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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 15, 1999
REGISTRATION NO. 333-63789
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
NEXTERA ENTERPRISES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 8742 95-4700410
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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ONE CRANBERRY HILL
LEXINGTON, MA 02421
(781) 778-4400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MICHAEL P. MULDOWNEY
CHIEF FINANCIAL OFFICER
NEXTERA ENTERPRISES, INC.
ONE CRANBERRY HILL
LEXINGTON, MA 02421
(781) 778-4400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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DAVID A. HAHN, ESQ. MARK H. BURNETT, ESQ.
HOWARD L. ARMSTRONG, ESQ. MICHAEL A. CONZA, ESQ.
LATHAM & WATKINS TESTA, HURWITZ & THIBEAULT, LLP
701 "B" STREET, SUITE 2100 HIGH STREET TOWER
SAN DIEGO, CA 92101 125 HIGH STREET
(619) 236-1234 BOSTON, MA 02110
(617) 248-7000
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [X]
CALCULATION OF REGISTRATION FEE
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PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1)(2) REGISTRATION FEE(3)
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Class A Common Stock, $.001 par value............... $176,812,500 $50,633
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(1) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(o) under the Securities Act.
(2) Includes shares that the Underwriters have the option to purchase solely to
cover over-allotments, if any.
(3) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MARCH 15, 1999
PROSPECTUS
, 1999
10,250,000 SHARES
[NEXTERA ENTERPRISES, INC. LOGO]
CLASS A COMMON STOCK
All of the 10,250,000 shares of Class A Common Stock, par value $0.001 per
share (the "Class A Common Stock"), offered hereby (the "Offering") are being
sold by Nextera Enterprises, Inc. ("Nextera" or the "Company"). The Class A
Common Stock and the Company's Class B Common Stock, par value $0.001 per share,
(the "Class B Common Stock" and together with the Class A Common Stock, the
"Common Stock"), are substantially identical except with respect to voting power
and conversion rights. 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 the Company's stockholders,
including in connection with the election of the Board of Directors. Each share
of Class B Common Stock is convertible into one share of Class A Common Stock
under certain circumstances. See "Description of Capital Stock." After the
Offering, Knowledge Enterprises, Inc. ("Knowledge Enterprises"), through its
wholly-owned subsidiary, Nextera Enterprises Holdings, Inc. ("Nextera
Holdings"), will control approximately 66.0% of the combined voting power of the
outstanding Common Stock.
Prior to the Offering, there has been no public market for the Class A
Common Stock. It is currently anticipated that the initial public offering price
will be between $13.00 and $15.00 per share. See "Underwriting" for information
relating to the factors to be considered in determining the initial public
offering price.
The Company has applied to have the Class A Common Stock approved for
quotation on the Nasdaq National Market under the symbol "NXRA."
THE CLASS A COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" BEGINNING ON PAGE 8 FOR INFORMATION THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
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Per Share....................... $ $ $
Total(3)........................ $ $ $
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(1) See "Underwriting" for indemnification arrangements with the Underwriters, a
description of the use of a portion of the net proceeds to repay
indebtedness to an affiliate of one of the Underwriters and the payment of
certain other compensation to certain Underwriters.
(2) Before deducting expenses estimated at $2,100,000, payable by the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an aggregate of 1,537,500 additional shares at the Price to Public less
Underwriting Discounts and Commissions, solely to cover over-allotments, if
any. If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to the Company will be
$ , $ and $ , respectively. See "Underwriting."
The shares are being offered by the several Underwriters when, as and if
delivered to and accepted by the Underwriters and subject to various prior
conditions, including their right to reject orders in whole or in part. It is
expected that delivery of the shares will be made in New York, New York, on or
about , 1999.
DONALDSON, LUFKIN & JENRETTE
BANCBOSTON ROBERTSON STEPHENS
BT ALEX. BROWN
NATIONSBANC MONTGOMERY SECURITIES LLC
THOMAS WEISEL PARTNERS LLC
The undersigned is facilitating Internet distribution.
DLJDIRECT INC.
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[NETERA'S VALUE PROPOSITION CHART]
Graphic entitled "Nextera's Value Proposition" depicts four overlapping
circles in the center of the graphic with three inward pointing arrows
surrounding the circles in the upper right, upper left and lower center portions
of the graphic. The upper-most circle contains the words "Research and
Strategy." The right-most circle contains the words "Process Transformation."
The lower-most circle contains the words "Human Capital." The left-most circle
contains the words "Information Technology." The inward-pointing arrow in the
upper left corner of the graphic has superimposed upon it the heading
"Multi-Disciplinary Consulting Expertise." The inward-pointing arrow in the
upper right corner of the graphic has superimposed upon it the heading
"Client-Focused Results Delivery." The inward-pointing arrow at the lower center
of the graphic has superimposed upon it the heading "Collaborative Businesses."
Nextera helps its clients enhance their business performance by providing
consulting services that enable clients to (i) proactively refine their
strategies to adjust to changing regulatory and market conditions, (ii)
transform business processes to achieve higher levels of operational
performance, (iii) capitalize on the capabilities of their internal resources,
and (iv) apply technology to support innovative approaches to conducting
business. Nextera brings together complementary services drawn from its four
practice areas and delivers these services through client-focused teams that
consist of individuals with the competencies needed to address all aspects of a
client's consulting needs. Nextera employs a business model in which business
units independently manage their operations while participating in the Company's
programs for cross-company joint marketing and opportunity management, sharing
best practices, locating needed expertise, and capitalizing on Nextera's
knowledge base.
2
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE
OFFERING AND MAY BID FOR AND PURCHASE SHARES OF THE CLASS A COMMON STOCK IN THE
OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
------------------------
This Prospectus includes forward-looking statements, which reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to uncertainties and other factors
that could cause actual results to differ materially from such statements. These
uncertainties and other factors include, but are not limited to, those discussed
in "Risk Factors" and elsewhere in this Prospectus. The words "believe,"
"expect," "anticipate," "project" and similar expressions identify
forward-looking statements. These forward-looking statements speak only as of
the date of this Prospectus, or, if specified, as of their dates. The Company
undertakes no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise.
------------------------
Lexecon is a registered service mark and Nextera, Sibson, Pyramid Imaging,
Nextera Business Performance Solutions Group, Symmetrix, SiGMA, The Planning
Technologies Group and Alexander are service marks used by the Company in
providing services. This Prospectus also includes names, trademarks, service
marks and registered trademarks and service marks of companies other than the
Company, which names, trademarks, service marks and registered trademarks and
service marks are the property of such companies.
3
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[THIS PAGE INTENTIONALLY LEFT BLANK]
4
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information, and the Historical Financial Statements and Notes thereto,
and the Unaudited Pro Forma Combined Financial Statements and Notes thereto
included elsewhere in this Prospectus. The Class A Common Stock offered hereby
involves a high degree of risk. See "Risk Factors" beginning on page 8. Unless
otherwise indicated, (i) all references in this Prospectus to Nextera or the
Company mean Nextera Enterprises, Inc., and its direct and indirect
subsidiaries, including the operations of, or the successors to, Nextera
Business Performance Solutions Group, Inc. (formerly Symmetrix, Inc.), SiGMA
Consulting, LLC, The Planning Technologies Group, Inc., Pyramid Imaging, Inc.,
Sibson & Company, L.P., Sibson Canada, Inc., Lexecon Inc. and The Alexander
Corporation Limited (each an "Acquired Company" and collectively the "Acquired
Companies") prior to their acquisition by the Company, and the operations of
Nextera Enterprises, L.L.C. ("Nextera LLC"), a predecessor to Nextera
Enterprises, Inc., prior to Nextera LLC's liquidation and dissolution; (ii) all
information in this Prospectus assumes the exchange of Class A Common Units and
Class B Common Units of Nextera LLC for shares of Class A Common Stock and Class
B Common Stock of the Company and the exchange of all exchangeable shares of a
Canadian subsidiary of the Company (the "Exchangeable Shares") for Class A
Common Stock (see "The Company--Exchangeable Shares"); and (iii) all information
in this Prospectus assumes no exercise of the Underwriters' over-allotment
option.
THE COMPANY
Nextera Enterprises, Inc. provides leading-edge consulting services focused
on business strategy, economic analysis, operations improvement, organizational
design and information technology ("IT") primarily to Fortune 500 and other
multinational companies and government agencies. The Company provides services
in four practice areas, which enables it to offer a broad range of complementary
services that assist clients in achieving enhanced business performance by
anticipating and addressing their complex, multi-disciplinary consulting needs.
Nextera helps organizations redefine the way in which existing work is conducted
or new businesses and markets are entered by analyzing underlying strategic and
economic issues affecting business performance, redesigning operational
processes and business practices, defining and managing major change
initiatives, and using emerging information technologies (such as web-based
technologies and electronic commerce) to support these new strategic approaches.
The professional consulting services industry is driven by changes in the
business environment, such as increased competition, regulatory changes,
globalization, technological advances and evolving organizational models. In
response to these changes, many organizations are altering traditional
approaches to overall strategy, business processes, organizational design and
the use of IT. Lacking the skilled personnel, technical capabilities and time
necessary to formulate and implement strategies to benefit from these changes,
many organizations are increasingly retaining third-party service professionals
for help and expertise. According to an industry source, the worldwide market
for professional consulting services is estimated to have been $46.3 billion in
1997, and is projected to increase to $88.5 billion in 2002. Consulting service
providers employing traditional approaches typically do not offer the broad
perspective and integrated solutions critical to solving the multi-disciplinary
problems organizations are currently facing. In order to solve such problems,
organizations are demanding that third-party providers have experience in a
breadth of practice areas.
The Company's portfolio of practice areas includes Strategy and Research
Services, Process Transformation Services, Human Capital Services, and
Information Technology Consulting Services. The Strategy and Research Services
practice provides in-depth business and economic analyses of business
conditions, relevant business frameworks and business practices. Through the
Strategy and Research Services practice area, Nextera assists senior management
in proactively developing, refining and managing business strategies, action
plans and core competencies, provides litigation support, including expert
testimony, principally in antitrust and securities matters, and also furnishes
focused research on a number of issues of client concern. The Process
Transformation Services practice helps organizations solve complex operational
issues through major business transformation programs, redesigned business
processes, and best practices adaptation. The Human Capital Services practice
assists clients in implementing organizational and strategic changes established
by senior management through all levels of the organization. The Information
Technology Consulting Services practice applies emerging technologies such as
web-based technologies and electronic commerce to design and develop high impact
business process support systems and knowledge management systems.
Nextera's flexible delivery model, which is designed to bring together
required expertise in business strategy and research, operations improvement,
organizational design and IT consulting, enables it to provide timely and
unbiased perspectives on clients' enterprise-wide management problems and
cost-effectively implement multi-disciplinary solutions. The Company's breadth
of expertise enables it to deliver services initially in any of its four
practice areas and offers opportunities to expand the scope of its engagements
to include complementary or follow-on services in other practice areas. The
Company provides its services across a broad spectrum of industries, including
communications, consumer products, diversified services, energy, entertainment,
financial services, government, health care, insurance, manufacturing, media,
retail and technology. Representative clients include America Online, Inc., The
Chubb Corporation, Duke Energy
5
<PAGE> 7
Corporation, International Business Machines Corporation, MCI WorldCom, Inc.,
Mead Johnson & Company, National Broadcasting Company, Inc., SmithKline Beecham,
PLC and the United States Department of Justice.
The Company was founded in February 1997 by executives with extensive
experience at major consulting firms and industry-leading companies. The Company
has focused on building its portfolio of practice areas through selective
acquisitions and internal growth to provide a comprehensive perspective on the
problems and issues facing its clients in today's competitive environment. Since
inception, the Company has built competencies in its four practice areas
primarily through acquisitions and, to a lesser extent, through internal growth.
Each Acquired Company maintains a business focus which complements the
businesses of the other Acquired Companies, enabling synergies to be realized
across all of Nextera's practice areas.
The Company's objective is to be a leading provider of consulting services
in its four practice areas. Nextera intends to achieve this objective by: (i)
expanding service offerings through selective acquisitions; (ii) leveraging
cross-selling opportunities to expand the scope of engagements; (iii) attracting
and retaining key personnel who will enhance and complement the Company's
service capabilities; (iv) building a common identity for the services the
Company provides by marketing the Nextera brand name; and (v) expanding
Nextera's international presence.
The Company is a Delaware corporation and maintains its principal executive
office at One Cranberry Hill, Lexington, Massachusetts 02421. The Company's
telephone number is (781) 778-4400.
THE OFFERING
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Class A Common Stock offered by the Company.......... 10,250,000 shares
Common Stock to be outstanding after the Offer-
ing:(1)
Class A Common Stock............................. 28,844,994 shares(2)(3)
Class B Common Stock............................. 4,274,630 shares
Total Common Stock.......................... 33,119,624 shares
Use of proceeds...................................... To repay certain outstanding indebtedness,
including indebtedness to certain affiliates of
the Company; to pay accrued management fees to
Knowledge Universe, Inc. ("Knowledge Universe"),
an affiliate of the Company; to pay certain other
fees; and for general corporate purposes. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol............... NXRA
</TABLE>
- ------------------------------
(1) The Class A Common Stock and the Class B Common Stock are substantially
identical except with respect to voting power and conversion rights. 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 the Company's stockholders, including in
connection with the election of the Board of Directors. Each share of Class
B Common Stock is convertible into one share of Class A Common Stock under
certain circumstances. See "Risk Factors--Control by Knowledge Universe or
its Affiliates" and "Description of Capital Stock."
(2) Excludes (i) 5,000,000 shares of Class A Common Stock reserved for issuance
under the Company's 1998 Equity Participation Plan (the "1998 Equity
Participation Plan") pursuant to which options to purchase 3,163,652 shares
will be outstanding upon the closing of the Offering, see
"Management--Employee Benefit Plans," (ii) 135,480 shares of Class A Common
Stock issuable upon exercise of options reserved for issuance to certain
non-stockholder key executives of Lexecon Inc. ("Lexecon") assuming the
price per share of the Class A Common Stock in the Offering is $14.00 (the
number of shares subject to such options will range from a minimum of 31,560
shares if the price per share in the Offering is $17.50 or higher to a
maximum of 197,760 shares if the price per share in the Offering is $12.50
or less), see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Results of Operations," (iii) 2,455,997 shares of
Class A Common Stock (assuming the price per share of Class A Common Stock
in the Offering is $14.00) issuable upon exercise of options which the
Company has granted or agreed to grant to certain personnel of Lexecon under
the Nextera/Lexecon Limited Purpose Stock Option Plan (the "Limited Purpose
Plan"), see "Management--Employee Benefit Plans," (iv) 250,000 shares of
Class A Common Stock issuable upon exercise of certain warrants issued in
connection with the acquisition of Lexecon (the "Lexecon Acquisition"), see
"Certain Transactions--Guaranty and Warrants to Purchase Class A Common
Stock," and (v) 4,274,630 shares of Class A Common Stock issuable upon
conversion of the 4,274,630 outstanding shares of the Company's Class B
Common Stock. See "Description of Capital Stock."
(3) Assumes (i) the exchange of all Exchangeable Shares for 197,813 shares of
Class A Common Stock, see "The Company--Exchangeable Shares," (ii) the
issuance of 53,333 shares of Class A Common Stock to the former shareholders
of Pyramid Imaging, Inc. ("Pyramid") assuming Pyramid's satisfaction in full
of certain financial performance criteria for the twelve months ending March
31, 1999 (the "Pyramid Earn-out Shares"), see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Acquisitions,"
and (iii) the issuance of 993,520 shares of Class A Common Stock to the
former stockholders of Lexecon in connection with the Lexecon Acquisition
(the "Lexecon Contingent Shares") (assuming the price per share of the Class
A Common Stock in the Offering is $14.00). The number of Lexecon Contingent
Shares to be issued will range from a minimum of 231,440 shares if the price
per share in the Offering is $17.50 or higher to a maximum of 1,450,240
shares if the price per share in the Offering is $12.50 or less. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Acquisitions."
6
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SUMMARY CONSOLIDATED AND PRO FORMA COMBINED FINANCIAL DATA
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ACTUAL PRO FORMA(1)
---------------------------------------- -----------------
PERIOD FROM
FEBRUARY 26, 1997
(DATE OF INCEPTION) FOR THE FOR THE
THROUGH YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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STATEMENT OF OPERATIONS DATA:
Net revenues.................................. $ 7,998 $ 67,590 $135,167
Gross profit.................................. 3,280 22,605 58,853
Income (loss) from operations(2).............. (2,281) (10,189) 1,713
Net loss...................................... (3,015) (17,155) (12,044)
Net loss per share, basic and diluted(3)...... $ (0.74) $ (1.14) $ (0.61)
Weighted average shares outstanding, basic and
diluted..................................... 4,061 14,997 19,891
</TABLE>
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<CAPTION>
AS OF DECEMBER 31, 1998
-------------------------------
PRO FORMA
ACTUAL AS ADJUSTED(4)
(IN THOUSANDS)
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 1,496 $ 5,328
Working capital (deficit)................................... (65,761) 14,024
Total assets................................................ 176,691 193,576
Total short-term debt and capital lease obligations......... 82,487 6,638
Total long-term debt and capital lease obligations.......... 55,749 2,600
Total stockholders' equity.................................. 11,490 158,333
</TABLE>
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(1) The summary pro forma combined statement of operations data for the year
ended December 31, 1998 is presented as if the acquisitions of the Acquired
Companies other than The Alexander Corporation Limited ("Alexander") had
been consummated as of January 1, 1998. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Acquisitions" and
Unaudited Pro Forma Combined Financial Statements. Alexander was acquired by
the Company in January 1999 and is not material to the Company's results of
operations or financial position.
(2) Income (loss) from operations for the year ended December 31, 1998 includes
$1,298,000 of restructuring costs related to Nextera Business Performance
Solutions Group, Inc. ("Business Performance Solutions") and a compensation
expense charge of $6,671,000 resulting from cash payments and fully-vested
stock options granted to certain non-stockholder key executives of Lexecon.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Results of Operations."
(3) See Note 2 of Notes to the Company's Consolidated Financial Statements for
information concerning the computation of historical net loss per share.
(4) Pro forma as adjusted to give effect to (i) the sale of 10,250,000 shares of
Class A Common Stock at an assumed initial public offering price of $14.00
per share and the application of the estimated net proceeds of the Offering,
see "Use of Proceeds" and "Capitalization," and (ii) the issuance of 993,520
Lexecon Contingent Shares (assuming the price per share of the Class A
Common Stock in the Offering is $14.00). The number of Lexecon Contingent
Shares to be issued will range from a minimum of 231,440 shares if the price
per share in the Offering is $17.50 or higher to a maximum of 1,450,240
shares if the price per share in the Offering is $12.50 or less. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Acquisitions."
7
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RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information contained in this Prospectus before purchasing the shares
of Class A Common Stock offered hereby. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those contained in the forward-looking statements.
Factors that may cause such differences include, but are not limited to, those
discussed below as well as those discussed elsewhere in this Prospectus.
LIMITED COMBINED OPERATING HISTORY. Nextera was formed in February 1997 and
has grown substantially since its inception, principally through the
acquisitions of the Acquired Companies. Although the Acquired Companies have
been in operation for some time, the Company has a limited history of combined
operations. Consequently, the historical and pro forma information herein may
not be indicative of Nextera's financial condition and future performance. There
can be no assurances that the Company will not encounter financial, managerial
or other difficulties as a result of its lack of combined operating history.
Further, the success of Nextera's acquisitions will depend on a number of
factors, including the Company's ability to integrate the businesses and
operations of the Acquired Companies, to retain certain key employees of the
Acquired Companies and to preserve and expand the businesses and operations of
the Acquired Companies. There can be no assurance that Nextera will be able to
successfully integrate and operate the businesses of the Acquired Companies or
that the Company will not experience losses as a result of these acquisitions.
Failure to achieve the anticipated benefits of these acquisitions or to
successfully integrate the operations of the Acquired Companies could materially
adversely affect the business, operating results and financial condition of the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Acquisitions."
NET LOSSES. The Company has been in existence since February 1997. On an
historical basis, for the period from February 26, 1997 through December 31,
1997 and for the year ended December 31, 1998, Nextera experienced net losses of
$3.0 million and $17.2 million, respectively. On a pro forma basis, Nextera
experienced a net loss of $12.0 million for the year ended December 31, 1998.
There can be no assurance that Nextera will achieve or sustain profitability in
the future.
MANAGEMENT OF GROWTH. Nextera has experienced a period of rapid growth that
has challenged, and will likely continue to challenge, the Company's managerial
and other resources. Since the Company's inception in February 1997 through
December 31, 1998, the number of consultants employed by the Company has
increased to 429 and the scope of Nextera's geographic coverage has expanded
significantly. Nextera intends to hire additional consultants through
acquisitions and its own recruiting efforts and expects its geographic coverage
to continue to grow in the future. The Company's success in managing its growth
will depend on its ability to continue to enhance its operating, financial and
management information systems and to recruit, develop, motivate and manage
effectively its expanding work force. For example, Nextera is in the process of
integrating a new financial reporting system, and any failure or significant
delay in achieving the integration of such system or complications with respect
to the change to such system could materially adversely affect the Company. In
addition, Nextera's future success will depend in large part on its ability to
continue to set rates and fees competitively and to maintain high employee
utilization rates and project quality, particularly if the average size or
number of the Company's projects increases. If Nextera is unable to manage
growth or new employees effectively or if its personnel are unable to achieve
anticipated performance or utilization levels, the Company's services, its
ability to retain key personnel, and its business, operating results and
financial condition could be materially adversely affected. There can be no
assurance that Nextera will be able to effectively manage its growth or that the
Company's business will continue to expand. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business--Growth
Strategy" and "--Human Resources."
OPERATIONAL, FINANCIAL AND ACCOUNTING RISKS OF ACQUISITIONS. Since its
inception, Nextera has significantly expanded through acquisitions and expects
to pursue additional acquisitions in order to enhance its service offerings and
client base, expand its geographic presence and obtain experienced consultants.
The timing, magnitude and success of the Company's acquisition efforts and the
related capital expenditures and
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commitments cannot be predicted. Nextera competes for acquisitions with
companies that have significantly greater financial and management resources
than the Company, which may lead to limited acquisition opportunities for
Nextera and may result in higher purchase prices or transaction costs. There can
be no assurance that the Company will be able to integrate successfully any
acquired businesses without substantial expense, delays or other operational or
financial costs or problems, including costs in pursuing and negotiating with
acquisition candidates, or that it will be able to identify, acquire or
profitably manage additional businesses or acquisitions. Acquisitions may
involve certain risks, including significant diversion of management's
attention, failure to retain key acquired personnel, unanticipated events or
circumstances and legal liabilities. Client satisfaction or performance problems
at a single acquired firm could have a material adverse impact on the reputation
of Nextera as a whole. Further, there can be no assurance that the Company's
future acquired businesses will achieve expected results or generate anticipated
revenues or earnings. In order to pursue additional acquisitions, Nextera may
also require debt or equity financing that may not be available on terms
favorable to the Company, if at all, and may result in dilution to the holders
of Class A Common Stock. For the foreseeable future, Nextera will be unable to
account for future acquisitions under the pooling-of-interests method of
accounting. Accordingly, the Company 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 Nextera's statements of operations. In addition, the
Company could be required to make substantial cash payments related to any such
acquisition. Any of these factors could materially adversely affect Nextera's
business, operating results and financial condition. See "--Substantial Amount
of Goodwill and Other Intangible Assets," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Business--Growth Strategy"
and "--Acquisitions."
ATTRACTION AND RETENTION OF SKILLED CONSULTANTS. Because Nextera's business
involves the delivery of professional services and is labor-intensive, the
Company's success depends in large part upon its ability to attract, motivate
and retain highly skilled consultants. Qualified business consultants are in
great demand and are likely to remain a limited resource for the foreseeable
future. There can be no assurance that Nextera will be able to attract, motivate
and retain sufficient numbers of highly skilled consultants. Any inability to do
so could impair the Company's ability to effectively manage and complete its
client projects and to secure future client engagements, and as a result could
materially adversely affect Nextera's business, operating results and financial
condition. Because the Company has experienced growth principally through the
acquisitions of the Acquired Companies, substantially all of Nextera's current
consultants were initially hired by one of the Acquired Companies and not the
Company. There can be no assurance that these consultants will continue to be
satisfied with the culture or benefits of the Company or prospects for
advancement within Nextera. Further, even if the Company is able to expand the
number of qualified consultants, the resources required to attract, motivate and
retain such consultants may adversely affect Nextera's operating margins, which
could materially adversely affect the Company's business, operating results and
financial condition. To the extent that Nextera is unable to attract, motivate
or retain qualified consultants from among individuals currently legally
eligible to work in the United States, the Company may need to utilize foreign
labor under H-1B and other employment-related permits and visas granted by the
United States government. In the event that such visas are unavailable, either
due to a change in policy or law or a reduction in the number of such visas
granted, Nextera may be unable to attract or retain additional qualified
consultants or may incur unexpected substantial additional labor costs, any of
which could materially adversely affect the Company's business, operating
results and financial condition. See "Business--Human Resources."
CONTROL BY KNOWLEDGE UNIVERSE OR ITS AFFILIATES. After the Offering,
Knowledge Enterprises will own, through Nextera Holdings, 8,810,000 shares of
Class A Common Stock and 3,844,200 shares of Class B Common Stock, which
together will represent approximately 66.0% of the voting power of the
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 Nextera's stockholders,
including in connection with the election of the Board of Directors.
Accordingly, Knowledge Enterprises will be able to elect all of the Company's
directors, except for two directors to be elected in accordance with the terms
of a stockholders agreement entered into in connection with the acquisitions
(the "Sibson Acquisitions") of Sibson & Company, L.P. and Sibson Canada, Inc.
(collectively, "Sibson"), as amended in connection with the Lexecon Acquisition
(the "Stockholders Agreement"), and determine the
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disposition of all matters submitted to a vote of Nextera's stockholders,
including mergers, transactions involving a change in control of the Company and
other corporate transactions and the terms thereof. See "Certain
Transactions--Stockholders Agreement." The former stockholders of Lexecon have
not yet exercised their right to nominate a director under the Stockholders
Agreement. Such control by Knowledge Enterprises could materially adversely
affect the market price of the Class A Common Stock or delay or prevent a change
in control of Nextera.
