for listing on the Nasdaq Smallcap Market,
subject to Nasdaq's approval. The Nasdaq Smallcap Market requires a minimum
stock price of one dollar per share, and there can be no assurance that we will
be able to meet this requirement. If not, our Class A Common Stock may trade
only over-the-counter. Delisting from the Nasdaq National Market could adversely
affect the liquidity and price of our Class A Common Stock and it could have a
long-term impact on our ability to raise future capital.
GLOBAL ECONOMIC UNCERTAINTY MAY AFFECT THE CAPITAL EXPENDITURES OF OUR
CUSTOMERS.
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The Internet and technology markets have been negatively impacted by certain
generic factors, including global economic difficulties and uncertainty,
declines in the stock market on which our Class A Common Stock trades,
reductions in capital expenditures by large customers, and increasing
competition. These factors could in turn give rise to deferral or delay of
customer purchasing decisions, and increased price competition. The presence of
such factors in the Internet and technology markets could harm our operating
results.
IF THE GROWTH OF COMMERCE ON THE INTERNET IS SLOWER THAN EXPECTED, THE NUMBER
AND SCOPE OF OUR PROJECTS COULD DECLINE CAUSING A REDUCTION IN OUR REVENUES.
Because Internet technologies are central to many of our capabilities, our
business depends on continued growth in the use of the Internet by our clients,
prospective clients and their customers and suppliers. If the number of Internet
users does not increase and commerce over the Internet does not become more
accepted and widespread, demand for our services may decrease causing our
revenues to decline. If Internet usage grows too rapidly, the existing Internet
infrastructure may not support the demands this growth will place on it. Factors
which may affect Internet usage or the acceptance of electronic commerce
include:
- actual or perceived lack of security of information;
- lack of access and ease of use;
- Internet congestion or other usage delays;
- inconsistent quality of service;
- increases in Internet access costs;
- increased governmental regulation;
- uncertainty regarding intellectual property ownership;
- reluctance to adopt new business methods; and
- the economic viability of the Internet commerce model.
WE MAY NOT BE ABLE TO OBTAIN THE ADDITIONAL CAPITAL NECESSARY FOR US TO CARRY
OUT OUR BUSINESS STRATEGY, WHICH COULD HINDER OUR GROWTH. IN ADDITION, THE TERMS
OF ANY ADDITIONAL CAPITAL MAY BE UNFAVORABLE TO US OR OUR STOCKHOLDERS.
Implementation of our growth strategy will likely require continued access
to capital. We may require additional financing in amounts that we cannot
determine at this time. If our plans or assumptions change or are inaccurate, we
may be required to seek capital sooner than anticipated. We may need to raise
funds through public or private debt or equity financings.
If funds are raised through the issuance of equity securities, the
percentage ownership of our then-current stockholders may be reduced and the
holders of new equity securities may have rights, preferences or privileges
senior to those of the holders of our common stock. If additional funds are
raised through a bank credit facility or the issuance of debt securities, the
holder of this indebtedness would have rights senior to the rights of the
holders of our common stock and the terms of this indebtedness could impose
restrictions on our operations. If we need to raise additional funds, we may not
be able to do so on terms favorable to us, or at all. If we cannot raise
adequate funds on acceptable terms, we may be unable to continue to fund our
operations.
IF WE FAIL TO ATTRACT, RETAIN AND TRAIN SKILLED CONSULTANTS, OUR REPUTATION WILL
SUFFER AND OUR OPERATING MARGINS COULD DECLINE.
Because our business involves the delivery of professional services and is
labor-intensive, our success depends in large part upon our ability to attract,
retain, motivate and train highly skilled consultants. If we fail to do so it
could impair our ability to effectively manage and complete our client projects
and secure future client engagements, and as a result our reputation could
suffer.
Qualified business consultants are in great demand and are likely to remain
a limited resource for the foreseeable future. Because we have experienced
growth principally through the acquisition of other companies, substantially all
of our current
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consultants were initially hired by one of the companies we have acquired. These
consultants may not continue to be satisfied with our culture, benefits or the
prospects for advancement within our company.
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 will reduce our revenues and could
adversely affect our operating margins.
OUR REVENUES AND PROSPECTS ARE DIFFICULT TO FORECAST BECAUSE WE HAVE A LIMITED
COMBINED OPERATING HISTORY.
We were formed in February 1997 and have grown substantially since our
inception, principally through the acquisition of other companies. Although some
of the companies we have acquired have been in operation for some time, we have
a limited history of combined operations. To achieve the anticipated benefits of
these transactions we will need to successfully integrate, preserve and expand
the businesses and operations of the companies we have acquired. However, we may
encounter financial, managerial or other difficulties as a result of the
difficulties involved in integrating our combined operations. Accordingly, you
should assess our prospects in light of the risks and difficulties frequently
encountered by companies in the early stages of development in new and rapidly
evolving industries.
If we are unsuccessful in addressing these risks, we may experience losses as a
result of these acquisitions. As a result, we may not meet the expectations of
market analysts and investors which could cause our stock price to decline.
FAILURE TO SUCCESSFULLY INTEGRATE AND EFFECTIVELY SOLVE THE FINANCIAL AND OTHER
CHALLENGES ARISING FROM OUR ACQUISITIONS COULD REDUCE OUR PROFITABILITY.
Since our inception, we have significantly expanded through acquisitions and
expect to pursue additional acquisitions to expand our geographic presence, gain
access to new technologies, obtain experienced consultants and enhance our
capabilities, service offerings and client base. The timing, magnitude and
success of our acquisition efforts and the related capital expenditures and
commitments cannot be predicted. Acquisitions involve a number of special risks,
including:
- successful integration of the acquired businesses into our existing
organization and culture without substantial expense, delays or other
operational or financial costs or problems;
- significant diversion of management's attention;
- potential failure to retain key acquired personnel;
- unanticipated events, circumstances or legal liabilities; and
- potential dilution of earnings per share.
For the foreseeable future, we will be unable to account for our
acquisitions under the pooling-of-interests method of accounting. Accordingly,
we will be required to account for acquisitions under the purchase method of
accounting, which may result in substantial additional annual non-cash
amortization charges for goodwill and other intangible assets in our statement
of operations. Further, the businesses we acquire may not achieve expected
results or generate anticipated revenues or earnings. If realized, any of these
factors could cause a decrease in our revenues and a decline in the price of our
stock.
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. Additionally, our products are subject
to long sales cycles. As a result, if expected revenues are not realized as
anticipated, our quarterly financial results could be materially harmed. As a
result, we believe that period-to-period comparisons of our operating results
are not necessarily meaningful, and you should not rely on them as an indication
of our future performance.
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POTENTIAL WRITE-OFF OF GOODWILL AND OTHER INTANGIBLE ASSETS RELATING TO
PERSONNEL COULD REDUCE OUR REVENUES.
As of December 31, 2000, our intangible assets, net of accumulated
amortization, were approximately $159.5 million. Intangible assets at December
31, 2000, net of accumulated amortization, included $156.0 million of goodwill
and $3.5 million for intangibles relating to personnel and trademarks.
Intangible assets are being amortized by us on a straight-line basis principally
over 40 years for goodwill and over five years for intangibles relating to
personnel. Our future acquisitions can be expected to result in additional
goodwill and intangible assets.
The amount amortized in a particular period constitutes a non-cash expense
that reduces our net income. In accordance with accounting guidelines, we
periodically evaluate the recoverability of goodwill when indications of
possible impairment are present by reviewing the anticipated undiscounted future
cash flows from operations and comparing such cash flows to the carrying value
of the associated goodwill. If goodwill becomes impaired, we will be required to
write down the carrying value of the goodwill and incur a related charge to our
income. A write down of goodwill would result in a reduction in our net income.
IF WE FAIL TO MANAGE OUR GROWTH, OUR REVENUES MAY DECREASE CAUSING OUR STOCK
PRICE TO DECLINE.
We have experienced a period of rapid growth that has challenged, and will
likely continue to challenge, our managerial and other resources.
In order to manage our growth effectively, we must:
- recruit and hire additional consultants and develop, motivate and
manage effectively our expanding work force;
- establish offices in new geographic locations;
- enhance our operating, financial and management information systems;
and
- maintain project quality, successfully negotiate competitive rates and
fees and maintain high employee utilization rates, particularly if the
average size or number of our projects continues to increase.
If we are unable to accomplish these objectives, our reputation will suffer, we
may be unable to attract new clients and our revenues could decrease causing a
decline in the price of our stock.
WE HAVE RELIED AND MAY CONTINUE TO RELY ON A LIMITED NUMBER OF CLIENTS AND
INDUSTRIES FOR A SIGNIFICANT PORTION OF OUR REVENUES AND, AS A RESULT, THE LOSS
OF OR A SIGNIFICANT REDUCTION IN WORK PERFORMED FOR ANY OF THEM COULD RESULT IN
REDUCED REVENUES.
We have in the past derived, and may in the future derive, a significant
portion of our net revenues from a relatively limited number of clients. To the
extent that any client or industry uses less of our services or terminates its
relationship with us, our revenues could decline accordingly. For example, for
the year ended December 31, 2000, our ten largest clients accounted for
approximately 33% of our net revenues. For the year ended December 31, 2000, our
largest client accounted for approximately 9.7% of our net revenues. Further,
clients in the financial services; information technologies, communications and
entertainment; and insurance industries accounted for approximately 25%, 16%,
and 11%, respectively, of our net revenues for the year ended December 31, 2000.
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.
WE DEPEND ON OUR SENIOR CONSULTING EXECUTIVES AND OTHER KEY PERSONNEL, AND THE
LOSS OF ANY THEM MAY DAMAGE CLIENT RELATIONSHIPS AND CAUSE OUR REPUTATION TO
SUFFER.
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Our success is highly dependent upon the efforts, abilities, business
generation capabilities and project execution skills of our senior consulting
executives and other key personnel. This dependence is particularly important to
our business because personal relationships are a critical element of obtaining
and maintaining client engagements. The loss of the services of any of these
persons for any reason could have an adverse effect on our reputation and our
ability to secure and complete engagements. We may not be able to retain these
persons or to attract suitable replacements or additional personnel if
necessary. We generally do not maintain key person life insurance coverage for
our employees.
In addition, if any of these key employees joins a competitor or forms a
competing business, some of our clients might choose to use the services of that
competitor or new company. Further, in the event of the loss of any such
personnel, we may not be able to prevent the unauthorized disclosure or use of
our technical knowledge, practices or procedures by these personnel. As a
result, we might lose existing or potential clients.
NEXTERA ENTERPRISES HOLDINGS OWNS 67.6% OF OUR VOTING STOCK AND CAN CONTROL
MATTERS SUBMITTED TO OUR STOCKHOLDERS AND ITS INTERESTS MAY BE DIFFERENT FROM
YOURS.
Nextera Enterprises Holdings owns 8,810,000 shares of Class A Common Stock
and 3,844,200 shares of Class B Common Stock, which together represent
approximately 67.6% of the voting power of our outstanding common stock. The
Class A Common Stock entitles its holders to one vote per share, and the Class B
Common Stock entitles its holders to ten votes per share, on all matters
submitted to a vote of our stockholders, including the election of the members
of the Board of Directors. Accordingly, Nextera Enterprises Holdings will be
able to determine the disposition of all matters submitted to a vote of our
stockholders, including mergers, transactions involving a change in control and
other corporate transactions and the terms thereof. In addition, Nextera
Enterprises Holdings will be able to elect all of our directors, except for two
directors to be elected in accordance with the terms of a stockholders
agreement. This control by Nextera Enterprises Holdings could materially
adversely affect the market price of the Class A Common Stock or delay or
prevent a change in control of our company.
Nextera Enterprises Holdings is indirectly controlled by Knowledge Universe,
Inc. Knowledge Universe, Inc. owns 210,000 shares of Series A Cumulative
Convertible Preferred Stock that it can convert into shares of our Class A
Common Stock after June 30, 2001, if such shares have not previously been
exchanged into debentures or called by us (see Note 10 to Consolidated Financial
Statements - Series A Cumulative Convertible Preferred Stock). 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. Lowell J. Milken is the brother of Michael R.
Milken.
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IF WE FAIL TO MEET OUR CLIENTS' EXPECTATIONS, WE COULD DAMAGE OUR REPUTATION AND
HAVE DIFFICULTY ATTRACTING NEW BUSINESS.
Our client engagements often involve projects that are complex and critical
to the operation of a client's business. Our failure or inability to meet a
client's expectations in the performance of our services could result in damage
to our reputation, which could adversely affect our ability to attract new
business from that client or others. In addition, if we fail to perform
adequately on a project, a client could refuse to pay or sue us for economic
damages which could further damage our reputation or cause a reduction in
revenues.
WE COULD LOSE MONEY ON OUR FIXED-PRICE OR CAPPED-FEE CONTRACTS.
We have undertaken and expect in the future to undertake certain projects
under fixed-price or capped-fee billing arrangements, which are distinguishable
from our principal method of utilizing time and materials billing arrangements.
To achieve profitability from fixed-price or capped-fee contracts, we must,
among other things:
- accurately estimate the resources required to perform these contracts;
- complete our clients' projects on a timely basis;
- effectively manage our clients' expectations; and
- complete the projects within budget and to our clients' satisfaction.
If we are unable to accomplish these goals, we could be exposed to cost
overruns and penalties. If this occurs in connection with a large project or a
sufficient number of projects, our revenues would decline.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTY RELATING TO OUR MARKETS COULD RESULT
IN DECREASED DEMAND FOR OUR SERVICES, INCREASED COSTS OR OTHERWISE HARM OUR
BUSINESS CAUSING A REDUCTION IN REVENUES.
For the year ended December 31, 2000 we derived approximately 38% of our net
revenues from economic and litigation consulting services related to antitrust
matters, mergers and acquisitions and other securities matters. A substantial
portion of these net revenues were derived from engagements relating to United
States antitrust and securities laws. Changes in these laws, changes in judicial
interpretations of these laws or less vigorous enforcement of these laws by the
United States Department of Justice, the United States Federal Trade Commission
or other federal agencies as a result of changes in philosophy, political
decisions, priorities or other reasons could materially reduce the magnitude,
scope, number or duration of engagements available to us in these areas.
In addition, adverse changes in general economic conditions or conditions
influencing merger and acquisition activity could have an adverse impact on
engagements in which we assist clients in connection with these types of
transactions. Any reductions in the number of our securities, antitrust and
mergers and acquisitions consulting engagements could cause a reduction in our
revenues.
IF A LARGE CLIENT PROJECT OR A SIGNIFICANT NUMBER OF OTHER CLIENT PROJECTS ARE
TERMINATED OR REDUCED, WE MAY HAVE A LARGE NUMBER OF EMPLOYEES WHO ARE NOT
GENERATING REVENUE.
Our clients engage us on a project-by-project basis, often without a written
contract, and a client can generally terminate an engagement with little or no
notice to us and without penalty. When a client defers, modifies or cancels a
project, we must be able to rapidly deploy our consultants to other projects in
order to minimize the underutilization of our employees. In addition, our
operating expenses are relatively fixed and cannot be reduced on short notice to
compensate for unanticipated variations in the number or size of projects in
progress. Thus, any termination, significant reduction or modification of our
business relationships with any of our significant clients or with a number of
smaller clients would have an adverse impact on our ability to generate revenue.
As a result, we believe that the number of our clients or the number and size of
our existing projects may not be reliable indicators or measures of future net
revenues.
POTENTIAL CONFLICTS OF INTERESTS REDUCE THE NUMBER OF BOTH POTENTIAL CLIENTS AND
ENGAGEMENTS.
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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 entities which may have interests which are adverse to the
subject matter of such engagements. In addition, we may be precluded from
accepting engagements due to clients' expectations of loyalty, perceived
conflicts of interests or other reasons. Accordingly, the number of both
potential clients and potential engagements is limited, particularly in the
economic consulting and litigation services markets. Moreover, in many of the
industries in which we provide economic and litigation consulting services,
there has been a continuing trend toward business consolidations and strategic
alliances which further reduce the number of potential clients for our services
and increase the likelihood that we will be unable to continue certain ongoing
engagements or accept certain new engagements as a result of conflicts of
interests, which could reduce our revenues.
WE MAY NOT SUCCESSFULLY COMPETE WITH OUR COMPETITORS, WHICH COULD RESULT IN
REDUCED MARGINS.
We compete in markets that are new, intensely competitive and rapidly
changing. We believe that the principal competitive factors in the consulting
services and e-business industries are reputation, industry expertise,
analytical ability and price. We also believe that our ability to compete
depends in part on a number of factors outside of our control, including the
ability of our competitors to hire, retain and compensate consultants, offer
lower-priced services, respond to client requirements and develop advanced
services or technology.
Our primary competitors include participants from a variety of market
segments, including:
- general management consulting companies;
- boutique management consulting firms that provide specialized services
or focus on certain industries;
- "Big Five" and other accounting firms;
- economic consulting firms;
- technical and economic advisory firms;
- individual academics;
- systems consulting and implementation firms;
- application software firms;
- service groups of computer equipment companies;
- outsourcing companies; and
- systems integration companies.
