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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 OR [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to _______ Commission File Number 0-25995 NEXTERA ENTERPRISES, INC.  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    95-4700410
(I.R.S. Employer
Identification Number)
 One Exeter Plaza
699 Boylston Street,
Boston, Massachusetts 02116
(Address of principal executive office, including zip code) (617) 262-0055
(Registrants telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act). Yes [  ] No [X] As of July 31, 2004 there were 30,025,441 shares of $0.001 par value Class
A Common Stock outstanding and 3,844,200 shares of $0.001 par value Class B
Common Stock outstanding.




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NEXTERA ENTERPRISES, INC.
Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 2004 INDEX Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003
    
    
    3Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 2004 and 2003
    
    
    5Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4. Controls and Procedures
    
    
    18PART II. OTHER INFORMATIONItem 4. Submission of Matters to a Vote of Security Holders
    
    
    19Item 6. Exhibits and Reports on Form 8-K
    
    
    19Signatures
    
    
    20EXHIBIT 31EXHIBIT 32
  2




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PART I  - FINANCIAL INFORMATION 
 Item 1. Financial Statements Nextera Enterprises, Inc. 
 Condensed Consolidated Balance Sheets
(Dollar amounts in thousands, except per share data) June 30,
    
    December 31,2004
    
    2003(unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    17,642
    
    
    $
    20,124Accounts receivable, net of allowance for
doubtful accounts of $250 at December 31,
2003
    
    
    
    
    
    
    528Prepaid expenses and other current assets
    
    
    1,347
    
    
    
    2,389Total current assets
    
    
    18,989
    
    
    
    23,041Property and equipment, net
    
    
    41
    
    
    
    7Other assets
    
    
    117
    
    
    
    18Total assets
    
    $
    19,147
    
    
    $
    23,066Liabilities and Stockholders EquityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    1,665
    
    
    $
    3,035Accrued taxes
    
    
    130
    
    
    
    1,347Accrued restructuring costs, current portion
    
    
    
    
    
    
    173Current portion of long-term debt
    
    
    185
    
    
    
    185Total current liabilities
    
    
    1,980
    
    
    
    4,740Long-term debt
    
    
    543
    
    
    
    543Other long-term liabilities
    
    
    400
    
    
    
    400Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Preferred Stock, $0.001 par value,
10,000,000 shares authorized, 600,000
authorized shares designated Series A,
44,060 and 42,554 Series A issued and
outstanding at June 30, 2004 and December
31, 2003, respectively
    
    
    4,406
    
    
    
    4,255Class A Common Stock, $0.001 par value,
95,000,000 shares authorized, 30,025,441
shares issued and outstanding at June 30,
2004 and December 31, 2003
    
    
    30
    
    
    
    30Class B Common Stock, $0.001 par value,
4,300,000 shares authorized, 3,844,200
shares issued and outstanding at June 30,
2004 and December 31, 2003
    
    
    4
    
    
    
    4Additional paid-in capital
    
    
    161,607
    
    
    
    161,755Retained earnings (accumulated deficit)
    
    
    (149,813
    )
    
    
    (148,445
    )Accumulated other comprehensive loss
    
    
    (10
    )
    
    
    (216
    )Total stockholders equity
    
    
    16,224
    
    
    
    17,383Total liabilities and stockholders equity
    
    $
    19,147
    
    
    $
    23,066
 See Notes to Condensed Consolidated Financial Statements 3




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Nextera Enterprises, Inc. 
 Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share amounts; unaudited) Three Months EndedJune 302004
    
    2003Net revenues
    
    $
    
    
    
    $
    Cost of revenues
    
    
    
    
    
    
    Gross profit
    
    
    
    
    
    
    Selling, general and administrative expenses
    
    
    691
    
    
    
    1,026Operating loss
    
    
    (691
    )
    
    
    (1,026
    )Interest Income, net
    
    
    43
    
    
    
    Loss from continuing operations before income taxes
    
    
    (648
    )
    
    
    (1,026
    )Provision for income taxes
    
    
    
    
    
    
    Loss from continuing operations
    
    
    (648
    )
    
    
    (1,026
    )Loss from discontinued operations
    
    
    
    
    
    
    (1,313
    )Net loss
    
    
    (648
    )
    
    
    (2,339
    )Preferred stock dividends
    
    
    (78
    )
    
    
    (70
    )Net loss applicable to common stockholders
    
    $
    (726
    )
    
    $
    (2,409
    )Net loss per common share, basic and dilutedContinuing operations
    
    $
    (0.02
    )
    
    $
    (0.03
    )Discontinued operations
    
    
    
    
    
    
    (0.04
    )Net loss per common share, basic and diluted
    
    $
    (0.02
    )
    
    $
    (0.07
    )Weighted average common shares outstanding, basic and diluted
    
    
    33,870
    
    
    
    33,870
 See Notes to Condensed Consolidated Financial Statements 4




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Nextera Enterprises, Inc. 
 Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share amounts; unaudited) Six Months EndedJune 302004
    