Knowledge Enterprises is controlled by Knowledge Universe which, in turn,
is controlled by Knowledge Universe, L.L.C. ("KU, LLC"). Knowledge Enterprises
was formed to conduct certain of Knowledge Universe's businesses whose primary
customers are other businesses. Knowledge Enterprises controls businesses which
presently operate in the following three sectors: (i) career workforce
management (including staffing, employee training and testing and assessment);
(ii) business consulting through Nextera; and (iii) informational meetings and
conferences (including seminars). Knowledge Universe 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 has
focused on acquiring and building education-oriented companies with activities
in areas such as youth education, continuing education, corporate training (both
classroom-based and computer-delivered), educational content creation and
distribution, and information technology and management consulting. Knowledge
Universe and Knowledge Enterprises 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 or Knowledge
Enterprises independently of Nextera. There can be no assurance that conflicts
of interest between Knowledge Universe, Knowledge Enterprises and the Company
will not arise or that any such conflict of interest will be resolved in a
manner favorable to Nextera, including potential competitive business
activities, indemnity arrangements, registration rights, sales or distributions
by Nextera Holdings of Nextera's Class A Common Stock and Class B Common Stock
and the exercise by Knowledge Enterprises of its ability to control the
management and affairs of the Company.
The Company was founded in February 1997 by entities which were under the
direct or indirect control of Lawrence J. Ellison, Michael R. Milken and Lowell
J. Milken. Subsequent to the formation of the Company, ownership of the Common
Stock originally held by such founding entities was transferred to Nextera
Holdings. KU, LLC indirectly controls Knowledge Enterprises. Lawrence J.
Ellison, Michael R. Milken and Lowell J. Milken may each be deemed to have the
power to control KU, 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 Nextera 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. On March 11, 1991, in the action entitled In the Matter of Michael
R. Milken, the Securities and Exchange Commission instituted a proceeding
pursuant to Section 15(b)(6) of the Exchange Act and ordered that Michael R.
Milken be barred from association with any broker, dealer, investment advisor,
investment company, or municipal securities dealer. On April 24, 1990, 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.
Drexel Burnham Lambert Incorporated, et al., restraining and enjoining Michael
R. Milken from engaging in transactions, acts, practices and courses of business
which constitute or would constitute violations of, or which aid and abet or
would aid and abet violations of Sections 7(c), 7(f), 9(a)(2), 10(b), 13(d),
14(e), 15(c)(3) and 17(a)(1) of the Exchange Act, and Regulations T and X and
Rules 10b-5, 10b-6, 13d-1, 13d-2, 14c-3, 15c3-1, 17a-3 and 17a-4 promulgated
thereunder and Section 17(a) of the Securities Act of 1933, as amended. Lowell
J. Milken is the brother of Michael R. Milken.
Any change in Nextera's relationship with Knowledge Enterprises, Knowledge
Universe or KU, LLC could materially adversely affect the Company's business,
operating results and financial condition. See "The
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Company--Transfer to Nextera Holdings," "Management--Board of Directors,"
"Certain Transactions," "Principal Stockholders" and "Description of Capital
Stock."
VARIABILITY AND SEASONALITY OF QUARTERLY OPERATING RESULTS. Nextera may
experience fluctuations in its future quarterly operating results. Variations in
the Company's net revenues and operating results from quarter-to-quarter may be
caused by such factors as the number of active client projects, termination of
major client projects, the number of business days in a quarter, hiring,
integration and utilization of consultants and other employees, the mix and
timing of client projects, re-evaluation of progress on and completion of client
projects, variations in utilization rates and average billing rates for
consultants, the accuracy of estimates of resources required to complete ongoing
projects, the integration of acquired entities, and the length of Nextera's
sales cycle. Because a relatively high percentage of the Company's expenses is
relatively fixed, a variation in the number or timing of client projects,
particularly at or near the end of any quarter, may cause significant variations
in operating results from quarter-to-quarter and could result in losses to
Nextera for any particular fiscal period. Events such as write-offs of
uncollectable accounts, the unanticipated termination of a major project or the
completion during a single quarter of several major client projects without
deploying consultants to new engagements could result in the Company's
underutilization of consultants which could, in turn, materially adversely
affect Nextera's business, operating results and financial condition. To the
extent that increases in the numbers of consultants are not followed by
corresponding increases in net revenues, the operating results of the Company
could be materially adversely affected. In addition, it is difficult for Nextera
to forecast the timing of revenues because project cycles depend on factors such
as the size and scope of consulting projects and circumstances specific to each
client. Because the Company's consultants only generate revenues when they are
engaged on client projects, Nextera's operating results are adversely affected
when its consultants cannot perform services for clients due to vacations, sick
days, holidays, inclement weather, training schedules or other reasons. In
particular, the Company can be expected to generate a smaller proportion of its
net revenues and realize lower operating income during the fourth quarter of the
year due to the number of holidays in that quarter. Given the foregoing factors,
Nextera believes that quarter-to-quarter comparisons of its operating results
are not necessarily meaningful and that the results for one quarter should not
be relied upon as an indication of future performance. Demand for Nextera's
services is significantly affected by the general level of economic activity.
When economic activity slows, clients may delay or cancel plans that involve the
hiring of consultants. The Company is unable to predict the level of economic
activity at any particular time, and fluctuations in the general economy could
materially adversely affect Nextera's business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
SUBSTANTIAL AMOUNT OF GOODWILL AND OTHER INTANGIBLE ASSETS RELATING TO
PERSONNEL. As of December 31, 1998, the Company's intangible assets, net of
accumulated amortization, were approximately $125.1 million, of which
approximately $39.5 million and $47.8 million were attributable to the Sibson
Acquisitions and the Lexecon Acquisition, respectively. Intangible assets at
December 31, 1998, net of accumulated amortization, included $120.4 million of
goodwill and $4.7 million for intangibles relating to personnel. Intangible
assets are being amortized by Nextera on a straight-line basis over 40 years for
goodwill and over five years for intangibles relating to personnel. Future
acquisitions by Nextera are expected to result in additional goodwill and
intangible assets. The amount amortized in a particular period constitutes a
non-cash expense that reduces the Company's net income. In accordance with
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets to be Disposed Of ("SFAS No. 121"), the Company
will 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, Nextera will be
required to write down the carrying value of the goodwill and incur a related
charge to its income. A write down of goodwill would result in a reduction in
net income which could materially adversely affect Nextera's business, operating
results and financial condition. See "--Operational, Financial and Accounting
Risks of Acquisitions," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Acquisitions."
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CONCENTRATION OF NET REVENUES WITHIN A RELATIVELY LIMITED NUMBER OF CLIENTS
AND INDUSTRIES. Nextera has in the past derived, and may in the future derive, a
significant portion of its net revenues from a relatively limited number of
clients. For example, for the years ended December 31, 1997 and 1998, on a pro
forma basis, the Company's ten largest clients accounted for approximately 24%,
and 29% of its net revenues, respectively. For the years ended December 31, 1997
and 1998, on a pro forma basis, the Company's largest client during such periods
accounted for approximately 6% and 5% of Nextera's net revenues, respectively.
There can be no assurance that these significant clients will continue to engage
the Company for additional projects or do so at the same revenue levels or that
the portion of Nextera's net revenues attributable to a relatively limited
number of clients will not increase in the future or that the Company will not
experience concentration of receivables. The loss of any such client, or a
reduction in the scope of engagements undertaken for such client, could
materially adversely affect Nextera's business, operating results and financial
condition. Clients engage the Company 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 Nextera and without penalty. Further, clients in the
financial services, diversified services, insurance and health care industries
accounted for approximately 16%, 13%, 12% and 10%, respectively, of Nextera's
pro forma net revenues for the year ended December 31, 1998. Any economic
conditions or other factors adversely affecting any of the foregoing industries
or any increase in the size or number of the Company's competitors within these
industries could materially adversely affect Nextera's business, operating
results and financial condition. See "--Absence of Written Contracts,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Clients and Representative Engagements."
POTENTIAL CONFLICTS OF INTERESTS. The Company provides 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. Nextera's engagement by a client to
provide such services frequently precludes the Company from accepting
engagements with entities which may have interests which are adverse to the
subject matter of such engagements. In addition, the Company 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 Nextera provides economic and litigation consulting
services, there has been a continuing trend toward business consolidations and
strategic alliances. These consolidations and alliances reduce the number of
potential clients for the Company's services and increase the likelihood that
the Company will be unable to continue certain ongoing engagements or accept
certain new engagements as a result of conflicts of interests. Any such result
could materially adversely affect Nextera's business, operating results and
financial condition.
DEPENDENCE ON KEY PERSONNEL. The Company's success is highly dependent upon
the efforts, abilities, business generation capabilities and project execution
skills of its senior consulting executives and other key personnel. The loss of
the services of any of these persons for any reason could materially adversely
affect Nextera's business, operating results and financial condition, including
its ability to secure and complete engagements. There can be no assurance that
the Company will be able to retain these persons or to attract suitable
replacements or additional personnel if required. In addition, if one or more of
Nextera's key personnel resigns from the Company to join a competitor or to form
a competing business, any resulting loss of existing or potential clients to any
such competitor could materially adversely affect Nextera's business, operating
results and financial condition. Most of the Company's senior consultants are
not bound by non-competition agreements with the Company. Further in the event
of the loss of any such personnel, there can be no assurance that the Company
would be able to prevent the unauthorized disclosure or use of its technical
knowledge, practices or procedures by such personnel. Nextera generally does not
maintain key person life insurance coverage for employees. See "Business--Human
Resources" and "Management--Directors, Executive Officers and Other Senior
Managers."
PROJECT RISKS. The Company's client engagements often involve projects that
are critical to the operation of a client's business and provide benefits that
may be difficult to quantify. Nextera's failure or inability to meet a client's
expectations in the performance of its services could result in a client's
refusal to pay or give rise to claims against the Company or damage Nextera's
reputation, any of which could materially adversely
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affect its business, operating results and financial condition. There can be no
assurance that the Company will not fail to satisfy certain clients'
expectations.
FIXED-PRICE OR CAPPED-FEE CONTRACTS. Nextera has undertaken and expects in
the future to undertake certain projects under fixed-price or capped-fee billing
arrangements, which are distinguishable from the Company's principal method of
utilizing time and materials billing arrangements. On a pro forma basis, fixed-
price or capped-fee billing arrangement projects accounted for approximately 8%
and 12% of Nextera's net revenues for the years ended December 31, 1997 and
1998, respectively. The failure of Nextera to complete such fixed-price or
capped-fee projects within budget or below the cap would expose the Company to
risks associated with potentially unrecoverable cost overruns, which could
materially adversely affect Nextera's business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
EFFECT OF CHANGING LAWS AND REGULATIONS. For the years ended December 31,
1997 and 1998, Nextera derived approximately 28% and 24%, respectively, of its
pro forma 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 the Company in
this area. In addition, adverse changes in general economic conditions or
conditions influencing merger and acquisition activity could have an adverse
impact on engagements in which Nextera assists clients in connection with
proposed mergers and acquisitions. Any reductions in the number of the Company's
securities, antitrust and mergers and acquisitions consulting engagements could
materially adversely affect Nextera's business, operating results and financial
condition.
ABSENCE OF WRITTEN CONTRACTS. Nextera derives a significant portion of its
net revenues from client projects involving significant dollar values.
Accordingly, the cancellation, delay or significant reduction in the scope of a
large engagement could materially adversely affect the Company's business,
operating results and financial condition. Clients engage the Company 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 Nextera and
without penalty. As a result, Nextera believes that the number of clients or the
number and size of its existing projects are not reliable indicators or measures
of future net revenues. The Company has in the past provided, and is likely in
the future to provide, services to clients without a written contract. When a
client defers, modifies or cancels a project, Nextera must be able to rapidly
deploy its consultants to other projects in order to minimize the
underutilization of employees and the resulting adverse impact on operating
results. In addition, the Company's 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. As a result, any termination,
significant reduction or modification of its business relationships with any of
its significant clients or with a number of smaller clients could materially
adversely affect Nextera's business, operating results and financial condition.
COMPETITION. The consulting services industry includes a large number of
competitors, is subject to rapid change and is highly competitive. Nextera
believes that the principal competitive factors in the consulting services
industry are reputation, industry expertise, analytical ability and price.
Nextera also believes that its ability to compete depends in part on a number of
factors outside of its control, including the ability of its competitors to
hire, retain and compensate consultants, offer lower-priced services, respond to
client requirements, and develop advanced services or 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. In addition,
many of these competitors have been operating for a significantly longer
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period of time than the Company 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. Such
competition may impose additional pricing pressures on Nextera. In addition,
Nextera faces intense competition in its efforts to recruit and retain qualified
consultants. There can be no assurance that the Company will be able to compete
successfully with its existing competitors or any new competitors. See
"Business--Competition."
FOREIGN OPERATIONS. Nextera derived approximately 7% and 6% of its net
revenues on a pro forma basis from clients outside of the United States for the
years ended December 31, 1997 and 1998, respectively. The Company has engaged in
projects in Canada and the United Kingdom and intends to continue to seek an
increasing number of foreign engagements. One of the components of Nextera's
growth strategy is to expand its international presence and seek additional
business outside the United States. Nextera's international business operations
are and will be subject to a number of risks, including difficulties in managing
foreign operations, enforcing agreements and collecting receivables through
foreign legal systems; longer payment cycles; fluctuations in the value of
foreign currencies; and unexpected regulatory, economic or political changes in
foreign markets. The relationship between non-dollar denominated revenues and
dollar denominated expenses may subject the Company to significant foreign
exchange risks. In addition, Nextera may in the future acquire an interest in
entities that operate in countries where the repatriation or conversion of
currency is restricted. There can be no assurance that these factors will not
materially adversely affect the Company's business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Growth Strategy."
RAPID TECHNOLOGICAL CHANGE. Nextera's success will depend in part on its
ability to develop business consulting and strategic information technology
solutions that keep pace with continuing changes in information processing
technology and the effect of such changes on client needs and preferences. Part
of the Company's strategy is to focus on business performance solutions, which
include strategic/knowledge management systems and enabling technologies. There
can be no assurance that Nextera will be successful in adequately addressing
developments in IT on a timely basis or that, if these developments are
addressed, the Company will be successful in the marketplace. In addition, there
can be no assurance that products or technologies developed by others or
changing client preferences will not render Nextera's services uncompetitive or
obsolete. The Company's failure to identify or address these developments could
materially adversely affect Nextera's business, operating results and financial
condition.
YEAR 2000 RISKS. Many currently installed computer systems are coded to
accept only two digit entries in the date code field. These date code fields
need to be modified or upgraded to accept four digit entries to distinguish 21st
century dates from 20th century dates. Many organizations are expending
significant resources to modify or upgrade their computer systems for such "Year
2000" compliance. These expenditures may result in reduced funds available to
purchase the types of services offered by the Company as resources that might
otherwise be directed towards the purchase of outside consulting services are
utilized for Year 2000 compliance. Any such reduction in the purchase of the
types of services offered by Nextera could materially adversely affect the
Company's business, operating results and financial condition.
The Year 2000 issue affects the Company's internal systems, including IT
and non-IT systems. Nextera has completed an assessment of its IT systems,
including the systems of the Acquired Companies, for Year 2000 compliance. The
Company relies upon microprocessor-based personal computers and commercially
available applications software. Nextera is in the process of upgrading the
existing computer software and IT systems of the Company, including the Acquired
Companies. The Company is reviewing its utility systems (heat, light,
telephones, etc.) and other non-IT systems for the impact of Year 2000.
Additionally, should the Company undertake future acquisitions, the Year 2000
risks that affect the Company can be expected to similarly affect such
acquisition candidates. The Company intends to review the systems of all
acquisition candidates for Year 2000 compliance. However, the failure to correct
a material Year 2000 problem either within the Company, including any of the
Acquired Companies, within a vendor or supplier or within an acquisition
candidate could result in an interruption in, or a failure of, certain normal
business activities or operations of the Company. Such interruptions or failures
could materially adversely affect the Company's business, operating results and
financial condition.
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The Company depends on smooth and timely interactions with its vendors,
clients and other third parties. Any unexpected costs or disruption in the
operations or activities of such vendors, clients or other third parties as a
result of Year 2000 compliance issues within such entities could materially
adversely affect Nextera's business, operating results or financial condition.
The Company intends to take continuous steps to identify Year 2000 problems
related to its vendors and to formulate a system of working with key
third-parties to understand their ability to continue providing services and
products through the change to Year 2000. The Company intends to work directly
with its key vendors, including financial institutions and utility-providers,
and partner with them if necessary, to avoid any business interruptions.
The Company believes the most likely worst case scenario related to Year
2000 risks is a material business interruption that leads to client
dissatisfaction and the termination of a project or projects by dissatisfied
clients. Such an interruption in services could occur due to a breakdown in any
number of the Company's computer systems and applications and non-IT systems, or
the systems of third-parties. Examples are failures in the Company's application
software, computer chips embedded in equipment, supply of materials from its
suppliers, or lack of adequate telecommunications, power, or other utilities.
Any such failure could prevent the Company from being able to deliver its
services as expected, which could materially adversely affect the Company's
business, operating results and financial condition.
The cost of the Company's Year 2000 compliance assessment and upgrade is
being funded from current operations. As of December 31, 1998, the cost to the
Company of its Year 2000 identification, assessment, remediation and testing
efforts, as well as currently anticipated costs to be incurred by the Company
with respect to Year 2000 issues of third parties, was expected to be less than
$200,000. Because of the uncertainty associated with Year 2000 failures, it is
not possible at present to quantify the cost of corrective actions. The Company
will continue to consider the likelihood of a material business interruption due
to the Year 2000 issue, and, if necessary, implement appropriate contingency
plans. Since the Company has adopted a plan to address these Year 2000 issues,
it has not developed a comprehensive contingency plan should these issues fail
to be completed successfully or in their entirety. However, if the Company
identifies significant risks or is unable to meet its anticipated timeline, the
Company will develop contingency plans as deemed necessary at that time. There
can be no assurance that unexpected Year 2000 compliance problems of either the
Company or its vendors, customers and service providers will not materially
adversely affect the Company's business, operating results and financial
condition.
The Company has in the past and may in the future perform services related
to the planning, implementation and testing of Year 2000 compliance work for its
clients. Failure to timely or accurately perform these services could cause a
client to experience failure of one or more key systems or result in
miscalculations causing material disruptions of one or more of a client's
operations, including an inability to process transactions or engage in business
activities. Disruptions in a client's operations and the variability of
definitions of "compliance" with the Year 2000 could lead to lawsuits against
the Company. The outcome of such lawsuits and the impact on the Company are not
estimable at this time. A claim for product or service liability brought against
Nextera related to its Year 2000 consulting could result in substantial cost to
the Company and divert management's attention from Nextera's operations, which
could materially adversely affect the Company's business, operating results and
financial condition.
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS. The Company's
Amended and Restated Certificate of Incorporation ("Certificate of
Incorporation") and Bylaws, as well as Delaware corporate law, contain certain
provisions that could have the effect of delaying, deferring or preventing a
change in control of Nextera. These provisions could limit the price that
certain investors might be willing to pay in the future for shares of the Class
A Common Stock. The Certificate of Incorporation authorizes the Company's Board
of Directors to issue shares of Preferred Stock of Nextera, in one or more
series, and to establish the rights and preferences (including the
convertibility of such shares of Preferred Stock into shares of Class A Common
Stock) of any series of Preferred Stock so issued. Such provisions could
diminish the opportunities for a stockholder to participate in tender offers,
including tender offers at a price above the then current market value of the
Class A Common Stock. Such provisions also may inhibit fluctuations in the
market price of the Class A Common Stock that could result from takeover
attempts. Additionally, the Certificate of Incorporation provides that any
action required or permitted to be taken by stockholders of Nextera must be
effected at
15
<PAGE> 17
a duly called annual or special meeting of stockholders and may not be effected
by any consent in writing. Special meetings of stockholders may be called only
by the Board of Directors, the Chairman of the Board, or the President of the
Company, and stockholders are not permitted to call a special meeting of
stockholders or to require that the Board of Directors call a special meeting.
The Bylaws require stockholders to comply with special advance notice procedures
in order to make a proposal or director nomination which such stockholder
desires to present at any annual or special meeting of stockholders (the
"Stockholder Notice Procedure"). The Stockholder Notice Procedure provides that
only persons who are nominated by, or at the direction of, the Company's notice
of meeting, the Board of Directors or by a stockholder who has given timely
written notice to the Secretary of the Company prior to the meeting at which
directors are to be elected, will be eligible for election as directors of the
Company. The Stockholder Notice Procedure also provides that at an annual
meeting only such business may be conducted as has been brought before the
meeting by, or at the direction of, the Company's notice of meeting, the Board
of Directors or by a stockholder who has given timely written notice to the
Secretary of the Company of such stockholder's intention to bring such business
before such meeting. In addition, under the Stockholder Notice Procedure, a
stockholder's notice to the Company proposing to nominate a person for election
as a director or relating to the conduct of business other than the nomination
of directors must contain a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the nomination or proposal is made. If
the chairman of a meeting determines that business was not properly brought
before the meeting, in accordance with the Stockholder Notice Procedure, such
business shall not be discussed or transacted. The foregoing provisions and
requirements could make it difficult for stockholders to effect certain
corporate actions.
The Company is subject to the provisions of Section 203 of the DGCL.
Section 203 prohibits a publicly-held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an
"interested stockholder," unless the business combination is approved in a
prescribed manner. A "business combination" includes mergers, asset sales and
other transactions resulting in a financial benefit to the interested
stockholder. Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns (or within the
previous three years, did own) 15% or more of the corporation's voting stock.
This statute contains provisions enabling a corporation to avoid the statute's
restrictions if the stockholders holding a majority of the corporation's voting
stock approve an amendment to the corporation's certificate of incorporation or
bylaws. Neither the Company's Certificate of Incorporation nor Bylaws contain
such a provision, and the Company does not presently intend to submit such a
provision to its stockholders. The Company does not believe that Nextera
Holdings, Knowledge Enterprises or their affiliates should be considered
interested stockholders subject to the provisions of Section 203. See "--Control
by Knowledge Universe or its Affiliates" and "Description of Capital Stock."
INTELLECTUAL PROPERTY RIGHTS. Nextera's success is dependent in part upon
certain methodologies and other proprietary intellectual property rights.
Nextera relies 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 its
proprietary rights and the proprietary rights of third parties from whom Nextera
licenses intellectual property. In addition, Nextera generally limits the
distribution of its proprietary information. There can be no assurance, however,
that the steps taken by Nextera to protect its intellectual property rights will
be adequate to deter misappropriation of proprietary information or that the
Company will be able to detect unauthorized use and take appropriate steps to
enforce its intellectual property rights or 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 no assurance can be given that foreign copyright and
trade secret laws will adequately protect the Company's intellectual property
rights. Although Nextera believes that its services do not infringe on the
intellectual property rights of others and that it has all rights necessary to
utilize the intellectual property employed in its business, there can be no
assurance that Nextera's employees will not misappropriate the intellectual
property of others. Accordingly, the Company is subject to the risk of claims
alleging infringement of third-party intellectual property rights. Any such
claims could require Nextera to spend significant sums in litigation, pay
damages, develop non-infringing intellectual property or acquire licenses to the
intellectual
16
<PAGE> 18
property that is the subject of asserted infringement, any of which could
materially adversely affect the Company's business, operating results and
financial condition. The Company presently holds no patents or registered
copyrights.
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to the
Offering, there has been no public market for the Class A Common Stock.
Consequently, the initial public offering price per share will be determined by
negotiations between Nextera and the representatives of the Underwriters and may
not be indicative of the market price of the Class A Common Stock after the
Offering. See "Underwriting" for a discussion of factors to be considered in
determining the initial public offering price per share. Application has been
made for quotation of the Class A Common Stock on the Nasdaq National Market;
however, there can be no assurance that an active trading market will develop
and be sustained after the Offering. In the absence of a public trading market,
investors may be unable to liquidate their investments in the Company. The
market price of the Class A Common Stock may fluctuate substantially due to a
variety of factors, including quarterly fluctuations in results of operations,
adverse circumstances affecting the introduction or market acceptance of new
services offered by Nextera, announcements of new services by competitors,
changes in earnings estimates by analysts, changes in accounting principles,
sales of Class A Common Stock or Class B Common Stock by existing holders, the
depth and liquidity of the market for Class A Common Stock, loss of key
personnel, general market conditions and other factors. The Company believes,
based on publicly available historical data, that equity securities of entities
with businesses similar to the Company's are subject to greater volatility than
the general market. In addition, the stock market from time to time has
experienced broad price and volume fluctuations that often have been unrelated
or disproportionate to the operating performance of individual companies. These
broad market fluctuations, as well as shortfalls in operating results as
compared to securities analysts' expectations or changes in such analysts'
projections or recommendations, and general economic market conditions, may
materially and adversely affect the market price of the Class A Common Stock. In
the past, following periods of volatility in the market price of a company's
securities, class action litigation has often been instituted against such a
company. Any such litigation brought against the Company could result in
substantial costs and a diversion of management's attention and resources, which
could materially adversely affect Nextera's business, operating results and
financial condition.
DILUTION. Purchasers of shares of Class A Common Stock in the Offering will
experience an immediate dilution of $13.41 per share in the pro forma net
tangible book value per share of Class A Common Stock after the Offering. To the
extent additional shares are issued or outstanding options and warrants to
purchase Class A Common Stock are exercised, there may be further dilution.