Many of our current and potential competitors have advantages over us. These
advantages include longer operating histories, larger client bases, greater name
recognition and significantly greater financial, technical and marketing
resources. We have faced, and expect to continue to face, additional competition
from new entrants into our markets and from our clients' internal resources. In
addition, we face intense competition in our efforts to recruit and retain
qualified consultants. Each of these competitive factors may limit our ability
to increase prices or fees commensurate with increases in labor costs which
could result in reduced margins. We cannot assure that we will be able to
compete successfully with existing or new competitors.
OUR INTERNATIONAL EXPANSION COULD RESULT IN FINANCIAL LOSSES DUE TO CHANGES IN
FOREIGN ECONOMIC CONDITIONS AS WELL AS FLUCTUATIONS IN CURRENCY AND EXCHANGE
RATES.
We have engaged in projects in Canada, the United Kingdom and Australia and
one of the components of our growth strategy is to expand our international
presence and seek additional business outside the United States. For example, we
derived approximately 6% of our net revenues from clients outside of the United
States for the year ended December 31, 2000.
Our international business operations are and will be subject to a number of
risks, including:
- unexpected changes in regulatory requirements, taxes, trade laws and
tariffs;
- political and economic instability and fluctuations in foreign
currency exchange rates;
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- increased expenses associated with establishing foreign repair and
support operations and complying with differing labor regulations; and
- reduced intellectual property rights and protections.
There can be no assurance that these factors will not adversely affect our
financial condition.
IF WE FAIL TO KEEP PACE WITH CHANGING TECHNOLOGIES, WE MAY LOSE CLIENTS.
Our markets are characterized by rapidly changing technologies, frequent new
product and service introductions and evolving industry standards. These changes
could render our existing service practices and methods out-of-date. Our success
will depend, in part, on our ability to:
- improve on the performance and reliability of existing services;
- develop new services and solutions that address the increasingly
sophisticated and varied needs of our clients;
- respond to technological advances; and
- respond to emerging industry standards and practices.
If we do not respond adequately to address these developments, our clients
may turn to our competition for their consulting and e-business needs.
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.
WE MAY NOT BE ABLE TO PROTECT OUR CONFIDENTIAL INFORMATION AND INTELLECTUAL
PROPERTY RIGHTS.
Our success is dependent in part upon certain methodologies and other
proprietary intellectual property rights. We rely upon a combination of
nondisclosure, confidentiality (including confidentiality agreements with
employees), license, employment and client agreements, and trade secret,
copyright and trademark laws to protect our proprietary rights and the
proprietary rights of third parties from whom we license intellectual property.
However, the steps we have taken to protect our intellectual property rights may
be inadequate to deter misappropriation of our proprietary information, prevent
our competitors from developing similar or functionally equivalent methodologies
or detect unauthorized use of our proprietary information so that we can take
appropriate steps to enforce our rights. Furthermore, effective copyright and
trade secret protection may be unavailable or limited in certain foreign
countries, and foreign copyright and trade secret laws may be inadequate to
protect our intellectual property rights.
In addition, we are subject to risk of claims alleging infringement of
third-party intellectual property rights. Any such claims could require us to
spend significant sums in litigation, damages, developing non-infringing
intellectual property or acquiring licenses to the intellectual property that is
the subject of the asserted infringement, any of which could reduce our
revenues.
OUR STOCK PRICE MAY BE VOLATILE AND YOU COULD LOSE ALL OR PART OF YOUR
INVESTMENT.
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We expect that the market price of our common stock will be volatile. We are
involved in a highly competitive, rapidly changing industry and stock prices in
our and similar industries have risen and fallen in response to a variety of
factors, including:
- quarter-to-quarter variations in operating results;
- entering into, or failing to enter into or renew, a material contract
or order;
- acquisitions of, or strategic alliances among, companies with our
industry;
- changes in recommendations by securities analysts regarding the
results or prospects of providers of wireless communications products
and services;
- changes in investor perceptions of the acceptance or profitability of
consulting and e-commerce services; and
- market conditions in the industry and the economy as a whole.
The market price for our common stock may also be affected by our ability to
meet investors' or securities analysts' expectations. Any failure to meet these
expectations, even slightly, may result in a material decline in the market
price of our common stock. In addition, the stock market is subject to extreme
price and volume fluctuations. This volatility has had a significant effect on
the market prices of securities issued by many companies for reasons unrelated
to the operating performance of these companies. In the past, following periods
of volatility in the market price of a company's securities, securities class
action litigation has often been instituted against that company. If similar
litigation were instituted against us, it could result in substantial costs and
a diversion of our management's attention and resources.
ITEM 2. PROPERTIES
Our corporate headquarters is located in Boston, Massachusetts in a leased
facility consisting of approximately 51,260 square feet, under a 10-year lease
that expires in April 2011. We also occupy leased office space in Los Angeles,
California; San Francisco, California; Atlanta, Georgia; Chicago, Illinois;
Princeton, New Jersey; New York, New York; Rochester, New York; Raleigh, North
Carolina; Toronto, Canada; London, England; and Sydney, Australia. 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.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
quarter ended December 31, 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Class A Common Stock, $0.001 par value per share, has traded on
the Nasdaq National Market under the symbol "NXRA" since May 18, 1999. The
following table sets forth the high and low sale prices for our Class A Common
Stock as reported by the Nasdaq National Market in each of the periods
indicated:
PERIOD HIGH LOW
------ ---- ---
Calendar Year - 1999
First Quarter............................... $ N/A $ N/A
Second Quarter.............................. $ 10.25 $ 6.31
Third Quarter............................... $ 9.07 $ 3.56
Fourth Quarter.............................. $ 13.19 $ 3.50
Calendar Year - 2000
First Quarter............................... $ 13.62 $ 7.00
Second Quarter.............................. $ 7.94 $ 3.75
Third Quarter............................... $ 5.75 $ 2.88
Fourth Quarter.............................. $ 3.38 $ 0.47
As of April 12, 2001 there were 31,396,789 shares of Class A Common
Stock outstanding held by approximately 214 holders of record.
We have never paid or declared any cash dividends on our Common Stock
and do not intend to pay dividends on our Common Stock in the foreseeable
future. We intend to retain any earnings for use in the operation and expansion
of our business.
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ITEM 6. SELECTED FINANCIAL DATA
The following tables contain selected consolidated financial data as of December
31 for each of the years 1997 (February 26, 1997 inception) through 2000 and for
each of the years in the four year period ended December 31, 2000. The selected
consolidated financial data have been derived from our audited consolidated
financial statements.
When you read this summary, it is important that you read along with it the
financial statements and related notes in our annual and quarterly reports filed
with the Securities and Exchange Commission, as well as the section of our
annual and quarterly reports titled "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
PERIOD FROM
FEBRUARY 26, 1997
(DATE OF
INCEPTION)
THROUGH DECEMBER
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net revenues .............................. $ 161,000 $ 155,955 $ 67,590 $ 7,998
Cost of revenues .......................... 98,394 87,835 44,985 4,718
--------- --------- --------- ---------
Gross profit ............................ 62,606 68,120 22,605 3,280
Selling, general and administrative
expenses .................................. 61,066 44,975 23,103 5,306
Amortization expense ...................... 5,436 4,723 1,722 255
Special charges ........................... 8,162 7,405 7,969 --
--------- --------- --------- ---------
Income (loss) from
operations .............................. (12,058) 11,017 (10,189) (2,281)
Other income (expense),
net ..................................... (13,205) (8,836) (6,723) (32)
--------- --------- --------- ---------
Income (loss) before
income taxes ............................ (25,263) 2,181 (16,912) (2,313)
Provision (benefit) for
income taxes ............................ (1,291) (884) 243 702
--------- --------- --------- ---------
Net income (loss) ......................... $ (23,972) $ 3,065 $ (17,155) $ (3,015)
========= ========= ========= =========
Net income (loss) per common share,
basic.................................... (0.69) 0.10 (1.14) (0.74)
Net income (loss) per common share,
diluted.................................. (0.69) 0.10 (1.14) (0.74)
Weighted Average common shares
outstanding, basic ...................... 35,121 29,990 14,997 4,061
Weighted Average common shares
outstanding, diluted .................... 35,121 30,441 14,997 4,061
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
CONSOLIDATED BALANCE SHEET DATA: (IN THOUSANDS)
Cash and cash equivalents ................. $ 4,322 $ 7,011 $ 1,496 $ 554
Working capital (deficit) ................. 11,097 33,035 (62,399) (335)
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Total assets .............................. 234,102 226,762 176,691 22,655
Total short-term debt and capital
lease obligations........................ 13,962 938 82,487 1,833
Total long-term debt and capital
lease obligations........................ 52,468 56,798 55,749 969
Total stockholders' equity ................ 141,977 146,057 14,852 16,732
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
OVERVIEW
We generate net revenues by providing business, economic, and information
technology consulting services primarily under time and materials, fixed-price
or capped-fee billing arrangements. Under time and materials billing
arrangements, revenues are recognized as the services are performed. Revenues on
fixed-price and capped-fee contracts are recognized using the percentage of
completion method of accounting and are adjusted monthly for the cumulative
impact of any revision in estimates. We determine the percentage of completion
of our contracts by comparing costs incurred to date to total estimated costs.
Contract costs include direct labor and expenses related to performance of the
contract. We believe that the majority of our work will continue to be performed
under time and materials billing arrangements. Net revenues exclude reimbursable
expenses charged to clients. We typically bill on a monthly basis to monitor
client satisfaction and manage our outstanding accounts receivable balances. Our
net revenues are substantially derived from clients located in the United States
and Canada.
Gross profit is derived from net revenues less the cost of revenues, which
includes salaries, bonuses and benefits paid to consultants. Our financial
performance is primarily based upon billing margin (billable daily rate less the
consultant's daily cost) and personnel utilization rates (billable days divided
by paid days). We monitor our engagements to manage billing and utilization
rates. We derive a substantial majority of our net revenues from engagements
billed on a time and materials basis. We are generally able to pass increases in
our cost of revenues along to our clients to the extent that we bill engagements
on a time and materials basis. We generally are unable to pass along increases
in our cost of revenues with respect to engagements billed on a fixed-price or
capped-fee basis. Generally, clients are billed for expenses incurred by us on
the clients' behalf. In addition, we closely monitor and attempt to control
expenses that are not passed through to our clients. Incentive compensation
expenses paid to consultants have a large variable component relating to net
revenues and profit and, therefore, vary based upon our ability to achieve our
operating objectives.
Selling, general and administrative expenses consist of salaries and
benefits of certain senior management and other administrative personnel and
training, marketing and promotional costs. These expenses are associated with
our development of new business and with our management, finance, recruiting,
marketing and administrative activities. Incentive compensation expenses for
certain senior management also have a significant variable component relating to
net revenues and profit and, therefore, vary based upon our ability to achieve
our operating objectives.
Through December 31, 1998, we and certain of our subsidiaries were treated
as partnerships for federal and state income tax purposes and items of income,
expense and tax credit were passed through to our respective equity holders.
Nextera Business Performance Solutions Group, Inc. (formerly named Symmetrix,
Inc.) and Pyramid Imaging, Inc. (subsequently merged into Nextera Business
Performance Solutions Group, Inc.), two of our wholly-owned subsidiaries, were
subject to federal and state income taxes for periods ended prior to January 1,
1999. Our provision for income taxes for periods ended through December 31, 1998
reflect the accrued tax liabilities of these two subsidiaries and certain items
of income and loss from the ownership of Lexecon Inc. Effective December 31,
1998, we changed to corporate form and became subject to federal and state
income taxes applicable to "C" corporations. Our tax provisions, both
historically and for periods ending after December 31, 1998, did and are
expected to vary from the federal statutory rate of 34% predominately due to
valuation allowance adjustments, nondeductible goodwill amortization,
utilization of post-acquisition net operating losses, state and local taxes and
nondeductible meal expenses.
PREFERRED STOCK
On December 14, 2000, the Company entered into a Note Conversion Agreement with
Knowledge Universe, Inc. (the Note Conversion Agreement). Under the terms of the
Note Conversion Agreement, Knowledge Universe, Inc. converted $21,000,000 of
debentures into 210,000 shares of $0.001 par value Series A Cumulative
Convertible Preferred Stock (Series A Preferred Stock). The Series A Preferred
Stock bears dividends at a 10% rate from issuance through June 30, 2001 and at a
7% rate thereafter. Such dividends are payable quarterly in arrears in cash or,
at the option of the Company, in additional nonassessable shares of Series A
Preferred Stock.
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ACQUISITIONS
We were founded in February 1997 and have focused on building our portfolio
of practice areas primarily through selective acquisitions through December 31,
1998 and, to a lesser extent, internal growth. The Company has pursued an
acquisition strategy resulting in the acquisitions detailed below. Our results
of operations have been, and will continue to be, affected by substantial annual
non-cash amortization charges for goodwill as a result of these acquisitions
being accounted for under the purchase method of accounting. For the foreseeable
future, we will be unable to account for future acquisitions under the
pooling-of-interests method of accounting because, among other reasons, we are a
controlled subsidiary. Accordingly, our historical Consolidated Financial
Statements include operating results of the acquired companies only from the
effective date of each respective acquisition. We are amortizing intangible
assets on a straight-line basis over 5 years for intangibles relating to
personnel and principally over 40 years for all other intangibles, including
goodwill. We periodically evaluate whether recent events and circumstances have
occurred that indicate the acquired goodwill lives or valuation may warrant
revision.
2000 ACQUISITION
Effective January 1, 2000, the Company acquired substantially all of the
assets and certain liabilities of Cambridge Economics, Inc. ("Cambridge
Economics"), a Massachusetts-based consulting firm that provides strategic,
economic and business transformation and other services to a diverse group of
domestic and international clients. Cambridge Economics was acquired for $8.4
million of cash and a $2.1 million promissory note due January 2002.
1999 ACQUISITIONS
Effective September 30, 1999, the Company, through Sibson AP, LLC, a newly
formed acquisition subsidiary of the Company, acquired substantially all of the
assets of SCCAP Pty Limited ("SCCAP"), an Australian human resources consulting
firm, for $1.7 million in cash.
Effective June 1, 1999, the Company acquired substantially all of the assets
and certain liabilities of The Economics Resource Group, Inc. ("ERG"), a
Massachusetts-based consulting firm that provides economic and strategic
services primarily to energy and other regulated industries. ERG was acquired
for $9.6 million of cash and a $2.4 million promissory note payable January 1,
2001.
Effective May 18, 1999, the Company acquired NeoEnterprises, Inc.
("NeoEnterprises"), a Connecticut-based electronic commerce, or "e-commerce,"
consulting and development company. NeoEnterprises was acquired for 170,000
shares of Class A Common Stock.
Effective January 29, 1999, the Company acquired the stock of The Alexander
Corporation Limited ("Alexander"), a United Kingdom-based human resources
consulting firm. Alexander was acquired for (pound)360,000 (approximately
$590,000) and 150,000 shares of Class A Common Stock, including the payment of
(pound)60,000 (approximately $100,000) in final satisfaction of amounts payable
under an earnout arrangement.
1998 ACQUISITIONS
Effective December 31, 1998, the Company acquired Lexecon Inc. ("Lexecon"),
an Illinois-based economic consulting firm. Lexecon was acquired for $31.1
million in cash and 4,266,240 shares of Class A Common Stock, including
1,450,240 shares of Class A Common Stock which were determined based upon the
price per share in the initial public offering of the Company's Class A common
stock.
Effective August 31, 1998, Nextera acquired substantially all the assets and
assumed certain liabilities of Sibson & Company, L.P. and acquired Sibson
Canada, Inc., (collectively "Sibson") human resources consulting firms based in
New Jersey and Toronto, Canada, respectively. Sibson was acquired for $37.4
million in cash, 2,613,087 shares of Class A Common Stock and 197,813
exchangeable shares of Sibson Canada Co., a newly formed wholly-owned subsidiary
of Nextera, that may be exchanged at the option of the holders into 197,813
shares of Class A Common Stock. The shares were exchanged in 2000.
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Effective March 31, 1998, Nextera acquired substantially all of the assets
and assumed certain liabilities of The Planning Technologies Group, Inc.
("PTG"), a Massachusetts-based strategy and management consulting firm. PTG was
acquired for $6.7 million in cash and 214,000 shares of Class A Common Stock.
Effective March 31, 1998, Nextera acquired Pyramid Imaging, Inc.
("Pyramid"), a California-based consulting and technology firm. Pyramid was
acquired for $10.0 million in cash and 640,000 shares of Class A Common Stock,
including $0.8 million in cash and 53,333 shares of Class A Common Stock issued
during 1999 as a result of the achievement of certain revenue and pretax
earnings targets related to the performance of Pyramid during the twelve months
ended March 31, 1999.
Effective January 5, 1998, Nextera acquired substantially all of the assets
and assumed certain liabilities of SiGMA Consulting, LLC ("SiGMA"), a New
York-based management consulting firm. SiGMA was acquired for $10.0 million in
cash and 669,000 shares of Class A Common Stock.