    2003Net revenues
    
    $
    
    
    
    $
    Cost of revenues
    
    
    
    
    
    
    Gross profit
    
    
    
    
    
    
    Selling, general and administrative expenses
    
    
    1,451
    
    
    
    2,122Special charges
    
    
    
    
    
    
    1,921Operating loss
    
    
    (1,451
    )
    
    
    (4,043
    )Interest Income, net
    
    
    83
    
    
    
    Loss from continuing operations before income taxes
    
    
    (1,368
    )
    
    
    (4,043
    )Provision for income taxes
    
    
    
    
    
    
    Loss from continuing operations
    
    
    (1,368
    )
    
    
    (4,043
    )Loss from discontinued operations
    
    
    
    
    
    
    (1,359
    )Net loss
    
    
    (1,368
    )
    
    
    (5,402
    )Preferred stock dividends
    
    
    (151
    )
    
    
    (144
    )Net loss applicable to common stockholders
    
    $
    (1,519
    )
    
    $
    (5,546
    )Net loss per common share, basic and dilutedContinuing operations
    
    $
    (0.04
    )
    
    $
    (0.12
    )Discontinued operations
    
    
    
    
    
    
    (0.04
    )Net loss per common share, basic and diluted
    
    $
    (0.04
    )
    
    $
    (0.16
    )Weighted average common shares outstanding, basic and diluted
    
    
    33,870
    
    
    
    33,954
 See Notes to Condensed Consolidated Financial Statements 5




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Nextera Enterprises, Inc. 
 Condensed Consolidated Statements of Cash Flows
(Dollar amounts in thousands; unaudited) Six Months Ended June 302004
    
    2003Operating activitiesNet loss
    
    $
    (1,368
    )
    
    $
    (5,402
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    6
    
    
    
    4,491Provision for doubtful accounts
    
    
    
    
    
    
    591Non-cash compensation charges
    
    
    3
    
    
    
    1,134Non-cash interest Paid in Kind
    
    
    
    
    
    
    2,518Other
    
    
    
    
    
    
    48Change in operating assets and liabilities:Accounts receivable
    
    
    528
    
    
    
    (1,992
    )Prepaid expenses and other assets
    
    
    943
    
    
    
    (5,114
    )Accounts payable and accrued expenses
    
    
    (2,381
    )
    
    
    (865
    )Restructuring costs
    
    
    (173
    )
    
    
    (158
    )Other
    
    
    
    
    
    
    74Net cash used in operating activities
    
    
    (2,442
    )
    
    
    (4,675
    )Investing activitiesPurchase of property and equipment
    
    
    (40
    )
    
    
    (444
    )Changes in restricted cash
    
    
    
    
    
    
    2,081Net cash provided by (used in) investing activities
    
    
    (40
    )
    
    
    1,637Financing activitiesBorrowings under Senior Credit Facility
    
    
    
    
    
    
    3,180Repayments of long-term debt and capital lease obligations
    
    
    
    
    
    
    (311
    )Net cash provided by financing activities
    
    
    
    
    
    
    2,869Effects of exchange rates on cash and cash equivalents
    
    
    
    
    
    
    (9
    )Net decrease in cash and cash equivalents
    
    
    (2,482
    )
    
    
    (178
    )Cash and cash equivalents at beginning of period
    
    
    20,124
    
    
    
    1,606Cash and cash equivalents at end of period
    
    $
    17,642
    
    
    $
    1,428
 See Notes to Condensed Consolidated Financial Statements 6




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NEXTERA ENTERPRISES, INC. 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements of
Nextera Enterprises, Inc. (Nextera or the Company) have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation have
been included. Operating results for the three and six-month periods ended
June 30, 2004 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2004. The balance sheet as of December 31, 2003 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. These financial statements should be read in conjunction with the financial
statements and notes thereto, together with managements discussion and
analysis of financial condition and results of operations, contained in the
Companys Annual Report on Form 10-K filed by the Company with the Securities
and Exchange Commission on March 26, 2004. On November 28, 2003, Nextera Enterprises, Inc. sold substantially all of the
assets Lexecon and its subsidiaries used in their economic consulting business
(Asset Sale) to FTI Consulting, Inc. and LI Acquisition Company, LLC, a
wholly owned subsidiary of FTI (collectively FTI). As of June 30, 2004 and
December 31, 2003, Nextera had no business operations. The Asset Sale is reflected in the accompanying financial statements in
accordance with Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. Accordingly,
the results of operations of the economic consulting business for the three and
six-months ended June 30, 2003 have been reflected as discontinued operations. Knowledge Universe, LLC controls a majority of the voting power of our equity
securities through its ownership of our Class A Common Stock, Class B Common
Stock and Series A Cumulative Preferred Stock. Note 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. 7