There can be no assurance that the Company will not require additional funds to
support its working capital requirements or for other purposes, in which case
Nextera may seek to raise such additional funds through public or private debt
or equity financing or from other sources. There can be no assurance that such
additional financing will be available or that, if available, such financing
will be obtained on terms favorable to the Company and would not result in
additional dilution of Nextera's stockholders. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of significant amounts of Common
Stock in the public market after the Offering or the perception that such sales
will occur could materially adversely affect the market price of the Class A
Common Stock or the future ability of the Company to raise capital through an
offering of its equity securities. Of the shares of Common Stock to be
outstanding upon completion of the Offering, the 10,250,000 shares offered
hereby will be eligible for immediate sale in the public market without
restriction unless such shares are purchased by "affiliates" of Nextera within
the meaning of Rule 144 ("Rule 144") under the Securities Act.
The remaining 22,869,624 shares of Common Stock (including (i) 197,813
shares of Class A Common Stock issuable upon exchange of the Exchangeable
Shares, (ii) 53,333 Pyramid Earn-out Shares and (iii) 993,520 Lexecon Contingent
Shares, assuming the price per share of the Class A Common Stock in the Offering
is $14.00, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Acquisitions") held by existing stockholders upon
completion of the Offering will be "restricted securities" as that term is
defined in Rule 144. Restricted securities may be sold in the public market only
if registered or if they qualify for an exemption from registration under the
Securities Act. Directors, officers and certain stockholders of the Company
holding an aggregate of 16,623,016 shares of Class A Common Stock
17
<PAGE> 19
and 4,266,030 shares of Class B Common Stock have agreed that they will not
sell, directly or indirectly, any Common Stock, subject to certain exceptions,
without the prior consent of Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ") for a period of 180 days from the date of this Prospectus (the "DLJ
Lock-up Agreements"). In connection with the Lexecon Acquisition, the former
stockholders of Lexecon entered into lock-up agreements which provide that they
may not sell or otherwise dispose of their shares of Class A Common Stock for a
six-month period following the Offering, and that subsequent to such six-month
period, those stockholders will not sell more than one-third of such shares in
the subsequent 12-month period and more than two-thirds of such shares in the
subsequent 24-month period (the "Lexecon Lock-up Agreements" and collectively
with the DLJ Lock-up Agreements, the "Lock-up Agreements"). A total of 3,809,520
shares of Class A Common Stock are subject to the Lexecon Lock-up Agreements
(assuming the issuance of 993,520 Lexecon Contingent Shares, which number may
vary based upon the price per share of the Class A Common Stock in the Offering,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Acquisitions"). In addition, Nextera's Certificate of Incorporation
provides that each holder of Common Stock, other than the holders of the shares
of Class A Common Stock acquired in the Offering, agrees not to sell, directly
or indirectly, any Common Stock, subject to certain exceptions, without the
prior consent of DLJ for a period of 180 days from the date of this Prospectus.
Giving effect to these Lock-up Agreements and the foregoing provisions of the
Company's Certificate of Incorporation and without giving effect to the
registration rights under the Stockholders Agreement, additional shares of Class
A Common Stock (including shares issuable upon conversion of Class B Common
Stock, upon the exchange of the Exchangeable Shares and as Pyramid Earn-out
Shares and Lexecon Contingent Shares assuming the price per share of the Class A
Common Stock in the Offering is $14.00) will be available for sale in the public
market (subject in certain circumstances to compliance with certain volume and
other restrictions under Rule 144) as follows: (i) 4,588 shares will be eligible
for sale 180 days after the date of this Prospectus; and (ii) 22,865,036 shares
will become eligible for sale under Rule 144 commencing December 31, 1999, upon
the expiration of the restrictions imposed by the Stockholders Agreement and the
Lexecon Lock-up Agreements.
Following the date of this Prospectus, Nextera intends to register on one
or more registration statements on Form S-8 5,000,000 shares of Class A Common
Stock issuable under the 1998 Equity Participation Plan. The Company has also
agreed to issue options under the Limited Purpose Plan and intends to file one
or more registration statements on Form S-8 to register the shares of Class A
Common Stock that are issuable upon the exercise of such options. Of the
5,000,000 shares of Class A Common Stock issuable under the 1998 Equity
Participation Plan, 3,163,652 shares were subject to outstanding options as of
March 1, 1999, of which approximately 364,283 will be exercisable at the time of
the Offering. Assuming the price per share of Class A Common Stock in the
Offering is $14.00, the Company will grant options to purchase an aggregate of
the 2,455,997 shares of Class A Common Stock under the Limited Purpose Plan, of
which options to purchase 455,149 shares of Class A Common Stock will be
exercisable at the time of the Offering. See "Management--Employee Benefit
Plans."
Upon completion of the Offering, the holders of 18,594,994 shares of Class
A Common Stock and 4,274,630 shares of Class B Common Stock (after conversion to
Class A Common Stock) will be entitled to certain registration rights with
respect to such shares (assuming the issuance of (i) 197,813 shares of Class A
Common Stock upon exchange of the Exchangeable Shares, (ii) 53,333 Pyramid
Earn-out Shares, and (iii) 993,520 Lexecon Contingent Shares, which number may
vary based upon the price per share of the Class A Common Stock in the Offering,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Acquisitions."). If such holders, by exercising their registration
rights, cause a large number of shares of Class A Common Stock to be registered
and sold in the public market, such sales could materially adversely affect the
market price of the Class A Common Stock. In addition, if the Company is
required, pursuant to such registration rights, to include shares held by such
persons in a registration statement which Nextera files to raise additional
capital, the inclusion of such shares could adversely affect the Company's
ability to raise needed capital. See "Management--Employee Benefit Plans,"
"Principal Stockholders" and "Shares Eligible for Future Sale."
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<PAGE> 20
THE COMPANY
The organizational structure of the Company and its subsidiaries is as
follows:
[COMPANY CHART]
Chart indicating the organizational structure of the Company depicts five
boxes. The top box contains the words "Nextera Enterprises, Inc." Below the top
box is a line leading to a second box with the number "100%" next to the line.
The second box contains the words "Timaeus, Inc." and "Critias, Inc." Below the
second box is a line leading to a third box with the number "14.3%" next to the
line. Below the top box is a line leading to the third box with the number
"85.7%" next to the line. The third box contains five bullet points: "Nextera
Business Performance Solutions Group, Inc.", "Pyramid Imaging, Inc.", "The
Planning Technologies Group, L.L.C.", "Sibson & Company, LLC" and "Sibson Canada
Co." Below the top box is a line leading to the fourth box with the number 100%
next to the line. The fourth box contains the words "Lexacon Inc." Also below
the top box is a line leading to the fifth box with the number 100% next to the
line. The fifth box contains the words "The Alexandar Corporation Limited."
The following discussion summarizes the Company's formation and certain
other significant events relating to its capital structure prior to the
Offering. For additional related information see "Management's Discussion and
Analysis of Financial Condition and Results of Operation--Liquidity and Capital
Resources" and "Certain Transactions."
Formation. The Company was formed on February 26, 1997 as Education
Technology Consulting, L.L.C. and renamed Nextera Enterprises, L.L.C. on April
11, 1997. Nextera LLC was liquidated and dissolved on December 31, 1998, at
which time the Company commenced operating as a Delaware corporation. The
initial members of Nextera LLC were Nextera Enterprises Holdings, L.L.C.
(formerly Education Technology Consulting Holdings, LLC) ("NEH") and EDU, L.L.C.
("EDU"), each of which was an affiliate of KU, LLC. In connection with the
commencement of their respective employment, Gresham T. Brebach, Jr., the
Company's President, Chief Executive Officer and Chairman of the Board of
Directors, Ronald K. Bohlin, the Company's Chief Operating Officer and Director,
Michael P. Muldowney, the Company's Chief Financial Officer, Debra I. Bergevine,
the Company's Vice President, Marketing, and certain additional individuals
became members of NEH. See "Certain Transactions--Investments in the Company."
Recapitalization. Effective as of April 30, 1998, approximately $48.0
million of Nextera LLC's contributed capital was redesignated as debt in the
form of (i) a debenture dated March 20, 1997 with a principal amount of $23.0
million, which matures on May 1, 2002 and bears interest at a rate of 10% per
annum (the "March Debenture") and (ii) a debenture dated January 5, 1998 with a
principal amount of $24.9 million, which matures on May 1, 2002 and bears
interest at a rate of 10% per annum (the "January Debenture" and together with
the March Debenture, the "Debentures"), and NEH was liquidated and dissolved. In
connection with these transactions, the former members of NEH became members of
Nextera LLC and interests in the January Debenture and March Debenture were
distributed to KU, LLC, Messrs. Brebach, Bohlin and Muldowney, Ms. Bergevine,
one other employee and one former employee of Nextera LLC. The March Debenture
is subordinate to the January Debenture. The interest on the principal amount of
the Debentures is deemed to have begun to accrue on the date the respective
redesignated capital contributions were originally contributed to Nextera LLC.
See Note 9 of Notes to the Company's Consolidated Financial Statements. The
Debentures were amended in connection with the Lexecon Acquisition with respect
to future interest rate provisions and conversion into preferred stock on
substantially equivalent terms. See "Certain Transactions--Amendment of the
Debentures."
Transfer to Nextera Holdings. Effective August 5, 1998, KU, LLC contributed
all of its Class A Common Units and Class B Common Units of Nextera LLC and all
of its other interests in Nextera LLC, including its interest in the Debentures
and its rights under a management agreement with Nextera LLC, to
19
<PAGE> 21
Knowledge Universe in exchange for shares of its capital stock. Effective August
7, 1998, Knowledge Universe and EDU contributed all of their Class A Common
Units and Class B Common Units of Nextera LLC to Knowledge Enterprises in
exchange for capital stock of Knowledge Enterprises (the "KE Transaction"). In
February 1999, Knowledge Enterprises contributed all of its interest in the
Common Stock of the Company to its wholly-owned subsidiary, Nextera Holdings.
See "Certain Transactions--Management Agreement" and "Principal Stockholders."
Exchangeable Shares. In connection with the Sibson Acquisitions, Nextera
LLC formed Sibson Canada Co., a wholly owned Canadian subsidiary, which issued
the Exchangeable Shares to the holders of capital stock of Sibson Canada, Inc.
The holders of Exchangeable Shares may exchange such shares at any time for an
aggregate of 197,813 shares of Class A Common Stock. The Exchangeable Shares are
designed to provide an opportunity for the shareholders of Sibson Canada, Inc.
to achieve a Canadian tax deferral in certain circumstances. The holders of
Exchangeable Shares are entitled to dividend and other rights equivalent to
shares of Class A Common Stock but are not entitled to vote on matters submitted
to the holders of Class A Common Stock until such time as the holders of
Exchangeable Shares exchange such shares for Class A Common Stock.
Exchange Transaction. On December 31, 1998 and in connection with the
Lexecon Acquisition, all of the members of Nextera LLC (the "Members") other
than Timaeus, Inc. and Critias, Inc., the two entities that owned Sibson &
Company, L.P. prior to its acquisition by Nextera LLC (together, the "Sibson
Entities"), contributed all of their membership interests in Nextera LLC to
Nextera in exchange for Common Stock. The percentage interests and classes of
Common Stock received by each Member (other than the Sibson Entities)
corresponded to the percentage interests and classes of the Nextera LLC
membership interests held by such Member. Each Member that contributed Class A
Common Units of Nextera LLC received shares of Class A Common Stock and each
member that contributed Class B Common Units of Nextera LLC received shares of
Class B Common Stock. Contemporaneous with the exchange of membership interests
of Nextera LLC for Common Stock, the shareholders of the Sibson Entities
contributed all of the issued and outstanding common stock of the Sibson
Entities to the Company in exchange for shares of Class A Common Stock. The
aggregate percentage interests of Class A Common Stock received by the
shareholders of the Sibson Entities corresponded to the percentage interests of
Class A Common Units in Nextera LLC held by the Sibson Entities (the collective
contributions of membership interests in Nextera LLC and capital stock of the
Sibson Entities to the Company and the Lexecon Acquisition are referred to as
the "Exchange Transaction"). Subsequent to the Exchange Transaction, Nextera LLC
was liquidated and dissolved and as a result thereof distributed its assets and
liabilities to the Company and the Sibson Entities in proportion to the
membership interests held by each of them.
20
<PAGE> 22
USE OF PROCEEDS
The net proceeds to Nextera from the sale of the 10,250,000 shares offered
by the Company pursuant to the Offering are estimated to be approximately $132.9
million ($153.0 million if the Underwriters' over-allotment option is exercised
in full), at an assumed offering price of $14.00 per share after deducting the
estimated underwriting discounts and commissions and Offering expenses payable
by the Company, net of certain reimbursements. See "Underwriting." The principal
purposes of the Offering are to create a public market for the Class A Common
Stock, enhance Nextera's ability to use its Class A Common Stock as a means of
attracting, motivating and retaining key employees, facilitate the Company's
future access to public equity markets, repay indebtedness, and obtain
additional working capital. Nextera intends to use the net proceeds from the
Offering as follows:
(i) approximately $78.3 million to repay outstanding principal and
interest under a $77.5 million credit facility entered into effective
August 31, 1998 and amended on December 31, 1998 (the "Bridge Loan") which
bears interest at 12% per annum, and matures on April 30, 1999. Under the
Bridge Loan, the Company borrowed $38.0 million to finance the Sibson
Acquisitions, $31.1 million to finance the Lexecon Acquisition, $4.2
million to finance the payment of bonuses to certain non-stockholder key
executives of Lexecon, $2.0 million to finance the acquisition of Alexander
and $2.2 million for general corporate purposes, including working capital.
See "Certain Transactions--Bridge Loan Amendment." Knowledge Universe holds
a note from the Company with a principal amount of $37.5 million and
Nextera Funding, Inc., an entity not affiliated with the Company, holds the
remaining interests under the Bridge Loan. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Underwriting."
(ii) approximately $750,000 will be paid to Nextera Funding, Inc., an
entity not affiliated with the Company, in consideration for certain
consents and amendments given in connection with the amendment to the
Bridge Loan. See "Underwriting."
(iii) approximately $54.3 million to repay outstanding principal and
interest on the March and January Debentures. Each of the Debentures bears
interest at 10% per annum, and matures on May 1, 2002. All of the interests
in the Debentures are held by Knowledge Universe, Messrs. Brebach, Bohlin
and Muldowney, Ms. Bergevine and one other employee of the Company, who
will receive payments of approximately $53,402,000, $636,000, $55,000,
$79,000, $79,000, and $79,000, respectively upon repayment of the
Debentures. The indebtedness associated with the Debentures was incurred to
finance acquisitions and for general working capital purposes. See "The
Company--Recapitalization," "Certain Transactions--Investments in the
Company" and "--Amendment of the Debentures." Upon the repayment of the
Debentures, Messrs. Brebach and Muldowney, Ms. Bergevine and one other
employee of the Company will repay $636,000, $79,000, $74,000 and $79,000,
respectively, pursuant to promissory notes executed by them and held by the
Company. See "Certain Transactions--Loans to Certain Officers."
(iv) approximately $360,000 to pay accrued management fees to
Knowledge Universe. See "Certain Transactions--Management Agreement."
(v) the remaining net proceeds for general corporate purposes.
Pending such uses, Nextera intends to invest the net proceeds from the
Offering in short-term, investment-grade, interest-bearing securities. Although
Nextera examines potential acquisition opportunities from time to time, other
than as disclosed in this Prospectus, the Company has no current plans,
commitments, agreements or understandings with respect to any material
acquisitions or investments as of the date of this Prospectus, and no portion of
the net proceeds has been allocated for any specific material acquisition or
investment. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Acquisitions" and "--Liquidity and Capital Resources."
DIVIDEND POLICY
Nextera has never declared or paid any cash dividends on its capital stock.
The Company currently intends to retain all future earnings, if any, for use in
the operation and development of its business and, therefore, does not expect to
declare or pay any cash dividends on its Common Stock in the foreseeable future.
The payment of dividends in the future, if any, will be at the discretion of the
Board of Directors.
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<PAGE> 23
CAPITALIZATION
The following table sets forth the capitalization of Nextera as of December
31, 1998 on (i) an actual basis and (ii) a pro forma as adjusted basis to give
effect to (a) the exchange of all Exchangeable Shares for 197,813 shares of
Class A Common Stock, (b) the issuance of 993,520 Lexecon Contingent Shares
(assuming the price per share of the Class A Common Stock in the Offering is
$14.00), and (c) the sale of 10,250,000 shares of Class A Common Stock offered
hereby at an assumed initial public offering price of $14.00 per share and the
application of the estimated net proceeds of the Offering. See "Use of Proceeds"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Acquisitions." The information set forth below should be read in
conjunction with the Company's Consolidated Financial Statements and the related
Notes thereto and the Unaudited Pro Forma Combined Financial Statements included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
--------------------------
PRO FORMA
ACTUAL AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
Total short-term debt and capital lease obligations......... $ 82,487 $ 6,638
Total long-term debt and capital lease obligations.......... 55,749 2,600
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value; 10,000,000 shares
authorized, no shares issued and outstanding, actual
and pro forma as adjusted.............................. -- --
Exchangeable Shares, no par value, 2,500,000 shares
authorized, 197,813 shares issued and outstanding,
actual, and zero shares issued and outstanding, pro
forma as adjusted...................................... 495 --
Class A Common Stock, $0.001 par value; 50,000,000 shares
authorized, 16,811,740 shares issued and outstanding,
actual, and 28,253,073 shares issued and outstanding,
pro forma as adjusted(1)............................... 17 28
Class B Common Stock, $0.001 par value, 4,300,000 shares
authorized, 4,274,630 shares issued and outstanding,
actual and pro forma as adjusted....................... 4 4
Additional paid-in capital................................ 31,144 178,471
Accumulated deficit....................................... (20,170) (20,170)
-------- --------
Total stockholders' equity (deficit)................... $ 11,490 $158,333
-------- --------
Total capitalization.............................. $149,726 $167,571
======== ========
</TABLE>
- ------------------------------
(1) Excludes (i) 5,000,000 shares of Class A Common Stock reserved for issuance
under the 1998 Equity Participation Plan pursuant to which options to
purchase 3,163,652 shares will be outstanding upon the closing of the
Offering, see "Management--Employee Benefit Plans," (ii) 384,000 shares of
Class A Common Stock issuable upon exercise of options granted to certain
non-stockholder key executives of Lexecon, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations," (iii) 135,480 shares of Class A Common Stock issuable upon
exercise of options reserved for issuance to certain non-stockholder key
executives of Lexecon assuming the price per share of the Class A Common
Stock in the Offering is $14.00 (the number of shares subject to such
options will range from a minimum of 31,560 shares if the price per share in
the Offering is $17.50 or higher to a maximum of 197,760 shares if the price
per share in the Offering is $12.50 or less), see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Results of
Operations," (iv) 2,455,997 shares of Class A Common Stock (assuming the
price per share of Class A Common Stock in the Offering is $14.00) issuable
upon exercise of options which the Company has granted or agreed to grant to
certain personnel of Lexecon under the Limited Purpose Plan, see
"Management--Employee Benefit Plans," (v) 250,000 shares of Class A Common
Stock issuable upon exercise of certain warrants issued in connection with
the Lexecon Acquisition, see "Certain Transactions--Guaranty and Warrants to
Purchase Class A Common Stock," and (vi) 4,274,630 shares of Class A Common
Stock issuable upon conversion of the 4,274,630 shares of the Company's
Class B Common Stock. See "Description of Capital Stock."
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<PAGE> 24
DILUTION
As of December 31, 1998, the pro forma net tangible book deficit of Nextera
was $(113.6) million, or $(5.10) per share of Common Stock. Pro forma net
tangible book value per share is equal to the amount of total tangible assets
less total liabilities, divided by the total number of shares of Common Stock
outstanding after giving effect to (i) the issuance of 993,520 Lexecon
Contingent Shares (assuming the price per share of the Class A Common Stock in
the Offering is $14.00) and (ii) the exchange of the Exchangeable Shares for
197,813 shares of Class A Common Stock. After giving effect to the receipt and
application of the estimated net proceeds from the sale of the 10,250,000 shares
of Class A Common Stock offered hereby at an assumed initial public offering
price of $14.00 per share, the net tangible book value of Nextera as of December
31, 1998 would have been $19.3 million, or $0.59 per share of Common Stock. This
represents an immediate increase in pro forma net tangible book value of $5.69
per share of Common Stock to existing stockholders and an immediate dilution of
$13.41 per share of Common Stock to new stockholders. The following table
illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $14.00
Pro forma net tangible book value per share before the
Offering............................................... $(5.10)
Increase per share attributable to new investors.......... 5.69
------
Pro forma net tangible book value per share after the
Offering.................................................. 0.59
------
Dilution per share to new investors......................... $13.41
======
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1998, the difference between the existing stockholders and new stockholders with
respect to the number of shares of Common Stock purchased from the Company, the
total consideration paid to Nextera and the average price paid per share by
existing stockholders and by new stockholders:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
Existing stockholders............. 22,277,703 68.5% $ 45,569,000 24.1% $ 2.05
New stockholders.................. 10,250,000 31.5 143,500,000 75.9 14.00
---------- ----- ------------ ------
Total................... 32,527,703 100.0% $189,069,000 100.0%
========== ===== ============ ======
</TABLE>
The foregoing tables and calculations assume (i) no exercise of the
Underwriters' over-allotment option, (ii) no exercise of options to purchase
2,480,240 shares of Class A Common Stock at a weighted average exercise price of
$6.50 per share granted under the 1998 Equity Participation Plan outstanding as
of December 31, 1998, (iii) no exercise of options to purchase 384,000 shares of
Class A Common Stock granted to certain non-stockholder key executives of
Lexecon, (iv) no exercise of options to purchase 135,840 shares of Class A
Common Stock issuable upon exercise of options reserved for issuance to certain
non-stockholder key executives of Lexecon at an exercise price of $1.50 per
share assuming the price per share of the Class A Common Stock in the Offering
is $14.00 (the number of shares subject to such options will range from minimum
of 31,560 shares if the price per share in the Offering is $17.50 or higher to a
maximum of 197,760 if the price per share in the Offering is $12.50 or less),
(v) no issuance of 2,455,997 shares of Class A Common Stock (assuming the price
per share in the Offering is $14.00) issuable upon exercise of options which the
Company has granted or agreed to grant to certain personnel of Lexecon under the
Limited Purpose Plan, and (vi) no exercise of warrants to purchase 250,000
shares of Class A Common Stock issuable upon exercise of certain warrants issued
in connection with the Lexecon Acquisition at an exercise price of $11.20 per
share (assuming the price per share in the Offering is $14.00). The exercise of
options and warrants to purchase Class A Common Stock will result in further
dilution to new investors. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Acquisitions," and "--Results of
Operations," "Management--Employee Benefit Plans," "Description of Capital
Stock--Warrants," "Certain Transactions--Guaranty and Warrants to Purchase Class
A Common Stock," and "Shares Eligible for Future Sale."
23
<PAGE> 25
SELECTED CONSOLIDATED AND PRO FORMA COMBINED FINANCIAL DATA
The following selected financial data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Company's Consolidated Financial Statements and Notes thereto
included elsewhere in this Prospectus. The Statements of Operations Data
presented below for the period from February 26, 1997 (date of inception)
through December 31, 1997 and the year ended December 31, 1998 and the Balance
Sheet Data as of December 31, 1997 and 1998 have been derived from the Company's
Consolidated Financial Statements included elsewhere in this Prospectus, which
have been audited by Ernst & Young LLP, independent auditors, whose report with
respect thereto is included elsewhere in this Prospectus. See the Company's
Consolidated Financial Statements and the related Notes thereto included
elsewhere in this Prospectus.
The unaudited pro forma Statements of Operations Data for the year ended
December 31, 1998 combine the historical statements of operations of Nextera and
the Acquired Companies other than Alexander as if such acquisitions had been
completed on January 1, 1998. This pro forma data should be read in conjunction
with the respective Historical Financial Statements of Nextera and the Acquired
Companies (including the Notes thereto), the Unaudited Pro Forma Combined
Financial Statements (including the Notes thereto), Management's Discussion and
Analysis of Financial Condition and Results of Operations, and other financial
information of Nextera and the Acquired Companies appearing elsewhere herein.
The pro forma statements may not be indicative of the results that would have
actually been obtained had the acquisitions reflected therein occurred on the
dates indicated or which may be obtained in the future.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
------------------------------------- -----------------
PERIOD FROM
FEBRUARY 26, 1997
(DATE OF
INCEPTION) FOR THE FOR THE
THROUGH YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER COMMON SHARE DATA)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues................................................ $ 7,998 $ 67,590 $135,167
Cost of revenues............................................ 4,718 44,985 76,314
------- -------- --------
Gross profit................................................ 3,280 22,605 58,853
Selling, general and administrative expenses................ 5,306 23,103 44,005
Amortization expense........................................ 255 1,722 4,326
Restructuring costs(2)...................................... -- 1,298 1,298
Compensation expense--other(3).............................. -- 6,671 7,511
------- -------- --------
Income (loss) from operations............................... (2,281) (10,189) 1,713
Interest income (expense), net.............................. (32) (6,723) (13,521)
------- -------- --------
Loss before provision for income taxes...................... (2,313) (16,912) (11,808)
Provision for income taxes.................................. 702 243 236
------- -------- --------
Net loss.................................................... $(3,015) $(17,155) $(12,044)
======= ======== ========
Net loss per common share, basic and diluted(4)............. $ (0.74) $ (1.14) $ (0.61)
Weighted average common shares outstanding, basic and
diluted................................................... 4,061 14,997 19,891
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------
1997 1998
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 554 $ 1,496
Working capital (deficit)................................. (335) (65,761)
Total assets.............................................. 22,655 176,691
Total short-term debt and capital lease obligations....... 1,833 82,487
Total long-term debt and capital lease obligations........ 969 55,749
Total stockholders' equity................................ 16,732 11,490
</TABLE>
- ------------------------------
(1) The pro forma selected combined statement of operations data for the year
ended December 31, 1998 are presented as if the acquisitions of the Acquired
Companies other than Alexander had been consummated as of January 1, 1998.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Acquisitions" and Unaudited Pro Forma Combined Financial
Statements. Alexander was acquired by the Company in January 1999 and is not
material to the Company's results of operations or financial position.
(2) Restructuring costs related to Business Performance Solutions.