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RESULTS OF OPERATIONS
The following table sets forth our results of operations for the year ended
December 31:
2000 1999 1998
AMOUNT % AMOUNT % AMOUNT %
Net revenues ............ $ 161,000 100% $ 155,955 100% $ 67,590 100%
Cost of revenues ........ 98,394 61 87,835 56 44,985 67
--------- --- --------- ----- --------- -----
Gross profit .......... 62,606 39 68,120 44 22,605 33
Selling, general and
administrative expenses 61,066 38 44,975 29 23,103 34
Amortization expense .... 5,436 4 4,723 3 1,722 3
Special charges ......... 8,162 5 7,405 5 7,969 12
--------- --- --------- ----- --------- -----
Income (loss) from
operations ........... (12,058) (8) 11,017 7 (10,189) (15)
Other income (expense),
net ................... (13,205) (8) (8,836) (6) (6,723) (10)
--------- --- --------- ----- --------- -----
Income (loss) before
income taxes .......... (25,263) (16) 2,181 1 (16,912) (25)
Provision (benefit) for
income taxes ........... (1,291) (1) (884) (1) 243 --
--------- --- --------- ----- --------- -----
Net income (loss) ....... $ (23,972) (15)% $ 3,065 2% $ (17,155) (25)%
========= === ========= ===== ========= =====
The following table sets forth our results of quarterly operations for the
periods indicated.
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
2000 2000 2000 2000 1999 1999
Net revenues ............ $ 34,193 $ 35,805 $ 44,040 $ 46,962 $ 43,197 $ 40,094
Cost of revenues ........ 21,694 25,492 24,992 26,216 24,098 22,755
-------- -------- -------- -------- -------- --------
Gross profit .......... 12,499 10,313 19,048 20,746 19,099 17,339
Selling, general and
administrative
expenses............... 16,170 17,268 14,240 13,388 12,696 11,531
Amortization expense .... 1,357 1,362 1,365 1,352 1,290 1,243
Special charges ......... 6,292 -- 1,870 -- 1,316 --
-------- -------- -------- -------- -------- --------
Income (loss) from
operations ........... (11,320) (8,317) 1,573 6,006 3,797 4,565
Other income
(expense), net ....... (7,545) (2,132) (1,828) (1,700) (1,240) (1,222)
-------- -------- -------- -------- -------- --------
Income (loss) before
income taxes ......... (18,865) (10,449) (255) 4,306 2,557 3,343
Provision (benefit)
for income taxes ..... 1,206 (4,208) (110) 1,821 (886) --
-------- -------- -------- -------- -------- --------
Net income (loss) ....... $(20,071) $ (6,241) $ (145) $ 2,485 $ 3,443 $ 3,343
======== ======== ======== ======== ======== ========
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1999 1999 1998 1998 1998 1998
Net revenues ............ $ 36,519 $ 36,145 $ 28,009 $ 17,486 $ 13,909 $ 8,186
Cost of revenues ........ 20,470 20,512 17,406 12,641 9,315 5,623
-------- -------- -------- -------- -------- --------
Gross profit .......... 16,049 15,633 10,603 4,845 4,594 2,563
Selling, general and
administrative
expenses............... 10,594 10,154 8,528 7,279 4,410 2,886
Amortization expense .... 1,156 1,034 688 466 344 224
Special charges ......... 1,705 4,384 7,002 967 -- --
-------- -------- -------- -------- -------- --------
Income (loss) from
operations ........... 2,594 61 (5,615) (3,867) (160) (547)
Other income
(expense), net ........ (2,591) (3,783) (2,404) (1,648) (1,104) (1,567)
-------- -------- -------- -------- -------- --------
Income (loss) before
income taxes ......... 3 (3,722) (8,019) (5,515) (1,264) (2,114)
Provision (benefit)
for income taxes ........ 2 -- 43 -- 75 125
-------- -------- -------- -------- -------- --------
Net income (loss) ....... $ 1 $ (3,722) $ (8,062) $ (5,515) $ (1,339) $ (2,239)
======== ======== ======== ======== ======== ========
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22
The following table sets forth the percentage relationship to net revenues
of our results of operations for the periods indicated.
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
2000 2000 2000 2000 1999 1999
Net revenues ............ 100% 100% 100% 100% 100% 100%
Cost of revenues ........ 63 71 57 56 56 57
---- ---- ---- ---- ---- ----
Gross profit .......... 37 29 43 44 44 43
Selling, general and
Administrative expenses 47 48 32 29 29 29
Amortization expense .... 4 4 3 3 3 3
Special charges ......... 18 -- 4 -- 3 --
---- ---- ---- ---- ---- ----
Income (loss) from
Operations ........... (33) (23) 4 12 9 11
Interest income
(expense), Net ........ (22) (6) (4) (3) (3) (3)
---- ---- ---- ---- ---- ----
Income (loss) before
Income taxes ........ (55) (29) -- 9 6 8
Provision (benefit)
for Income taxes ...... 4 (12) -- 4 (2) --
---- ---- ---- ---- ---- ----
Net income (loss) ....... (59)% (17)% -- % 5% 8% 8%
==== ==== ==== ==== ==== ====
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1999 1999 1998 1998 1998 1998
Net revenues ............ 100% 100% 100% 100% 100% 100%
Cost of revenues ........ 56 57 62 72 67 69
---- ---- ---- ---- ---- ----
Gross profit .......... 44 43 38 28 33 31
Selling, general and
Administrative expenses 29 28 30 42 32 35
Amortization expense .... 3 3 2 3 2 3
Special charges ......... 5 12 25 6 -- --
---- ---- ---- ---- ---- ----
Income (loss) from
Operations ........... 7 -- (20) (22) (1) (7)
Interest income
(expense), Net ........ (7) (10) (9) (9) (8) (19)
---- ---- ---- ---- ---- ----
Income (loss) before
Income taxes ........ -- (10) (29) (32) (9) (26)
Provision (benefit)
for Income taxes ...... -- -- -- -- 1 1
---- ---- ---- ---- ---- ----
Net income (loss) ....... 0% (10)% (29)% (32)% (10)% (27)%
==== ==== ==== ==== ==== ====
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23
Acquisitions completed by Nextera have been accounted for under the purchase
method of accounting. Accordingly, the Consolidated Financial Statements of the
Company include operating results of the acquired companies only from the
effective date of each respective acquisition.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2000 AND THE YEAR ENDED DECEMBER 31,
1999
Net Revenues. Net revenues increased 3.2% to $161.0 million for the year
ended December 31, 2000 from $156.0 million for the year ended December 31,
1999. This increase was primarily attributable to an increase in economic
consulting revenues, due in part to the inclusion of revenues relating to the
acquisition of ERG effective June 30, 1999 and Cambridge Economics effective
January 1, 2000. Offsetting this increase was a decrease in revenues primarily
from the Company's Technology Solutions Group due principally to an
industry-wide decrease in demand for such services during the second half of
2000 and, to a lesser extent, a decrease in revenues from our human capital
services. The Company expects the decreased demand for technology services to
continue to adversely affect its Technology Solutions Group revenues during at
least the first half of 2001.
Gross Profit. Gross profit decreased 8.1% to $62.6 million for the year
ended December 31, 2000 from $68.1 million for the year ended December 31, 1999.
Gross margin as a percentage of sales decreased to 38.9% in 2000 from 43.7% in
1999. The decrease in gross margin was due primarily to lower chargeability in
the Company's Technology Solutions Group. As a result of the decreased demand
for technology services, the Company reduced its workforce by 100 consultants in
the fourth quarter of 2000, most of whom work in the Technology Solutions Group.
Annualized cost savings resulting from the workforce reduction actions is
anticipated to be approximately $16.5 million. The workforce was further reduced
by an additional 67 consultants in the first quarter of 2001 due to the
continued weakening demand for technology services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 35.8% to $61.0 million for the year ended
December 31, 2000 from $45.0 million for the year ended December 31, 1999. As a
percentage of revenues, such expenses increased to 38.0% in 2000 from 28.8% in
1999. The increase in expense resulted primarily from higher sales and
marketing spending and an increase in reserves for bad debts in the Company's
Technology Solutions Group. As a result of the decreased demand for technology
services, the Company reduced its workforce principally in this sector by 32
administrative personnel in the fourth quarter of 2000. The increase in selling
general and administrative expenses also resulted in part from the acquisitions
of ERG and Cambridge Economics.
Other Expense, Net. Interest expense, net decreased to $7.8 million for
the year ended December 31, 2000 from $8.8 million for the year ended December
31, 1999 due principally to the repayment of a portion of the Company's
outstanding indebtedness with the proceeds from the Company's initial public
offering of Class A Common Stock, which was completed on May 21, 1999.
Offsetting this reduction in borrowings and interest expense were borrowings and
expense incurred in connection with the acquisitions of ERG and Cambridge
Economics and for working capital requirements.
Also included in other expense, net in 2000 was a $5.4 million non-cash
charge associated with the write down to fair market value of certain available
for sale investments and other assets for which an other than temporary decline
in market value was incurred.
Special Charges. In the fourth quarter 2000, the Company awarded to
certain employees special incentive-related compensation awards. Such awards
totaled $6.7 million and are payable in cash and restricted stock during 2001,
subject to employees remaining employed by the Company on the dates of the
payments. The Company recorded a special charge of $2.3 million in 2000
associated with the pro rata share of such payments over the associated vesting
period and will record a charge for the remainder of the award in 2001.
In October and December 2000, the Company implemented a plan to reduce
its consulting and administrative staffs, resulting in severance costs of
approximately $2.4 million. Approximately $1.8 million of this charge was paid
in the fourth quarter of 2000 and the remainder of the accrual is expected to be
substantially paid in the first quarter of 2001. In June 2000, the Company
recorded a charge of $1.9 million as a result of severance costs incurred in
connection with management changes at the Company's Technology Solutions Group.
Approximately $1.2 million of this charge was paid in 2000 and the remainder is
expected to be paid ratably through January of 2002.
21
24
As a result primarily of the fourth quarter workforce reduction
described above, the Company has identified and made plans to vacate certain
portions of leased facilities. The Company recorded a charge of $1.5 million
associated with the cost of exiting these facilities which was included in
accounts payable and accrued expenses as of December 31, 2000.
The Company granted to certain non-employee consultants options to
purchase 445,245 of its Class A Common Stock at an exercise price of $14.00 per
share in 1999. Such options were fully-vested upon grant. The Company recorded a
non-cash compensation expense of $4.4 million, which represented the estimated
fair value of the options calculated using the Black-Scholes model.
The Company recorded a non-cash compensation expense of $1.7 million,
principally representing the difference between the fair value of 197,760
fully-vested options granted in 1999 to certain non-stockholder employees on the
date of grant of $10.00 per share and the $1.50 exercise price of the options.
Such options were granted in final satisfaction of an agreement entered into in
December 1998 under which payments totaling $4.2 million in cash and
fully-vested options to purchase 384,000 of Class A Common Stock at a purchase
price of $1.50 per share were granted during 1998.
In November 1999, in connection with a change in senior management, the
Company implemented a plan to reduce its administrative staff, resulting in
severance costs of approximately $1.3 million.
Income Tax Benefit. The Company recorded an income tax benefit of $1.3
million for the year ended December 31, 2000. Valuation allowances have been
established during 2000 relating to all net deferred tax assets that must be
realized through the generation of taxable income in future periods.
In light of the number and significance of acquisitions completed from
January 1, 1998 through December 31, 1999, management has presented below for
1999 and 1998 a comparison of the sequential quarterly results of operations for
the periods enumerated below because it believes such comparisons are the most
meaningful presentation of the Company's financial results.
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 1999 AND THREE MONTHS ENDED
SEPTEMBER 30, 1999
Net Revenues. Net revenues increased 7.7% to $43.2 million for the
three months ended December 31, 1999 from $40.1 million for the three months
ended September 30, 1999. This increase was primarily attributable to an
increase in human capital revenues, due in part to the inclusion of revenues
relating to the acquisition of the assets of SCCAP effective September 30, 1999,
and to an increase in e-commerce and e-business revenues.
Gross Profit. Gross profit increased 10.1% to $19.1 million for the
three months ended December 31, 1999 from $17.3 million for the three months
ended September 30, 1999. Gross margin as a percentage of sales increased to
44.2% for the three months ended December 31, 1999 from 43.2% for the three
months ended September 30, 1999. The increase in gross margin was due primarily
to improved chargeability of our consultants in the quarter.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 10.1% to $12.7 million for the three months
ended December 31, 1999 from $11.5 million for the three months ended September
30, 1999. As a percentage of revenues, such expenses increased slightly to 29.4%
for the three months ended December 31, 1999 from 28.8% for the three months
ended September 30, 1999.
Interest Expense, Net. Interest expense, net increased to $1.3 million
for the three months ended December 31, 1999 from $1.2 million for the three
months ended September 30, 1999 due principally to incremental borrowings
incurred in connection with the acquisition of the assets of SCCAP effective
September 30, 1999.
Special Charges. During the three months ended December 31, 1999, in
connection with a change in senior management, the Company implemented a plan to
reduce its administrative staff, resulting in severance costs of approximately
$1.3 million. This charge was fully paid during the fourth quarter of 1999 and
the first and second quarters of 2000.
Income Tax Benefit. The Company recorded an income tax benefit of $0.9
million for the three months ended December 31, 1999 primarily as a result of
the reversal of reserves previously established for certain deferred tax assets.
In the fourth quarter, Management determined the recovery of these assets is
more likely than not, principally as a result of the Company's achievement of
22
25
pretax profitability in the fourth quarter of 1999. This benefit was partially
offset by the unfavorable impact of nondeductible goodwill amortization.
23
26
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1999 AND THREE MONTHS ENDED JUNE
30, 1999
Net Revenues. Net revenues increased 9.8% to $40.1 million for the
three months ended September 30, 1999 from $36.5 million for the three months
ended June 30, 1999. This increase was primarily attributable to an increase in
e-commerce and e-business revenues and to the inclusion of revenues generated by
ERG, which was acquired effective June 1, 1999, offset in part by a reduction in
revenues related to enterprise resource planning ("ERP") services performed
during the quarter.
Gross Profit. Gross profit increased 8.0% to $17.3 million for the three
months ended September 30, 1999 from $16.0 million for the three months ended
June 30, 1999. Gross margin as a percentage of sales decreased to 43.2% for the
three months ended September 30, 1999 from 43.9% for the three months ended June
30, 1999. The decrease in gross margin was due primarily to lower chargeability
from junior level resources due to seasonal training and vacation schedules.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 8.8% to $11.5 million for the three months
ended September 30, 1999 from $10.6 million for the three months ended June 30,
1999. As a percentage of revenues, such expenses decreased slightly to 28.8% for
the three months ended September 30, 1999 from 29.0% for the three months ended
June 30, 1999.
Interest Expense, Net. Interest expense, net decreased to $1.2 million
for the three months ended September 30, 1999 from $2.6 million for the three
months ended June 30, 1999. This decrease was due primarily to the repayment of
a portion of the Company's outstanding indebtedness with the proceeds from the
Company's initial public offering of Class A Common Stock, which was completed
on May 21, 1999.
Special Charges. The Company recorded a non-cash compensation expense of
$1.7 million in the three months ended June 30, 1999, which represented the
difference between the fair value of fully-vested options granted to certain
non-stockholder employees of Lexecon on the date of grant of $10.00 per share,
and the $1.50 exercise price of the options.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 AND THREE MONTHS ENDED MARCH 31,
1999
Net Revenues. Net revenues increased to $36.5 million for the three
months ended June 30, 1999 from $36.1 million for the three months ended March
31, 1999. This increase was primarily attributable to an increase in e-commerce
and e-business revenues and to the inclusion of revenues generated by ERG, which
was acquired effective June 1, 1999, offset in part by a reduction in revenues
related to ERP services performed during the quarter. As a result of the reduced
demand for ERP services, the Company utilized a lower level of outside
contractors during the three months ended June 30, 1999.
Gross Profit. Gross profit increased 2.6% to $16.0 million for the three
months ended June 30, 1999 from $15.6 million for the three months ended March
31, 1999. Gross margin as a percentage of sales increased to 43.9% for the three
months ended June 30, 1999 from 43.3% for the three months ended March 31, 1999.
The increase in gross margin was due primarily to higher margins on e-commerce
and e-business services than those earned on ERP-related business. The Company
has historically utilized subcontractors to perform a significant portion of ERP
services and, in most instances, has recorded lower gross margins on revenue
related to such subcontracted services than on work performed by internal
consultant resources.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 4.3% to $10.6 million for the three months
ended June 30, 1999 from $10.2 million for the three months ended March 31,
1999. As a percentage of revenues, such expenses increased slightly to 29.0% for
the three months ended June 30, 1999 from 28.1% for the three months ended March
31, 1999.