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NEXTERA ENTERPRISES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued) Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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. Reclassification Certain reclassifications were made to the 2003 financial statements in order
that they may be consistent with the 2004 presentation. Stock-Based Compensation and Other Equity Instruments As allowed under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation(SFAS 123) the Company has elected
to follow Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25) and related Interpretations in accounting for
its employee stock options. Under APB 25, because the exercise price of the
Companys employee stock options equals or exceeds the market price of the
underlying stock on the date of grant, no compensation expense is recognized. The Company accounts for equity instruments issued to non-employees in exchange
for goods or services using the fair value method. Accordingly, warrants issued
to creditors have been recorded at their fair value on the date of grant. If the Company had adopted the optional recognition provisions of SFAS 123 for
its stock option plans, net loss and net loss per common share would have been
changed to the pro forma amounts indicated below: Three months ended June 30
    
    Six months ended June 302004
    
    2003
    
    2004
    
    2003(Amounts in thousands, except per share data)Net loss as reported
    
    $
    (648
    )
    
    $
    (2,339
    )
    
    $
    (1,368
    )
    
    $
    (5,402
    )Compensation
expense under SFAS
123
    
    
    (279
    )
    
    
    (960
    )
    
    
    (572
    )
    
    
    (1,367
    )Pro forma net loss
    
    $
    (927
    )
    
    $
    (3,299
    )
    
    $
    (1,940
    )
    
    $
    (6,769
    )Net loss per common
share, basic and
diluted:As reported
    
    $
    (0.02
    )
    
    $
    (0.07
    )
    
    $
    (0.04
    )
    
    $
    (0.16
    )Pro forma
    
    $
    (0.03
    )
    
    $
    (0.10
    )
    
    $
    (0.06
    )
    
    $
    (0.20
    )
 The weighted average fair value of options granted during 2004 and 2003 was
$0.38 and $0.26, respectively, at the date of the grants. As recommended by
SFAS No. 123, the fair values of options were estimated using the Black-Scholes
option pricing model assuming expected volatility of 121% and 120% in 2004 and 2003, respectively, a risk free interest rate of 3.75% and
4.70% in 2004 and 2003, respectively, and an expected life of 6 years in 2004
and 2003. 8




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NEXTERA ENTERPRISES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued) Note 3. Discontinued Operations On November 28, 2003, Nextera sold substantially all of the assets Lexecon and
its subsidiaries used in their economic consulting business to FTI.
Accordingly, all consulting operations of the Company have been recorded as
discontinued operations in the accompanying financial statements. FTI paid cash in the amount of $129.2 million, plus additional consideration,
including the assumption of certain operating liabilities, in exchange for the
Lexecon assets. Included within Prepaid expense and other current assetsis
$1.1 million of the sale proceeds which was placed in escrow pending a final
review of the adequacy of the allowance for doubtful accounts receivable
acquired by FTI. The review period has been extended by mutual agreement
between the parties. The funds held in escrow were included as part of the
gain on sale recognized in the fourth quarter of 2003. Revenues from discontinued operations for the three and six-month periods ended
June 30, 2003 were $16.8 and $35.6 million and the pre-tax loss was $1.3
million and $1.4 million, respectively. Included within the three and six-month
periods ended June 30, 2003 discontinued operations was interest expense of
$2.1 million and $4.1 million, respectively. Interest expense was allocated to
discontinued operations as the debt related to the interest expense was repaid,
as required, as part of the Asset Sale. Note 4. Basic and Diluted Net Income (Loss) per Common Share Basic net income (loss) per share (Basic EPS) is computed by dividing income
(loss) from continuing operations applicable to common stockholders and net
income (loss) applicable to common stockholders by the weighted average number
of common shares outstanding. Diluted net income (loss) per common share
(Diluted EPS) is the same as the basic loss per share for the three and
six-month periods ended June 30, 2004 and 2003 as the computation of diluted
income (loss) per share would have an anti-dilutive effect on loss per share. Basic and diluted loss per share were calculated as follows: Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(dollar amounts in thousands, except per share data)Loss from continuing operations
    
    $
    (648
    )
    
    $
    (1,026
    )
    
    $
    (1,368
    )
    
    $
    (4,043
    )Preferred stock dividends
    
    
    (78
    )
    
    
    (70
    )
    
    
    (151
    )
    
    
    (144
    )Loss from continuing operations
applicable to common
stockholders
    
    $
    (726
    )
    
    $
    (1,096
    )
    
    $
    (1,519
    )
    
    $
    (4,187
    )Loss from discontinued operations
    
    
    
    
    
    
    (1,313
    )
    
    
    
    
    
    
    (1,359
    )Net loss applicable to common
stockholders
    
    $
    (726
    )
    
    $
    (2,409
    )
    
    $
    (1,519
    )
    
    $
    (5,546
    )Weighted average common shares
outstandingbasic and diluted
    
    
    33,870
    
    
    
    33,870
    
    
    
    33,870
    
    
    