(3) Results from cash payments and fully-vested stock options granted to certain
non-stockholder key executives of Lexecon. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(4) See Note 2 of Notes to the Company's Consolidated Financial Statements for
information concerning the computation of historical net loss per share.
24
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following section of this Prospectus contains certain forward-looking
statements that involve substantial risks and uncertainties. When used in this
section, the words "anticipate," "believe," "estimate," and "expect" and similar
expressions as they relate to the Company or its management are intended to
identify such forward-looking statements. Nextera's actual results, performance
or achievements could differ materially from the results, performance or
achievements expressed in, or implied by, these forward-looking statements.
Factors that could cause or contribute to such differences include those
discussed in "Risk Factors" and elsewhere in this Prospectus.
OVERVIEW
Nextera Enterprises, Inc. provides leading-edge consulting services focused
on business strategy, economic analysis, operations improvement, organizational
design and IT primarily to Fortune 500 and other multinational companies and
government agencies. The Company provides services in four practice areas, which
enables it to offer a broad range of complementary services that assist clients
in achieving enhanced business performance by anticipating and addressing their
complex, multi-disciplinary consulting needs. Nextera helps organizations
redefine the way in which existing work is conducted or new businesses and
markets are entered by analyzing underlying strategic and economic issues
affecting business performance, redesigning operational processes and business
practices, defining and managing major change initiatives, and using emerging
information technologies (such as web-based technologies and electronic
commerce) to support new strategic approaches.
Nextera was founded in February 1997 and has focused on building its
portfolio of practice areas primarily through selective acquisitions and, to a
lesser extent, internal growth. The Company has pursued an acquisition strategy
that has resulted in the acquisitions of the Acquired Companies. The Company's
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, Nextera will be unable to account for future
acquisitions under the pooling-of-interests method of accounting because, among
other reasons, the Company is a controlled subsidiary. Accordingly, the Company
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 Nextera's
statements of operations. Intangible assets are being amortized by Nextera on a
straight-line basis over 5 years for intangibles relating to personnel and over
40 years for all other intangibles, including goodwill. In accordance with SFAS
No. 121, the Company will periodically evaluate whether recent events and
circumstances have occurred that indicate the acquired goodwill may warrant
revision.
Nextera is affiliated with Knowledge Enterprises and Knowledge Universe and
from time-to-time has been engaged on an arm's-length basis to provide
consulting services for Knowledge Universe and its affiliates. The Company
expects that it may also be engaged to provide such services in the future. See
"Certain Transactions--Engagement of the Company by Knowledge Universe or its
Affiliates." Knowledge Enterprises and Knowledge Universe are engaged in
acquiring and operating companies in a broad range of areas relating to (i)
career workforce management (including staffing, employee training and testing
and assessment), (ii) business consulting through Nextera, and (iii)
informational meetings and conferences (including seminars). Knowledge Universe
has focused on acquiring and building education-oriented companies with
activities in areas such as youth education, corporate training (both
classroom-based and computer-delivered), educational content creation and
distribution, and information technology and management consulting. Nextera
expects to benefit from its association with Knowledge Universe and Knowledge
Enterprises through increased access to prospective client contacts and other
business opportunities and the potential ability of Knowledge Universe and
Knowledge Enterprises to enhance the Company's market exposure, although there
can be no assurance that these expected benefits will be realized.
The Company generates net revenues by providing business and IT consulting
services primarily under time and materials, fixed-price or capped-fee billing
arrangements. Under time and materials billing
25
<PAGE> 27
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. The Company determines the percentage of
completion of its contracts by comparing costs incurred to date to total
estimated costs. Contract costs include all direct labor and expenses related to
the contract performance. On a pro forma basis, fixed-price or capped-fee
billing arrangements accounted for approximately 8% and 12% of Nextera's net
revenues for the years ended December 31, 1997 and 1998, respectively. See "Risk
Factors--Fixed-Price or Capped-Fee Contracts." The Company believes that the
majority of its work will continue to be performed under time and materials
billing arrangements. Net revenues exclude reimbursable expenses charged to
clients. The Company typically bills on a monthly basis to monitor client
satisfaction and manage its outstanding accounts receivable balances.
Substantially all of the Company's net revenues are derived from clients located
in the United States and Canada. The Company's 10 largest clients accounted for
approximately 24% and 29% of pro forma net revenues for the years ended December
31, 1997 and 1998, respectively. For the years ended December 31, 1997 and 1998,
none of the Company's clients individually accounted for 10% or more of the
Company's pro forma net revenues. See "Risk Factors--Concentration of Net
Revenues Within a Relatively Limited Number of Clients and Industries."
Gross profit is derived from net revenues less the cost of revenues, which
includes salaries, bonuses and benefits paid to consultants. Nextera's 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). The Company monitors its engagements to manage billing and
utilization rates. The Company derives a substantial majority of its net
revenues from engagements billed on a time and materials basis. The Company is
generally able to pass increases in its cost of revenues along to its clients to
the extent that the Company bills engagements on a time and materials basis. The
Company generally is unable to pass along increases in its cost of revenues with
respect to engagements billed on a fixed-price or capped-fee basis. Generally,
clients are billed for expenses incurred by Nextera on the clients' behalf. In
addition, Nextera closely monitors and attempts to control expenses that are not
passed through to its clients. Incentive compensation expenses paid to
consultants have a large variable component relating to net revenues and profit
and, therefore, vary based upon the Company's ability to achieve its 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
the Company's development of new business and with the Company's 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 the Company's ability to achieve its operating objectives.
Through December 31, 1998, the Company and certain of its subsidiaries were
treated as partnerships for federal and state income tax purposes and all items
of income, expense and tax credits were passed through to their respective
equity holders. Business Performance Solutions (formerly named Symmetrix, Inc.
("Symmetrix")) and Pyramid, two of the Company's wholly owned subsidiaries, were
subject to income taxes for periods ended prior to January 1, 1999. The
Company's 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. As of December 31, 1998,
Business Performance Solutions had pre-acquisition net operating loss
carryforwards of approximately $5.8 million which arose principally as a result
of disqualifying dispositions of Business Performance Solutions' previously
outstanding stock options. As a result of the ownership change of Business
Performance Solutions upon its acquisition by the Company, these net operating
loss carryforwards are subject to limitations under the Internal Revenue Code.
See Note 6 of Notes to the Company's Consolidated Financial Statements.
Effective December 31, 1998, as a result of the Exchange Transaction, the
Company changed its form of incorporation and became subject to income taxes.
The Company's 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 nondeductible goodwill amortization, utilization of
post-acquisition net operating losses, state and local taxes and nondeductible
meal expenses.
26
<PAGE> 28
ACQUISITIONS
All acquisitions completed by Nextera have been accounted for under the
purchase method of accounting. Accordingly, the historical Consolidated
Financial Statements of the Company included in this Prospectus include
operating results of the Acquired Companies only from the effective date of each
respective acquisition and are not necessarily indicative of the future
financial condition or results of operations of the Company.
Effective July 30, 1997, Nextera acquired Symmetrix, a Massachusetts-based
management consulting and technology consulting company, which has been renamed
Nextera Business Performance Solutions Group, Inc. Through Business Performance
Solutions, the Company offers enhanced services in acquisition due diligence,
customer profitability, IT strategy assessment and design, construction, and
deployment of complete business systems. Business Performance Solutions was
acquired for $15.5 million in cash.
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. Through SiGMA, the Company offered
consulting services focusing on change management and helping organizations
improve core business processes, including product development, manufacturing
and distribution, sales, and enterprise management. SiGMA was acquired for $10.0
million in cash and 669,000 shares of Class A Common Stock. Effective December
31, 1998, the Company transferred all of the membership interests of SiGMA to
Business Performance Solutions. SiGMA subsequently liquidated and dissolved and
distributed all of its assets to Business Performance Solutions.
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. Through
PTG, the Company offers strategy formulation, strategic planning process design,
and business process assessment and redesign services. PTG was acquired for $6.7
million in cash and 214,000 shares of Class A Common Stock.
Effective March 31, 1998, the Company acquired Pyramid, a California-based
consulting and technology firm. Through Pyramid, the Company offers consulting
services focused on providing technology-based solutions within the areas of
knowledge management, electronic commerce, customer management, and human
capital management. Pyramid was acquired for $9.2 million in cash and 586,667
shares of Class A Common Stock. In addition, the Company agreed to an earn-out
provision providing for the payment of up to an additional $0.8 million in cash
and 53,333 shares of Class A Common Stock upon the achievement of certain
revenue and pre-tax profit targets related to the performance of Pyramid during
the twelve months ending March 31, 1999.
Effective August 31, 1998, Nextera acquired substantially all the assets
and assumed certain liabilities of Sibson & Company, L.P. and acquired Sibson
Canada, Inc., human resources consulting firms based in New Jersey and Toronto,
Canada, respectively. Through Sibson, the Company provides human capital
consulting services offering human resource strategies, outsourcing assessments,
organizational designs, rewards/ incentives programs, performance management
processes and systems, and executive coaching services. Sibson also serves sales
and marketing organizations with sales strategy, selling process, sales channel
and selling effectiveness consulting. Sibson was acquired for $37.4 million in
cash and 2,613,087 shares of Class A Common Stock and the Exchangeable Shares
which may be exchanged at the option of the holders into 197,813 shares of Class
A Common Stock.
Effective December 31, 1998, the Company acquired Lexecon, an
Illinois-based economic consulting firm. Through Lexecon, Nextera provides a
full range of economic consulting services, including economic, financial and
statistical analysis and expert testimony, which are predominately used in
matters relating to complex litigation and regulatory proceedings. Lexecon was
acquired for $31.1 million in cash, 2,816,000 shares of Class A Common Stock and
the Lexecon Contingent Shares to be determined based on the price per share of
the Class A Common Stock in the Offering. The number of Lexecon Contingent
Shares to be issued will range from a minimum of 231,440 shares if the price per
share in the Offering is $17.50 or higher to a maximum of 1,450,240 shares if
the price per share in the Offering is $12.50 or less. Assuming the price per
27
<PAGE> 29
share of the Class A Common Stock in the Offering is $14.00, 993,520 Lexecon
Contingent Shares will be issued. However, if the Offering does not occur on or
prior to February 29, 2000, all 1,450,240 Lexecon Contingent Shares will be
deemed issued and simultaneously redeemed by the Company at a price of $7.65 per
share, which will require the Company to pay approximately $11.1 million in cash
to the former stockholders of Lexecon. The value of the Lexecon Contingent
Shares actually issued will increase the amount of goodwill the Company records
in connection with the Lexecon Acquisition. Nextera's obligation to effect the
foregoing redemption of the Lexecon Contingent Shares was guaranteed by
Knowledge Universe in consideration for the issuance of warrants to purchase
250,000 shares of Class A Common Stock. See "Certain Transactions--Guaranty and
Warrants to Purchase Class A Common Stock."
Effective January 29, 1999, the Company acquired Alexander, a United
Kingdom-based human resources consulting firm. Through Alexander, Nextera
provides human capital consulting services including leadership development,
culture change, team performance and individual coaching. Alexander was acquired
for L300,000 (approximately $490,000 as of January 29, 1999) and 150,000 shares
of Class A Common Stock, subject to post-closing adjustments. In addition, the
Company will pay an earn-out of up to an additional L700,000 over a three-year
period depending upon Alexander's satisfaction of certain performance criteria.
Effective February 21, 1999, the Company executed a nonbinding term sheet
to acquire The Economics Resource Group, Inc. ("ERG"), a Massachusetts-based
consulting firm that provides economic and strategic services primarily to
energy and other regulated industries. The transaction consideration is expected
to be up to $12 million in cash, subject to post-closing adjustment based upon
specified financial performance criteria for ERG, and the assumption of
specified liabilities. The Company proposes to enter into service agreements
with the principal stockholders of ERG and may enter into employment agreements
with other key ERG employees. The service agreements are expected to provide,
among other things, for the issuance of options to purchase Class A Common Stock
to the principal stockholders of ERG based on prior cash compensation paid to
such individuals. The transaction is subject to the Company's due diligence
review of ERG and other customary closing conditions. No assurance can be made
that the Company will consummate this acquisition or that the terms of such
acquisition will not vary from those anticipated at this time.
Effective February 23, 1999, the Company executed a nonbinding term sheet
to acquire NeoEnterprises, Inc. ("NeoEnterprises"), a Connecticut-based
electronic commerce, or "e-commerce," consulting and development company. If
this acquisition is completed, the Company will develop and provide e-commerce
services to clients. The transaction consideration is expected to be 86,000
shares of Class A Common Stock. NeoEnterprises is expected to be merged into
Pyramid as a part of the acquisition. James K. Burns, the sole stockholder of
NeoEnterprises, became an employee of the Company effective February 1, 1999.
See "Management -- Directors, Executive Officers, and Other Senior Managers." It
is anticipated that Mr. Burns will receive an earn-out of up to an additional
84,000 shares of Class A Common Stock over a five-year period depending upon
Pyramid's satisfaction of certain performance criteria. No assurance can be made
that the Company will consummate this acquisition or that the terms of such
acquisition will not vary from those anticipated at this time.
28
<PAGE> 30
RESULTS OF OPERATIONS
The following table sets forth the Company's results of operations for the
periods indicated. This information for quarterly periods has been prepared on
the same basis as the Consolidated Financial Statements and, in the opinion of
the Company's management, reflects all adjustments (consisting only of normal
and recurring adjustments and adjustments related to the Company's equity
recapitalization) necessary for the fair presentation of the information for the
periods presented.
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 26, 1997
(DATE OF INCEPTION) FOR THE FOR THE THREE MONTHS ENDED
THROUGH YEAR ENDED --------------------------------------------------------------
DECEMBER 31, DECEMBER 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1997 1998 1997(1) 1997 1997 1998 1998
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues......... $ 7,998 $ 67,590 $ -- $ 3,039 $4,959 $ 8,186 $13,909
Cost of revenues..... 4,718 44,985 -- 1,851 2,867 5,623 9,315
------- -------- ----- ------- ------ ------- -------
Gross profit....... 3,280 22,605 -- 1,188 2,092 2,563 4,594
Selling, general and
administrative
expenses........... 5,306 23,103 987 1,848 2,471 2,886 4,410
Amortization
expense............ 255 1,722 -- 101 154 224 344
Restructuring
costs(2)........... -- 1,298 -- -- -- -- --
Compensation
expense--
other(3)........... -- 6,671 -- -- -- -- --
------- -------- ----- ------- ------ ------- -------
Loss from
operations....... (2,281) (10,189) (987) (761) (533) (547) (160)
Interest income
(expense), net..... (32) (6,723) 3 8 (43) (1,567) (1,104)
------- -------- ----- ------- ------ ------- -------
Loss before
provision for
income taxes..... (2,313) (16,912) (984) (753) (576) (2,114) (1,264)
Provision for income
taxes.............. 702 243 -- 280 422 125 75
------- -------- ----- ------- ------ ------- -------
Net loss........... $(3,015) $(17,155) $(984) $(1,033) $ (998) $(2,239) $(1,339)
======= ======== ===== ======= ====== ======= =======
<CAPTION>
FOR THE THREE MONTHS ENDED
----------------------------
SEPTEMBER 30, DECEMBER 31,
1998 1998
(IN THOUSANDS)
<S> <C> <C>
Net revenues......... $17,486 $28,009
Cost of revenues..... 12,641 17,406
------- -------
Gross profit....... 4,845 10,603
Selling, general and
administrative
expenses........... 7,279 8,528
Amortization
expense............ 466 688
Restructuring
costs(2)........... 967 331
Compensation
expense--
other(3)........... -- 6,671
------- -------
Loss from
operations....... (3,867) (5,615)
Interest income
(expense), net..... (1,648) (2,404)
------- -------
Loss before
provision for
income taxes..... (5,515) (8,019)
Provision for income
taxes.............. -- 43
------- -------
Net loss........... $(5,515) $(8,062)
======= =======
</TABLE>
- ------------------------------
(1) During the period from February 26, 1997 (date of inception) through March
31, 1997, the Company incurred expenses of $34,000 which are included in the
three months ended June 30, 1997.
(2) Restructuring costs are related to Business Performance Solutions.
(3) Results from cash payments and fully-vested stock options granted to certain
non-stockholder key executives of Lexecon.
29
<PAGE> 31
The following table sets forth, for periods indicated, the percentage
relationship to net revenues of the Company's results of operations. This
information for quarterly periods has been prepared on the same basis as the
Consolidated Financial Statements and, in the opinion of the Company's
management, reflects all adjustments (consisting only of normal and recurring
adjustments and adjustments related to the Company's equity recapitalization)
necessary for the fair presentation of the information for the periods
presented.
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 26, 1997
(DATE OF INCEPTION) FOR THE FOR THE THREE MONTHS ENDED
THROUGH YEAR ENDED --------------------------------------------------------------
DECEMBER 31, DECEMBER 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1997 1998 1997 1997 1997 1998 1998
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues......... 100% 100% -- 100% 100% 100% 100%
Cost of revenues..... 59 67 -- 61 58 69 67
---- --- ---- ---- ---- ---- ---
Gross profit....... 41 33 39 42 31 33
Selling, general and
administrative
expenses........... 66 34 61 50 35 32
Amortization
expense............ 3 3 3 3 3 2
Restructuring
costs.............. -- 2 -- -- -- --
Compensation
expense--other..... -- 10 -- -- -- -- --
---- --- ---- ---- ---- ---- ---
Loss from
operations....... (29) (15) (25) (11) (7) (1)
Interest income
(expense),
net................ 0 (10) 0 (1) (19) (8)
---- --- ---- ---- ---- ---- ---
Loss before
provision for
income taxes..... (29) (25) (25) (12) (26) (9)
Provision for income
taxes.............. 9 -- 9 8 1 1
---- --- ---- ---- ---- ---- ---
Net loss........... (38%) (25%) (34%) (20%) (27%) (10%)
==== === ==== ==== ==== ==== ===
<CAPTION>
FOR THE THREE MONTHS ENDED
----------------------------
SEPTEMBER 30, DECEMBER 31,
1998 1998
<S> <C> <C>
Net revenues......... 100% 100%
Cost of revenues..... 72 62
--- ---
Gross profit....... 28 38
Selling, general and
administrative
expenses........... 42 30
Amortization
expense............ 3 2
Restructuring
costs.............. 6 1
Compensation
expense--other..... -- 24
--- ---
Loss from
operations....... (22) (20)
Interest income
(expense),
net................ (9) (9)
--- ---
Loss before
provision for
income taxes..... (32) (29)
Provision for income
taxes.............. -- --
--- ---
Net loss........... (32%) (29%)
=== ===
</TABLE>
In light of the Company's inception on February 26, 1997, the number of
acquisitions completed and the absence of significant operations through June
30, 1997, management has decided to present a comparison of results for (i) the
three months ended December 31, 1998 versus the three months ended September 30,
1998, (ii) the three months ended September 30, 1998 versus the three months
ended June 30, 1998, (iii) the three months ended June 30, 1998 versus the three
months ended March 31, 1998, and (iv) the three months ended March 31, 1998
versus the three months ended December 31, 1997, because it believes that such
comparisons are the most meaningful presentation of the Company's operating
results.
All acquisitions completed by Nextera have been accounted for under the
purchase method of accounting. Accordingly, the historical Consolidated
Financial Statements of the Company included in the Prospectus include operating
results of the Acquired Companies only from the date of each respective
acquisition. As the Lexecon Acquisition was consummated on December 31, 1998 and
Alexander was acquired by the Company in January 1999, the following
period-to-period comparisons do not reflect the results of Lexecon or Alexander.
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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. See "Business -- Legal Proceedings" for a discussion of other issues
related to this contract.
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 Sibson
Acquisitions. 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 ended
September 30, 1998. The dollar increase was due primarily to the inclusion of
the Sibson Acquisitions 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 charge 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. See "Certain
Transactions--Management Agreement."
Interest Income (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 Sibson Acquisitions on August 31, 1998. See
"Liquidity and Capital Resources," "Use of Proceeds" and Note 9 of Notes to the
Company's Consolidated Financial Statements.
Restructuring. 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, renamed Business Performance Solutions. 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. The accounting
for the Company's restructuring plan and its related exit costs is in compliance
with EITF 94-3.
Compensation Expense--Other. 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"). The
number of shares of Class A Common Stock subject to the Reserved Options will be
determined based on the initial public offering price per share of the Class A
Common Stock, ranging from a minimum of 31,560 shares if the initial public
offering price per share is $17.50 or higher, to a maximum of
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197,760 shares if the initial public offering price per share is $12.50 or less.
However, if the Offering does not occur on or prior to February 29, 2000, all
197,760 Reserved Options will be deemed issued and exercised, and the Class A
Common Stock acquired upon such exercise will be redeemed by the Company at a
price of $7.65 per share, which will require the Company to pay approximately
$1.2 million in cash to such non-stockholder key executives of Lexecon, net of
the proceeds for the exercise of such 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. The Company will incur additional compensation expense related to the
Reserved Options at the time the number of shares of Class A Common Stock
subject to the Reserved Options is determined.
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 Sibson Acquisitions. 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 Sibson Acquisitions 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. See "Certain
Transactions--Management Agreement," and "--Investments in the Company."
Interest Income (Expense), Net. Interest expense 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 to finance the Sibson Acquisitions. See "Liquidity and
Capital Resources," "Use of Proceeds" and Note 9 of Notes to the Company's
Consolidated Financial Statements.
Restructuring. During the three months ended September 30, 1998, the
Company recorded restructuring costs of $1.0 million related to Business
Performance Solutions. 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.
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.
No net revenues from PTG or Pyramid were recorded by Nextera in the three months
ended March 31, 1998.
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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 Income (Expense), Net. Interest expense 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. See "--Liquidity and Capital Resources,"
"Use of Proceeds" and Note 9 of Notes to the Company's Consolidated Financial
Statements.
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. No net revenues from SiGMA were recorded by Nextera 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 Income (Expense), Net. Net interest expense 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. See "--Liquidity and
Capital Resources," "Use of Proceeds" and Note 9 of Notes to the Company's
Consolidated Financial Statements.
CERTAIN FIRST QUARTER 1999 COMPENSATION EXPENSE
The Company anticipates granting to certain non-employee consultants of
Lexecon options to purchase 445,149 shares of Class A Common Stock at an
exercise price of $14.00 per share in March 1999. Such options will be
fully-vested upon grant. The Company will account for the issuance of such
options in
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accordance with EITF 96-18 and will record a non-cash compensation charge of
$4.4 million in the three months ended March 31, 1999. Such charge represents
the estimated fair value of the options calculated using the Black-Scholes
model.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has funded its operations and its short term and long
term liquidity needs through the proceeds of equity issuances and borrowings.
Nextera LLC initially issued common and preferred equity units between February
1997 and April 1998 for total proceeds of approximately $50.0 million. On April
30, 1998, in connection with the recapitalization of Nextera LLC, the preferred
units and a portion of the common units were converted into the Debentures. The
Debentures accrue interest at 10% per annum, and interest on the principal
amount of the Debentures was deemed to have begun to accrue on the date the
respective equity capital contributions were originally made. The total
Debentures outstanding, including accrued interest, at December 31, 1998 was
$53.1 million. The Debentures were amended in connection with the Lexecon
Acquisition with respect to future interest rate provisions and conversion into
preferred stock on substantially equivalent terms and to provide that, in the
event the Bridge Loan remains unpaid following its maturity, the interest rate
will increase to 200 basis points over the interest rate on the Bridge Loan. See
"Certain Transactions--Investments in the Company," "--Amendment of the
Debentures," and Note 12 of Notes to the Company's Consolidated Financial
Statements.
SHORT-TERM LIQUIDITY
On August 31, 1998, the Company entered into the Bridge Loan, which was
amended on December 31, 1998 in connection with the Lexecon Acquisition. The
Bridge Loan is secured by substantially all of the Company's assets and contains
certain restrictive covenants. The Bridge Loan provides for financing in the
amount of $77.5 million, of which $38.0 million was used to finance the Sibson
Acquisitions, $31.1 million was used to finance the Lexecon Acquisition, $4.2
million was used to finance the payment of bonuses to certain non-stockholder
key executives of Lexecon and $2.2 million was used for general corporate
purposes, including working capital. The Bridge Loan bears interest at 12% per
annum and matures on April 30, 1999. Prior to December 31, 1998, the Bridge Loan
bore interest at the rate of LIBOR plus 450 basis points. As of December 31,
1998, $75.8 million of principal and interest was outstanding under the Bridge
Loan, which will be repaid with a portion of the net proceeds of the Offering.
See "Use of Proceeds," "Certain Transactions--Bridge Loan Amendment" and
"Underwriting." Principally as a result of the Bridge Loan, as of December 31,
1998, the Company had a working capital deficit of $65.8 million. Subsequent to
December 31, 1998, the Company drew down an additional $2.0 million under the
Bridge Loan to finance the acquisition of Alexander and for other general
corporate purposes.
Net cash used in operating activities was $5.5 million for the year ended
December 31, 1998. The primary component of the net cash used in operations was
a net loss of $17.2 million, which was partially offset by depreciation and
amortization of $2.8 million, an increase in accounts payable and accrued
liabilities of $4.3 million, and an increase in accrued interest related to the
Debentures of $5.2 million.
Net cash used in investing activities was $97.4 million for the year ended
December 31, 1998. The primary components of the net cash used in investing
activities were (i) the acquisition of SiGMA in January 1998, the acquisition of
PTG in March 1998, the acquisition of Pyramid in March 1998, the Sibson
Acquisitions in August 1998 and the Lexecon Acquisition in December 1998,
totalling $96.1 million, exclusive of $0.9 million of cash acquired and (ii)
expenditures of $2.2 million for furniture, equipment and leasehold
improvements. See Note 1 of Notes to the Company's Consolidated Financial
Statements.