Interest Expense, Net. Interest expense, net decreased to $2.6 million
for the three months ended June 30, 1999 from $3.8 million for the three months
ended March 31, 1999. This decrease was due primarily to the repayment of a
portion of the Company's outstanding indebtedness with the proceeds from the
Company's initial public offering of Class A Common Stock, which was completed
on May 21, 1999.
Special Charges. The Company granted to certain non-stockholder
employees of Lexecon fully-vested options to purchase 197,760 shares of Class A
Common Stock at an exercise price of $1.50 per share effective as of May 1999.
The Company recorded an
24
27
expense of $1.7 million in the three months ended June 30, 1999, which
represented the difference between the fair value of the options on the date of
grant of $10.00 per share, and the exercise price of the options.
In March 1999, the Company granted to certain non-employee consultants
of Lexecon fully-vested options to purchase 445,245 shares of Class A Common
Stock at an exercise price of $14.00 per share. The Company recorded a non-cash
compensation charge of $4.4 million related to the grant of these options in the
three months ended March 31, 1999.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 AND THREE MONTHS ENDED DECEMBER
31, 1998
Net Revenues. Net revenues increased 29.1% to $36.1 million for the
three months ended March 31, 1999 from $28.0 million for the three months ended
December 31, 1998. This increase was primarily attributable to the inclusion of
revenues generated by Lexecon, which was acquired effective December 31, 1998,
and by Alexander, which was acquired effective January 29, 1999.
Gross Profit. Gross profit increased 47.4% to $15.6 million for the
three months ended March 31, 1999 from $10.6 million for the three months ended
December 31, 1998. Gross margin as a percentage of sales increased to 43.3% for
the three months ended March 31, 1999 from 37.9% for the three months ended
December 31, 1998. The increase in gross profit and gross margin was due
primarily to the acquisition of Lexecon.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 19.1% to $10.2 million for the three months
ended March 31, 1999 from $8.5 million for the three months ended December 31,
1998. As a percentage of revenues, such expenses decreased to 28.1% for the
three months ended March 31, 1999 from 30.4% for the three months ended December
31, 1998. The dollar increase was due primarily to the inclusion of the
acquisition of Lexecon for the three months ended March 31, 1999, offset in part
by the inclusion in the three months ended December 31, 1998 of $0.4 million of
a supplemental management fee charged by Knowledge Universe, Inc. ("Knowledge
Universe").
Interest Expense, Net. Interest expense, net increased to $3.8 million
for the three months ended March 31, 1999 from $2.4 million for the three months
ended December 31, 1998. This increase was due primarily to borrowings incurred
to fund the acquisition of Lexecon.
Special Charges. During the three months ended December 31, 1998 the
Company recorded restructuring costs of $0.3 million related to severance
obligations incurred in connection with the combination of two of the Company's
operating subsidiaries.
The Company granted to certain non-employee consultants of Lexecon
options to purchase 445,245 shares of Class A Common Stock at an exercise price
of $14.00 per share in March 1999. Such options were fully-vested upon grant.
The Company recorded a non-cash compensation charge of $4.4 million in the three
months ended March 31, 1999, which represented the estimated fair value of the
options calculated using the Black-Scholes model.
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 1998 AND THREE MONTHS ENDED
SEPTEMBER 30, 1998
Net Revenues. Net revenues increased 60.2% to $28.0 million for the
three months ended December 31, 1998 from $17.5 million for the three months
ended September 30, 1998. This increase was due primarily to the inclusion of
Sibson's net revenues for the three months ended December 31, 1998 as compared
to only one month of such net revenues in the three months ended September 30,
1998. The increase in revenues was also attributable to a $0.6 million reduction
in revenues resulting principally from a reduction in the estimated percentage
of completion of a fixed-price contract during the three months ended September
30, 1998. No such reduction was reflected in the three months ended December 31,
1998.
Gross Profit. Gross profit increased 118.8% to $10.6 million for the
three months ended December 31, 1998 from $4.8 million for the three months
ended September 30, 1998. Gross margin increased to 37.9% for the three months
ended December 31, 1998 from 27.7% for the three months ended September 30,
1998. The increase in gross profit and gross margin was due primarily to the
acquisition of Sibson. Gross profit and gross margin also increased due, to a
lesser extent, to a reduction reflected during the three months ended September
30, 1998 in the estimated percentage of completion of a fixed-price contract.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 17.2% to $8.5 million for the three months
ended December 31, 1998 from $7.3 million for the three months ended September
30, 1998. As a percentage of net revenues, such expenses decreased to 30.5% for
the three months ended December 31, 1998 from 41.6% for the three months
25
28
ended September 30, 1998. The dollar increase was due primarily to the inclusion
of Sibson for the entire three months ended December 31, 1998 and the inclusion
in the three months ended December 31, 1998 of $0.4 million of a supplemental
management fee charge by Knowledge Universe, offset in part by the inclusion
during the three months ended September 30, 1998 of $1.1 million of a
supplemental management fee charged by Knowledge Universe for 1998, and the
inclusion of $0.3 million of compensation expense related to the purchase of
Common Stock by certain of the Company's executive officers.
Interest Expense, Net. Interest expense, net increased 45.9% to $2.4
million for the three months ended December 31, 1998 from $1.6 million for the
three months ended September 30, 1998. This increase was due primarily to the
borrowings to fund the acquisition of Sibson on August 31, 1998.
Special Charges. During the three months ended December 31, 1998 and
September 30, 1998, the Company recorded restructuring costs of $0.3 million and
$1.0 million, respectively, related to the approval by the Board of Directors of
a plan to combine two of the Company's operating subsidiaries, Symmetrix and
SiGMA, into a single operating unit. In connection with such plan, specific
individuals were identified for termination along with the severance benefits to
be offered. In addition, certain leased space was to be vacated. The
restructuring charge recorded during the three months ended December 31, 1998
consisted of severance and termination costs related to individuals who were not
informed of their severance until after September 30, 1998. The restructuring
charges recorded during the three months ended September 30, 1998 consisted
principally of $0.3 million for severance payments and termination costs related
to individuals whose severance arrangements were known as of September 30, 1998
and $0.6 million for leased office space to be vacated, net of estimated
sub-lease income.
On December 31, 1998, the Company entered into agreements with certain
non-stockholder key executives of Lexecon under which payments totaling $4.2
million in cash were made and fully-vested options (the "Vested Options") to
purchase 384,000 shares of Class A Common Stock at an exercise price of $1.50
per share were granted. In addition, the Company reserved for issuance to these
key executives options to purchase Class A Common Stock at an exercise price of
$1.50 per share (the "Reserved Options"). Based upon the price per share of the
Class A Common Stock in the initial public offering, 197,760 shares of Class A
Common Stock will be subject to the Reserved Options. The Company recorded $6.6
million in the three months ended December 31, 1998, which represented the cash
paid plus the difference between the fair market value of the Class A Common
Stock on the date of grant of $7.65 per share, and the exercise price of the
Vested Options.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 AND THREE MONTHS ENDED JUNE
30, 1998
Net Revenues. Net revenues increased 25.7% to $17.5 million for the
three months ended September 30, 1998 from $13.9 million for the three months
ended June 30, 1998. This increase was due primarily to the net revenues
generated by Sibson which was acquired effective August 31, 1998, partially
offset by a $0.6 million reduction in revenues resulting principally from a
reduction in the estimated percentage completion of an ongoing fixed-price
contract.
Gross Profit. Gross profit increased 5.5% to $4.8 million for the three
months ended September 30, 1998 from $4.6 million for the three months ended
June 30, 1998. Gross margin decreased to 27.7% for the three months ended
September 30, 1998 from 33.0% for the three months ended June 30, 1998. The
increase in gross profit was due primarily to the acquisition of Sibson. The
decrease in gross margin was primarily attributable to a reduction in the
estimated percentage completion of a fixed-price contract.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 65.1% to $7.3 million for the three months
ended September 30, 1998 from $4.4 million for the three months ended June 30,
1998. As a percentage of net revenues, such expenses increased to 41.6% for the
three months ended September 30, 1998 from 31.7% for the three months ended June
30, 1998. The dollar increase was due primarily to the increase in the number of
employees attributable to the acquisition of Sibson and the inclusion in the
three months ended September 30, 1998 of $1.1 million of the $1.5 million
supplemental management fee charged by Knowledge Universe for 1998 and
approximately $0.3 million of compensation expense related to the purchase of
Common Stock by certain of the Company's executive officers during the three
months ended September 30, 1998, as well as additional hirings. Excluding the
foregoing $1.1 million supplemental management fee and $0.3 million compensation
expense, selling, general and administrative expenses for the three months ended
September 30, 1998 were $5.8 million, or 33% of net revenues.
Interest Expense, Net. Interest expense, net increased 49.3% to $1.6
million for the three months ended September 30, 1998 from $1.1 million for the
three months ended June 30, 1998. This increase was due primarily to borrowings
under the bridge loan used to finance the acquisition of Sibson.
26
29
Special Charges. During the three months ended September 30, 1998, the
Company recorded restructuring costs of $1.0 million. These restructuring
costs consisted principally of $0.3 million for severance payments and
termination costs and $0.6 million for vacated leased office space, net of
estimated sub-lease income.
27
30
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 AND THREE MONTHS ENDED MARCH 31,
1998
Net Revenues. Net revenues increased 69.9% to $13.9 million for the
three months ended June 30, 1998 from $8.2 million for the three months ended
March 31, 1998. This increase was due predominately to the net revenues
generated by PTG and Pyramid, which were acquired effective March 31, 1998, and
to a lesser extent from higher utilization rates and greater business levels at
Symmetrix. Nextera recorded no net revenues from PTG or Pyramid in the three
months ended March 31, 1998.
Gross Profit. Gross profit increased 79.2% to $4.6 million for the
three months ended June 30, 1998 from $2.6 million for the three months ended
March 31, 1998. Gross margin increased to 33.0% for the three months ended June
30, 1998 from 31.3% for the three months ended March 31, 1998. The increase in
gross margin was due primarily to the addition of PTG and Pyramid and, to a
lesser extent, more effective utilization of consultants on billable projects
and a lower utilization of outside contractors, which decreased cost of
revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 52.8% to $4.4 million for the three months
ended June 30, 1998 from $2.9 million for the three months ended March 31, 1998.
As a percentage of net revenues, such expenses decreased to 31.7% for the three
months ended June 30, 1998 from 35.3% for the three months ended March 31, 1998.
The dollar increase was due primarily to the increase in the number of employees
attributable to the PTG and Pyramid acquisitions, as well as additional hirings.
The decrease as a percentage of net revenues was due primarily to a greater
increase in net revenues in relation to the increase in such expenses.
Interest Expense, Net. Interest expense, net decreased 29.5% to $1.1
million for the three months ended June 30, 1998 from $1.6 million for the three
months ended March 31, 1998. This decrease was due primarily to the inclusion in
the three months ended March 31, 1998 of $0.8 million related to 1997 interest
on the debentures, which was accrued in such period due to the recapitalization
of the Company. This decrease was partially offset by increased borrowings to
fund the PTG and Pyramid acquisitions.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND THREE MONTHS ENDED DECEMBER
31, 1997
Net Revenues. Net revenues increased 65.1% to $8.2 million for the
three months ended March 31, 1998 from $5.0 million for the three months ended
December 31, 1997. This increase was due to the net revenues generated from
SiGMA, which was acquired under the purchase method of accounting on January 5,
1998, partially offset by reserves taken on a fixed-price contract which has now
been completed. Nextera recorded no net revenues from SiGMA for the three months
ended December 31, 1997.
Gross Profit. Gross profit increased 22.5% to $2.6 million for the
three months ended March 31, 1998 from $2.1 million for the three months ended
December 31, 1997. Gross margin decreased to 31.3% for the three months ended
March 31, 1998 from 42.2% for the three months ended December 31, 1997. The
decrease in gross margin was primarily due to a $0.5 million reserve adjustment
on a fixed-price contract taken in the three months ended March 31, 1998,
partially offset by increased gross profit generated from SiGMA. The amount of
the reserve adjustment was determined using the percentage of completion method
of accounting.
Selling, General and Administrative. Selling, general and
administrative expenses increased 16.8% to $2.9 million for the three months
ended March 31, 1998 from $2.5 million for the three months ended December 31,
1997. As a percentage of net revenues, such expenses decreased to 35.3% for the
three months ended March 31, 1998 from 49.8% for the three months ended December
31, 1997. The dollar increase was due primarily to the increase in the number of
employees attributable to the SiGMA acquisition as well as additional hirings.
The decrease as a percentage of net revenues was due primarily to a greater
increase in net revenues in relation to the increase in such expenses.
Interest Expense, Net. Interest expense, net increased to $1.6 million
for the three months ended March 31, 1998 from $43,000 for the three months
ended December 31, 1997. This increase was due primarily to interest on the
debentures which was accrued in the three months ended March 31, 1998, $0.8
million of which related to contributions made in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated working capital was $11.1 million on December 31, 2000,
compared with working capital of $33.0 million on December 31, 1999. Included in
working capital were cash and cash equivalents of $4.3 million and $7.0 million
on December 31, 2000 and 1999, respectively.
28
31
Net cash used in operating activities was $9.9 million for the year
ended December 31, 2000. The primary components of net cash used in operating
activities were a net loss of $24.0 million offset in part by depreciation and
amortization expense of $9.9 million and non-cash charges of $14.7 million.
Increases in accounts receivables of $7.3 million were largely offset by a
reduction in costs and estimated earnings in excess of billings of $6.7 million.
Net cash used in investing activities was $17.2 million for the year
ended December 31, 2000. The primary components of cash used in investing
activities were net expenditures of $8.2 million for the acquisition of
Cambridge Economics in January 2000 and expenditures of $8.6 million for
furniture, equipment and leasehold improvements.
Net cash provided by financing activities was $25.1 million for the
year ended December 31, 2000. The primary components of cash generated from
financing activities were $23.1 million of bank borrowings, of which $8.2
million was utilized in connection with an acquisition completed during 2000.
Effective March 30, 2001, the Company's Senior Credit Facility was
amended. Under the amended Senior Credit Facility, the Company will be required
to reduce the outstanding principal balance of the Senior Credit Facility by
$8.05 million by December 31, 2001 and is not permitted to make any further
borrowings or drawings of letters of credit. Effective with this March
amendment, borrowings under the Senior Credit Facility will bear interest at the
bank base rate plus 3.5%, with payment of 2% of this rate deferred until January
2, 2002. This 2% deferred interest will be waived if the credit obligations are
paid in full and the lender's commitment to provide loans and other financial
accommodations are terminated on or before December 15, 2001. In connection with
this amendment, an affiliate of Knowledge Universe guaranteed $2.5 million of
the Company's obligations under the Senior Credit Facility and was granted a
security interest and lien in all of the Company's assets, junior and
subordinated to the security interest and lien of the senior lenders.
The Company further agreed, pursuant to the amended Senior Credit
Facility, that it will pay $0.9 million of waiver fees between April 1, 2001 and
December 1, 2001. Also, on or before April 23, 2001, the Company will provide
the senior lenders with warrants to purchase 1,418,351 shares of the Company's
Class A Common Stock at an exercise price of $0.86 per share, exercisable at the
senior lenders' sole discretion at any time prior to 18 months after payment in
full of all of the Company's obligations due under the amended Senior Credit
Facility. The Company also agreed that upon the sale or other disposition (or
any series of sales or dispositions) by the Company of any of the Company's
assets with gross proceeds, in the aggregate, in excess of $10,000,000, the
senior lenders can elect in their sole discretion to require the Company to
redeem the warrants for a cash payment of $500,000 by the Company (except to the
extent prohibited by a non-waiveable applicable law or regulation). In addition,
the Company has the right to call the warrants for a cash payment of $750,000,
which payment may only be made from new financing sources.
The Company's primary sources of liquidity are cash on hand, future
cash flow from operations, the sale of certain available-for-sale securities and
non-operating other assets, and potential additional loans and capital infusions
from Knowledge Universe, its majority shareholder. The Company believes that the
available capacity from these sources will be sufficient to meet its operating
and capital requirements for the next twelve months. However, there can be no
assurances the Company's actual cash needs will not exceed anticipated levels,
the Company will generate sufficient operating cash flows to fund its operations
in the absence of other sources or acquisition opportunities will not arise
requiring resources in excess of those currently available, and in such events,
the Company might seek to raise additional debt or equity.