    33,954
 9




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NEXTERA ENTERPRISES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued) Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Basic and diluted net loss per
common shareLoss from continuing operations
    
    $
    (0.02
    )
    
    $
    (0.03
    )
    
    $
    (0.04
    )
    
    $
    (0.12
    )Loss from discontinued operations
    
    
    
    
    
    
    (0.04
    )
    
    
    
    
    
    
    (0.04
    )Net loss per common share, basic
and diluted
    
    $
    (0.02
    )
    
    $
    (0.07
    )
    
    $
    (0.04
    )
    
    $
    (0.16
    )
 Note 5. Special Charges Accrued restructuring charges and their utilization for the periods presented
are summarized as follows (in thousands): UtilizedBalance at
    
    
    
    
    
    
    
    
    
    Balance at June 30,December 31, 2003
    
    Non-Cash
    
    Cash
    
    2004Severance
    
    $
    77
    
    
    $
    
    
    
    $
    77
    
    
    $
    Facilities
    
    
    45
    
    
    
    
    
    
    
    45
    
    
    
    Operating lease obligations
    
    
    51
    
    
    
    
    
    
    
    51
    
    
    
    $
    173
    
    
    $
    
    
    
    $
    173
    
    
    $
    
 UtilizedBalance at
    
    Q1 2003
    
    
    
    
    
    
    
    
    
    Balance atDecember 31, 2002
    
    charge
    
    Non-Cash
    
    Cash
    
    June 30, 2003Severance
    
    $
    
    
    
    $
    785
    
    
    $
    
    
    
    $
    334
    
    
    $
    451Facilities
    
    
    1,380
    
    
    
    
    
    
    
    324
    
    
    
    576
    
    
    
    480Operating lease
obligations
    
    
    84
    
    
    
    
    
    
    
    
    
    
    
    33
    
    
    
    51$
    1,464
    
    
    $
    785
    
    
    $
    324
    
    
    $
    943
    
    
    $
    982
 In connection with the resignation of the Companys former Chief Executive
Officer, David Schneider, in the first quarter of 2003, the Company incurred a
$1.9 million charge. Approximately $0.8 million of the charge related to
salary continuance until February 2004 and approximately $1.1 million related
to a non-cash charge for fully vested options, with an exercise price of $2.00
per share, which was previously being expensed over the anticipated service
period. In accordance with the original employment agreement, Mr. Schneider
was to be granted a bonus, if and only if the above mentioned options vested
and became exercisable, equal to the exercise price of the options at the time
of the exercise of the 10




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NEXTERA ENTERPRISES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued) options. The portion of the option exercise price bonus
not expensed at the time of the resignation of Mr. Schneider was required to be
expensed immediately and recorded in equity due to the accelerated vesting of
the options which occurred as a result of the resignation. Note 6. Income Taxes No federal tax benefit was recorded for the three and six-month periods ended
June 30, 2004 and 2003 due to the Companys uncertainty associated with
utilizing its net operating losses. Note 7. Comprehensive Income Comprehensive income combines net income (loss) and other comprehensive items
which represent certain amounts that are reported as components of
stockholders equity in the accompanying balance sheet. During the second
quarter of 2004 and 2003, comprehensive loss was $0.7 million and $2.3 million,
respectively. For the six months ended June 30, 2004 and 2003, comprehensive
loss was $1.2 million and $5.4 million, respectively. Accumulated other
comprehensive loss at June 30, 2004 consisted solely of unrealized investment
losses. Note 8. Commitments and Contingencies The Company, from time to time, 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. As mentioned in Note 3, as of June 30, 2004, $1.1 million of the Asset Sale
proceeds is being held in escrow by a third party pending the final review of
the adequacy of the allowance for doubtful accounts related to the accounts
receivables acquired by FTI. The date to finalize this determination has been
extended to allow for additional time for certain receivables to be collected.
The Company believes that the escrow amount is fairly recorded on the balance
sheet, however, actual results may vary materially pending the final outcome. In accordance with the Asset Purchase Agreement, Nextera agreed to indemnify
FTI for a number of matters including the breach of its representations,
warranties and covenants contained in the Asset Purchase Agreement. These
representations, warranties and covenants related to organization, corporate,
financial statement, business, operational, tax, legal, insurance, intellectual
property, title to assets, employee, labor, leases, environmental, record
keeping, contracts, permits, licenses, authorizations, solvency, cooperation
and other matters. A breach or inaccuracy of any of these representations,
warranties and covenants could lead to an indemnification claim by FTI against
the Company. Any such indemnification claims could require the Company to pay
substantial sums and incur related costs and expenses and have a material
adverse effect on our liquidity, financial condition, future prospects and
ability to acquire a new operating business. In connection with the Asset Sale, the Company continues to be a guarantor on
certain leased property through August 2007, the lease expiration date. The
annual lease obligation is approximately $0.8 million. Under the lease
assignment agreement with the assignee, the Company, as guarantor, would have
recourse for any damages incurred due to any default by the assignee. 11