Nextera, principally through the Acquired Companies, had an aggregate of
$11.0 million under credit facilities (collectively, the "Credit Facilities") as
of December 31, 1998. Interest rates on the Credit Facilities are based on prime
or commercial paper interest rates plus margins varying from prime plus 25 basis
points to prime plus 100 basis points. The Credit Facilities are secured by
substantially all of the assets of the applicable
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borrower. Collectively, $6.2 million was outstanding under the Company's Credit
Facilities at December 31, 1998 and bore interest at a weighted average rate of
8.5%. Certain of the Credit Facilities contain restrictive covenants relating to
maintenance of financial ratios, operating restrictions, and restrictions of the
payment of dividends from certain Acquired Companies to Nextera. However, the
Credit Facilities do not restrict the incurrence of indebtedness by Nextera at
the parent company level.
LONG-TERM LIQUIDITY
The Company intends to consolidate these Credit Facilities in a new credit
arrangement to provide working capital and financing for potential acquisitions.
Toward this end, the Company has initiated discussions with several commercial
banks for the establishment of a senior credit facility which would be effective
after the completion of the Offering. The Company is also evaluating alternative
sources of financing, although no firm commitments exist as of the date of this
Prospectus. There can be no assurance that such new credit arrangement or
alternative arrangements will be obtained, and if so, when and on what terms.
The Company believes that the cash flow expected to be generated from
operations, together with available borrowings under the Credit Facilities, will
be sufficient to finance the Company's currently anticipated capital
requirements for at least the next twelve months, excluding potential
acquisitions. The Company may require significant amounts of cash for any future
acquisitions. There can be no assurance that the Company will be able to obtain
financing for any such acquisition, including ERG. In addition, there can be no
assurance that the Company's actual needs will not exceed anticipated levels or
that the Company will generate sufficient net revenues to fund its operations in
the absence of other sources. There also can be no assurance that any additional
required financing will be available through additional bank borrowings, debt or
equity offerings or otherwise, or that if such financing is available, that it
will be available on terms favorable to the Company.
YEAR 2000 COMPLIANCE
Many currently installed computer systems are coded to accept only two
digit entries in the date code field. These date code fields need to be modified
or upgraded to accept four digit entries to distinguish 21st century dates from
20th century dates. Many organizations are expending significant resources to
modify or upgrade their computer systems for such "Year 2000" compliance. These
expenditures may result in reduced funds available to purchase the types of
services offered by the Company as resources that might otherwise be directed
towards the purchase of outside consulting services are utilized for Year 2000
compliance. Any such reduction in the purchase of the types of services offered
by Nextera could materially adversely affect the Company's business, operating
results and financial condition.
The Year 2000 issue affects the Company's internal systems, including IT
and non-IT systems. Nextera has completed an assessment of its IT systems,
including the systems of the Acquired Companies, for Year 2000 compliance. The
Company relies upon microprocessor-based personal computers and commercially
available applications software. Nextera is in the process of upgrading the
existing computer software and IT systems of the Company, including the Acquired
Companies. The Company is reviewing its utility systems (heat, light,
telephones, etc.) and other non-IT systems for the impact of Year 2000.
Additionally, should the Company undertake future acquisitions, the Year 2000
risks that affect the Company can be expected to similarly affect such
acquisition candidates. The Company intends to review the systems of all
acquisition candidates for Year 2000 compliance. However, the failure to correct
a material Year 2000 problem either within the Company, including any of the
Acquired Companies, within a vendor or supplier or within an acquisition
candidate could result in an interruption in, or a failure of, certain normal
business activities or operations of the Company. Such interruptions or failures
could materially adversely affect the Company's business, operating results and
financial condition.
The Company depends on smooth and timely interactions with its vendors,
clients and other third parties. Any unexpected costs or disruption in the
operations or activities of such vendors, clients or other third parties as a
result of Year 2000 compliance issues within such entities could materially
adversely affect Nextera's business, operating results or financial condition.
The Company intends to take continuous steps to identify
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Year 2000 problems related to its vendors and to formulate a system of working
with key third-parties to understand their ability to continue providing
services and products through the change to Year 2000. The Company intends to
work directly with its key vendors, including financial institutions and
utility-providers, and partner with them if necessary, to avoid any business
interruptions.
The Company believes the most likely worst case scenario related to Year
2000 risks is a material business interruption that leads to client
dissatisfaction and the termination of a project or projects by dissatisfied
clients. Such an interruption in services could occur due to a breakdown in any
number of the Company's computer systems and applications and non-IT systems, or
the systems of third-parties. Examples are failures in the Company's application
software, computer chips embedded in equipment, supply of materials from its
suppliers, or lack of adequate telecommunications, power, or other utilities.
Any such failure could prevent the Company from being able to deliver its
services as expected, which could materially adversely affect the Company's
business, operating results and financial condition.
The cost of the Company's Year 2000 compliance assessment and upgrade is
being funded from current operations. As of December 31, 1998, the cost to the
Company of its Year 2000 identification, assessment, remediation and testing
efforts, as well as currently anticipated costs to be incurred by the Company
with respect to Year 2000 issues of third parties, was expected to be less than
$200,000. Because of the uncertainty associated with Year 2000 failures, it is
not possible at present to quantify the cost of corrective actions. The Company
will continue to consider the likelihood of a material business interruption due
to the Year 2000 issue, and, if necessary, implement appropriate contingency
plans. Since the Company has adopted a plan to address these Year 2000 issues,
it has not developed a comprehensive contingency plan should these issues fail
to be completed successfully or in their entirety. However, if the Company
identifies significant risks or is unable to meet its anticipated timeline, the
Company will develop contingency plans as deemed necessary at that time. There
can be no assurance that unexpected Year 2000 compliance problems of either the
Company or its vendors, customers and service providers will not materially
adversely affect the Company's business, operating results and financial
condition.
The Company has in the past and may in the future perform services related
to the planning, implementation and testing of Year 2000 compliance work for its
clients. Failure to timely or accurately perform these services could cause a
client to experience failures of one or more key systems or result in
miscalculations causing material disruptions of one or more of a client's
operations, including an inability to process transactions or engage in business
activities. Disruptions in a client's operations and the variability of
definitions of "compliance" with the Year 2000 could lead to lawsuits against
the Company. The outcome of such lawsuits and the impact on the Company are not
estimable at this time. A claim for product or service liability brought against
Nextera related to its Year 2000 consulting could result in substantial cost to
the Company and divert management's attention from Nextera's operations, which
could materially adversely affect the Company's business, operating results and
financial condition.
RECENT 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 bivalence 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 qualified for hedge accounting. SFAS 133 is
effective beginning in 2000. The adoption of SFAS 133 is not expected to have a
material impact on the financial position or results of operations of the
Company.
In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use ("SOP 98-1"). SOP 98-1 requires companies to
capitalize qualifying computer software costs that are incurred during the
application development stage and amortize them over the software's estimated
useful life. The Company adopted the provisions of SOP 98-1 effective January 1,
1998 and capitalized costs totaling $349,000 in accordance with its provisions.
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BUSINESS
THE COMPANY
Nextera Enterprises, Inc. provides leading-edge consulting services focused
on business strategy, economic analysis, operations improvement, organizational
design and IT primarily to Fortune 500 and other multinational companies and
government agencies. The Company provides services in four practice areas, which
enables it to offer a broad range of complementary services that assist clients
in achieving enhanced business performance by anticipating and addressing their
complex, multi-disciplinary consulting needs. Nextera helps organizations
redefine the way in which existing work is conducted or new businesses and
markets are entered by analyzing underlying strategic and economic issues
affecting business performance, redesigning operational processes and business
practices, defining and managing major change initiatives, and using emerging
information technologies (such as web-based technologies and electronic
commerce) to support new strategic approaches.
The Company's portfolio of practice areas includes Strategy and Research
Services, Process Transformation Services, Human Capital Services, and
Information Technology Consulting Services. The Strategy and Research Services
practice provides in-depth business and economic analyses of business
conditions, relevant business frameworks and business practices. Through the
Strategy and Research Services practice area, Nextera assists senior management
in proactively developing, refining and managing business strategies, action
plans and core competencies, provides litigation support, including expert
testimony, principally in antitrust and securities matters, and also furnishes
focused research on a number of issues of client concern. The Process
Transformation Services practice helps organizations solve complex operational
issues through major business transformation programs, redesigned business
processes, and best practices adaptation. The Human Capital Services practice
assists clients in implementing organizational and strategic changes established
by senior management through all levels of the organization. The Information
Technology Consulting Services practice applies emerging technologies such as
web-based technologies and electronic commerce to design and develop high impact
business process support systems and knowledge management systems.
Nextera's flexible delivery model, which is designed to bring together
required expertise in business strategy and research, operations improvement,
organizational design and IT consulting, enables it to provide timely and
unbiased perspectives on clients' enterprise-wide management problems and to
cost-effectively implement multi-disciplinary solutions. The Company's breadth
of expertise enables it to deliver services initially in any of its four
practice areas and offers opportunities to expand the scope of its engagements
to include complementary or follow-on services in other practice areas. The
Company provides its services across a broad spectrum of industries, including
communications, consumer products, diversified services, energy, entertainment,
financial services, government, health care, insurance, manufacturing, media,
retail and technology. Representative clients include America Online, Inc., The
Chubb Corporation, Duke Energy Corporation, International Business Machines
Corporation, MCI WorldCom, Inc., Mead Johnson & Company, National Broadcasting
Company, Inc., SmithKline Beecham, PLC and the United States Department of
Justice.
The Company was founded in February 1997 by executives with extensive
experience at major consulting firms and industry-leading companies. The Company
has focused on building its portfolio of practice areas through selective
acquisitions and, to a lesser extent, internal growth to provide a balanced
perspective on the problems and issues facing its clients in today's competitive
environment. As of December 31, 1998, Nextera had 600 employees, including 429
consultants.
INDUSTRY BACKGROUND
Change is one of the most important factors driving demand for professional
consulting services. Increased competition, regulatory changes, globalization,
technological advances, and evolving organizational models are leading to
changes in the business environment. Traditional barriers to competition are
becoming less effective in protecting competitive positions. Regulatory changes
have led to increased competition both from within industries and from new
entrants from other market sectors. Commercial activity is becoming increasingly
global, requiring consideration of both domestic and international operations in
strategic decision-
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making and resource utilization. With the advent of the Internet and electronic
commerce, technology is increasingly being used in a variety of innovative,
strategic ways to create new products and services, open new sales and marketing
channels, and reduce costs and time-to-market for products and services.
Moreover, business and IT strategies continue to converge as organizations
recognize that technology can create new business opportunities as well as
support existing business. The increasingly complex and dynamic business
environment is also forcing government agencies to frequently adjust their
regulatory strategies, leading to an increased need for businesses to understand
the underlying economic issues affecting business strategies and performance. In
response to these challenges and opportunities, organizations are altering
traditional approaches to overall strategy, business processes, organizational
design, and the use of IT.
Many organizations lack the skilled personnel, technical capabilities, and
time necessary to formulate strategies and implement changes needed to benefit
from these new challenges and opportunities. In addition, organizations must
continually keep pace with new technological and competitive developments, which
further strain internal resources. Moreover, organizations expect timely and
substantial economic returns from their investments in strategic initiatives and
organizational change. As a result, many organizations are increasingly
retaining third-party professionals for help and expertise.
Demand for professional consulting services is expected to grow rapidly.
According to an industry source, the worldwide market for professional
consulting services is estimated to have been $46.3 billion in 1997, and is
projected to increase to $88.5 billion in 2002. It is estimated that the
worldwide market for strategy and business consulting services will grow at an
annual rate of 12%, from $19.9 billion in 1997 to $34.9 billion in 2002. The
worldwide market for IT consulting is estimated to grow at an annual rate of
14%, from $12.7 billion in 1997 to $24.8 billion in 2002. It is estimated that
the worldwide market for custom application development and integration will
grow at an annual rate of 15%, from $13.7 billion in 1997 to $28.8 billion in
2002. Moreover, the Company believes that the professional consulting services
industry is highly fragmented and will experience consolidation as service
providers seek to expand and enhance service to clients.
Professional consulting services have traditionally been focused on issues
of business strategy, operations improvement, organizational design, and IT
consulting. Historically, consulting service providers have offered services
focusing on one or two of these issues and few providers have had the breadth of
expertise or comprehensive approach to providing services to address effectively
multi-disciplinary business problems. For example, service providers oriented
around strategy formulation and market assessment often provide some expertise
in addressing operational or organizational issues, but typically do not address
IT issues or opportunities.
Given the rapidly changing nature of today's business environment,
traditional approaches do not provide the broad perspective or range of
expertise required for a comprehensive examination of the causes of business
problems. Consequently, consulting service providers employing traditional
approaches do not offer the types of integrated solutions critical to solving
the multi-disciplinary problems that organizations currently face. In order to
solve such problems, organizations are demanding that third-party service
providers have experience in a breadth of practice areas. For example,
organizations increasingly seek assistance not only to formulate strategy, but
also to implement strategic processes that support ongoing strategic
decision-making. As a result, organizations now demand highly-participative,
fact-driven strategic management processes that focus on strategic objectives
and explicitly link business processes, human capital, and IT strategies.
NEXTERA ADVANTAGE
Through its portfolio of practice areas, Nextera offers a broad range of
complementary services that assist clients in achieving enhanced business
performance by anticipating and addressing their complex, multi-disciplinary
consulting needs. The Company helps organizations develop dynamic business
strategies, redesign operational processes, and enhance organizational
effectiveness needed to achieve their visions and goals. The Company's flexible
delivery model, which is designed to bring together required expertise in
business strategy and research, operations improvement, organizational design,
and IT consulting, enables Nextera to solve its
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clients' enterprise-wide management problems and deliver results which are
timely and cost-effective. The key elements of Nextera's advantage include:
Portfolio of Complementary Practice Areas. Through its portfolio of four
practice areas--Strategy and Research Services, Process Transformation Services,
Human Capital Services, and Information Technology Consulting Services--the
Company addresses its clients' needs from varying perspectives and draws on its
experience from each to provide multi-disciplinary services to its clients.
Nextera utilizes this perspective to help clients identify and examine business
problems and to develop and implement the strategic, operational, and
organizational responses needed to solve such problems and sustain performance
improvement. As a result, the Company, with its balanced perspective, offers
objective and independent services which are valued by organizations.
Experience and Expertise. Nextera's experience within industries and
practice areas enables its consultants to more fully and rapidly understand
their clients' businesses and the competitive industry environments in which
they operate. The Company's senior consulting executives average more than 20
years of consulting or industry experience and have all held senior level
positions in large organizations with management responsibility for large
numbers of consultants. Of the Company's consultants, 51% have either doctorate
or master's degrees.
Long-term Client Relationships. The Company has established long-term
relationships with numerous clients, many of whom are Fortune 500 companies.
Through these relationships, the Company gains in-depth knowledge of its
clients' businesses and industries, which facilitates the Company's
identification of other complementary services and the ability to offer timely
services to these clients. As a result of these long-term relationships, the
Company has amassed significant expertise in a wide range of industries,
including the financial services, health care, utilities, and manufacturing
industries.
Flexible Delivery Model. Nextera's flexible delivery model enables it to
provide timely and unbiased perspectives on client problems and implement
multi-disciplinary solutions. Initially, the Company is able to deliver services
in any of its practice areas and then expand the scope of its engagements to
include complementary or follow-on services in other practice areas. Nextera
delivers its services through Client Service Teams with the support of Affinity
Groups. For each engagement, Nextera establishes a Client Service Team managed
by a senior-level client service director and comprised of consultants who are
selected to provide the appropriate combination of industry experience,
functional expertise, and geographic coverage. Client service teams enhance
overall client satisfaction by enabling the senior-level client service director
to provide a single point of contact for the client and the overall team to take
a multi-disciplinary approach to engagements. Client Service Teams are supported
by Affinity Groups, which are comprised of individuals from across the Company's
practice areas as well as third-party practitioners. Affinity Group members draw
from their respective client work, industry experience, and expertise to share
knowledge and experiences and develop methodologies and tools used in the
delivery of services.
Proprietary Information System and Scaleable Infrastructure. Nextera has
developed and is expanding its proprietary information system that facilitates
synergies across its practice areas. NextNet, the foundation of the Company's IT
infrastructure, provides the backbone and architecture for a collection of
integrated applications accessed through a common, web-based user interface.
Nextera's information system enables it to share business information and
knowledge among its consultants and to effectively manage its corporate
resources. NextNet provides an interactive environment through which defined
groups, including Client Service Teams, can collaborate to solve complex client
problems. In addition to its information system, Nextera's infrastructure
incorporates recruiting, staff development and deployment, collaborative
marketing initiatives, sharing of intellectual capital, and enterprise
management systems. The Company believes that this scaleable infrastructure has
the capacity to support the Company's growth plans for the foreseeable future.
Nextera Culture. The Company emphasizes professionalism, independence, and
objectivity among its consultants, and believes that these attributes are
reflected in the quality of the services it provides to its clients. Nextera
encourages teamwork and knowledge sharing to foster the professional growth of
its consultants and enhance the delivery of services to clients. The Company
seeks to sustain high retention rates for consultants achieved by the Acquired
Companies by retaining certain key cultural elements of each
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Acquired Company. Toward this end, Nextera's compensation and incentive programs
are designed to give all consultants the ability to become equity participants
in the Company. Stability among the Company's consultants leads to consistency
in the composition of Client Service Teams and a reduced learning curve on new
projects for existing clients.
GROWTH STRATEGY
The Company's objective is to be a leading provider of consulting services
in its four practice areas. The key elements of the Company's growth strategy
include:
Expand Service Offerings through Selective Acquisitions. Nextera intends to
continue to take advantage of the highly fragmented nature of the consulting
industry by acquiring select complementary consulting businesses. The Company is
developing its business around its practice areas and intends to broaden and
enhance its substantive expertise, service offerings, and geographic coverage
through strategic acquisitions. For example, to capitalize on the growth in
electronic commerce, the Company intends to evaluate potential acquisitions
designed to strengthen its capabilities in this area. From time to time, the
Company may also evaluate selective potential acquisitions outside these
practice areas if justified by client needs and market demand.
Pursue Cross-selling Opportunities. Nextera intends to provide additional
services and expand the scope of engagements during delivery to include
follow-on complementary activities. The Company believes that its integrated
approach to its portfolio of practice areas and its ability to cross-sell will
significantly enhance its ability to establish, sustain, and expand
relationships with clients. The Company's close working relationship with its
clients affords it the opportunity to become aware of, and to help define,
additional project opportunities and to market additional capabilities to its
clients. Client service opportunities are disseminated and coordinated on-line
through Nextera's Business Development System, a proprietary NextNet application
providing company-wide access and the identification and sharing of sales,
marketing, and other business data.
Attract and Retain Key Personnel. The Company intends to attract and retain
consultants who will enhance and complement the Company's service capabilities
by fostering a creative, innovative, collaborative work environment and through
competitive compensation and incentive programs. Nextera has a national
recruiting program aimed at hiring entry-level consultants as well as
consultants with experience at major management consulting firms, IT and process
consulting firms, technology companies, and from the industries that the Company
serves. Nextera's broad client base and flexible delivery model provide its
consultants diverse client experiences for professional growth. The Company
offers its consultants the opportunity to become equity participants in the
Company and has implemented policies and programs designed to accommodate
individual needs. For example, Nextera employs a "virtual office" concept to
provide travel and relocation flexibility where appropriate.
Market the Nextera Brand Name. Nextera intends to continue to build a
common identity for the services it provides under the Nextera brand name. The
Company actively promotes its name and capabilities through its sales and
marketing activities. The Company believes that using a common brand name for
its services enhances its visibility and recognition in the market and improves
its ability to compete for new and expanded business. Nextera also believes that
its association with Knowledge Enterprises and Knowledge Universe will increase
the Company's market exposure and provide prospective client contacts and other
business opportunities.
Expand International Presence. The Company intends to expand its
international presence through the growth of existing practices and selective
acquisitions of complementary consulting businesses in international markets.
For example, Nextera recently acquired Alexander, thereby enhancing its ability
to offer human capital consulting services to the European market. The Company
believes that clients will increasingly demand a global presence from consulting
service providers and Nextera intends to continue to expand internationally to
participate in the market for global consulting services and to generate new
opportunities. Nextera's geographic priority is to expand its service offerings
in Europe within the Company's existing portfolio of practice areas.
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SERVICE OFFERINGS
The Company's portfolio of practice areas enables it to provide a breadth
of services to its clients. By offering clients a combination of business
strategy, operations improvement, organizational design, and IT consulting
services, Nextera helps clients identify and examine business problems and
develop and implement the strategic, organizational, and operational initiatives
needed to solve such problems and sustain performance improvement. Each of the
Company's practice areas has a well-articulated perspective that not only
addresses its own particular service offerings, but also promotes the logical
flow of consulting services from research to strategy to implementation and IT
processes.
For example, the Strategy and Research Services practice area provides
analyses which often demonstrate the need for organizations to develop a
business strategy to proactively respond to new competitive challenges and
assists organizations in developing such business strategy that can be
interactively managed throughout the organization. The Process Transformation
Services practice area develops the creative business processes that are
designed to yield the desired results. In order to successfully implement such
business strategy, the Human Capital Services practice area provides innovative
services to address the need for flexible organizational structures capable of
capitalizing on internal resources. Finally, the Information Technology
Consulting Services practice area develops IT infrastructure and applications
that enable clients to conduct business in new ways, support the redesigned
business processes and aid employee decision making.
The Company's four practice areas are as follows:
Strategy and Research Services. The Company provides in-depth business and
economic analyses of business conditions, relevant business frameworks, and
business practices. Nextera combines the expertise of its consultants with that
of clients, independent practitioners, and academics to provide focused research
on issues of client concern, including strategic management, merger analysis,
employment practices, corporate finance, product development, and knowledge
management. Through the Strategy and Research Services practice area, Nextera
provides litigation support, including expert testimony, principally in
antitrust and securities matters. The Company also assists organizations in
developing, refining, and implementing successful business strategies. Nextera
works with the senior management of a client to develop multiple probability
scenarios based on external market conditions as well as current and potential
operational capabilities. Through the use of IT, the Company conducts analyses
of such information, assesses alternative strategies, and provides a basis for
consensus building. For example, a major regional bank, faced with significant
market discontinuity resulting from bank consolidations and the emergence of new
competitors, sought Nextera's assistance to determine strategies for future
growth. Through an analytically rigorous scenario planning process, the Company
helped its client decide to acquire a leading competitor and invest in emerging
business opportunities that could be critical to the client's future growth. As
a result of this new strategy, the Company's client has strengthened its leading
regional market position.
Process Transformation Services. Nextera helps organizations solve complex
operational issues through major business transformation programs, redesigned
business processes, and best practices adaptation. Business transformation
programs typically involve refinement of the client's operations strategy,
examination of the existing processes and procedures, redesign of critical
processes, and identification of the cultural and organizational issues to be
addressed to successfully implement change. For example, Nextera assisted a high
technology company in re-engineering its software services business. After
analyzing the differences between existing delivery methods and best practices,
Nextera designed a new service model, then assisted the client in working with
its engineering, service, finance and marketing organizations to implement
service center consolidations, establish a new customer call handling system and
revise its service delivery and engineering management practices.
Human Capital Services. Nextera helps clients invest in and gain business
advantages from their human capital by identifying the impact on their workforce
of various strategies. The Company also assists in developing new organizational
designs by establishing programs for personnel selection, recruitment,
development, and succession, identifying the drivers of business performance,
and helping organizations achieve critical focus from their workforce through
programs to enhance "business literacy." The Company also helps clients
communicate and implement organizational changes designed to respond to new
opportunities or
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competitive threats and establish reward programs for broad employee groups,
managers and executives. For example, when a leading defense contractor
transitioned its market focus from government clients to commercial clients, it
experienced uneven earnings across diversified business units. Nextera assisted
in establishing corporate and business unit goals focused on sustaining
profitable growth and enhancing shareholder value. In addition, the Company
helped design short- and long-term incentives for the client's senior managers
that were based on the expected contribution of their individual areas of
responsibility.
Information Technology Consulting Services. Nextera helps clients use
emerging technologies to create high impact business process support systems and
knowledge management systems. The Company develops custom solutions that employ
electronic commerce and web-based technologies to redefine clients' processes
for customer service, new product development, and channel expansion. For
example, through the development of an electronic commerce application
infrastructure that supports the creation, publication and distribution of
time-sensitive information, Nextera helped a publishing company transition from
distributing financial analysts' research reports to its customers via facsimile
to providing on-line, on-demand electronic access to research. The Company also
helps clients define, manage and implement packaged solutions in finance,
customer relationship, supply chain and operations management.
The following chart illustrates the Company's portfolio of practice areas:
[PRACTICE AREAS CHART]
The chart consists of five columns and six rows. In the first column, the
following words appear in the rows, descending from the top: "Lexecon Inc.,"
"The Planning Technologies Group, L.L.C.", "Nextera Business Performance
Solutions Group, Inc.", "Sibson & Company, LLC Sibson Canada Co. The Alexander
Corporation Limited" and "Pyramid Imaging, Inc." The words "Practice Areas"
appear above columns two through five. Column two is entitled "Research and
Strategy Services." Beneath this title, a bullet point appears in rows one and
two. Column three is entitled "Process Transformation Services." Beneath this
title, a bullet point appears in the third row and a shaded diamond appears in
rows four and five. Column four is entitled "Human Capital Services". Beneath
this title is a shaded diamond in row three; a bullet point in row four, and a
shaded diamond in row five. The fifth column is entitled "Information Technology
Consulting Services". Beneath this title is a shaded diamond in row two, a
bullet point in row three, a shaded diamond in row four and a bullet point in
row five. Beneath the chart is a legend that indicates that a bullet point
symbolizes "Primary Business Focus" and a shaded diamond symbolizes "Secondary
Business Focus".
ACQUISITIONS
Since inception, the Company has made the following acquisitions:
Symmetrix, Inc. Symmetrix was founded in 1985 and acquired by the
Company effective July 30, 1997 and subsequently renamed Nextera Business
Performance Solutions Group, Inc. Through Business Performance Solutions, the
Company offers enhanced services in acquisition due diligence, customer
profitability, IT strategy assessment, and the design, construction, and
deployment of complete business systems. Business Performance Solutions
primarily offers its services to the financial services, health care, insurance,
and utilities industries. Business Performance Solutions is located in
Lexington, Massachusetts.