29
32
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders of
Nextera Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of Nextera
Enterprises, Inc. (the "Company") as of December 31, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Nextera
Enterprises, Inc. at December 31, 2000 and 1999, and the results of its
operations and its cash flows for the three years in the period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
February 7, 2001, except for Note 6,
as to which the date is March 30, 2001
30
33
NEXTERA ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
---------------------------------
2000 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 4,322 $ 7,011
Accounts receivable, net of allowance for doubtful
accounts of $2,551 and $953 at December 31, 2000
and 1999, respectively .................................... 36,890 38,930
Costs and estimated earnings in excess of billings ........... 422 7,092
Due from affiliates .......................................... 610 156
Due from officers ............................................ 30 93
Income taxes receivable ...................................... 4,350 --
Prepaid expenses and other current assets .................... 2,803 2,460
--------- ---------
Total current assets .................................... 49,427 55,742
Property and equipment, net .................................... 14,542 10,587
Intangible assets, net of accumulated amortization of
$12,136 and $6,700 at December 31, 2000 and 1999, respectively 159,459 155,800
Other assets ................................................... 10,674 4,633
--------- ---------
Total assets ............................................ $ 234,102 $ 226,762
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ........................ $ 22,610 $ 19,512
Notes payable to bank ........................................ 187 248
Senior credit facility ....................................... 8,050 --
Deferred revenue ............................................. 1,758 1,505
Due to affiliates ............................................ 2,503 752
Current portion of long-term debt and capital lease
obligations ................................................ 3,222 690
--------- ---------
Total current liabilities ............................... 38,330 22,707
Long-term debt and capital lease obligations ................... 3,516 4,021
Senior credit facility, net of current portion ................. 37,972 22,946
Debentures due to affiliates, including at December 31, 2000
accrued interest thereon ....................................... 10,980 29,831
Other long-term liabilities .................................... 1,327 1,200
Stockholders' equity:
Preferred Stock, $0.001 par value, 10,000,000 shares
authorized, 600,000 authorized shares designated
Series A, 210,000 Series A and no shares issued and
outstanding at December 31, 2000 and 1999 ................. 21,098 --
Exchangeable shares, no par value, 2,500,000 shares
authorized, no and 197,813 shares issued and outstanding
at December 31, 2000 and 1999 ............................. -- 495
Class A Common Stock, $0.001 par value, 50,000,000
shares authorized, 31,396,789 and 30,633,049
shares issued at December 31, 2000 and 1999 ............... 31 31
Class B Common Stock, $0.001 par value, zero, 4,300,000
shares authorized, 3,848,560 and 4,274,630 shares issued
and outstanding at December 31, 2000 and 1999 ............. 4 4
Treasury Stock, 301,400 shares Class A Common Stock
at December 31, 2000 ...................................... (947) --
Additional paid-in capital ................................... 163,263 162,299
Retained earnings (deficit) .................................. (41,077) (17,105)
Accumulated other comprehensive income (loss) ................ (395) 333
--------- ---------
Total stockholders' equity ................................ 141,977 146,057
--------- ---------
Total liabilities and stockholders' equity .............. $ 234,102 $ 226,762
========= =========
The accompanying notes are an integral part of these financial statements.
31
34
NEXTERA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER COMMON SHARE DATA)
Net revenues .................................. $ 161,000 $ 155,955 $ 67,590
Cost of revenues .............................. 98,394 87,835 44,985
--------- --------- ---------
Gross profit ............................. 62,606 68,120 22,605
Selling, general and administrative expenses... 61,066 44,975 23,103
Amortization expense .......................... 5,436 4,723 1,722
Special charges ............................... 8,162 7,405 7,969
--------- --------- ---------
Income (loss) from operations ............ (12,058) 11,017 (10,189)
Interest income ............................... -- 531 160
Interest expense .............................. (7,773) (9,367) (6,883)
Other expense ................................. (5,432) -- --
--------- --------- ---------
Income (loss) before income taxes ........ (25,263) 2,181 (16,912)
Provision (benefit) for income taxes .......... (1,291) (884) 243
--------- --------- ---------
Net income (loss) ........................ $ (23,972) $ 3,065 $ (17,155)
========= ========= =========
Net income (loss) per common share, basic...... $ (0.69) $ 0.10 $ (1.14)
========= ========= =========
Net income (loss) per common share, diluted.... $ (0.69) $ 0.10 $ (1.14)
========= ========= =========
Weighted average common shares outstanding,
Basic ....................................... 35,121 29,990 14,997
========= ========= =========
Weighted average common shares outstanding,
Diluted ..................................... 35,121 30,441 14,997
========= ========= =========
The accompanying notes are an integral part of these financial statements.
32
35
NEXTERA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SERIES A
CUMULATIVE CLASS A
CLASS A CLASS B CONVERTIBLE CLASS B COMMON ADDITIONAL RETAINED
COMMON COMMON PREFERRED PREFERRED EXCHANGEABLE TREASURY PAID-IN EARNINGS
STOCK STOCK STOCK STOCK SHARES STOCK CAPITAL (DEFICIT)
------- ------ ----------- --------- ------------ -------- ---------- ---------
(IN THOUSANDS)
Balance at December 31,
1997...................... $8 $-- $ -- $ -- $ -- $ -- $19,739 $ (3,015)
Net loss.................... -- -- -- -- -- -- -- (17,155)
Issuance of Class A Common
Stock..................... 2 -- -- -- -- -- 5,276 --
Issuance of Class A Common
Stock in connection with
Acquired businesses....... 7 -- -- -- 495 -- 28,846 --
Recapitalization of Shares -- -- -- 22,977 -- -- (22,977) --
Exchange of warrant for
Class B Common Stock...... -- 4 -- -- -- -- (4) --
Issuance of Class B
Preferred Stock........... -- -- -- 24,993 -- -- -- --
Redemption of Class B
Preferred Stock in
exchange for 10%
Debentures................ -- -- -- (47,970) -- -- -- --
Repurchases and cancellation
of Class A and Class B
Common Stock.............. -- -- -- -- -- -- (70) --
Value of warrants issued in
connection with
acquisition............... -- -- -- -- -- -- 1,000 --
Value of options issued for
Services rendered......... -- -- -- -- -- -- 2,362 --
Issuances of Class A and
Class B Common Stock...... -- -- -- -- -- -- 334 --
Balance at December 31, 1998 17 4 -- -- 495 -- 34,506 (20,170)
--- --- --- ------ -------- ------ -------- --------
Net income.................. -- -- -- -- -- -- -- 3,065
Foreign currency
translation Adjustment.... -- -- -- -- -- -- -- --
Unrealized holding gain on
certain investments (net
of tax)................... -- -- -- -- -- -- -- --
Total comprehensive income
Issuance of Class A Common
Stock in connection with
Acquired businesses....... 2 -- -- -- -- -- 17,690 --
Issuance of Class A Common
Stock in connection with
option exercises.......... -- -- -- -- -- -- 857 --
Initial public offering of
Class A Common Stock..... 12 -- -- -- -- -- 103,015 --
Value of options issued for
Services rendered........ -- -- -- -- -- -- 6,031 --
Tax benefit from employee
Stock options............. -- -- -- -- -- -- 200 --
Balance at December 31, 1999 31 4 -- -- 495 -- 162,299 (17,105)
--- --- --- ------ -------- ------ -------- --------
Net loss.................... -- -- -- -- -- -- -- (23,972)
33
36
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCK TOTAL
INCOME HOLDERS' COMPREHENSIVE
(LOSS) EQUITY INCOME (LOSS)
------------- -------- -------------
Balance at December 31,
1997...................... $ -- $ 16,732 $ --
Net loss.................... -- (17,155) (17,155)
Issuance of Class A Common
Stock..................... -- 5,278
Issuance of Class A Common
Stock in connection with
Acquired businesses....... -- 29,348
Recapitalization of Shares -- --
Exchange of warrant for
Class B Common Stock...... -- --
Issuance of Class B
Preferred Stock........... -- 24,993
Redemption of Class B
Preferred Stock in
exchange for 10%
Debentures................ -- (47,970)
Repurchases and cancellation
of Class A and Class B
Common Stock.............. -- (70)
Value of warrants issued in
connection with
acquisition............... -- 1,000
Value of options issued for
Services rendered......... -- 2,362
Issuances of Class A and
Class B Common Stock...... -- 334
Balance at December 31, 1998 -- 14,852
---- -------- ------
Net income.................. -- 3,065 3,065
Foreign currency
translation Adjustment.... 216 216 216
Unrealized holding gain on
certain investments (net
of tax)................... 117 117 117
Total comprehensive income 3,398
Issuance of Class A Common
Stock in connection with
Acquired businesses....... -- 17,692
Issuance of Class A Common
Stock in connection with
option exercises.......... -- 857
Initial public offering of
Class A Common Stock..... -- 103,027
Value of options issued for
Services rendered........ -- 6,031
Tax benefit from employee
Stock options............. -- 200
Balance at December 31, 1999 333 146,057
---- -------- ------
Net loss.................... -- (23,972) (23,972)
34
37
Foreign currency translation
Adjustment.................... -- -- -- -- -- -- -- --
Unrealized holding loss on
certain investments (net
of tax and reclassification
adjustments................... -- -- -- -- -- -- -- --
Total comprehensive income (loss)
Purchases of Class A Common
Stock......................... -- -- -- -- -- (947) -- --
Issuance of Class A Common
Stock in connection with
option exercises.............. -- -- -- -- -- -- 636 --
Conversion of Exchangeable
Shares Into Class A Common
Stock......................... -- -- -- -- (495) -- 495 --
Conversion of Debentures into
Series A Preferred Stock........ -- -- 21,000 -- -- -- (69) --
Cumulative Dividend on Series
A Preferred Stock............. -- -- 98 -- -- -- (98) --
--- --- ------- --- --- ------ -------- --------
Balance at December 31, 2000.... $31 $ 4 $21,098 $-- $-- $ (947) $163,263 $(41,077)
=== === ======= === === ====== ======== ========
Foreign currency translation
Adjustment.................... (681) (681) (681)
Unrealized holding loss on
certain investments (net
of tax and reclassification
adjustments................... (47) (47) (47)
Total comprehensive income (loss) (24,700)
Purchases of Class A Common
Stock......................... -- (947)
Issuance of Class A Common
Stock in connection with
option exercises.............. -- 636
Conversion of Exchangeable
Shares Into Class A Common
Stock......................... -- --
Conversion of Debentures into
Series A Preferred Stock........ -- 20,931
Cumulative Dividend on Series
A Preferred Stock............. -- --
----- -------- ------
Balance at December 31, 2000.... $(395) $141,977
===== ======== ======
The accompanying notes are an integral part of these financial statements.
35
38
NEXTERA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
(IN THOUSANDS)
Cash flows from operating activities:
Net income (loss) ................................................ $ (23,972) $ 3,065 $ (17,155)
Adjustments to reconcile net income (loss) to net cash
Provided by (used in) operating activities:
Depreciation and amortization .................................. 9,876 7,951 2,813
Deferred income taxes .......................................... -- (2,539) --
Non-cash expense items ......................................... 14,719 6,031 2,670
Change in operating assets and liabilities, net of
effect of acquired businesses:
Accounts receivable .......................................... (7,284) (3,724) 1,923
Due from affiliates .......................................... (454) 244 (175)
Due to affiliates ............................................ (749) (316) 978
Prepaid expenses and other current assets .................... 789 2,013 (3,747)
Income tax receivable ........................................ (4,350) -- 414
Accounts payable and accrued expenses ........................ (5,461) 444 9,461
Costs and estimated earnings in excess of
billings ................................................... 6,670 (4,131) (2,212)
Deferred revenue ............................................. 253 295 (747)
Other ........................................................ 92 (1,058) 273
--------- --------- ---------
Net cash provided by (used in) operating activities ..... (9,871) 8,275 (5,504)
--------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment ............................... (8,585) (5,220) (2,209)
Acquisition of businesses, net of cash acquired .................. (8,205) (14,784) (95,168)
Other investments ................................................ (415) (1,083) --
--------- --------- ---------
Net cash used in investing activities ................... (17,205) (21,087) (97,377)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of Class A and Class B
Common Stock ..................................................... 566 104,085 5,304
Proceeds from issuance of Class B Preferred Stock ................ -- -- 24,993
Repurchases of Class A and B Common Stock ........................ (947) -- (70)
Due from officers ................................................ 63 387 (856)
Borrowings (repayments) under notes payable to bank .............. 23,076 17,599 (324)
Repayments of debentures due to affiliates ....................... -- (25,607) --
Borrowings from affiliates ....................................... 2,500 -- --
Borrowings under Bridge Loan ..................................... -- 2,000 75,500
Repayments under Bridge Loan ..................................... -- (79,564) --
Repayments of long-term debt and capital lease
obligations .................................................... (160) (771) (724)
--------- --------- ---------
Net cash provided by financing activities ............... 25,098 18,129 103,823
--------- --------- ---------
Effects of exchange rates on cash and cash
equivalents .................................................... (711) 198 --
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents .................................................... (2,689) 5,515 942
Cash and cash equivalents at beginning of year ................... 7,011 1,496 554
--------- --------- ---------
Cash and cash equivalents at end of year ......................... $ 4,322 $ 7,011 $ 1,496
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest ........................... $ 5,328 $ 7,744 $ 1,240
========= ========= =========
Cash paid during the year for taxes .............................. $ 4,472 $ 151 $ 76
========= ========= =========
The accompanying notes are an integral part of these financial statements.
36
39
NEXTERA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Nextera Enterprises, Inc. ("Nextera" or the "Company") is a leading global
management-consulting firm with deep expertise in strategy, organizational
management, economics and technology. Nextera's unique consultancy combines
unusually broad and distinctive experience with thought leadership and hands-on
tactics and capabilities to deliver complete solutions. The Company provides
companies with collaborative and integrated approaches to address complex
business issues involving the relationship of knowledge, people and technology.
Nextera was formed on February 26, 1997 as Education Technology Consulting
LLC and renamed Nextera Enterprises L.L.C. on April 11, 1997. Effective December
31, 1998, Nextera Enterprises L.L.C. was dissolved, at which time the Company
commenced operating as Nextera Enterprises, Inc. Accordingly, the consolidated
financial statements reflect the operations of the predecessor, Nextera
Enterprises, L.L.C., for all periods through December 31, 1998. Stockholders'
equity has been restated to give retroactive recognition to the establishment of
Nextera Enterprises, Inc. for all periods presented by reclassifying from common
stock to additional paid-in capital the proceeds from the issuance of units in
excess of the par value of the common stock. In addition, all references in the
financial statements and notes to number of shares, per share amounts and stock
option data have been restated to reflect the formation of Nextera Enterprises,
Inc.
The majority stockholder of the Company is Nextera Enterprises Holdings,
Inc., which is controlled by Knowledge Universe, Inc., which, in turn, is
controlled by Knowledge Universe, L.L.C.
Acquisitions
The Company has used the purchase method of accounting for its acquisitions.
Operating results of acquired companies have been included in the Company's
results of operations only from the effective date of each respective
acquisition. Allocation of purchase price for these acquisitions was based upon
estimates of the fair value of the net assets. Pro forma data is not presented
for the acquisitions completed in 2000 or 1999 since the acquisitions were not
material to the Company's results of operations.
2000
Effective January 1, 2000, the Company acquired substantially all of the
assets and certain liabilities of Cambridge Economics, Inc. ("Cambridge
Economics"), a Massachusetts-based consulting firm that provides strategic,
economic and business transformation and other services to a diverse group of
domestic and international clients. Cambridge Economics was acquired for $8.4
million of cash and a $2.1 million promissory note due January 2002.
1999
Effective September 30, 1999, the Company, through Sibson AP, LLC, a newly
formed acquisition subsidiary of the Company, acquired substantially all of the
assets of SCCAP Pty Limited ("SCCAP"), an Australian human resources consulting
firm, for $1.7 million in cash.
Effective June 1, 1999, the Company acquired substantially all of the assets
and certain liabilities of The Economics Resource Group, Inc. ("ERG"), a
Massachusetts-based consulting firm that provides economic and strategic
services primarily to energy and other regulated industries. ERG was acquired
for $9.6 million of cash and a $2.4 million promissory note that was paid in
January 2001.
37
40
Effective May 18, 1999, the Company acquired NeoEnterprises, Inc.
("NeoEnterprises"), a Connecticut-based electronic commerce, or "e-commerce,"
consulting and development company. NeoEnterprises was acquired for 170,000
shares of Class A Common.
Effective January 29, 1999, the Company acquired the stock of The Alexander
Corporation Limited ("Alexander"), a United Kingdom-based human resources
consulting firm. Alexander was acquired for (pound)360,000 (approximately
$590,000) and 150,000 shares of Class A Common Stock, including the payment of
(pound)60,000 (approximately $100,000) in satisfaction of amounts payable under
an earnout arrangement.
1998
Effective December 31, 1998, the Company acquired Lexecon Inc. ("Lexecon"),
an Illinois-based economic consulting firm. Lexecon was acquired for $31.1
million in cash and 4,266,240 shares of Class A Common Stock, including
1,450,240 shares of Class A Common Stock which were determined based upon the
price per share in the initial public offering of the Company's Class A common
stock.
Effective August 31, 1998, Nextera acquired substantially all the assets and
assumed certain liabilities of Sibson & Company, L.P. and acquired Sibson
Canada, Inc., (collectively "Sibson") human resources consulting firms based in
New Jersey and Toronto, Canada, respectively. Sibson was acquired for $37.4
million in cash, 2,613,087 shares of Class A Common Stock and 197,813
exchangeable shares of Sibson Canada Co., a newly formed wholly-owned subsidiary
of Nextera, that may be exchanged at the option of the holders into 197,813
shares of Class A Common Stock. The shares were exchanged in 2000.