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NEXTERA ENTERPRISES, INC. 
 Item 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The disclosure and analysis in this quarterly report contain forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. These statements can be identified by the fact that
they do not relate strictly to historic or current facts. They use words such
as anticipate, estimate, expect, project, intend, plan, believe,
and other words and terms of similar meaning in connection with any discussion
of future operating or financial performance. In particular, these
forward-looking statements include statements relating to future actions or the
outcome of financial results. From time to time, we also may provide oral or
written forward-looking statements in other materials released to the public.
Any or all of the forward-looking statements in this quarterly report and in
any other public statements may turn out to be incorrect. They can be affected
by inaccurate assumptions or by known or unknown risks and uncertainties.
Consequently, no forward-looking statement can be guaranteed. Actual results
may vary materially. Forward-looking statements are based on many factors that may be outside our
control, causing actual results to differ materially from those suggested.
These factors include, but are not limited to, those disclosed below under the
heading Factors That May Affect Our Future Performance. New factors emerge
from time to time, and it is not possible for us to predict all these factors
nor can we assess the impact of these factors on our business or the extent to
which any factor or combination of factors may cause actual results to differ
materially from those contained in any forward-looking statements. Given these
risks and uncertainties, you should not place undue reliance on forward-looking
statements as a prediction of actual results. Overview Nextera was formed in 1997 and focused on building a portfolio of consulting
companies through multiple acquisitions. The Company offered services in three
practice areas: technology consulting, human capital consulting, and economic
consulting. The technology consulting business was exited during the latter
half of 2001 and the human capital consulting business was sold on January 30,
2002. On November 28, 2003, Nextera and its direct and indirect subsidiaries,
Lexecon Inc., CE Acquisition Corp. and ERG Acquisition Corp., sold
substantially all of the assets Lexecon and its subsidiaries used in their
economic consulting business to FTI. We are currently reviewing opportunities with the goal of maximizing our
resources and increasing stockholder value. We believe that an increase in
stockholder value will be best obtained through the acquisition of one or more
on-going businesses or operations. To that end, we have retained an
investment-banking firm to assist in the identification and selection of
appropriate acquisition and merger candidates. As a result of the Asset Sale, Nextera ceased to have business operations. All
results from consulting operations have been classified as discontinued
operations. The continuing operations in the financial statements consist of
operating expenses incurred in operating the corporate entity. Selling,
general and administrative expenses consist primarily of salaries and benefits
of certain senior management and other administrative personnel and facility,
information technology, insurance, legal and professional, marketing and
promotional costs. These expenses are associated with our efforts to identify
and develop new business operations and with our management, finance, marketing
and administrative activities. Our tax provision has historically varied from the federal statutory rate of
34% predominately due to deferred tax valuation allowance adjustments, the
utilization of net operating losses, and state and local taxes. 12




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COMPARISON OF THREE MONTHS ENDED JUNE 30, 2004 AND THREE MONTHS ENDED
JUNE 30, 2003 Selling, General and Administrative Expenses.Selling, general and
administrative expenses decreased 32.7%, or $0.3 million, to $0.7 million for
the three months ended June 30, 2004 from $1.0 million for the three months
ended June 30, 2003. The decrease in selling, general and administrative
expenses from the second quarter of 2003 was primarily attributed to the
following components: a decrease of $0.1 million in promotion expenses due to
the termination of the Companys investor relations firm and public relations
firm along with cost savings associated with the production of the Annual
Report; a $0.1 million decrease in insurance expense; and a $0.1 million
decrease in facilities and compensation expense associated with a reduced
overhead structure. The Company anticipates that selling, general, and
administrative expenses will approximate $0.7 million per quarter under the
Companys current structure. If the Company acquires a business during 2004,
it is expected that the selling, general, and administrative expenses will
materially exceed the $0.7 million per quarter. Interest Income, Net.Interest Income, net was $0.04 million for the
three months ended June 30, 2004. Interest expense in the second quarter of
2003 was included within discontinued operations as the debt related to the
interest expense was repaid, as required, as part of the Asset Sale. Income taxes. No federal tax benefit was recorded for the three months
ended June 30, 2004 and 2003 due to the Companys uncertainty associated with
utilizing its net operating losses. COMPARISON OF SIX MONTHS ENDED JUNE 30, 2004 AND THREE MONTHS ENDED
JUNE 30, 2003 Selling, General and Administrative Expenses.Selling, general and
administrative expenses decreased 31.6%, or $0.6 million, to $1.5 million for
the six months ended June 30, 2004 from $2.1 million for the six months ended
June 30, 2003. The decrease in selling, general and administrative expenses
from the first six-months of 2003 was primarily attributed to the following
components: a decrease of $0.3 million in promotion expenses due to the
termination of the Companys investor relations firm and public relations firm
along with cost savings associated with the production of the Annual Report; a
$0.1 million decrease in compensation expense primarily attributed to the
resignation of the Companys former Chief Executive Officer in February 2003;
and a $0.1 million decrease in insurance expense. The Company anticipates that
selling, general, and administrative expenses will approximate $0.7 million per
quarter under the Companys current structure. If the Company acquires a
business during 2004, it is expected that the selling, general, and
administrative expenses will materially exceed the $0.7 million per quarter. Special Charges. In connection with the resignation of the Companys
former Chief Executive Officer, David Schneider, in the first quarter of 2003,
the Company incurred a $1.9 million charge. Approximately $0.8 million of the
charge related to salary continuance until February 2004 and approximately $1.1
million related to a non-cash charge for fully vested options, with an exercise
price of $2.00 per share, which was previously being expensed over the
anticipated service period. In accordance with the original employment
agreement, Mr. Schneider was to be granted a bonus, if and only if the above
mentioned options vested and became exercisable, equal to the exercise price of
the options at the time of the exercise of the options. The portion of the
option exercise price bonus not expensed at the time of the resignation of Mr.
Schneider was required to be expensed immediately and recorded in equity due to
the accelerated vesting of the options which occurred as a result of the
resignation. Interest Income, Net.Interest Income, net was $0.08 million for the six
months ended June 30, 2004. Interest expense in the first six months of 2003
was included within discontinued operations as the debt related to the interest
expense was repaid, as required, as part of the Asset Sale. Income taxes. No federal tax benefit was recorded for the six months ended
June 30, 2004 and 2003 due to the Companys uncertainty associated with
utilizing its net operating losses. 13