SiGMA Consulting, LLC. SiGMA commenced operations in 1991 and was
acquired by the Company effective January 5, 1998. Through SiGMA, the Company
offers consulting services focusing on change management and helping
organizations improve core business processes, including product development,
manufacturing and distribution, sales, and enterprise management. SiGMA
primarily offers its services to the manufacturing, high technology,
entertainment, and transportation industries. SiGMA, which employ a
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"virtual office" concept for its consultants, maintains an office in Rochester,
New York and a development center in Hudson, Massachusetts. Effective December
31, 1998, the Company transferred all of the membership interests of SiGMA to
Business Performance Solutions. SiGMA was subsequently liquidated and dissolved
and distributed all of its assets to Business Performance Solutions.
The Planning Technologies Group, Inc. PTG was founded in 1990 and
acquired by the Company effective March 31, 1998. Through PTG, the Company
offers strategy formulation, strategic planning process design, and business
process assessment and redesign services. PTG primarily offers its services to
the health care, insurance, financial services, consumer products,
manufacturing, and high technology industries. PTG is located in Lexington,
Massachusetts.
Pyramid Imaging, Inc. Pyramid was founded in 1993 and acquired by the
Company effective March 31, 1998. Through Pyramid, the Company offers consulting
services focused on providing technology-based solutions within the areas of
knowledge management, electronic commerce, customer management, and human
capital management. Pyramid primarily offers its services to the investment
banking and brokerage, investment management, commercial and retail banking,
insurance, utility, and high technology industries. Pyramid is located in San
Francisco, California and maintains an office in New York, New York.
Sibson & Company, L.P. and Sibson Canada, Inc. Sibson & Company, L.P.
and Sibson Canada, Inc. were founded in 1959 and 1993, respectively, and
acquired by the Company effective August 31, 1998. Through Sibson, the Company
provides human capital consulting services offering human resource strategies,
outsourcing assessments, organizational designs, rewards and incentives
programs, performance management processes and systems, and executive coaching
services. The Company also serves sales and marketing organizations with sales
strategy, selling process, sales channel, and selling effectiveness consulting.
Sibson primarily offers its services to the health care, financial services,
professional services, consumer products, and high technology industries. Sibson
is located in Princeton, New Jersey, and Toronto, Canada and maintains offices
in New York, New York, Raleigh, North Carolina, Los Angeles, California,
Chicago, Illinois, and London, England.
Lexecon Inc. Lexecon was founded in 1977 and acquired by the Company
effective December 31, 1998. Through Lexecon, the Company provides a full range
of economic consulting services, including economic, financial and statistical
analysis and expert testimony, which are predominantly used in matters relating
to complex litigation and regulatory proceedings. Lexecon provides expertise in
the areas of antitrust, contracts, regulatory issues, corporate finance,
intellectual property, international trade, securities, taxation and employment
practices. Lexecon serves clients across a broad range of industries, including
telecommunications, high technology and government, and is located in Chicago,
Illinois.
The Alexander Corporation Limited. Alexander was founded in 1987 and was
acquired by the Company effective January 29, 1999. Through Alexander, the
Company provides human capital consulting services including leadership
development, culture change, team performance and individual coaching. Alexander
serves clients across a broad range of industries including the pharmaceutical,
financial services, professional services, retail and consumer products and
leisure industries. Alexander is located in London, England.
NeoEnterprises, Inc. The Company has executed a nonbinding term sheet to
acquire NeoEnterprises, which was founded in 1998. NeoEnterprises is a
Connecticut-based e-commerce consulting and development company. As a part of
the acquisition, it is expected that NeoEnterprises will be merged with Pyramid.
James K. Burns, the sole stockholder of NeoEnterprises, became an employee of
the Company effective February 1, 1999. See "Management--Directors, Executive
Officers, and Other Senior Managers." Through Pyramid, the Company may develop
and provide the e-commerce services previously provided by NeoEnterprises. No
assurance can be made that the Company will consummate this acquisition or that
the terms of such acquisition will not vary from those anticipated at this time.
The Economic Resources Group, Inc. The Company has executed a
nonbinding term sheet to acquire ERG, a Massachusetts-based consulting firm that
provides economic and strategic services primarily to energy and other regulated
industries. The transaction is subject to the Company's due diligence review of
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ERG and other customary closing conditions. No assurance can be made that the
Company will consummate this acquisition or that the terms of such acquisition
will not vary from those anticipated at this time.
CLIENTS AND REPRESENTATIVE ENGAGEMENTS
The Company's clients consist primarily of Fortune 500 and other
multinational companies. On a pro forma basis, the Company's ten largest clients
accounted for approximately 24% and 29% of its net revenues for the years ended
December 31, 1997 and 1998, respectively, and no client in either such period
accounted for 10% or more of the Company's pro forma net revenues. See "Risk
Factors--Absence of Written Contracts." Nextera has served a broad range of
clients, including those in the table below, which collectively represented a
significant portion of the Company's 1997 and 1998 pro forma net revenues. This
table includes the names of clients which were the ultimate beneficiary of
Lexecon's services, although Lexecon was generally retained by law firms
representing such clients.
<TABLE>
<S> <C> <C>
MEDIA/ENTERTAINMENT FINANCIAL SERVICES MANUFACTURING
National Broadcasting BancBoston Robertson Stephens Inc. American Business Products
Company, Inc. Fleet Financial Group, Inc. BE Aerospace
Nelson Information, Inc. ING Capital Corporation Rockwell International
NationsBanc Montgomery Securities LLC Corporation
TECHNOLOGY/COMMUNICATIONS PaineWebber Group Inc.
America Online, Inc. Wells Fargo & Company HEALTH CARE
BellSouth Corporation Olsten Corporation
GTE Corporation DIVERSIFIED SERVICES Pfizer Inc
International Business Ernst & Young LLP SmithKline Beecham, PLC
Machines Corporation PricewaterhouseCoopers LLP
MCI WorldCom, Inc. Qualex, Inc. GOVERNMENT
SBC Communications Inc. Internal Revenue Service
Scientific-Atlanta, Inc. INSURANCE U.S. Department of Justice
The Chubb Corporation
CONSUMER PRODUCTS/RETAIL Massachusetts Mutual Life Insurance ENERGY
Mead Johnson & Company Metropolitan Life Insurance Company Duke Energy Corporation
Polo Ralph Lauren Southern California Edison
</TABLE>
Examples of services provided to clients in each of Nextera's practice
areas include the following:
Strategy and Research Services. A major global insurance and financial
services company retained Nextera to develop a new corporate strategy for one of
its global businesses and to identify organizational and operational changes
needed to enable the client to pursue such new strategy. The Company's
consultants worked with the client's management team in a scenario based
planning process, which developed multiple probable future scenarios based on
external market factors as well as current and potential operational
capabilities, and then conducted simulations to test the effectiveness of
various strategies against each probable scenario. Using the results of these
simulations, the client's management team worked with Nextera to gain consensus
on their strategic direction. As a result of this process, the client decided to
pursue a strategy of focused growth and diversification, including selective
acquisitions. The client then worked closely with Nextera to conduct an
organizational alignment analysis, a highly structured process designed to
identify opportunities for work reduction and cost savings and to focus an
organization on the activities critical to providing the operational and
financial leverage necessary to execute the new strategy. The client has
estimated that the organizational alignment analysis identified annual cost
savings in excess of $100 million, which are expected to provide a financial
basis for the implementation of the client's new corporate strategy.
Process Transformation Services. A subsidiary of a Fortune 500 company
retained Nextera to redesign its finance function by addressing issues of
organizational effectiveness and technology support. Working closely with the
client's financial management, the Company clarified the goals and role of the
finance function and analyzed the organizational factors and systems critical to
achieving such redesign. Nextera initiated a comprehensive solution that
modified the finance processes and standardized the client's general ledger and
financial reporting requirements. These initiatives were followed by the
Company's examination and conversion of the chart of accounts used by various
financial subsystems to conform to the new
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standardized accounting and reporting requirements. Nextera also assisted the
client in a broad variety of finance initiatives, including process
reengineering and redesign of its enterprise-wide IT architecture. The Company
believes that its services have enabled the client to realize efficiencies in
the finance function's information collection, analysis and reporting
activities.
Human Capital Services. A leading consumer services company retained
Nextera to assist in addressing productivity and quality issues which the client
believed were hindering customer satisfaction and compressing margins.
Turn-around time demanded by customers had shortened and capital costs required
in this fast-evolving business made cost management critical. Resulting downward
pressure on employee compensation was causing higher employee turnover and the
client's management team believed that its ability to hire better qualified
employees was being undermined by its compensation structure. Nextera studied
quality and productivity performance at 50 of the client's sites and identified
the critical points where the workforce had the most impact on the process.
Nextera then helped the client develop employee incentive programs tailored to
each facility's process and geared toward the leverage points that could drive
productivity, quality, and cost performance in that facility. In addition,
Nextera developed a comprehensive communication program to introduce and
implement the new programs. The Company believes that the introduction of these
programs contributed to improved quality and productivity, decreased employee
turnover and absenteeism, and reduced overtime costs.
Information Technology Consulting Services. The Equity Research division
of a leading investment banking firm retained Nextera to assist it in improving
its internal publication process and creating a new, efficient mechanism for
distributing research to its sales desk and clients. Building on the client's
existing database of its earnings estimates on hundreds of companies, Nextera
worked with the client on a requirements definition, functional specification
and project plan for a repository capable of storing all of the client's
electronic research documents so that such documents could be accessed either
through the client's intranet or home page. Nextera then helped the client
design and develop a new, scaleable IT system capable of preserving the existing
data model while supporting potential future expansion. Once developed, the
solution was integrated, tested, and installed. The entire project, from the
requirements definition to installation and integration, was executed in four
months. This system currently supports over 2,000 internal and external users
and is designed to support an annual flow of thousands of documents through the
system and to archive more than 10,000 documents. Nextera believes this system
will improve the client's service capabilities by providing faster delivery,
enabling personalized distributions to customers and generating increased
feedback on customer preferences.
FLEXIBLE DELIVERY MODEL
Nextera's flexible delivery model provides clients with the full range of
the Company's expertise through a structured multi-disciplinary approach that
focuses on the needs and problems of each individual client. The Company's
breadth of expertise enables it to deliver services initially in any of its four
practice areas and expand the scope of its engagements to include complementary
or follow-on services in other practice areas. Nextera delivers its services
through Client Service Teams with the support of Affinity Groups. The key
elements of Nextera's flexible delivery model are as follows:
Client Service Teams. For each engagement, Nextera establishes a Client
Service Team managed by a senior-level client service director and comprised of
consultants who are selected to provide the appropriate combination of industry
experience, functional expertise, and geographic coverage. Client service teams
enhance overall client satisfaction by enabling the senior-level client service
director to provide a single point of contact for the client and the overall
team to take a multi-disciplinary approach to engagements. In addition, Client
Service Teams increase visibility of potential opportunities and enhance the
Company's ability to establish strong relationships with the client's senior
executives. As a result, the Client Service Team develops an in-depth
understanding of the client's needs and focuses the Company's various service
capabilities to meet such needs, providing substantial value to the client.
Client Service Teams emphasize the Company's diverse capabilities to clients and
regularly cross-market across its practice areas.
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Affinity Groups. Client Service Teams are supported by Affinity Groups,
which are comprised of individuals from across the Company's practice areas as
well as independent consultants, specialists and academics. Affinity Group
members draw from their respective client work, industry experience and
expertise to share knowledge and best practices and develop methodologies and
tools used in the delivery of services to clients and in the training of the
Company's consultants. Affinity Groups utilize NextNet to facilitate the sharing
of information and have formal and informal meetings and discussions. The
Company has established Affinity Groups for the financial services, health care,
and utilities industries and intends to establish Affinity Groups for other key
industry sectors and practice areas as needed.
SALES AND MARKETING
Nextera employs a variety of business development and marketing techniques
to reach prospective clients, including industry seminars featuring
presentations by Company personnel, trade press coverage, an Internet site, and
authoring of articles and other publications regarding market trends, emerging
business challenges and the Company's service offerings. Nextera's marketing
leadership team, with members from each of the Acquired Companies, sets the
Company's overall marketing priorities and provides oversight to key marketing
initiatives. The principal buyers of the Company's services are chief executive
officers and other senior executives with organizational policy-making
responsibilities.
Nextera also relies to a significant extent on the efforts of its
employees, particularly its senior consulting executives and consultants, to
market the Company's services. Nextera employs a "selling practitioner" model in
which the Company's senior consulting executives are responsible for identifying
and obtaining new business as well as managing client engagements and
relationships. Consultants are encouraged to generate business from both
existing and new clients and successful efforts are rewarded with increased
compensation and promotions. Nextera's close working relationships with many of
its clients enable the Company's consultants to become aware of, and to help
define, additional project opportunities, thereby facilitating the Company's
ability to market additional capabilities to its clients. In pursuing new
business, the Company's consultants emphasize Nextera's overall capabilities and
experience while also promoting the expertise of the particular employees who
will work on the project. In addition, Nextera's senior consulting executives
meet with prospective clients and senior managers in organizations where Nextera
has worked in the past to make them aware of the Company's capabilities.
MANAGEMENT INFORMATION SYSTEM
Nextera is investing in NextNet to improve individual and organizational
performance through shared business information and knowledge. NextNet provides
the backbone and architecture for a collection of integrated applications
accessed through a common web-based user interface. NextNet facilitates rapid
delivery responsiveness by identifying the most qualified resources available
for each client engagement and encourages collaboration around resolution of
client problems, increasing quality, and expertise. The Company also utilizes
NextNet to help integrate newly acquired companies into the Company's portfolio
of practice areas and rapidly adopt Nextera's business practices and procedures.
The initial NextNet application areas are the Nextera Business Development
System, the NextHR Employee Management System, and an integrated financial
system. The Business Development System, which is updated weekly by engagement
managers of each Acquired Company, provides company-wide management of all sales
leads and business opportunities and enhances Nextera's ability to set
priorities and manage future business. The first release of the NextHR Employee
Management System will provide skills and expertise location, staffing requests,
and job posting information. A company-wide, third-party financial management
system is being implemented and will be integrated with other NextNet
applications.
In addition to its application focus, NextNet offers an interactive
environment through which user groups can share knowledge throughout the
Company. Using NextNet, members of Client Service Teams and Affinity Groups
share timely information, tools, methodologies, and insights, which are
delivered to each consultant's personalized home page, creating a focused,
interactive environment.
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<PAGE> 48
NextNet has been developed to have a flexible application architecture
capable of expanding and supporting applications in response to the Company's
growth and changing needs. A high-performance SQL database drives the data
elements of NextNet, while a full-text search engine enables knowledge
management services. Application logic is built using the latest web-development
tools, and the applications are delivered through an integrated browser
interface.
HUMAN RESOURCES
Nextera's ability to attract and retain experienced consultants to work on
client engagements and to generate new business is a key factor to Nextera's
success. As of December 31, 1998, the Company had 600 employees, including 429
consultants.
Consulting Personnel. Nextera's senior consulting executives average more
than 20 years of consulting or industry experience. Many of these senior
consulting executives are nationally recognized as experts in their respective
fields, having published articles and lectured extensively. Eleven of the
Company's senior consulting executives have founded and managed successful
management and IT consulting firms. Of Nextera's consultants, 51% have either
doctorate or master's degrees. This flexibility in staffing engagements enhances
Nextera's ability to apply its resources as needed to meet the demands of its
clients.
Recruiting. Nextera seeks to hire consultants who not only have strong
analytical skills but also are creative, intellectually curious, and driven to
develop expertise in new practice areas and industries. The Company has a
national recruiting program aimed at hiring entry-level consultants as well as
consultants with experience at major management consulting, IT and process
consulting firms, technology companies, and from the industries that Nextera
serves. Entry-level consultants are recruited from leading academic
institutions, graduate business administration programs and undergraduate IT
programs. In connection with its hiring efforts, Nextera employs internal
recruiters, retains several executive search firms, and relies on personal and
business contacts to recruit experienced consultants.
Compensation. In order to attract and retain consultants, Nextera offers
what it believes to be attractive compensation and benefits packages. Employee
compensation is a combination of base salary, bonus opportunity, and equity
participation. Consultant bonuses are paid out of bonus pools established for
each of the Acquired Companies through an annual operations planning process. A
consultant's bonus is based on the consultant's individual contributions and the
Acquired Company's performance. See "Management--Bonus Plans."
Training and Career Development. The Company has a career enhancement
program that offers its consultants career enrichment opportunities and access
to individualized training. Career development programs are specific to the
needs of each Acquired Company and all employees receive a combination of
orientation training, skills enhancement training, mentoring, and periodic
briefings. Nextera's flexible staffing methods are supported by its NextHR
Employee Management System to provide the Company's consultants with diverse and
challenging client experiences.
Outside Consultants and Independent Contractors. Through Lexecon, the
Company maintains affiliate relationships with distinguished academics. These
individuals are engaged by Nextera to give expert testimony or to participate in
client engagements. When necessary, the Company supplements its consultants on
certain engagements with independent contractors. The Company believes that its
practice of retaining independent contractors on a per-engagement basis provides
it with greater flexibility in providing specialized skills and adjusting
consultant levels in response to changes in demand for its services.
COMPETITION
The consulting services industry includes a large number of competitors, is
subject to rapid change, and is highly competitive. Nextera believes that the
principal competitive factors in the consulting services industry are
reputation, industry expertise, analytical ability, service, and price. The
Company believes it competes favorably with respect to these factors. Nextera
also believes that its ability to compete depends in part on a number of factors
outside of its control, including the ability of its competitors to hire, retain
and compensate consultants, offer lower-priced services, respond to client
requirements, and develop advanced services or technology.
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<PAGE> 49
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. In addition,
many of these competitors have been operating for a significantly longer period
of time than the Company 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. Such competition may impose
additional pricing pressures on Nextera. In addition, Nextera faces intense
competition in its efforts to recruit and retain qualified consultants. There
can be no assurance that the Company will be able to compete successfully with
its existing competitors or any new competitors.
INTELLECTUAL PROPERTY RIGHTS
The Company's success has resulted, in part, from its analytical templates,
application frameworks, software objects and customizable applications. Nextera
relies upon a combination of nondisclosure, confidentiality, license and other
contractual arrangements and trade secret, copyright and trademark laws to
protect its proprietary rights and the proprietary rights of third parties from
whom the Company licenses intellectual property. In addition, Nextera generally
limits the distribution of its proprietary information. There can be no
assurance, however, that the steps taken by Nextera to protect its intellectual
property will be adequate to deter misappropriation of proprietary information
or that the Company will be able to detect unauthorized use and take appropriate
steps to enforce its intellectual property rights or 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 no assurance can be given that
foreign copyright and trade secret laws will adequately protect the Company's
intellectual property rights. Although Nextera believes that its services do not
infringe on the intellectual property rights of others and that it has all
rights necessary to utilize the intellectual property employed in its business,
there can be no assurance that Nextera's employees will not misappropriate the
intellectual property of others. Accordingly, the Company is subject to the risk
of claims alleging infringement of third-party intellectual property rights. Any
such claims could require the Company 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. The
Company presently holds no patents or registered copyrights.
FACILITIES
The Company's corporate headquarters is located in Lexington, Massachusetts
in a leased facility consisting of approximately 6,900 square feet, under a
four-year lease that expires in 2002. The Company also occupies leased office
space in Los Angeles, California; San Francisco, California; Chicago, Illinois;
Hudson, Massachusetts; Lexington, Massachusetts; Princeton, New Jersey; New
York, New York; Rochester, New York; Raleigh, North Carolina; Toronto, Canada;
and London, England. The Company believes that its existing facilities are
adequate to meet its current requirements and that suitable space will be
available as needed on terms acceptable to the Company.
LEGAL PROCEEDINGS
In January 1999, a client sent a letter to Business Performance Solutions
purporting to terminate a fixed-price engagement with Business Performance
Solutions and asserting that, pursuant to the terms of the engagement, the
client was entitled to a refund of approximately $5.6 million of payments
previously made. Business Performance Solutions has disputed the client's right
to terminate the engagement and asserted a claim for payment for work done
through January 1999. Business Performance Solutions has errors and omissions
coverage of up to $3.0 million, less a $250,000 deductible. This matter will be
submitted to the
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<PAGE> 50
insurance carrier for a determination of coverage. Business Performance
Solutions intends to vigorously assert its rights and defend itself in any
litigation which may develop out of this situation.
Lexecon is a plaintiff in certain litigation with Milberg Weiss Bershad
Hynes & Lerach LLP ("Milberg Weiss") alleging damage to Lexecon's reputation
arising out of certain actions by Milberg Weiss and certain of its current and
former partners. Milberg Weiss is a national law firm which represents
plaintiffs in class actions, including securities litigation. In connection with
the Lexecon Acquisition, all rights, interest and liabilities with respect to
this litigation were transferred to Lexecon Enterprises, Inc., a corporation
owned by three of the former stockholders of Lexecon. Lexecon remains a named
party in the proceedings. Such former stockholders of Lexecon have agreed to
indemnify Lexecon and the Company from any losses or expenses in connection with
the litigation. The trial is expected to begin in March 1999.
From time to time the Company is 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 the
Company.
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<PAGE> 51
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER SENIOR MANAGERS
The directors, executive officers, and other senior managers of the Company
and their respective ages as of March 1, 1999, and positions are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Directors and Executive Officers
Gresham T. Brebach, Jr. ........................ 58 President, Chief Executive Officer,
and Chairman of the Board of Directors
Ronald K. Bohlin................................ 47 Chief Operating Officer and Director
Michael P. Muldowney............................ 35 Chief Financial Officer
Debra I. Bergevine.............................. 48 Vice President, Marketing
Roger Brossy.................................... 39 Managing Director, Sibson and Director
Ralph Finerman.................................. 63 Director
Steven B. Fink(1)(2)............................ 48 Director
Stanley E. Maron(2)............................. 50 Director
Michael D. Rose(1).............................. 56 Director
Richard V. Sandler(2)........................... 50 Director
Other Senior Managers
Martin G. Glavin................................ 41 Managing Director, Business Performance
Solutions
James K. Burns.................................. 51 Managing Director, E-Business, Pyramid
Mason S. Tenaglia............................... 42 Managing Director, PTG
Andrew M. Rosenfield............................ 47 Chairman, Lexecon
Dennis W. Carlton............................... 47 President, Lexecon
Daniel R. Fischel............................... 47 Principal, Lexecon
</TABLE>
- ------------------------------
(1) Member of the Compensation Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
Gresham T. Brebach, Jr. currently serves as President, Chief Executive
Officer, and Chairman of the Board of Directors of the Company, positions he has
held since its inception. Prior to founding the Company, Mr. Brebach was
Executive Vice President of Renaissance Solutions, Inc. from January 1995 to
February 1997 and was a self-employed consultant from September 1994 to December
1994. Mr. Brebach was Senior Vice President of Digital Equipment Corporation
from March 1993 to August 1994 and a Director of McKinsey & Co., a management
consulting firm, from December 1989 to March 1993. In 1988, Mr. Brebach founded
ICG, Inc., an IT consulting firm, and operated such firm until it was acquired
by McKinsey & Co. in December 1989. Prior to such time, Mr. Brebach was Managing
Partner of Andersen Consulting, North America, a leading systems integration and
consulting firm, from 1986 to 1988. Mr. Brebach also serves as a director of
Aspen Technology.
Ronald K. Bohlin currently serves as Chief Operating Officer and a Director
of the Company, positions he has held since its inception. Prior to founding the
Company, Mr. Bohlin was Senior Vice President of Renaissance Solutions from
November 1994 to February 1997. Mr. Bohlin was Vice President, Strategic
Services of Digital Equipment Corporation from October 1993 to November 1994,
Vice President, Corporate Marketing of Analog Devices, Inc. from February 1992
to October 1993 and, from 1981 to 1992, held various management and consulting
positions, including Principal, with McKinsey & Co.
Michael P. Muldowney joined the Company in May 1997 as Vice President,
Finance and currently serves as Chief Financial Officer, a position he has held
since May 1998. Mr. Muldowney is a certified public accountant and, prior to
joining the Company, Mr. Muldowney was Corporate Controller as well as a
Principal
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<PAGE> 52
of Mercer Management Consulting, Inc., ("Mercer"), from 1992 to May 1997, and
held various other financial management positions with Mercer from 1989 to 1992.
Mr. Muldowney was a Senior Auditor of Marsh & McLennan Companies, Inc. from 1986
to 1989.
Debra I. Bergevine currently serves as Vice President, Marketing of the
Company, a position she has held since April 1997. Prior to joining Nextera, Ms.
Bergevine was Director of Marketing & Investor Relations of Renaissance
Solutions, Inc. from March 1995 to April 1997. Ms. Bergevine served as Director
of Marketing and in various other management capacities with Digital Equipment
Corporation from 1980 to 1995.
Roger Brossy currently serves as Managing Director, Sibson and a Director
of the Company, positions he has held since August 1998. Mr. Brossy was elected
as a Director of the Company pursuant to a stockholders agreement. See "Certain
Transactions--Stockholders Agreement." Mr. Brossy has held various management
and consulting positions with Sibson since 1985. From 1981 to 1985, Mr. Brossy
was a consultant with Hay Associates, a human resources consulting firm.
Ralph Finerman currently serves as a Director of the Company, a position he
has held since August 1998. Mr. Finerman is the President of RFG Financial
Group, Inc., a financial consulting firm, a position he has held since 1994.
From 1983 to 1994, Mr. Finerman was in private practice as a certified public
accountant and attorney.
Steven B. Fink currently serves as a Director of the Company, a position he
has held since its inception. Mr. Fink is Vice Chairman of Knowledge Universe, a
position he has held since January 1995, and serves as an officer or director of
other privately-held affiliates of Knowledge Universe. From December 1993 to
December 1996, Mr. Fink was Vice President of MC Group, a business consulting
firm. Mr. Fink was President of East West Capital, an investment firm, from 1989
to December 1993. Mr. Fink is a director of Spring Group, PLC, a business
consulting firm.