Effective March 31, 1998, Nextera acquired substantially all of the assets
and assumed certain liabilities of The Planning Technologies Group, Inc.
("PTG"), a Massachusetts-based strategy and management consulting firm. PTG was
acquired for $6.7 million in cash and 214,000 shares of Class A Common Stock.
Effective March 31, 1998, Nextera acquired Pyramid Imaging, Inc.
("Pyramid"), a California-based consulting and technology firm. Pyramid was
acquired for $10.0 million in cash and 640,000 shares of Class A Common Stock,
including $0.8 million in cash and 53,333 shares of Class A Common Stock issued
during 1999 as a result of the achievement of certain revenue and pretax
earnings targets related to the performance of Pyramid during the twelve months
ended March 31, 1999.
Effective January 5, 1998, Nextera acquired substantially all of the assets
and assumed certain liabilities of SiGMA Consulting, LLC ("SiGMA"), a New
York-based management consulting firm. SiGMA was acquired for $10.0 million in
cash and 669,000 shares of Class A Common Stock.
The following information presents the unaudited pro forma condensed results
of operations for the year ended December 31, 1998 as if the acquisitions of
SiGMA, PTG, Pyramid, Sibson and Lexecon had occurred on January 1, 1998. The pro
forma results are presented for information purposes only and are not
necessarily indicative of the future results of operations of the Company or the
results of operations of the Company had the acquisitions occurred on January 1,
1998 (in thousands, except per share data).
Net revenues........................................ $ 135,167
Net loss............................................ (12,044)
Net loss per common share, basic and diluted........ $ (0.61)
38
41
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Significant intercompany accounts and transactions have
been eliminated in consolidation. The Company accounts for its investments in
which it owns less than 20% of the voting stock and does not possess significant
influence over the operations of the investee under the cost method of
accounting.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting services under time and
materials, capped-fee and fixed-price billing arrangements. Under time and
materials arrangements, revenues are recognized as the services are provided.
Revenues on fixed-price and capped-fee contracts are recognized using the
percentage of completion method of accounting and are adjusted monthly for the
cumulative impact of any revision in estimates. The Company determines the
percentage of completion of its contracts by comparing costs incurred to date to
total estimated costs. Contract costs include direct labor and expenses related
to the contract performance. Costs and estimated earnings in excess of billings
represents revenues recognized in excess of amounts billed. Deferred revenue
represents billings in excess of revenues recognized. Net revenues exclude
reimbursable expenses charged to clients.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and demand deposits
accounts. The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Cash equivalents are
stated at cost, which approximates market value.
Available-for-sale Investments
The Company's marketable equity securities are considered available-for-sale
investments and are carried in "Other assets" in the accompanying consolidated
balance sheet at market value, with the difference between cost and market
value, net of related tax effects, recorded in the "Accumulated other
comprehensive income" component of Consolidated Stockholders' Equity. As of
December 31, 2000 and 1999, the market value of available-for-sale investments
was $7,358,000 and $1,307,000, respectively, amounts $134,000 and $224,000,
respectively, more than the adjusted cost basis of such investments. No such
investments were outstanding as of December 31, 1998. During 2000, the Company
recorded a $209,000 write down to fair market value of certain available for
sale investments that had an other than temporary decline in market value. The
unrealized gains (losses) component of accumulated other comprehensive income
(loss) was $70,000 and $117,000 at December 31, 2000 and 1999, respectively.
39
42
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets as
follows:
Furniture and fixtures.. 5--7 years
Equipment............... 3--5 years
Software................ 3 years
Leasehold improvements are amortized over the lesser of the lease term or
the useful life of the property. Amortization of assets under capital leases is
included in depreciation.
Intangible and Other Long-lived Assets
Intangible assets consist principally of the cost in excess of assets
acquired resulting from acquisitions and are being amortized on a straight-line
basis over 5 years for intangibles relating to personnel and principally over 40
years for other intangibles. Other long-lived assets include, among others,
investments in affiliates, certain available-for-sale investments and fixed
assets. The Company assesses the carrying value and future useful life of these
assets whenever events or changes in circumstances indicate that impairment may
have occurred or that the future life has diminished. The Company considers the
future undiscounted cash flows of the acquired companies in assessing the
recoverability of these assets. If impairment is indicated through this review,
the carrying amount of the intangible assets will be reduced to their respective
estimated fair values as determined based upon the best information available in
the circumstances. Such information likely would include a review of comparable
market prices of similar assets or businesses, if available, or an estimate of
fair value based upon the present value of estimated expected future cash flows.
Any impairment is charged to expense in the period in which the impairment is
incurred.
Financial Instruments
The carrying value of financial instruments such as cash equivalents,
accounts receivable, accounts payable and accrued expenses approximate their
fair values based on the short-term maturities of these instruments. The
carrying value of long-term debt approximates its fair value based on references
to similar instruments.
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. During 2000, 1999 and 1998, no customer accounted for
more than 10% of net revenues.
Foreign Currency Translation
Assets and liabilities of the Company's foreign subsidiaries are translated
at year-end exchange rates, and revenues and expenses are translated at average
exchange rates. The gains and losses resulting from the changes in exchange
rates from year to year have been reported in other comprehensive income.
Foreign currency transaction gains and losses are included in the accompanying
statement of operations and are not material for the periods presented. The
foreign currency translation component of accumulated other comprehensive income
(loss) was $(465,000) and $ 216,000 at December 31, 2000 and 1999, respectively.
40
43
Basic and Diluted Earnings Per Common Share
The Company presents two earnings per share amounts, basic earnings per
common share and diluted earnings per common share. Basic earnings per common
share includes only the weighted average shares outstanding and excludes any
dilutive effects of options, warrants and convertible securities. The dilutive
effects of options, warrants and convertible securities are added to the
weighted average shares outstanding in computing diluted earnings per common
share. For the years ended December 31, 2000 and 1998, basic and diluted
earnings per common share are the same due to the antidilutive effect of
potential common shares outstanding.
Income Taxes
Deferred income taxes are provided for temporary differences between the
financial reporting and the tax bases of assets and liabilities and are measured
using enacted income taxes and laws that will be in effect when temporary
differences are expected to reverse.
Stock-Based Compensation and Other Equity Instruments
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
(see Note 8) have been recorded at their fair value on the date of grant.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS
133 requires companies to record derivatives on the balance sheet as assets and
liabilities, measured at fair value. Gains or losses resulting from changes in
the value of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. SFAS 133, as
amended, is effective beginning in 2001. The adoption of SFAS 133 is not
expected to have a material impact on the financial position or results of
operations of the Company.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
AS OF
DECEMBER 31,
-------------------
2000 1999
(IN THOUSANDS)
Equipment ...................... $ 9,230 $ 7,578
Software ....................... 3,201 1,981
Furniture and fixtures ......... 4,208 3,100
Leasehold improvements ......... 4,558 2,343
------- -------
21,197 15,002
Less: accumulated depreciation.. 6,655 4,415
------- -------
Property and equipment, net .... $14,542 $10,587
======= =======
41
44
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
AS OF
DECEMBER 31,
---------------------
2000 1999
(IN THOUSANDS)
Goodwill ................................. $165,547 $156,542
Intangibles related to personnel ......... 6,048 5,958
-------- --------
171,595 162,500
Less: accumulated amortization ........... 12,136 6,700
-------- --------
Intangible assets, net ................... $159,459 $155,800
======== ========
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
AS OF
DECEMBER 31,
-------------------
2000 1999
(IN THOUSANDS)
Trade accounts payable ........... $ 4,918 $ 4,097
Accrued payroll and compensation.. 11,053 11,165
Accrued income taxes ............. -- 1,601
Other ............................ 6,639 2,649
------- -------
$22,610 $19,512
======= =======
6. FINANCING ARRANGEMENTS
Notes Payable to Bank
The Company has a Canadian line of credit that provides for maximum
borrowings of approximately $300,000. Borrowings under the line are payable on
demand and bear interest at Canadian prime plus 1%. As of December 31, 2000,
$187,000 was outstanding under the line.
Effective June 25, 1999, the Company consolidated its domestic notes payable
to banks into an interim discretionary demand credit agreement. Borrowings under
the discretionary demand credit agreement bore interest at the banks base rate
and were available for working capital and acquisition financing purposes, with
an aggregate limit of $30,000,000. All borrowing under the discretionary demand
credit facility were repaid on December 30, 1999 when the facility was replaced
with a Senior Credit Facility.
42
45
Debentures Due to Affiliates - Short Term
On December 15, 2000, the Company entered into a debenture agreement with
Knowledge Universe Capital Co. LLC, an affiliate of our majority shareholder,
for borrowings of $10,000,000. The Company borrowed $2,500,000 on December 15,
2000, with additional funding of $2,500,000 received on January 15, 2001 and
$5,000,000 received on February 15, 2001. Interest accrues on the debentures at
a rate of 10%, compounded monthly, and is payable on the last day of each
quarter. Accrued but unpaid interest is added to the outstanding principal
balance. Borrowings under the debentures are due and payable on 10 days demand
by the lender and interest and principal repayments are subordinated to
borrowings under the Senior Credit Facility. Currently, interest is being
accrued on the debentures, however, neither interest nor principal payments may
be made by the Company until the lenders under the Senior Credit Facility permit
such payments to be made.
Bridge Loan Payable
In August 1998, the Company secured a $40,000,000 credit facility (the
"Bridge Loan"), which bore interest during 1998 at the rate of LIBOR plus 450
basis points per annum (10.2% at December 31, 1998). Effective December 31,
1998, the Bridge Loan was amended to increase the credit facility to
$77,500,000, to add Knowledge Universe, Inc. as a lender under the credit
facility and to extend the maturity to May 31, 1999. Borrowings under the
amended Bridge Loan bore interest at a rate of 12% and were repaid in full
during 1999.
LONG-TERM DEBT
Senior Credit Facility
Effective December 30, 1999, the Company entered into a Senior Credit
Facility which replaced and expanded the Company's previous discretionary demand
credit facility. The Senior Credit Facility, which matures on March 29, 2002,
currently provides for a $25 million revolving credit arrangement, intended for
general corporate purposes, and a $30 million revolving acquisition facility.
The revolving credit arrangement further contained a sublimit that provided for
the issuance of letters of credit in an amount that may not exceed $7.5 million.
Interest under the Senior Credit Facility was based, at the Company's election,
on the bank's base rate plus 0.25% to 1.50% or LIBOR plus 1.5% to 2.75%, with
the spread in either election determined by an overall measurement of total
indebtedness to trailing earnings, as defined in the agreement. The agreement
also provided for a commitment fee on unused borrowings equal to 0.35% to 0.50%.
The Company incurred $1,050,000 of upfront fees and expenses in connection with
the establishment of the Senior Credit Facility, which are being amortized as
interest expense over the life of the facility. The Senior Credit Facility
contains covenants related to the maintenance of financial ratios, operating
restrictions and restrictions on the payment of dividends and disposition of
assets.
As a result of operating losses incurred during 2000, the Senior Credit
Facility was amended in November and December 2000 to waive compliance with
certain of these covenants and to permanently reduce borrowings available under
the facility by $2.4 million. Effective March 2001, the Senior Credit Facility
was amended again to waive compliance with certain covenants through January
2002. In connection with this waiver, the Company has agreed to permanently
reduce the borrowings outstanding under the facility by $8.05 million between
April 2001 and December 31, 2001. Additionally, no further borrowings or Letters
of Credit may be drawn or issued under the facility. Borrowings under the
amended facility will bear interest at the bank's base rate plus 3.50%, with
payment of 2% of this rate deferred until January 2, 2002 and waived if the
facility is fully repaid by December 15, 2001. The waiver requires the Company
to pay a fee to the Senior Lenders of $0.9 million and to issue the senior
lenders warrants to purchase 1,418,351 shares of the Company's Class A Common
Stock at an exercise price of $0.86 per share, exercisable at the senior
lenders' sole discretion at any time prior to 18 months after payment in full of
all of the Company's obligations due under the amended Senior Credit Facility.
The Company also agreed that upon the sale or other disposition (or any series
of sales or dispositions) by the Company of any of the Company's assets with
gross proceeds, in the aggregate, in excess of $10,000,000, the senior lenders
can elect in their sole discretion to require the Company to redeem the warrants
for a $500,000 cash payment by the Company (except to the extent prohibited by a
non-waiveable applicable law or regulation). In addition, the Company has the
right to call the warrants for a cash payment of $750,000, which payment may
only be made from new financing sources. Additionally, an affiliate of Knowledge
Universe is obligated to deliver a guarantee to the senior lenders in the amount
of $2.5 million on or before April 17, 2001. This affiliate was granted a
security interest and lien in all of the Company's assets, junior and
subordinated to the security interest and lien of the senior lenders. Under the
provisions of the amendment, on January 15, 2002 the Company will be required to
deliver cash collateral for all outstanding letters of credit ($2.9 million as
of March 30, 2001). The amended Senior Credit Facility contains covenants
related to the maintenance of financial ratios, operating restrictions, partial
payment of excess consolidated EBITA to the lenders, and restrictions on the
payment of dividends and disposition of assets. The revised covenants were based
on the Company's operating plan for 2001. The Company's ability to remain in
compliance will be dependent on its ability to successfully execute its
operating plan and take appropriate corrective actions if circumstances arise
which could cause actual operating results to vary from the plan.
43
46
Debentures Due to Affiliates
In 1998, the Company issued two debentures with principal amounts of
$24,970,000 and $23,000,000, respectively. Both debentures are due on May 1,
2002. The debentures accrue interest at a rate of 10% retroactive to the date
the initial capital was funded.
During 1999, the Company repaid $25,607,000 of principal and interest due
under the Debentures. Effective August 31, 1999, in accordance with the terms of
the Debenture, unpaid interest then outstanding was converted to principal, with
interest accruing thereafter payable on a quarterly basis. Principal and
interest amounts due under the Debentures are subordinated to borrowings under
the Senior Credit Facility.
In December 2000, $21,000,000 of the then outstanding debentures was
converted into Series A Cumulative Convertible Preferred Stock (see Note 10 -
Series A Cumulative Convertible Preferred Stock) and dividends accruing
thereafter will be added to the outstanding principal balance on a quarterly
basis.
Other Long-term Debt
Other long-term debt consists of the following:
AS OF
DECEMBER 31,
----------------
2000 1999
(IN THOUSANDS)
Unsecured note payable to a former stockholder of Symmetrix
Issued in connection with a non-compete agreement.
Annual payments of $120,000 are due through May 2010.
Interest accrues annually at 8.7% ....................... $ 780 $ 828
Promissory note payable to former stockholders of ERG,
interest at 5.0%, due January 1, 2001 ................... 2,400 2,460
Promissory note payable to former stockholders of Cambridge
Economics, interest at 5.88%, due January 10, 2002 ..... 2,100 --
Other ..................................................... -- 11
------ ------
5,280 3,299
Less: current portion ..................................... 2,452 48
------ ------
Long-term debt ............................................ $2,828 $3,251
====== ======
Annual maturities of other long-term debt for the years ending after
December 31, 2000 are as follows (in thousands):
2001.................. $2,452
2002.................. 2,156
2003.................. 62
2004.................. 67
2005.................. 73
2006 and thereafter... 470
------
$5,280
======
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47
7. INCOME TAXES
The provision for income taxes consists of the following:
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
(IN THOUSANDS)
Current:
Federal ....................................... $(1,291) $ 1,308 $ 200
State ......................................... -- 347 43
------- ------- -----
Total current tax provision (benefit).. (1,291) 1,655 243
------- ------- -----
Deferred:
Federal ....................................... -- (2,158) --
State ......................................... -- (381) --
------- ------- -----
Total deferred tax provision (benefit).. -- (2,539) --
------- ------- -----
Total tax provision (benefit) .......... $(1,291) $ (884) $ 243
======= ======= =====
The reconciliation of the consolidated effective tax rate of the Company is
as follows:
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
Tax (benefit) at statutory rate ............... (34)% 34% (34)%
State taxes (benefit), net of federal benefit.. 0 (1) 0
Permanent differences ......................... 4 49 2
Loss treated as partnership flow-through
for tax purposes ............................ 0 0 11
Valuation allowance adjustments ............... 24 (123) 20
Other ......................................... 1 0 2
--- ---- ---
Income tax provision (benefit) ................ (5)% (41)% 1%
=== ==== ===
Significant components of the Company's deferred tax assets and liabilities
are as follows:
AS OF
DECEMBER 31,
-----------------------------
2000 1999
(IN THOUSANDS)
Deferred tax assets:
Reserves ......................... $ 3,439 $ 2,861
Other accrued liabilities ........ 1,326 1,737
Net operating loss carryforwards.. 10,669 3,552
-------- --------
Deferred tax assets ........... 15,434 8,150
Valuation allowance .............. 12,551 5,135
-------- --------
2,883 3,015
Deferred tax liabilities:
Depreciation and other ........... (110) (71)
Deductible goodwill amortization.. (1,947)
Cash-to-accrual adjustments ...... (826) (1,651)
-------- --------
Net deferred tax assets ..... $ -- $ 152
======== ========
Valuation allowances relate to uncertainties surrounding the realization of
tax loss carryforwards and the tax benefit attributable to certain tax assets of
the Company. Of the valuation allowances at December 31, 2000, $2,328,000 will
be used to reduce goodwill when any portion of the deferred tax asset is
recognized.