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LIQUIDITY AND CAPITAL RESOURCES Consolidated working capital was $17.0 million on June 30, 2004, compared with
working capital of $18.3 million on December 31, 2003. Included in working
capital were cash and cash equivalents of $17.6 million and $20.1 million on
June 30, 2004 and December 31, 2003, respectively. Net cash used in operating activities was $2.4 million for the six months ended
June 30, 2004. The primary components of net cash used in operating activities
was a net loss of $1.4 million; a decrease in accounts payable of $2.4 million
due primarily to the payment of $1.2 million related to Companys 2003 federal
tax liability along with a $0.7 million profit sharing plan contribution; and
the payment of $0.2 million of restructuring obligations related to the final
salary continuation payment to the Companys former Chief Executive Officer,
David Schneider, and the final settlement of a lease obligation. Partially
offsetting the cash used in operating activities was the collection of
approximately $0.5 million of accounts receivable; the collection of
approximately $0.4 million of the Asset Sale proceeds that were held in escrow;
and the collection of approximately $0.3 million of cash which had been acting
as collateral for a letter of credit which was subsequently terminated. Net cash provided by investing activities was not material for the six-months
ended June 30, 2004. The Company anticipates that its capital expenditures for
2004 will be immaterial, unless it acquires business operations. In such case,
capital expenditures may be materially increased. Net cash used in financing activities was not material for the six-months ended
June 30, 2004. The Companys primary source of liquidity is cash on hand. The Company
believes that its current cash on hand is sufficient to meet all expenditures
over the next twelve months. The Company is in the process of identifying
opportunities to acquire one or more operating businesses and expects that it
will use a combination of cash on hand, third party debt, and the Companys
equity securities to acquire any such on-going businesses or operations. We
believe that additional liquidity sources, if necessary, could be obtained by
borrowing funds from a third party or raising equity through a public or
private transaction. Critical Accounting Policies Our Condensed Consolidated Financial Statements have been prepared with
accounting principles generally accepted in the United States of America.
Preparation of these financial statements requires management to make judgments
and estimates. Some accounting policies have a significant impact on amounts
reported in these financial statements. A summary of significant accounting
polices and a description of accounting policies that are considered critical
may be found in our 2003 Annual Report on Form 10-K, filed on March 26, 2004,
in the Notes to the Consolidated Financial Statements, Note 2 and the Critical
Accounting Policies Section. 14