Stanley E. Maron currently serves as a Director of the Company, a position
he has held since its inception. Mr. Maron also currently serves as a Director
of Knowledge Universe. Mr. Maron is a senior partner in the law firm of Maron &
Sandler, a Professional Corporation, which was formed in September 1994. Mr.
Maron specializes in corporate and tax law. Prior to forming Maron & Sandler,
Mr. Maron was a senior partner of Buchalter, Nemer, Fields & Younger, a law
firm, which he joined as an associate in 1975.
Michael D. Rose currently serves as a Director of the Company, a position
he has held since October 1998. Mr. Rose also currently serves as a director of
Knowledge Universe. Mr. Rose served as Chairman of the Board of Directors of
Promus Hotel Corporation from April 1995 through December 1997 and has continued
to serve as a Director since December 1997. Mr. Rose was Chairman of the Board
of Directors of Harrah's Entertainment, Inc. from June 1995 to December 1996.
From November 1989 to June 1995, Mr. Rose was Chairman of the Board of Directors
of The Promus Companies, Incorporated and also served as its Chief Executive
Officer from November 1989 to April 1994. Mr. Rose is also a Director of Ashland
Inc., First Tennessee National Corporation, General Mills, Inc., Stein Mart,
Inc., FelCor Lodging Trust, Inc., ResortQuest International, Inc. and Darden
Restaurants, Inc.
Richard V. Sandler currently serves as a Director of the Company, a
position he has held since its inception. Mr. Sandler also currently serves as
President of EDU. Mr. Sandler is a senior partner in the law firm of Maron &
Sandler, a Professional Corporation, which was formed in September 1994. Mr.
Sandler specializes in general securities and business law. Prior to forming
Maron & Sandler, Mr. Sandler was a partner of Victor & Sandler, a law firm.
Martin G. Glavin currently serves as Managing Director, Business
Performance Solutions and has held various management positions with SiGMA (now
part of Business Performance Solutions) since 1991. Prior to co-founding SiGMA,
Mr. Glavin held various management and consulting positions with KPMG Peat
Marwick from 1987 to 1991 and Price Waterhouse from 1979 to 1987.
James K. Burns currently serves as Managing Director, E-Business, Pyramid,
a position he has held since February 1999. Mr. Burns is also President and
Chairman of the Board of NeoEnterprises. From 1997 to 1998, Mr. Burns served as
Co-Chief Executive Officer and as a director of CIS, Inc., a strategic change
and
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<PAGE> 53
information technology solutions firm. From 1994 to 1997, Mr. Burns was
associated with Swiss Bank--Warburg, an investment bank, as Chief Operating
Officer of North America, a Managing Director and a member of the United States
Management Committee, among other positions. From 1992 to 1994, Mr. Burns was
Vice Chairman, Chief Operating Officer and Chief Executive Officer--United
States and Latin America of SHL Systemhouse, now MCI Systemhouse. From 1988 to
1992, Mr. Burns was Vice President and Head of Global Information Technology at
Goldman Sachs.
Mason S. Tenaglia currently serves as Managing Director, PTG and has held
various management positions with PTG since 1990. Prior to co-founding PTG, Mr.
Tenaglia was Sr. Vice President of MicroMentor, Inc., a consulting and executive
development firm, from 1986 to 1989.
Andrew M. Rosenfield currently serves as Chairman, Lexecon and has held
various management positions with Lexecon since he co-founded it in 1977. Mr.
Rosenfield also serves as a Senior Lecturer in Law at The University of Chicago
Law School. Mr. Rosenfield is also a director of UNEXT.com, LLC, an educational
services company.
Dennis W. Carlton currently serves as President, Lexecon, a position he has
held since November 1997. Mr. Carlton has held various executive positions with
Lexecon since 1977. Mr. Carlton also serves as Professor of Economics at The
University of Chicago's Graduate School of Business, a position he has held
since 1984.
Daniel R. Fischel currently serves as Principal, Lexecon, and has held
various management positions with Lexecon since 1981. Mr. Fischel also serves as
Dean of The University of Chicago Law School and has served as the Lee and Brena
Freeman Professor of Law and Business at The University of Chicago Law School
since 1989.
BOARD OF DIRECTORS
The Company's Certificate of Incorporation and its Bylaws provide that the
Company's Board of Directors will consist of not less than seven nor more than
thirteen members, the exact number to be fixed from time to time by resolution
adopted by the directors of the Company. The Board of Directors currently
consists of eight directors. Directors will be elected by the holders of Class A
Common Stock and Class B Common Stock voting together as a class with the
holders of Class A Common Stock entitled to one vote per share and the holders
of the Class B Common Stock entitled to ten votes per share. See "Risk Factors--
Control by Knowledge Universe or its Affiliates" and "Description of Capital
Stock." Pursuant to the Stockholders Agreement, the stockholders of the Company
agreed to vote their shares of Common Stock to elect Sibson's manager or senior
managing principal to the Board of Directors and to elect a nominee of the
former stockholders of Lexecon. Mr. Brossy was elected to the Board of Directors
as the Sibson representative pursuant to the Stockholders Agreement. The former
stockholders of Lexecon have not yet exercised their right to nominate a
director.
BOARD COMMITTEES
Audit Committee. The Board of Directors has established an audit committee
(the "Audit Committee") consisting of Messrs. Fink, Maron, and Sandler. The
Audit Committee makes recommendations concerning the engagement of independent
public accountants, reviews with the independent public accountants the plans
and results of the audit engagement, reviews the independence of the independent
public accountants, considers the range of audit and non-audit fees, and reviews
the adequacy of the Company's internal accounting controls.
Compensation Committee. The Board of Directors has established a
compensation committee (the "Compensation Committee"), consisting of Messrs.
Fink and Rose. The Compensation Committee determines compensation for the
Company's senior executive officers and administers the 1998 Equity
Participation Plan.
The Company may from time to time form other committees as circumstances
warrant. Such committees will have authority and responsibility as delegated by
the Board of Directors.
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<PAGE> 54
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee of the Board of Directors
are Messrs. Fink and Rose. There are no Compensation Committee interlocks.
DIRECTOR COMPENSATION
Directors are reimbursed for all expenses incurred in connection with
attendance at Board of Directors and Committee meetings, but do not otherwise
receive any compensation for services as a director. In February 1999, pursuant
to the 1998 Equity Participation Plan, the Company granted to each of Messrs.
Finerman, Fink, Maron, Rose and Sandler in their capacity as independent
directors, options to purchase 15,000 shares of Class A Common Stock at an
exercise price of $11.00 per share. Following the Offering, Nextera intends to
evaluate director compensation and may implement a more extensive program for
directors who are not employed by the Company.
EXECUTIVE COMPENSATION
The following table sets forth all compensation paid or accrued for the
period from February 26, 1997 through December 31, 1997 and for the year ended
December 31, 1998 for the Company's Chief Executive Officer and its four other
most highly compensated executive officers whose compensation exceeded $100,000
(collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
--------------------- UNDERLYING ALL OTHER
FISCAL OPTIONS COMPENSATION(1)
NAME AND POSITION YEAR SALARY BONUS (# OF SHARES) ---------------
<S> <C> <C> <C> <C> <C>
Gresham T. Brebach, Jr................ 1998 $716,000(2) $ (3) -- $173,047
Chief Executive Officer 1997 530,588(4) 133,000 -- --
Ronald K. Bohlin...................... 1998 450,004(5) 101,250 -- 168,445
Chief Operating Officer 1997 337,509(6) 65,000 -- --
Michael P. Muldowney.................. 1998 181,417 40,950 -- 30,547
Chief Financial Officer 1997 116,666 24,000 -- --
Debra I. Bergevine.................... 1998 175,958 39,713 -- 30,813
Vice President, Marketing 1997 113,333 18,000 -- --
Roger Brossy.......................... 1998(7) 83,333 100,000 8,000 --
Managing Director, Sibson
</TABLE>
- ------------------------------
(1) Includes (i) dollar value of the difference between the price paid for
shares of Common Stock purchased in August 1998 and the fair market value of
such Common Stock on the date of purchase, and (ii) the value of life
insurance paid by the Company.
(2) Includes $150,000 consisting of guaranteed bonus amount earned in 1998.
(3) Discretionary bonus for the year ended December 31, 1998 has not yet been
determined.
(4) Includes $125,000 consisting of guaranteed bonus amount earned in 1997.
(5) Includes $100,000 consisting of guaranteed bonus amount earned in 1998.
(6) Includes $75,000 consisting of guaranteed bonus amount earned in 1997.
(7) Represents compensation and awards from August 31, 1998 to December 31,
1998.
BONUS PLANS
As a key component of the annual compensation program, the Company has
implemented a bonus plan designed to recognize individual and Acquired Company
performance. The bonus plan is funded by the performance of each Acquired
Company (other than Sibson and Lexecon) and is intended to complement base
compensation while providing incentive and recognition for exceptional
individual and team efforts in
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<PAGE> 55
meeting and exceeding such Acquired Company's operating targets. All employees
with three months or more of service are eligible to participate. Employee
target bonus percentages range from 10% to 50% of the individual's base salary,
dependent on their classification. Bonus calculations are dependent upon an
employee's target bonus percentage, individual performance rating, annualized
service as well as the final performance of the applicable Acquired Company.
Lexecon maintains a bonus plan for its employees which provides for the
payment of discretionary bonuses based on individual performance and Lexecon's
operating results. This plan is administered by Lexecon's management, subject to
the Company's approval with respect to certain matters.
Sibson & Company, LLC, a subsidiary of the Company ("Sibson LLC") has
established an Annual Incentive Plan, the principal purpose of which is to
attract and motivate the principals and certain employees of Sibson LLC by
providing them with the opportunity to participate in Sibson LLC's success.
Bonus awards under the plan are distributed semi-annually or annually to the
participants from an award pool based upon the performance of the individual
participant and Sibson LLC during such semi-annual or annual period and the
target bonus award for the participant as established by Sibson LLC management.
This plan provides for an annual award pool based on Sibson LLC's financial
performance and is administered by Sibson LLC management, subject to the
Company's approval with respect to the establishment of performance criteria for
the individual participants and Sibson LLC.
OPTION GRANTS
The following table summarizes individual grants of options to purchase
Class A Common Stock granted in 1998 to the Named Executive Officers.
STOCK OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
INDIVIDUAL GRANTS STOCK
------------------------------------------------------------ PRICE APPRECIATION
NUMBER OF FOR
SECURITIES PERCENT OF TOTAL OPTION TERM(1)
UNDERLYING OPTIONS GRANTED TO EXERCISE ------------------------
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED FISCAL 1998 ($/SH) DATE 5% 10%
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gresham T. Brebach, Jr...... -- -- -- -- -- --
Ronald K. Bohlin............ -- -- -- -- -- --
Michael P. Muldowney........ -- -- -- -- -- --
Debra I. Bergevine.......... -- -- -- -- -- --
Roger Brossy................ 8,000 * $7.50 August 31, 2008 $0 $0
</TABLE>
- ---------------
* Indicates less than 1.0%.
(1) The potential realizable values are based on an assumption that the stock
price of the Company's Class A Common Stock will appreciate at the annual
rate shown (compounded annually) from the date of grant until the end, of
the option term. The Board of Directors has determined that the fair market
value of the Company's Class A Common Stock on the date of grant was $2.50
per share. These values do not take into account amounts required to be paid
as income taxes under the Internal Revenue Code and any applicable state
laws or option provisions providing for termination of an option following
termination of employment, non-transferability or vesting. These amounts are
calculated based on the requirements promulgated by the Commission and do
not reflect the Company's estimate of future stock price growth of the
shares of the Class A Common Stock, nor do they give effect to any actual
appreciation in the Class A Common Stock. Actual gains, if any, on stock
option exercises are dependent on the future performance of the Class A
Common Stock and overall stock market conditions.
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<PAGE> 56
FISCAL YEAR-END OPTION VALUE TABLE
None of the Named Executive Officers exercised any Company options during
1998. The following table sets forth certain information with respect to the
value of the options as of December 31, 1998 held by the Named Executive
Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS(#) AT FISCAL YEAR END(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
Gresham T. Brebach, Jr. ......................... -- -- -- --
Ronald K. Bohlin................................. -- -- -- --
Michael P. Muldowney............................. -- -- -- --
Debra I. Bergevine............................... -- -- -- --
Roger Brossy..................................... 0 8,000 $0 $1,200
</TABLE>
- ---------------
(1) Options are in-the-money if the market value of the shares covered thereby
is greater than the option exercise price. This calculation is based on the
fair market value at December 31, 1998 of $7.65 as determined by the Board
of Directors.
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with Gresham T. Brebach, Jr. dated
March 3, 1997 (the "Brebach Agreement"). The Brebach Agreement provides for a
term of three years. Such term may be extended for an additional period of two
years with 90 days written notice prior to the expiration of the initial term.
Pursuant to the Brebach Agreement, Mr. Brebach is employed as the Company's
Chief Executive Officer and receives a minimum annual base salary of $500,000, a
guaranteed annual bonus of $150,000, and an additional annual bonus of up to
one-third of his base salary, in an amount to be determined by the Board of
Directors of the Company, as well as benefits under the Company's benefit plans.
Pursuant to the Brebach Agreement, Mr. Brebach purchased Class A Common Units of
NEH at an aggregate purchase price of $40,000 (which units were ultimately
converted into 200,000 shares of Class A Common Stock and 86,000 shares of Class
B Common Stock), subject to the Company's right to repurchase at original cost
up to (i) 80% of such interests in the event Mr. Brebach is terminated or leaves
the employ of the Company prior to one year after commencement of employment,
(ii) 60% of such interests in the event Mr. Brebach is terminated or leaves the
employ of the Company after one year but prior to two years after commencement
of employment, (iii) 40% of such interests in the event Mr. Brebach is
terminated or leaves the employ of the Company after two years but prior to
three years after commencement of employment, and (iv) 20% of such interests in
the event Mr. Brebach is terminated or leaves the employ of the Company after
three years but prior to four years after commencement of employment. The
Company's right to repurchase any portion of Mr. Brebach's interests in the
Company shall terminate if Mr. Brebach leaves the employ of the Company prior to
March 3, 2000 for any reason other than death, disability, cause, voluntary
termination, or if the Company elects not to extend the term past March 3, 2000.
The Brebach Agreement also provides that in the event the Company terminates Mr.
Brebach's employment, other than for cause, retirement, disability or death, the
Company shall (i) pay Mr. Brebach the balance of his base salary to which he
would have been entitled to receive through the end of the then applicable term
and (ii) continue to provide benefits upon the same terms and conditions then in
effect on the date of termination through the then applicable term or until Mr.
Brebach is employed elsewhere. The Brebach Agreement provides that a change of
control of the Company shall have no effect on Mr. Brebach's financial interests
pursuant to the Brebach Agreement. Mr. Brebach is also subject to
noncompetition, nondisclosure, post-employment cooperation, and nonsolicitation
covenants.
The Company has an employment agreement with Ronald K. Bohlin dated April
1, 1997 (the "Bohlin Agreement"). The Bohlin Agreement provides for an initial
term of three years. Such initial term may be extended for an additional period
of two years with 90 days written notice prior to the expiration of the initial
term. Pursuant to the Bohlin Agreement, Mr. Bohlin is employed as the Company's
Chief Operating Officer and receives a minimum annual base salary of $350,000, a
guaranteed annual bonus of $100,000, and an
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additional annual bonus of up to 25% of his base salary, in an amount to be
determined by the Board of Directors of the Company, as well as benefits under
the Company's benefit plans. Pursuant to the Bohlin Agreement, Mr. Bohlin
purchased Class A Common Units of NEH at an aggregate purchase price of $20,000
(which units were ultimately converted into 100,000 shares of Class A Common
Stock and 43,000 shares of Class B Common Stock), subject to the Company's right
to repurchase at original cost up to (i) 80% of such interests in the event Mr.
Bohlin is terminated or leaves the employ of the Company prior to one year after
commencement of employment, (ii) 60% of such interests in the event Mr. Bohlin
is terminated or leaves the employ of the Company after one year but prior to
two years after commencement of employment, (iii) 40% of such interests in the
event Mr. Bohlin is terminated or leaves the employ of the Company after two
years but prior to three years after commencement of employment, and (iv) 20% of
such interests in the event Mr. Bohlin is terminated or leaves the employ of the
Company after three years but prior to four years after commencement of
employment. The Company's right to repurchase any portion of Mr. Bohlin's
interests in the Company shall terminate if Mr. Bohlin leaves the employ of the
Company prior to April 1, 2000 for any reason other than death, disability,
cause, voluntary termination, or if the Company elects not to extend the term
past April 1, 2000. The Bohlin Agreement also provides that in the event the
Company terminates Mr. Bohlin's employment prior to April 1, 2000, other than
for cause, retirement, disability or death, the Company shall (i) pay Mr. Bohlin
the balance of his base salary to which he would have been entitled to receive
through the end of the then applicable term and (ii) continue to provide
benefits upon the same terms and conditions then in effect on the date of
termination through the then applicable term or until Mr. Bohlin is employed
elsewhere. The Bohlin Agreement provides that a change of control of the Company
shall have no effect on Mr. Bohlin's financial interests pursuant to the Bohlin
Agreement. Mr. Bohlin is also subject to noncompetition, nondisclosure,
post-employment cooperation, and nonsolicitation covenants.
The Company entered into an employment agreement with Michael P. Muldowney
dated April 25, 1997 (the "Muldowney Agreement"). The Muldowney Agreement
provides for a term of one year, renewable by the Company for additional periods
of one year each upon at least 90 days prior notice to Mr. Muldowney. The
Company has renewed the Muldowney Agreement for an additional one year period.
Pursuant to the Muldowney Agreement, Mr. Muldowney is employed as the Company's
Chief Financial Officer and receives a minimum annual base salary of $182,000
and an annual bonus of up to 30% of his base salary, in an amount to be
determined by the Board of Directors of the Company, as well as benefits under
the Company's benefit plans. Pursuant to the Muldowney Agreement, Mr. Muldowney
purchased Class A Common Units of NEH at an aggregate purchase price of $5,000
(which units were ultimately converted into 25,000 shares of Class A Common
Stock and 10,750 shares of Class B Common Stock), subject to the Company's right
to repurchase such shares at fair market value, provided that in the event Mr.
Muldowney voluntarily terminates his employment or is dismissed for cause prior
to April 25, 2000, the Company has the right to repurchase such shares at cost.
Mr. Muldowney is also subject to noncompetition, nondisclosure, and
nonsolicitation covenants.
The Company entered into an at-will employment agreement with Debra I.
Bergevine dated March 25, 1997 (the "Bergevine Agreement"). Pursuant to the
Bergevine Agreement, Ms. Bergevine is employed as the Company's Vice President,
Marketing and receives a minimum annual base salary of $170,000 and an annual
bonus of up to 20% of her base salary, in an amount to be determined by the
Board of Directors of the Company, as well as benefits under the Company's
benefit plans. Pursuant to the Bergevine Agreement, Ms. Bergevine purchased
Class A Common Units of NEH at an aggregate purchase price of $5,000 (which
units were ultimately converted into 25,000 shares of Class A Common Stock and
10,750 shares of Class B Common Stock), subject to the Company's right to
repurchase such shares at its then fair market value, provided that in the event
Ms. Bergevine voluntarily terminates her employment or is dismissed for cause
prior to March 25, 2000, the Company has the right to repurchase such shares at
cost. Ms. Bergevine is also subject to noncompetition, nondisclosure, and
nonsolicitation covenants.
Sibson LLC entered into an employment agreement with Roger Brossy dated
August 31, 1998 (the "Brossy Agreement"). The Brossy Agreement provides for a
term of two years, as well as automatic renewal on each subsequent anniversary
for subsequent one-year terms unless either Mr. Brossy or Sibson LLC gives
written notice to the other not less than sixty days prior to such anniversary.
Pursuant to the Brossy Agreement, Mr. Brossy receives a minimum annual base
salary of $250,000, an initial annual target bonus
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equal to 60% of his annual base salary pursuant to Sibson LLC's Annual Incentive
Plan, as well as benefits under Sibson LLC's benefit plans. Pursuant to the
Brossy Agreement, Mr. Brossy purchased 1,554 Class A Common Units of Nextera LLC
at a price of $0.14 per unit (which were ultimately converted into 1,554 shares
of Class A Common Stock). The Brossy Agreement also provides that upon Sibson
LLC's termination of Mr. Brossy's employment, other than for cause, retirement,
disability or death, Sibson LLC shall (i) pay Mr. Brossy the balance of his base
salary and a pro-rata share of the applicable bonus to which he would have been
entitled to receive through the end of the then applicable term (ii) cause any
options granted to Mr. Brossy under the Company's 1998 Equity Participation Plan
to vest to the extent of 50% of the remaining unvested portion of such options,
and (iii) continue to provide benefits upon the same terms and conditions then
in effect on the date of termination through the then applicable term. Mr.
Brossy is also subject to a Noncompete, Non-Solicitation, Proprietary
Information, Confidentiality and Inventions Agreement.
EMPLOYEE BENEFIT PLANS
1998 Equity Participation Plan. Nextera's 1998 Equity Participation Plan
provides incentives for officers, key employees and consultants of the Company
and its subsidiaries through granting of options, restricted stock and other
awards ("Awards"). In addition to Awards made to officers, key employees or
consultants, the 1998 Equity Participation Plan permits the granting of options
("Director Options") to the Company's independent non-employee directors.
Under the 1998 Equity Participation Plan, not more than 5,000,000 shares of
Class A Common Stock (or the equivalent in other equity securities) are
authorized for issuance upon exercise of options, stock appreciation rights
("SARs"), and other Awards, or upon vesting of restricted or deferred stock
awards. The maximum number of shares which may be subject to options or stock
appreciation rights granted under the 1998 Equity Participation Plan to any
individual in any calendar year cannot exceed 100,000. As of March 1, 1999,
options to purchase 3,163,652 shares of Class A Common Stock were outstanding
under the 1998 Equity Participation Plan.
Prior to the closing of the Offering, the Board of Directors of the Company
will administer the 1998 Equity Participation Plan. After the closing of the
Offering, the Compensation Committee or another committee thereof (the
"Committee") will administer the 1998 Equity Participation Plan with respect to
grants to key employees or consultants of the Company and the full Board of
Directors will administer the 1998 Equity Participation Plan with respect to
Director Options. The Committee will consist of at least two members of the
Board of Directors, each of whom is a "non-employee director" for purposes of
Rule 16b-3 under the Securities Exchange Act of 1934, as amended ("Rule 16b-3")
and, with respect to options and SARs which are intended to constitute
performance-based compensation under Section 162(m) of the Internal Revenue Code
of 1986, as amended (the "Code"), an "outside director" for the purposes of
Section 162(m) of the Code. Subject to the terms and conditions of the 1998
Equity Participation Plan, the Board of Directors or Committee has the authority
to select the persons to whom Awards are to be made, to determine the number of
shares to be subject thereto and the terms and conditions thereof, and to make
all other determinations and to take all other actions necessary or advisable
for the administration of the 1998 Equity Participation Plan. The Board of
Directors or Committee may delegate to certain officers of the Company its
authority to select the persons to whom Awards are to be made, to determine the
number of shares to be subject thereto and the terms and conditions thereof. In
addition, the Board of Directors has discretion to determine the terms and
conditions of Director Options and to interpret and administer the 1998 Equity
Participation Plan with respect to Director Options. The Committee (and the
Board of Directors) are also authorized to adopt, amend and rescind rules
relating to the administration of the 1998 Equity Participation Plan.
Options, SARs, restricted stock and other Awards under the 1998 Equity
Participation Plan may be granted to individuals who are then officers or other
key employees of the Company or any of its present or future subsidiaries. Such
Awards also may be granted to consultants of the Company selected by the Board
of Directors or Committee for participation in the 1998 Equity Participation
Plan. Independent directors of the Company may be granted NQSOs (as defined
herein) by the Board of Directors. The Committee may grant
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or issue stock options, SARs, restricted stock, deferred stock, dividend
equivalents, performance awards, stock payments and other stock related
benefits, or any combination thereof to key employees and consultants. Each
Award will be set forth in a separate agreement with the person receiving the
Award and will indicate the type, terms and conditions of the Award.
Nonqualified Stock Options ("NQSOs") will provide for the right to purchase
Class A Common Stock at a specified price which, except with respect to NQSOs
intended to qualify as performance-based compensation under Section 162(m) of
the Code, may be less than fair market value on the date of grant (but not less
than par value), and usually will become exercisable (in the discretion of the
Board of Directors) in one or more installments after the grant date, subject to
the participant's continued employment with the Company and/or subject to the
satisfaction of individual or Company performance targets established by the
Board of Directors and/or the Company. NQSOs may be granted for a term of up to
ten (10) years, as specified by the Board of Directors.
Incentive Stock Options ("ISOs"), will be designed to comply with the
provisions of the Code and will be subject to certain restrictions contained in
the Code. Among such restrictions, ISOs must have an exercise price not less
than the fair market value of a share of Class A Common Stock on the date of
grant, may only be granted to key employees, must expire within a specified
period of time following the Optionee's termination of employment, and must be
exercised within the ten years after the date of grant; but may be subsequently
modified to disqualify them from treatment as ISOs. In the case of an ISO
granted to an individual who owns (or is deemed to own) at least 10% of the
total combined voting power of all classes of stock of the Company, the 1998
Equity Participation Plan provides that the exercise price must be at least 110%
of the fair market value of a share of Class A Common Stock on the date of grant
and the ISO must expire upon the fifth anniversary of the date of its grant.
Restricted Stock may be sold to any key employee or consultant at various
prices (but not below par value) and made subject to such restrictions as may be
determined by the Committee. Restricted stock, typically, may be repurchased by
the Company at the original purchase price if the conditions or restrictions are
not met. In general, restricted stock may not be sold, or otherwise transferred
or hypothecated, until restrictions are removed or expire. Purchasers of
restricted stock, unlike recipients of options, will have voting rights and will
receive dividends prior to the time when the restrictions lapse.
Deferred Stock may be awarded to any key employee or consultant, typically
without payment of consideration, but subject to vesting conditions based on
continued employment or on performance criteria established by the Committee.