During 2000, the increase in the valuation allowance represented a reserve
against all deferred tax assets that must be realized through the generation of
taxable income in future periods.
45
48
At December 31, 2000, the Company has tax net operating loss carryforwards
of approximately $26,673,000, which will expire through the year 2019. As a
result of ownership changes, net operating losses of $8,879,000 are subject to
limitations under the Internal Revenue Code.
8. RELATED PARTY TRANSACTIONS
The Company from time to time performs professional consulting services for
Knowledge Universe, L.L.C and certain of its subsidiaries. Revenues recognized
from performance of such services were $125,000, $290,000, and $1,632,000 in
2000, 1999 and 1998, respectively. During 2000 and 1999, the Company recognized
$2,872,000 and $3,674,000, respectively of revenue in connection with
professional services performed for an entity whose chairman, founder and Chief
Executive Officer is a senior executive of one of the Company's subsidiaries. A
subsidiary of Knowledge Universe L.L.C. is also a minority investor in the
entity.
During 2000 and 1999, the Company recognized revenues totaling $20,556,000
and $869,000 from certain entities in which it holds equity investments (see
Note 2 - Available-for-sale Investments). Knowledge Universe L.L.C. or its
subsidiaries have also made equity investments in certain of these entities.
Management fees of $200,000 and $120,000 in 1999 and 1998, respectively, due
to Knowledge Universe, Inc. were incurred. In addition, the Company also
incurred a supplemental management fee of $1,500,000 to Knowledge Universe, Inc.
for additional services rendered to the Company during 1998. No management fees
were incurred after April 1999.
The law firm of Maron & Sandler has served as Nextera's general counsel
since its inception. Stanley E. Maron and Richard V. Sandler, two of the
Company's Directors, are partners of Maron & Sandler. In 2000, 1999 and 1998,
Maron & Sandler billed Nextera approximately $245,000, $650,000 and $473,000,
respectively, for legal services rendered to the Company.
Since June 1997, Nextera has retained RFG Financial Group, Inc. to provide
accounting and financial services. Ralph Finerman, a Director, is President of
RFG Financial Group, Inc. In 1999 and 1998, the Company paid RFG Financial Group
approximately $20,000 and $13,000, respectively, for their services. Services
rendered in 2000 were immaterial.
In 1998, $47,970,000 was recorded as debentures due to affiliates. In
connection with the amendment of the Bridge Loan during 1998, Knowledge
Universe, Inc. provided a $37.5 million credit facility to the Company (see Note
6). During 1999, the Company utilized a portion of the net proceeds it received
from its initial public offering of Class A Common Stock to repay to Knowledge
Universe, Inc. $25,169,000 of principal and interest due under the Debentures
and $38,499,000 of principal and interest due under the Bridge Loan. During
2000, $21,000,000 of these Debentures were converted into Series A Cumulative
Convertible Preferred Stock (see Note 10).
In December 2000, the Company entered into a debenture agreement with
Knowledge Universe Capital Co. LLC for borrowings of $10,000,000. The Company
borrowed $2,500,000 on December 15, 2000, with additional funding of $2,500,000
received on January 15, 2001 and $5,000,000 received on February 15, 2001 (see
Note 6).
As consideration for a guaranty provided by Knowledge Universe, Inc. in
connection with the Company's acquisition of Lexecon (see Note 1--Acquisitions),
the Company granted to Knowledge Universe, Inc. warrants to purchase 250,000
shares of Class A Common Stock at an exercise price of $8.00 share. The warrants
expire on December 31, 2003. The Company has included approximately $1,000,000,
the estimated fair value of the warrants, calculated using the Black-Scholes
model, as a component of its purchase price incurred in connection with the
Lexecon acquisition.
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49
9. LEASES
The Company leases its office facilities under operating leases which expire
from 2001 to 2007. The majority of the leases require payments for additional
expenses such as taxes, maintenance and utilities. Certain of the leases contain
renewal options. The Company also has operating leases for certain equipment.
Total rent expense was approximately $7,535,000, $5,828,000 and $2,223,000, in
2000, 1999 and 1998, respectively. The Company also leases certain equipment
under capital leases.
Future minimum lease payments under capital leases and noncancelable
operating leases for the years ending after December 31, 2000 are as follows (in
thousands):
CAPITAL OPERATING
LEASES LEASES
2001................................. $ 869 $ 8,885
2002................................. 406 7,899
2003................................. 245 7,200
2004................................. 87 6,659
2005................................. 28 6,591
2006 and thereafter.................. - 26,761
------- -------
Total minimum lease payments. 1,635 $63,995
=======
Less amounts representing interest... (177)
-------
Present value of minimum capitalized
lease Payments.................... 1,458
Current portion...................... (770)
-------
Long-term capitalized lease
obligation......................... $ 688
=======
10. STOCKHOLDERS' EQUITY
Class A and Class B Common Stock
On May 21, 1999, the Company completed its initial public offering of its
Class A Common Stock. The Company sold 11,500,000 shares of Class A Common Stock
and realized net proceeds of $103,027,000. Substantially all of these net
proceeds were used to repay a portion of the Company's then outstanding short-
and long-term debt.
The Company has 3,848,560 shares of Class B Common Stock outstanding. The
Class B Common Stock has the same economic characteristics as the Class A Common
Stock, except each Class B Common stockholder has ten votes per share of Class B
Common Stock.
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50
Series A Cumulative Convertible Preferred Stock
On December 14, 2000, the Company entered into a Note Conversion Agreement
with Knowledge Universe, Inc. (the Note Conversion Agreement). Under the terms
of the Note Conversion Agreement, Knowledge Universe, Inc. converted $21,000,000
of debentures (see Note 6--Debentures Due to Affiliates) 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.
The Series A Preferred Stock carries a liquidation preference equal to $100
per share and is convertible into Class A Common Stock at the option of the
holder beginning on June 30, 2001. For the period from June 30, 2001 through
December 14, 2002, the Series A Preferred Stock is convertible at a price equal
to the lesser of $3.00 or 150% of the average closing price of the Company's
Class A Common Stock for the 10 trading day period preceding June 30, 2001 (the
Initial Conversion Price). Thereafter, the conversion price will be reset at the
lower of the Initial Conversion Price or 80% of the average closing price for
the 30 day trading day period preceding December 14, 2002 (the Reset Conversion
Price). In no event will either the Initial Conversion Price or the Reset
Conversion price be less than $0.6875 per share, the closing price of the
Company's Class A Common Stock on December 13, 2000. Each holder of Series A
Preferred Stock will be entitled votes on matters presented to shareholders on
an as converted basis.
The Series A Preferred Stock is redeemable at the option of the Company at a
price equal to $100 per share plus accrued unpaid dividends through June 30,
2001. Additionally, beginning on December 14, 2004, in the event that the
average closing price of the Company's Class A Common Stock for the 30 days
prior to the redemption is at least 150% of the Reset Conversion Price, the
Series A Preferred Stock may be redeemed at the option of the Company at a price
equal to $106 per share plus accrued unpaid dividends though December 14, 2005.
Each year thereafter, the redemption price will decrease $1 per share until
December 14, 2010, at which point the redemption price will be fixed at $100 per
share plus accrued unpaid dividends.
For the period through June 30, 2001, the Company can, at its option,
exchange the Series A Preferred Stock into a debenture (the Exchange Debenture)
with terms equal to those carried in the debentures exchanged for the Series A
Preferred Stock on December 14, 2000. Solely for purposes of determining the
principal amount of the Exchange Debenture, in the event of such an exchange,
the Series A Preferred Stock shall be deemed to have accrued dividends at a rate
equal to 12%, retroactive to December 14, 2000.
Employee Equity Participation Plan
The Company has granted options principally under two stock option plans,
adopted in 1998 and 1999. Options granted under these plans have up to a 10 year
life and vest principally over three to four year periods, with certain options
subject to acceleration if certain conditions are achieved. The exercise price
of options granted is generally equal to the fair market value of the Company's
Class A common stock on the date of grant. As of December 31, 2000, the Company
had reserved 22,500,000 shares of common stock for future issuance under the
stock option plans, of which 5,000,000 were subject to shareholder approval and
3,403,039 were available for future grants.
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51
A summary of stock option related transactions is as follows:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
Outstanding options at December 31, 1997.. 450,000 $ 3.51
Granted ................................ 2,554,233 6.91
Forfeited .............................. (139,993) 6.06
----------- --------
Outstanding options at December 31, 1998.. 2,864,240 6.44
Granted ................................ 8,484,573 8.27
Exercised .............................. (497,729) 6.47
Forfeited .............................. (457,683) 6.61
----------- --------
Outstanding options at December 31, 1999.. 10,393,401 7.77
Granted ................................ 11,252,346 3.57
Exercised .............................. (139,857) 4.55
Forfeited .............................. (2,464,755) 6.42
----------- --------
Outstanding options at December 31, 2000.. 19,041,135 $ 5.49
=========== ========
A summary of information about stock options outstanding as of December 31,
2000 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ------------------------------------
WEIGHTED-AVERAGE
REMAINING
RANGE OF EXERCISE NUMBER CONTRACTUAL LIFE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
PRICES OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
$0.50 - $ 5.00 10,448,589 9.5 $2.23 1,373,648 $4.31
$5.01 - $10.00 6,910,016 8.5 8.93 1,491,727 8.73
$10.01 - $14.00 1,682,530 8.4 11.61 648,816 13.06
---------- ----- ---------- -----
19,041,135 $5.49 3,514,191 $7.80
========== =========
The Company has adopted the disclosure requirements of SFAS 123, "Accounting
for Stock-Based Compensation" and, as permitted under SFAS 123, applies
Accounting Principles Board Opinion ("APB") No. 25 and related interpretations
in accounting for its plans. 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:
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss):
As reported............ $ (23,972) $ 3,065 $(17,155)
Pro forma.............. (37,861) (993) (17,627)
Net income (loss) per diluted common share:
As reported............ $ (0.69) $ 0.10 $ (1.14)
Pro forma.............. $ (1.08) $ (0.03) $ (1.18)
The fair value of stock options used to compute pro forma net loss and net
loss per common share disclosure is the estimated fair value at grant date using
the Black-Scholes option pricing model assuming expected volatility of 65% in
2000 and 1999 and 55% in 1998, respectively, and a risk free interest rate of
6.0%, 5.5% and 5.0% in 2000, 1999 and 1998, respectively and an expected life of
approximately 10 years for all periods.
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11. BASIC AND DILUTED EARNINGS PER COMMON SHARE
The following table sets forth the reconciliation of the numerator and
denominator of the net income (loss) per common share computation:
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER COMMON SHARE DATA)
Net income (loss) ............ $(23,972) $ 3,065 $(17,155)
Preferred dividends .......... (98) -- --
-------- -------- --------
Net income (loss) available to
common stockholders ....... $(24,070) $ 3,065 $(17,155)
======== ======== ========
Weighted average common
shares outstanding ....... 35,121 29,990 14,997
Dilutive effect of options
and warrants .............. 0 451 0
-------- -------- --------
Weighted average common
shares outstanding ........ 35,121 30,441 14,997
======== ======== ========
Basic net income (loss) per
common share: ............. $ (0.69) $ 0.10 $ (1.14)
======== ======== ========
Diluted net income (loss) per
common share: ............. $ (0.69) $ 0.10 $ (1.14)
======== ======== ========
In 2000, the Company had 3,611,455 of common stock equivalents, consisting
of stock options, which were not included in the computation of earning per
share because they were antidilutive.
12. RETIREMENT SAVINGS PLANS
The Company and certain of its subsidiaries sponsor retirement savings plans
under Section 401(k) of the Internal Revenue Code for the benefit of all of
their employees meeting certain minimum service requirements. Eligible employees
may elect to contribute to the retirement plans subject to limitations
established by the Internal Revenue Code. The trustees of the plans select
investment opportunities from which participants may choose to contribute.
Matching contributions are made at the discretion of the Company and, for
certain plans, as a percentage of employee contributions. Total discretionary
and matching contribution expense under the plans were $1,854,000, $3,107,000
and $1,839,000 in 2000, 1999 and 1998, respectively.
13. SPECIAL CHARGES
2000
Compensation Expense - Other
In the fourth quarter 2000, the Company awarded to certain employees special
incentive-related compensation awards. Such awards totaled $6,716,000 and are
payable in cash and restricted stock during 2001, subject to employees remaining
employed by the Company on the dates of the payments. The Company has recorded a
special charge of $2,338,000 in 2000 associated with the pro rata share of such
payments over the associated vesting period and will record a charge for the
remainder of the award in 2001.
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Restructuring and Other Charges
During the fourth quarter of 2000, the Company implemented a plan to reduce
its consulting and administrative staffs, resulting in severance costs of
approximately $2,423,000. Approximately $1,741,000 of this charge was paid in
the fourth quarter of 2000 and the remainder of the accrual is expected to be
substantially paid in the first quarter of 2001. In total, the positions of 108
consultants and administrative personnel were terminated. In June 2000, the
Company recorded a charge of $1,870,000 as a result of severance costs incurred
for seven individuals in connection with management changes at the Company's
Technology Solutions Group. Approximately $1,228,000 of this charge was paid in
2000 and the remainder is expected to be paid ratably through January of 2002.
As of December 31, 2000, approximately $1,324,000 was included in accounts
payable and accrued expenses related to the above severance costs.
As a result primarily of the fourth quarter workforce reduction described
above, the Company has identified and made plans to vacate certain portions of
its leased facilities. The Company has recorded a charge of $1,531,000
associated with the cost of exiting these facilities, net of estimated sublease
income, all of which was included in accounts payable and accrued expenses as of
December 31, 2000.
1999
Compensation Expense - Other
The Company granted to certain non-employee consultants options to purchase
445,245 of its Class A Common Stock at an exercise price of $14.00 per share in
1999. Such options were fully-vested upon grant. The Company recorded a non-cash
compensation expense of $4,384,000, which represented the estimated fair value
of the options calculated using the Black-Scholes model.
The Company recorded a non-cash compensation expense of $1,705,000,
principally representing the difference between the fair value of 197,760
fully-vested options granted in 1999 to certain non-stockholder employees on the
date of grant of $10.00 per share and the $1.50 exercise price of the options.
Such options were granted in final satisfaction of an agreement entered into in
December 1998 under which payments totaling $4,248,000 in cash and fully-vested
options to purchase 384,000 of Class A Common Stock at a purchase price of $1.50
per share were granted during 1998.
Restructuring and Other Charges
In November 1999, in connection with a change in senior management, the
Company implemented a plan to reduce its administrative staff, resulting in
severance costs of approximately $1,316,000. As of December 31, 1999, $798,000
was included in accounts payable and accrued expenses related to severance
costs. The accrual at December 31, 1999 was fully paid during the first and
second quarters of 2000.
1998
Compensation Expense - Other
The Company recorded $6,671,000 of charges in 1998, which represented the
cash paid plus the difference between the between the fair value of options
granted in 1998 on the date of grant of $7.65 per share and the $1.50 exercise
price of the options.
Restructuring and Other Charges
During 1998, the Company recorded restructuring costs of $1,298,000 related
to the combination of certain operating subsidiaries. These restructuring costs
consisted principally of $603,000 of severance payments and terminating costs
and $616,000 for vacated leased office space, net of
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estimated sublease income. As of December 31, 1999, $332,000 was included in
accounts payable and accrued expenses related to unpaid restructuring costs.
14. OTHER EXPENSE
During 2000, the Company recorded Other Expense of $5,432,000 associated
with the write down to fair market value of certain available for sale
investments and other assets for which an other than temporary decline in market
value was incurred.
15. 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.
16. QUARTERLY INFORMATION (UNAUDITED)
(IN THOUSANDS, EXCEPT PER COMMON SHARE DATA)
FIRST SECOND THIRD FOURTH
2000
Net revenue $46,962 $44,040 $35,805 $34,193
Gross profit 20,746 19,048 10,313 12,499
Income (loss) before income taxes 4,306 (255) (10,449) (18,865)
Net income (loss) 2,485 (145) (6,241) (20,071)
Net income (loss) per common share:
Basic $ 0.07 $ 0.00 $ (0.18) $ (0.57)
Diluted $ 0.07 $ 0.00 $ (0.18) $ (0.57)
1999
Net revenue $36,145 $36,519 $40,094 $43,197
Gross profit 15,633 16,049 17,339 19,099
Income (loss) before income taxes (3,722) 3 3,343 2,557
Net income (loss) (3,722) 1 3,343 3,443
Net income (loss) per common share:
Basic $ (0.17) $ 0.00 $ 0.10 $ 0.10
Diluted $ (0.17) $ 0.00 $ 0.09 $ 0.10
The net loss for the second quarter of 2000 includes a charge of $1.9
million for severance costs incurred in connection with management changes at
the Company's Technology Solutions Group.