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Factors That May Affect Our Future Performance You should carefully consider the following risk factors in your evaluation of
our company. If any of the following risks actually occur it could materially
harm our business and impair the price of our stock. We
will likely liquidate if we are unable to acquire a new business by December
2004. We are in the process of identifying new business acquisition
opportunities for Nextera in order to maximize the use of our assets and
balance sheet. We do not intend to continue our corporate existence beyond
December 2004 without having tangible business operations. If we
cannot successfully acquire such new business operations before
December 2004, then it is likely that we will commence a process
to liquidate Nextera. If we liquidate, no assurance can be given as to the
amount or timing of when funds will be available to distribute to our
stockholders, whether from the proceeds of the Asset Sale or elsewhere. The Asset Purchase Agreement will expose us to contingent liabilities. In accordance with the Asset Purchase Agreement, we agreed to indemnify FTI for
a number of matters including the breach of our representations, warranties and
covenants contained in the Asset Purchase Agreement. These representations,
warranties and covenants related to organization, corporate, financial
statement, business, operational, tax, legal, insurance, intellectual property,
title to assets, employee, labor, leases, environmental, record keeping,
contracts, permits, licenses, authorizations, solvency, cooperation and other
matters. A breach or inaccuracy of any of these representations, warranties
and covenants could lead to an indemnification claim by FTI against us. Any
such indemnification claims could require us to pay substantial sums and incur
related costs and expenses and have a material adverse effect on our liquidity,
financial condition, future prospects and ability to acquire a new operating
business. Our ability to utilize our net operating loss carryforward may be limited or
eliminated in its entirety. As
of June 30, 2004, we had approximately $45.0 million of net operating loss
carryforwards that expire in 2022, for which a 100% valuation allowance has
been recorded. The utilization of this net operating loss carryforward in the
future is dependent upon our having U.S. federal taxable income. Currently, we
have no business operations and are unable to generate U.S. federal taxable
income to utilize the net operating loss carryforwards. We will likely need to
acquire an operating business in order to generate such taxable income. Even
if we are able to acquire an operating business, there can be no assurance that
we will be able to generate taxable income in the future. Furthermore, the
likelihood of an annual limitation on our ability to utilize the net operating
loss carryforward to offset future U.S. federal taxable income is increased by
(1) the issuance of common stock, certain convertible preferred stock, options,
warrants, or other securities exercisable for common stock, (2) changes in the
equity ownership occurring in the last three years and (3) potential future
changes in the equity ownership. The amount of an annual limitation can vary
significantly based on factors existing at the date of an ownership change. A
substantial portion of the net operating loss was used to offset our federal
tax liability, other than alternative minimum tax, generated by the Asset Sale.
If the net operating loss carryforward were to be determined to be subject to
annual limitations prior to its utilization to offset the taxable gain from the
Asset Sale, our federal tax liability and the net operating loss could be
materially different and our financial position could be adversely affected.
Such limitations could have a material adverse impact on our financial
condition, results of operations and cash flows. The delisting of our Class A Common Stock from the Nasdaq SmallCap Market may
make our Class A Common Stock more difficult to trade, harm our business
reputation and adversely affect our ability to raise funds in the future. Our Class A Common Stock was delisted from the Nasdaq SmallCap Market on
November 28, 2003 due to our failure to have an operating business after the
Asset Sale. As a result of the delisting, our common stock may be more
difficult to trade and we may suffer harm to our general business reputation
and have greater difficulty in the future raising funds in the capital markets.
Each of these consequences could have a material adverse effect on our
business, results of operations and financial condition. We currently do not
meet Nasdaqs initial listing requirements to be re-listed on the Nasdaq
SmallCap Market because we do not have business operations and do not satisfy
the minimum bid price requirement. 15




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Knowledge Universe, LLC controls 71.7% of the voting power of our stock and can
control all matters submitted to our stockholders and its interests may be
different from yours. Knowledge Universe, LLC owns 8,810,000 shares of Class A Common Stock,
3,844,200 shares of Class B Common Stock, and 44,060 shares of our Series A
Preferred Stock, which combined represents approximately 71.7% of the voting
power of our outstanding common and preferred stock. The Class A Common Stock
entitles its holders to one vote per share, and the Class B Common Stock
entitles its holders to ten votes per share, on all matters submitted to a vote
of our stockholders, including the election of the members of the Board of
Directors. Holders of Series A Preferred Stock are entitled to 145 votes per
share, which equals the number of whole shares of Class A Common Stock into
which one share of Series A Preferred Stock is convertible. Accordingly,
Knowledge Universe, LLC will be able to determine the disposition of all
matters submitted to a vote of our stockholders, including mergers,
transactions involving a change in control and other corporate transactions and
the terms thereof. In addition, Knowledge Universe, LLC will be able to elect
all of our directors. This control by Knowledge Universe, LLC could materially
adversely affect the market price of the Class A Common Stock or delay or
prevent a change in control of our company. Knowledge Universe, LLC was formed by Lawrence J. Ellison, Michael R. Milken
and Lowell J. Milken to build, through a combination of internal development
and acquisitions, leading companies in a broad range of areas relating to
career management, technology and education and the improvement of individual
and corporate performance. Knowledge Universe, LLC. may form, invest in or
acquire other businesses which are involved in these and related areas, among
others, which businesses may be operated under the direct or indirect control
of Knowledge Universe, LLC independently of us. Potential conflicts of interest
between Knowledge Universe, LLC and us may arise and may not be resolved in our
favor. These potential conflicts of interest include competitive business
activities, indemnity arrangements, registration rights, sales or distributions
by Knowledge Universe, LLC of our Class A, Class B Common Stock or Series A
Preferred Stock and the exercise by Knowledge Universe, LLC of its ability to
control our management and affairs. This control and the potential conflicts of
interest it creates could limit our future independence and harm our
reputation. We were formed in February 1997 by entities which were under the direct or
indirect control of Lawrence J. Ellison, Michael R. Milken and Lowell J.
Milken. After our formation, ownership of our common stock originally held by
our founding entities was transferred to Knowledge Universe, LLC. Lawrence J.
Ellison, Michael R. Milken and Lowell J. Milken may each be deemed to have the
power to control Knowledge Universe, LLC. As a result, Lawrence J. Ellison,
Michael R. Milken and Lowell J. Milken may each be deemed to have the power to
direct the voting and disposition of, and to share beneficial ownership of, any
shares of common stock owned by Knowledge Universe, LLC. We have a history of losses and there is no assurance that we can achieve or
sustain profitability in the future. Since our inception in February 1997, we have incurred, on an historical basis,
net losses of $3.0 million and $17.2 million for the years ended December 31,
1997 and 1998, respectively, and net losses of $24.0 million and $117.5 million
for the years ended December 31, 2000 and 2001, respectively. Currently, we have no business operations and are not profitable. There is no
assurance that if even if we are able to acquire business operations that we
will be profitable in the future. 16