The decline in net income for the third quarter of 2000 is primarily
attributable to a decrease in revenues primarily from the Company's Technology
Solutions Group due principally to an industry-wide decline in demand for such
services and, to a lesser extent, a decrease in revenues from the Company's
human capital services.
The net loss for the fourth quarter of 2000 includes a $2.4 million charge
for severance costs, a $1.5 million charge for the costs of exiting certain
portions of leased facilities, a $5.4 million non-cash charge associated with
the write down to fair market value of certain investments, and a special charge
of $2.3 million associated with the pro rata share of payments for special
incentive-related compensation awards granted to certain employees.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is set forth in the section
headed "Proposal 1--Election of Directors" in our definitive Proxy Statement for
the Annual Meeting of Stockholders of the Company (the "Proxy Statement") which
is expected to be filed not later than 120 days after the end of our fiscal year
ended December 31, 2000, and is incorporated in this report by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth in the section
headed "Executive Compensation" in our definitive Proxy Statement and is
incorporated in this report by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is set forth in the section
headed "Security Ownership of Certain Beneficial Owners and Management" in our
definitive Proxy Statement and is incorporated in this report by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is set forth in the sections
headed "Certain Relationships and Related Transactions" and "Compensation
Committee Interlocks and Insider Participation" in our definitive Proxy
Statement and is incorporated in this report by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report as Exhibits:
1. The following financial statements of and report of independent public
accountants are included in Item 8 of this Form 10-K:
- Report of Ernst & Young LLP, Independent Auditors
- Consolidated Balance Sheets
- Consolidated Statements of Operations
- Consolidated Statements of Stockholders' Equity
- Consolidated Statements of Cash Flows
- Notes to Consolidated Financial Statements
2. The following financial statement schedule is filed as part of this
report and is attached hereto:
Schedule II Valuation and Qualifying Accounts.
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or notes
thereto.
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3. Exhibits:
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
- ------- ----------- -----------
3.1(1) Second Amended and Restated Certificate of Incorporation
3.2(2) Amended and Restated Bylaws
4.1(3) Form of Class A Common Stock Certificate
4.2(4) Certificate of Designations, Preferences and Relative Participating, Optional and Other
Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions
Thereof of Series A Cumulative Convertible Preferred Stock of Nextera
4.3(4) Note Conversion Agreement by and between Knowledge Universe, Inc. dated as of December
14, 2000
10.1(1) Amended and Restated 1998 Equity Participation Plan
10.2(5) Nextera/Lexecon Limited Purpose Stock Option Plan
10.3(6) Stock Purchase Agreement dated as of July 30, 1997 by and among Nextera Enterprises,
L.L.C., Symmetrix, Inc. and the stockholders and certain option holders of
Symmetrix, Inc. listed on the signature pages thereto.
10.4(6) Purchase Agreement dated as of January 5, 1998 by and among
SGM Consulting, L.L.C., Nextera Enterprises, L.L.C.,
Nextera Enterprises Holdings, L.L.C., SiGMA Consulting,
LLC, and the members of SiGMA Consulting, LLC listed on the
signature pages thereto.
10.5(6) Purchase Agreement dated as of March 31, 1998 by and among Nextera Enterprises,
L.L.C., Pyramid Imaging, Inc. and the stockholders of Pyramid Imaging, Inc. listed
on the signature pages thereto.
10.6(7) First Amendment to Purchase Agreement dated as of September
30, 1998 by and among Nextera Enterprises, L.L.C., Pyramid
Imaging, Inc., the former shareholders of Pyramid Imaging,
Inc. listed on the signature pages thereto and Nextera
Enterprises, Inc.
10.7(6) Asset Purchase Agreement dated as of March 31, 1998 by and
among The Planning Technologies Group, Inc., the
shareholders of The Planning Technologies Group, Inc.
listed on the signature pages thereto, The Planning
Technologies Group, L.L.C., Nextera Enterprises, L.L.C. and
Nextera Enterprises Holdings, L.L.C.
10.8(6) Asset Purchase Agreement dated as of August 31, 1998 by and among SC/NE, LLC,
Nextera Enterprises, L.L.C., Sibson & Company, L.P., Sibson & Company, Inc., SC2,
Inc., and the shareholders of Sibson & Company, Inc. and SC2, Inc. listed on the
signature pages thereto.
10.9(6) First Amendment to Asset Purchase Agreement dated as of August 31, 1998 by and
among SC/NE, LLC, Nextera Enterprises, L.L.C., Sibson &
Company, L.P., Sibson & Company, Inc. and SC2, Inc.
10.10(6) Escrow Agreement dated as of August 31, 1998 by and among SC/NE, LLC, Nextera
Enterprises, L.L.C., Sibson & Company, L.P., Sibson & Company, Inc., SC2, Inc., the
shareholders of Sibson & Company, Inc. and SC2, Inc. listed on the signature pages
thereto and Chase Manhattan Trust Company.
10.11(6) Share Purchase Agreement dated as of August 31, 1998 by and among Nextera
Enterprises, L.L.C., Sibson Acquisition Co. and the shareholders of Sibson Canada
Inc. listed on the signature pages thereto.
10.12(6) Escrow Agreement dated as of August 31, 1998 by and among Nextera Enterprises,
L.L.C., Sibson Acquisition Co., the shareholders of Sibson Canada Inc. listed on the
signature pages thereto and Chase Manhattan Trust Company.
10.13(6) Share Exchange Agreement dated as of August 31, 1998 by and among Nextera
Enterprises, L.L.C., and the shareholders of Sibson & Company, Inc., SC2, Inc. and
Sibson Canada, Inc. listed on the signature pages thereto.
10.14(6) Stockholders Agreement dated as of August 31, 1998 by and
among Nextera Enterprises, L.L.C., Nextera Enterprises,
Inc. and the individuals and other parties listed on the
Table of Stockholders attached thereto as Schedule A.
10.15(2) First Amendment to Stockholders Agreement dated as of December 15, 1998 by and among
Nextera Enterprises, L.L.C., Nextera Enterprises, Inc. and the individuals and other
parties listed on the signature pages thereto.
10.16(2) Letter dated December 15, 1998 from Nextera Enterprises, Inc. to certain
stockholders of Nextera Enterprises, Inc.
10.17(8) Contribution Agreement dated as of December 31, 1998 by and among Nextera
Enterprises, Inc., Lexecon Inc. and the shareholders of Lexecon Inc. listed on the
signature pages thereto.
10.18(2) Letter agreement dated as of December 31, 1998 by and among Nextera Enterprises,
Inc., Knowledge Universe, Inc. and the individuals listed on the signature page
thereto.
10.19(8) Warrant to Purchase Class A Common Stock of Nextera Enterprises, Inc. dated as of
December 31, 1998 issued to Knowledge Universe, Inc.
10.20(8) Agreement relating to the sale and purchase of the whole of
the issued share capital of The Alexander Corporation Limited
dated as of January 29, 1999 by and among Nextera
Enterprises, Inc. and the parties listed on Schedule I
thereto.
10.21(8) Supplemental Deferred Consideration Agreement dated as of January 29, 1999 by and
among Nextera Enterprises, Inc., Graham Alexander and Arthur Morgan.
10.22(8) Loan Note Instrument dated as of January 29, 1999 of Nextera Enterprises, Inc.
10.23(8) Tax Deed of Covenant dated as of January 29, 1999 by and among Nextera Enterprises,
Inc. and the persons listed on the Schedule thereto.
10.24(8) Charge of Shares dated as of January 29, 1999 by the persons listed on Schedule I
thereto in favor of Nextera Enterprises, Inc.
10.25(2) Assignment effective April 30, 1998 with respect to Debenture of Nextera
Enterprises, L.L.C. in the principal amount of $23,000,000.
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57
10.26(2) Assignment effective April 30, 1998 with respect to Debenture of Nextera
Enterprises, L.L.C. in the principal amount of $24,970,000.
10.27(2) Assignment effective August 5, 1998 with respect to Debenture of Nextera
Enterprises, L.L.C. in the principal amount of $23,000,000.
10.28(2) Assignment effective August 5, 1998 with respect to Debenture of Nextera
Enterprises, L.L.C. in the principal amount of $24,970,000.
10.29(8) Amended and Restated Debenture of Nextera Enterprises, Inc. in the principal amount
of $22,966,411.50 dated as of December 31, 1997.
10.30(9) First Amendment to Amended and Restated Debenture of Nextera Enterprises, Inc. dated
as of April 15, 1999.
10.31(8) Amended and Restated Debenture of Nextera Enterprises, Inc. in the principal amount
of $24,933,543.66 dated as of December 31, 1997.
10.32(9) First Amendment to Amended and Restated Debenture of Nextera Enterprises, Inc.
dated as of April 15, 1999.
10.33(6) Employment Agreement dated as of August 31, 1998 by and between Roger Brossy and
SC/NE, LLC.
10.34(6) Noncompete, Non-solicitation, Proprietary Information, Confidentiality and
Inventions Agreement dated as of August 31, 1998 between Roger Brossy and Nextera
Enterprises, L.L.C.
10.35(8) Agreement dated as of December 31, 1998 by and between Lexecon Inc. and Andrew M.
Rosenfield.
10.36(8) Confidentiality and Proprietary Rights Agreement dated as of December 31, 1998
between Lexecon Inc. and Daniel R. Fischel.
10.37(8) Confidentiality and Proprietary Rights Agreement dated as of December 31, 1998
between Lexecon Inc. and Dennis W. Carlton.
10.38(10) Discretionary Demand Credit Agreement dated as of June, 25 1999 between Nextera
Enterprises, Inc. and BankBoston, N.A.
10.39(10) Demand Note dated June 25, 1999 of Nextera Enterprises, Inc. in favor of BankBoston,
N.A.
10.40(10) Guarantee and Security Agreement dated as of June 25, 1999 by and among Nextera
Enterprises, Inc., BankBoston, N.A. and the entities listed on the signature pages
thereto.
10.41(14) Third Amendment to Credit Agreement dated as of December 30, 1999 by and among Nextera
Enterprises, Inc., BankBoston, N.A. and the entities listed on the signature pages thereto,
dated December 31, 2000.
10.42(12) Second Amendment to Credit Agreement dated as of December 30, 1999 by and among
Nextera Enterprises, Inc., BankBoston, N.A. and the entities listed on the signature pages
thereto, dated November 14, 2000.
10.43(13) Credit Agreement dated as of December 30, 1999 by and among Nextera Enterprises,
Inc., BankBoston, N.A. and the entities listed on the signature pages thereto.
10.44(13) Guarantee and Security Agreement dated as of December 30, 1999 by and among Nextera
Enterprises, Inc., BankBoston, N.A. and the entities listed on the signature pages
thereto.
10.45(13) Non-Qualified Stock Option Agreement between Nextera Enterprises, Inc. and Steven B.
Fink.
10.46(6) Promissory Note of Gresham Brebach, Jr. dated January 2, 1998 in the principal
amount of $576,000 in favor of Nextera Enterprises Holdings, L.L.C.
10.47(6) Promissory Note of Michael Muldowney dated January 2, 1998 in the principal amount
of $72,000 in favor of Nextera Enterprises Holdings, L.L.C.
10.48(6) Promissory Note of Debra Bergevine dated January 2, 1998 in the principal amount of
$62,000 in favor of Nextera Enterprises Holdings, L.L.C.
10.49(11) Employment Agreement dated September 30, 2000 between Nextera and Vincent C. Perro.
10.50(11) Employment Agreement dated October 24, 2000 between Nextera and Michael P. Muldowney.
10.51(11) Employment Agreement dated October 25, 2000 between Nextera and David Schneider.
10.52(12) Employment Letter dated November 8, 2000 between Steven B. Fink and Nextera.
21.1(14) List of Subsidiaries
23.1(14) Consent of Ernst & Young LLP, Independent Auditors
(1) Filed as an exhibit to Nextera's Registration Statement on Form S-8 dated
November 17, 2000, and incorporated herein by reference.
(2) Filed as an exhibit to Nextera's Amendment No. 2 to Registration Statement
on Form S-1 (File No. 333-63789) dated January 21, 1999, and incorporated herein
by reference.
(3) Filed as an exhibit to Nextera's Amendment No. 7 to Registration Statement
on Form S-1 (File No. 333-63789) dated May 17, 1999, and incorporated herein by
reference.
(4) Filed as an exhibit to Nextera's Form 8-K filed on December 15, 2000, and
incorporated herein by reference.
(5) Filed as an exhibit to Nextera's Amendment No. 6 to Registration Statement
on Form S-1 (File No. 333-63789) dated May 6, 1999, and incorporated herein by
reference.
(6) Filed as an exhibit to Nextera's Registration Statement on Form S-1 (File
No. 333-63789) dated September 18, 1998, and incorporated herein by reference.
(7) Filed as an exhibit to Nextera's Pre-Effective Amendment No. 1 to
Registration Statement on Form S-1 (File No. 333-63789) dated December 4, 1998,
and incorporated herein by reference.
(8) Filed as an exhibit to Nextera's Amendment No. 3 to Registration Statement
on Form S-1 (File No. 333-63789) dated February 24, 1999, and incorporated
herein by reference.
(9) Filed as an exhibit to Nextera's Amendment No. 5 to Registration Statement
on Form S-1 (File No. 333-63789) dated April 16, 1999, and incorporated herein
by reference.
(10) Filed as an exhibit to Nextera's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999 and incorporated herein by reference.
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58
(11) Filed as an exhibit to Nextera's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000 and incorporated herein by reference.
(12) Filed as an exhibit to Nextera's Quarterly Report on Form 10-Q/A for the
quarter ended September 30, 2000 and incorporated herein by reference.
(13) Filed as an exhibit to Nextera's Quarterly Report on Form 10-K for the year
ended December 31, 2000 and incorporated herein by reference.
(14) Filed herewith.
(b) REPORTS ON FORM 8-K
On December 15, 2000, we filed a report on Form 8-K. A press release was
attached to the report announcing that Knowledge Universe, Inc. has converted
$21.0 million of subordinated debt into a new series of Nextera Preferred Stock.
Attached as exhibits were the Certificate of Designations for the new series of
Preferred Stock and the Note Conversion Agreement pursuant to the transaction.
SCHEDULE II
NEXTERA ENTERPRISES, INC.
VALUATION AND QUALIFYING ACCOUNTS
- -----------------------------------------------------------------------------------------------------------------------
BALANCE AT
BEGINNING OF CHARGED TO END OF
DESCRIPTION PERIOD OPERATIONS ACQUISITIONS DEDUCTIONS PERIOD
- -----------------------------------------------------------------------------------------------------------------------
Period ended December 31, 1998
Allowance for uncollectible
accounts .................... $ 100,000 $ 304,000 $ 863,000 $ -- $1,267,000
- -----------------------------------------------------------------------------------------------------------------------
Period ended December 31, 1999
Allowance for uncollectible
accounts .................... $ 1,267,000 $ 871,000 $ -- $ 1,185,000 $ 953,000
- -----------------------------------------------------------------------------------------------------------------------
Period ended December 31, 2000
Allowance for uncollectible
accounts .................... $ 953,000 $ 4,552,000 $ 50,000 $ 3,004,000 $2,551,000
- -----------------------------------------------------------------------------------------------------------------------
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Nextera Enterprises, Inc.
April 17, 2001
By: /s/ David Schneider
------------------------------------------
David Schneider,
Chief Executive Officer, President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ David Schneider President, Chief Executive Officer and April 17, 2001
- ------------------------------------------- Director (Principal Executive Officer)
David Schneider
/s/ Michael P. Muldowney Chief Financial Officer (Principal April 17, 2001
- ------------------------------------------- Financial and Accounting Officer)
Michael P. Muldowney
/s/ Vincent C. Perro Chief Operating Officer and Director April 17, 2001
- -------------------------------------------
Vincent C. Perro
/s/ Steven B. Fink Chairman of the Board April 17, 2001
- -------------------------------------------
Steven B. Fink
/s/ Roger Brossy Director April 17, 2001
- -------------------------------------------
Roger Brossy
/s/ Gregory J. Clark Director April 17, 2001
- -------------------------------------------
Gregory J. Clark
/s/ Ralph Finerman Director April 17, 2001
- -------------------------------------------
Ralph Finerman
/s/ Keith D. Grinstein Director April 17, 2001
- -------------------------------------------
Keith D. Grinstein
/s/ Stanley E. Maron Director April 17, 2001
- -------------------------------------------
Stanley E. Maron
/s/ Michael D. Rose Director April 17, 2001
- -------------------------------------------
Michael D. Rose
/s/ Richard V. Sandler Director April 17, 2001
- -------------------------------------------
Richard V. Sandler
/s/ Richard L. Sandor Director April 17, 2001
- -------------------------------------------
Richard L. Sandor
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