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Our stock price may be volatile and you could lose all or part of your
investment. We expect that the market price of our common stock will be volatile. Stock
prices have risen and fallen in response to a variety of factors, including:  
    
    quarter-to-quarter variations in operating results;
    
    market conditions in the economy as a whole. The market price for our common stock may also be affected by our ability to
meet investors or securities analysts expectations. Any failure to meet these
expectations, even slightly, may result in a decline in the market price of our
common stock. In addition, the stock market is subject to extreme price and
volume fluctuations. This volatility has had a significant effect on the market
prices of securities issued by many companies for reasons unrelated to the
operating performance of these companies. In the past, following periods of
volatility in the market price of a companys securities, securities class
action litigation has often been instituted against that company. If similar
litigation were instituted against us, it could result in substantial costs and
a diversion of our managements attention and resources. 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. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk We are not currently exposed to changes in interest rates because we do not
have any borrowings. Foreign Currency Risk We are not currently exposed to foreign currency risk because we do not
currently have business operations and related sales and expenses. 17




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Item 4. Controls and Procedures The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Companys Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules and forms and that
such information is accumulated and communicated to the Companys management,
including its President and Chief Financial Officer, as appropriate, to allow
for timely decisions regarding required disclosure. In designing and evaluating
the disclosure controls and procedures, management recognizes that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and
management is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under
the supervision and with the participation of the Companys management,
including the Companys President and Chief Financial Officer, of the
effectiveness of the design and operation of the Companys disclosure controls
and procedures as of the end of the period covered by this report. Based on the
foregoing, the Companys President and Chief Financial Officer concluded that
the Companys disclosure controls and procedures were effective at the
reasonable assurance level. There has been no change in the Companys internal controls over financial
reporting during the Companys most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Companys internal
controls over financial reporting. 18




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PART II  OTHER INFORMATION 
 Item 4. Submission of Matters to a Vote of Security Holders On May 24, 2004, an annual meeting of the stockholders of Nextera was held in
Boston, Massachusetts. At the meeting, each director that was a member of the
Board of Directors immediately prior to the Annual Meeting was re-elected. The
matters voted upon and the votes cast at the annual meeting were as follows: Election of Directors
    
    Votes For
    
    Votes WithheldRalph Finerman
    
    
    70,816,342
    
    
    
    589,561Steven B. Fink
    
    
    70,815,952
    
    
    
    589,951Keith D. Grinstein
    
    
    71,226,511
    
    
    
    179,392Alan B. Levine
    
    
    71,225,011
    
    
    
    180,892Stanley E. Maron
    
    
    70,807,719
    
    
    
    598,184Richard V. Sandler
    
    
    70,796,819
    
    
    
    609,084Karl L. Sussman
    
    
    71,217,711
    
    
    
    188,192
 BrokerVotes
    
    
    
    
    
    Non-Other Matters Voted Upon
    
    For
    
    Against
    
    Abstentions
    
    Votes2. Ratification of the selection of Ernst & Young LLP as
the independent auditors for the fiscal year ending
December 31, 2004.
    
    
    71,152,521
    
    
    
    206,692
    
    
    
    46,690
    
    
    
    
 
 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits  31
    
    Rule 13a-14(a)/15(d)-14(a) Certification32
    
    Section 1350 Certification (b) Reports on Form 8-K  1.
    
    A Current Report on Form 8-K filed on April 30, 2004
regarding a press release issued with financial information for the
first quarter ended March 31, 2004. 19




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. NEXTERA ENTERPRISES, INC.(Registrant)Date: August 16, 2004
    
    By: /s/ Michael P. MuldowneyMichael P. MuldowneyPresident and Chief Financial Officer(Principal Executive Officer and PrincipalFinancial Officer)Date: August 16, 2004
    
    By: /s/ Michael J. DolanMichael J. DolanChief Accounting Officer and Corporate Controller(Principal Accounting Officer)
 20