Like restricted stock, deferred stock may not be sold, or otherwise transferred
or hypothecated, until vesting conditions are removed or expire. Unlike
restricted stock, deferred stock will not be issued until the deferred stock
award has vested, and recipients of deferred stock generally will have no voting
or dividend rights prior to the time when vesting conditions are satisfied.
SARs may be granted to any key employee or consultant in connection with
stock options or other Awards, or separately. SARs granted by the Committee in
connection with stock options or other Awards will provide for payments to the
holder based upon increases in the price of the Company's Class A Common Stock
over the exercise price of the related option or other Awards. Except as
required by Section 162(m) of the Code with respect to an SAR intended to
qualify as performance-based compensation as described in Section 162(m) of the
Code, there are no restrictions specified in the 1998 Equity Participation Plan
on the exercise of SARs or the amount of gain realizable therefrom, although
restrictions may be imposed by the Board of Directors or Committee in the SAR
agreements. The Committee may elect to pay SARs in cash or in Class A Common
Stock or in a combination of both.
Dividend Equivalents may be granted to any key employee or consultant by
the Board of Directors or the Committee. The amount of the Dividend Equivalents
represent the value of the dividends per share paid by the Company, calculated
with reference to the number of shares covered by the stock options, Deferred
Stock, Performance Awards, SARs or other Awards held by the participant.
Performance Awards may be granted to any key employee or consultant by the
Committee. Generally, these Awards will be based upon specific performance
targets and may be paid in cash or in Class A Common
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Stock or in a combination of both. Performance Awards may also include bonuses
which may be granted by the Committee which may be payable in cash or in Class A
Common Stock or in a combination of both.
Stock Payments may be received by any key employee or consultant selected
by the Committee in the manner determined from time to time by the Committee.
The number of shares of Class A Common Stock or an option or other right to
purchase Class A Common Stock shall be determined by the Committee, and may be
based upon performance criteria as determined by the Committee.
The 1998 Equity Participation Plan prohibits any participant in the plan
from, without the prior written consent of the representatives of the
Underwriters and subject to certain exceptions, selling or otherwise disposing
of any shares of Class A Common Stock or options to acquire shares of Class A
Common Stock during the 180-day period following the date of this Prospectus.
The Nextera/Lexecon Limited Purpose Stock Option Plan. Nextera has agreed
to adopt the Limited Purpose Plan to provide incentives for key personnel of
Lexecon by granting such key personnel options to purchase shares of Nextera's
Class A Common Stock. Assuming the price per share of the Class A Common Stock
in the Offering is $14.00, the Company will grant options to purchase 2,455,997
shares of Class A Common Stock under the Limited Purpose Plan. The Company
anticipates granting to certain non-employee consultants of Lexecon fully-vested
options to purchase an aggregate of 445,149 shares of Class A Common Stock with
an exercise price of $14.00 per share in March 1999. The number of remaining
shares subject to options to be granted to employees under the Limited Purpose
Plan will vary based upon the price per share in the Offering.
Prior to the closing of the Offering, the Board of Directors will
administer the Limited Purpose Plan. After the closing of the Offering, the
Committee will administer the Limited Purpose Plan. The Committee will consist
of at least two members of the Board, each of whom is a "non-employee director"
for purposes of Rule 16b-3 and an "outside director" for the purposes of Section
162(m) of the Code. Subject to the terms and conditions of the Limited Purpose
Plan, the Board of Directors or Committee has the authority to select the
persons to whom options will be granted, to determine the number of shares to be
subject thereto and the terms and conditions thereof, and to make all other
determinations and to take all other actions necessary or advisable for the
administration of the Limited Purpose Plan. The Committee (and the Board of
Directors) may delegate to certain officers of the Company its authority to
select the persons to whom options will be granted, to determine the number of
shares to be subject thereto and the terms and conditions thereof. The Committee
(and the Board of Directors) is also authorized to adopt, amend and rescind
rules relating to the administration of the Limited Purpose Plan.
Under the terms of the Limited Purpose Plan, options may be granted only to
individuals who are then key employees of Lexecon or who are consultants of
Lexecon selected by the Board of Directors or Committee for participation in the
Limited Purpose Plan. Options granted under the Limited Purpose Plan shall not
be "incentive stock options" within the meaning of Section 422 of the Code, but
rather all such options shall be "nonqualified stock options." Each such option
will be evidenced by a separate written agreement with the person receiving the
option and will indicate the type, terms and conditions of the option.
Options granted under the Limited Purpose Plan will provide for the right
to purchase Class A Common Stock at the price per share of the Class A Common
Stock in the Offering and will become exercisable (at the discretion of the
Board of Directors or the Committee) in one or more installments after the grant
date, subject to the participant's continued employment with Lexecon. Options
may be granted for a term of up to ten (10) years, as specified by the Committee
(or the Board of Directors).
The Limited Purpose Plan prohibits any participant in the Limited Purpose
Plan from, without the prior written consent of the representatives of the
Underwriters and subject to certain exceptions, selling or otherwise disposing
of any shares of Class A Common Stock or options to acquire shares of Class A
Common Stock during the 180-day period following the date of this Prospectus.
Retirement Plans. Nextera and certain subsidiaries sponsor retirement
savings plans (the "Retirement Plans") under Section 401(k) of the Code for the
benefit of employees meeting certain minimum service requirements. Eligible
employees may elect to contribute to the plan subject to limitations established
by the
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Code. The trustees of the Retirement Plans select investment opportunities from
which participants may choose to contribute. The Company matches up to 25% of
the first 4% of eligible participant contributions for employees of PTG,
Pyramid, and the Company's Executive Officers and administrative personnel. The
Company has agreed to match 25% of total contributions (subject to the
limitations of the Code) for individuals who were active employees of Business
Performance Solutions as of December 31, 1998. Other contributions are made at
the discretion of the Company. On a pro forma basis, the Company made
contributions to the Retirement Plans of $406,804 for the year ended December
31, 1997.
Sibson LLC maintains a defined contribution profit-sharing plan (the
"Profit-Sharing Plan") providing retirement benefits to eligible employees of
Sibson LLC. Contributions by the Company to the Profit-Sharing Plan are at the
discretion of the management of Sibson LLC, subject to overall budgetary control
by Nextera. Participants are eligible to make elective deferral contributions,
without matching by Sibson LLC. Sibson LLC may also make qualified non-elective
contributions. For the year ended December 31, 1997 on a pro forma basis, Sibson
LLC contributed $1.5 million to the Profit-Sharing Plan. Sibson LLC intends to
make additional contributions to the Profit-Sharing Plan in the future as
determined by Sibson management.
Other. The Company maintains customary health and benefit plans for its
employees. In addition, Sibson LLC currently provides post-retirement medical
benefits for Sibson LLC employees who retire after age 50 with at least 15 years
of service. Any such Sibson retiree may elect to receive medical coverage under
Sibson LLC's medical program until the earlier of age 65 or the retiree's death.
Sibson LLC pays 75% of the annual cost of the comprehensive medical coverage and
the retiree pays the remaining 25%. In connection with the Sibson Acquisitions,
the Company committed to maintain this post-retirement medical coverage (and all
other Sibson employee benefit programs) through December 31, 1999, subject to
certain limited exceptions, and the termination of applicable employment
agreements.
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CERTAIN TRANSACTIONS
Loans to Certain Officers. NEH made loans to Gresham T. Brebach, Jr., the
Company's Chief Executive Officer, Michael P. Muldowney, the Company's Chief
Financial Officer and Debra I. Bergevine, the Company's Vice President,
Marketing, the proceeds of which were used to purchase from NEH Preferred Units
of NEH. These loans were evidenced by promissory notes, dated January 2, 1998,
executed by the respective individuals in favor of NEH, and secured by a
security interest in the respective membership units purchased by these
individuals. All of the foregoing promissory notes bear interest at 10% per
annum and mature on January 2, 2003, subject to mandatory prepayment upon the
happening of certain events. The principal amounts of the promissory notes
executed by Messrs. Brebach and Muldowney and Ms. Bergevine are $576,000,
$72,000 and $62,000, respectively. All of the foregoing promissory notes and
security documents were contributed to, and are now held by, the Company. The
foregoing Preferred Units purchased by Messrs. Brebach and Muldowney and Ms.
Bergevine were ultimately converted to a 1.2%, 0.1% and 0.1% interest,
respectively, in the Debentures.
Bridge Loan Amendment. The Company, Knowledge Universe and the other party
to the Bridge Loan entered into a Consent and Amendment (the "Bridge Loan
Amendment") to the Bridge Loan on December 31, 1998. Pursuant to the Bridge Loan
Amendment, Knowledge Universe loaned the Company $37.5 million and became a
participant under the Bridge Loan. In connection with the Bridge Loan Amendment,
the Company, Lexecon, Sibson LLC, Pyramid, Business Performance Solutions and
PTG granted Knowledge Universe a security interest ("Security Interest") in
substantially all of their respective assets and properties, including the stock
or membership interests of all of the Acquired Companies. The Security Interest
is pari passu with the security interest granted to the other party to the
Bridge Loan. The Acquired Companies also guaranteed the obligations of the
Company under the Bridge Loan. The Bridge Loan Amendment provides for an
interest rate of 12% per annum and extended the maturity of the Bridge Loan to
April 30, 1999. The Company used $31.1 million of the proceeds of the loan from
Knowledge Universe to finance the Lexecon Acquisition, $4.2 million to finance
the payment of bonuses to certain non-stockholder key executives of Lexecon,
$2.0 million to finance the acquisition of Alexander and $2.2 million for
general corporate purposes, including working capital.
Management Agreement. Effective March 1, 1997, Nextera entered into an oral
agreement with KU, LLC whereby KU, LLC provided certain management and advisory
services to the Company, for which the Company agreed to pay a management fee of
$10,000 per month to KU, LLC. Such agreement was subsequently transferred to
Knowledge Universe in August 1998. The $10,000 monthly fee was increased to
$50,000 per month effective January 1, 1999. In December 1998, the Company
entered into an agreement to pay an additional management fee of $1.5 million to
Knowledge Universe for additional services rendered by Knowledge Universe and
KU, LLC to the Company in 1998. This fee was paid in January 1999. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations." Accrued management fees of approximately
$360,000 will be paid from the proceeds of the Offering. See "Use of Proceeds."
Said monthly management fee agreement was terminated effective as of the date of
this Prospectus.
Engagement of the Company by Knowledge Universe or its Affiliates. The
Company was engaged by KU, LLC to perform certain reviews and render advice in
connection with potential acquisitions of third-parties by KU, LLC. The total
amount billed to KU, LLC by the Company in connection with this engagement
amounted to approximately $207,480 in 1998. In addition, the Company was engaged
by KU, LLC at various times to provide advice relating to general business
strategy and human resources. The amount billed to KU, LLC by the Company in
connection with these engagements amounted to approximately $692,520 in 1998.
The Company was engaged at various times by Productivity Point
International, LLC ("PPI"), an affiliate of Knowledge Universe, to provide
strategy, business operations and IT advice. The total amount billed to PPI by
the Company in connection with these engagements amounted to approximately
$225,000 in 1997 and $642,000 in 1998. In addition, the Company was engaged at
various times by TEC Worldwide, Inc. ("TEC"), an affiliate of Knowledge
Universe, to provide strategy, business operations and IT advice. The total
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amount billed to TEC by the Company in connection with these engagements
amounted to approximately $90,000 in 1998.
Knowledge Universe, PPI, TEC and other affiliates of Knowledge Universe may
engage the Company to provide various consulting services in the future. Such
future transactions will be entered into on an arm's-length basis in accordance
with Delaware law.
Investments in the Company. From March 7, 1997 through April 30, 1998, KU,
LLC purchased Class A Common Units of NEH for aggregate consideration of $1.8
million (net of a subsequent redemption), which were ultimately converted into
8,805,000 shares of Class A Common Stock and 3,842,050 shares of Class B Common
Stock. Also during this period, EDU purchased Class A Common Units of NEH for
aggregate consideration of $1,000, which were ultimately converted into 5,000
shares of Class A Common Stock and 2,150 shares of Class B Common Stock.
Pursuant to the KE Transaction, ownership of the Class A Common Stock and Class
B Common Stock arising out of the foregoing transactions was transferred to
Knowledge Enterprises. See "The Company--Transfer to Nextera Holdings." During
the same period, KU, LLC purchased Class B Preferred Units of NEH for aggregate
consideration of $47.1 million, which were ultimately converted into a 98.1%
interest in the Debentures.
In November 1997, Messrs. Brebach, Bohlin, and Muldowney and Ms. Bergevine
purchased Class A Common Units of NEH, which purchases were in addition to the
Common Stock purchased pursuant to their respective employment agreements. Mr.
Brebach purchased Class A Common Units of NEH for aggregate consideration of
$40,000, which units were ultimately converted into 200,000 shares of Class A
Common Stock and 86,000 shares of Class B Common Stock. Mr. Bohlin purchased
Class A Common Units of NEH for aggregate consideration of $10,000, which units
were ultimately converted into 50,000 shares of Class A Common Stock and 21,500
shares of Class B Common Stock. Mr. Muldowney purchased Class A Common Units of
NEH for aggregate consideration of $5,000, which units were ultimately converted
into 25,000 shares of Class A Common Stock and 10,750 shares of Class B Common
Stock. Ms. Bergevine purchased Class A Common Units of NEH for aggregate
consideration of $5,000, which units were ultimately converted into 25,000
shares of Class A Common Stock and 10,750 shares of Class B Common Stock.
From March 20, 1997 to July 23, 1997, EDU contributed $25,000 to Nextera
LLC in exchange for 10,000 Class A Common Units of Nextera LLC, which were
subsequently redeemed for $25,000.
In April 1997, Nextera LLC issued a warrant to NEH (the "Warrant") to
purchase 5,000,000 Class A Common Units at an exercise price of $2.50 per unit.
Effective April 30, 1998, the Warrant was amended to provide for the issuance of
5,000,000 Class B Common Units. The Warrant was exchanged for 4,300,000 Class B
Common Units which were ultimately converted into 4,300,000 shares of Class B
Common Stock.
Effective as of April 30, 1998, approximately $48.0 million of Nextera
LLC's contributed capital was redesignated as debt in the form of the
Debentures. As a result of the liquidation and dissolution of NEH, interests in
the Debentures were distributed to KU, LLC, Messrs. Brebach, Bohlin and
Muldowney, Ms. Bergevine, one other employee and one former employee of Nextera
LLC. See "The Company--Recapitalization."
On August 31, 1998, Messrs. Brebach, Bohlin, and Muldowney and Ms.
Bergevine purchased additional Class A Common Units and Class B Common Units of
Nextera LLC. Mr. Brebach purchased units for aggregate consideration of $9,900,
which units were ultimately converted into 49,500 shares of Class A Common Stock
and 21,285 shares of Class B Common Stock. Mr. Bohlin purchased units for
aggregate consideration of $9,900, which units were ultimately converted into
49,500 shares of Class A Common Stock and 21,285 shares of Class B Common Stock.
Mr. Muldowney purchased units for aggregate consideration of $1,800, which units
were ultimately converted into 9,000 shares of Class A Common Stock and 3,870
shares of Class B Common Stock. Ms. Bergevine purchased units for aggregate
consideration of $1,800, which units were ultimately converted into 9,000 shares
of Class A Common Stock and 3,870 shares of Class B Common Stock. Also on August
31, 1998, Mr. Brossy purchased Class A Common Units of Nextera LLC for aggregate
consideration of $218, which units were ultimately converted into 1,554 shares
of Class A Common Stock.
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On December 31, 1998 and in connection with the Lexecon Acquisition, all of
the members of Nextera LLC other than the Sibson Entities contributed all of
their membership interests in Nextera LLC to Nextera in exchange for Common
Stock. See "The Company--Exchange Transaction."
On December 31, 1998 and in connection with the Exchange Transaction, Mr.
Brossy received 194,203 shares of Class A Common Stock in exchange for his
equity interest in the Sibson Entities.
Amendment of the Debentures. Effective December 31, 1998, the Company,
Knowledge Universe, Messrs. Brebach, Bohlin and Muldowney, Ms. Bergevine and one
other employee of the Company amended the Debentures in connection with the
Lexecon Acquisition (the "Debenture Amendment"). The Debenture Amendment
provides that in the event the Bridge Loan remains unpaid following its
maturity, the interest rate will increase to two points over the interest rate
on the Bridge Loan. In addition, as required by the terms of the Bridge Loan, if
an event of default occurs under the Bridge Loan, the Debentures must either be
(i) moved up in the Company's capital structure to a holding company level or
(ii) at Knowledge Universe's election, exchanged for preferred stock of Nextera
on terms substantially equivalent to the existing terms of the Debentures with
the addition of a liquidation preference until all amounts owed under the Bridge
Loan are paid in full. Three months after the full repayment of all amounts due
under the Bridge Loan, the holders of the Debentures (or preferred stock, if
converted) will have the ability to modify the terms of the Debentures (or
preferred stock, if converted) to provide for current cash interest (or
dividend) payments.
Guaranty and Warrants to Purchase Class A Common Stock. Effective December
31, 1998, Knowledge Universe agreed to guaranty (the "Guaranty") the Company's
obligations to the former stockholders of Lexecon to repurchase 1,450,240 shares
of Class A Common Stock which will be issued if Nextera does not complete an
initial public offering by February 29, 2000 to such persons in connection with
the Lexecon Acquisition at a price of $7.65 per share. This repurchase
obligation will arise if Nextera has not completed an initial public offering of
the Class A Common Stock prior to February 29, 2000. As compensation to
Knowledge Universe to provide the Guaranty, the Company issued Knowledge
Universe warrants (the "Guaranty Warrants") to purchase 250,000 shares of Class
A Common Stock at an exercise price equal to 80% of the initial public offering
price of the Class A Common Stock (assuming the price per share in the Offering
is $14.00 the exercise price would be $11.20), provided, however, if such
initial public offering does not occur by August 31, 2000, the exercise price
will be $7.65 per share, as adjusted for stock splits, stock dividends and
similar transactions. The Guaranty Warrants expire on December 31, 2003. See
"Description of Capital Stock--Warrants."
Stockholders Agreement. In connection with the Sibson Acquisitions and the
Lexecon Acquisition the Company, Nextera LLC and the stockholders of the Company
prior to the Offering entered into the Stockholders Agreement, including an
amendment thereto, to set forth various agreements among the stockholders and
the Company. The Stockholders Agreement provides that the stockholders are
required to vote their shares of Common Stock to elect Sibson's manager/senior
managing principal to the Company's Board of Directors. This requirement
continues until such time that (i) the Company's consolidated net revenues
generated by Sibson LLC fall below 15% of the Company's total consolidated net
revenues for any fiscal year and (ii) the earnings before interest, taxes,
depreciation and amortization ("EBITDA") generated by Sibson LLC falls below 15%
of the Company's total consolidated EBITDA less corporate headquarters expense
for such fiscal year. Pursuant to this provision, Roger Brossy was appointed to
the Board of Directors. The Stockholders Agreement also provides that the
stockholders are required to vote their shares of Common Stock to elect one
designee of the former stockholders of Lexecon until December 31, 2000. The
former stockholders of Lexecon have not yet exercised their right pursuant to
this provision.
The Stockholders Agreement also provides that the Company will not enter
into related transactions in excess of $2 million with any affiliate of the
Company without the prior approval of a majority of the Company's Board of
Directors who are not and, within the past five years, have not been directly or
indirectly affiliated with such affiliate and do not receive any compensation
from, or own any equity interest in, such affiliate. The Stockholders Agreement
also provides that Nextera Holdings, Messrs. Brebach, Bohlin and Muldowney, Ms.
Bergevine, and certain other individuals will not sell or otherwise dispose of
their shares for a six-month period following the Offering, and that subsequent
to such six-month period, those stockholders will
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not sell or otherwise dispose of more than one-third of such shares in the
subsequent 12-month period and more than two-thirds of such shares in the
subsequent 24-month period. 12,654,200, 642,785, 285,285, 84,370, and 84,370
shares of Common Stock held by Nextera Holdings, Messrs. Brebach, Bohlin, and
Muldowney and Ms. Bergevine, respectively, are subject to this provision. In
addition, the Stockholders Agreement provides certain registration rights. See
"Shares Eligible for Future Sale--Registration Rights."
The Stockholders Agreement may be amended only by the affirmative vote of
(i) Nextera, (ii) stockholders of Nextera holding a majority of the shares of
Common Stock subject to the Stockholders Agreement and (iii) stockholders of
Nextera holding a majority of the shares of Common Stock held by the former
stockholders of the Sibson Entities and which are subject to the Stockholders
Agreement. Subject to certain exceptions, pursuant to the Stockholders Agreement
as amended and the terms of a certain letter agreement between Nextera and the
former stockholders of the Sibson Entities dated December 15, 1998, upon the
vote of a majority of Nextera's Board of Directors, the Stockholders Agreement
may be amended by Nextera to add additional parties with the consent of a
majority of the shares of Common Stock held by the former stockholders of the
Sibson Entities and which are subject to the Stockholders Agreement.
Retention of Maron & Sandler. The law firm of Maron & Sandler has served as
the Company's general counsel since the Company's inception. Stanley E. Maron
and Richard V. Sandler, Directors of the Company, are partners of Maron &
Sandler. In 1998, Maron & Sandler billed Nextera $473,471 for legal services
rendered to the Company. In addition, Messrs. Maron and Sandler and other
attorneys of Maron & Sandler hold interests in an entity which holds non-voting
units of a limited liability company which holds membership interests in KU,
LLC. These non-voting units amount to a less than 0.18% interest in KU, LLC.
Retention of RFG Financial Group, Inc. Since June 1997, the Company has
retained RFG Financial Group, Inc. to provide accounting and financial services.
Ralph Finerman, a Director of the Company, is President of RFG Financial Group,
Inc.
Transactions with Founders. The Company was founded in February 1997 by
entities which were under the direct or indirect control of Lawrence J. Ellison,
Michael R. Milken and Lowell J. Milken. Subsequent to the formation of the
Company, ownership of the Common Stock held by such founding entities was
transferred to Nextera Holdings. Nextera Holdings is a wholly-owned subsidiary
of Knowledge Enterprises. Knowledge Enterprises is controlled by Knowledge
Universe which, in turn, is controlled by KU, LLC. Lawrence J. Ellison, Michael
R. Milken and Lowell J. Milken may each be deemed to have the power to control
KU, 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
Nextera Holdings. Nextera Holdings holds 8,810,000 shares of Class A Common
Stock and 3,844,200 shares of Class B Common Stock, which were acquired for
aggregate consideration of approximately $1.8 million. See "--Investments in the
Company."
The Company pays Knowledge Universe management fees for certain advisory,
management and other services. Said management fee agreement was terminated
effective as of the date of this Prospectus. See "--Management Agreement." The
Company has also been engaged by Knowledge Universe or its affiliates from time
to time to provide consulting services and render advice. The Company expects
that such engagements will continue after the date of this Prospectus on an
arm's length basis. See "--Engagement of the Company by Knowledge Universe or
its Affiliates." Knowledge Universe will receive approximately $360,000 of the
net proceeds of the Offering to pay accrued management fees. See "Use of
Proceeds."
Knowledge Universe holds a 98.1% interest in the Debentures, which interest
was acquired for approximately $47.1 million. See "--Investments in the
Company." The Debentures were subsequently amended in connection with the
Lexecon Acquisition. See "--Amendment of the Debentures." Knowledge Universe
also loaned the Company $37.5 million and became a participant under the Bridge
Loan. See "--Bridge Loan Amendment." Of the net proceeds from the Offering,
Knowledge Universe will receive approximately $53.4 million in repayment of its
interest in the Debentures and $37.9 million in repayment of its interest in the
Bridge Loan. See "Use of Proceeds."
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Knowledge Universe received the Guaranty Warrants from the Company as
compensation for providing the Guaranty. See "--Guaranty and Warrants to
Purchase Class A Common Stock." In addition, Nextera Holdings is a party to the
Stockholders Agreement, which provides Nextera Holdings with certain
registration rights. See "--Stockholders Agreement" and "Shares Eligible for
Future Sale--Registration Rights."
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of March 1, 1999 by (i) each person known to
the Company to beneficially own more than five percent of any class of the
outstanding Common Stock, (ii) each director of the Company, (iii) each Named
Executive Officer of the Company, and (iv) all directors and executive officers
of the Company as a group. Unless otherwise indicated, all shares are owned
directly and the indicated person has sole voting and investment power. Unless
otherwise indicated, the address of the persons named below is care of Nextera
Enterprises, Inc., One Cranberry Hill, Lexington, MA 02421.
<TABLE>
<CAPTION>
CLASS B BENEFICIAL OWNERSHIP
CLASS A COMMON STOCK COMMON STOCK(1) AFTER THE OFFERING(2)(3)
------------------------------------------ ------------------------- --------------------------
SHARES PERCENT PERCENT OF
BENEFICIALLY OWNED PERCENT SHARES COMMON
NAME OF OWNED PRIOR TO PRIOR TO OWNED AFTER BENEFICIALLY PERCENT OF PERCENT OF STOCK
BENEFICIAL OWNER OFFERING(2) OFFERING(3) OFFERING(3) OWNED CLASS VOTING POWER OUTSTANDING
<S> <C> <C> <C> <C> <C> <C> <C>
Gresham T. Brebach,
Jr..................... 449,500 2.4% 1.6% 193,285 4.5% 3.3% 1.9%
Ronald K Bohlin.......... 199,500 1.1 * 85,785 2.0 1.5 *
Michael P.
Muldowney(4)........... 59,000 * * 25,370 * * *
Debra I. Bergevine....... 59,000 * * 25,370 * * *
Roger Brossy............. 194,203 1.0 * -- -- * *
Ralph Finerman........... -- -- -- -- -- -- --
Steven B. Fink........... -- -- -- -- -- -- --
Stanley E. Maron......... -- -- -- -- -- -- --
Michael D. Rose.......... -- -- -- -- -- -- --
Richard V. Sandler....... -- -- -- -- -- -- --
Dennis W. Carlton(5)..... 1,042,856 5.6 3.6 -- -- 1.5 3.2
Daniel R. Fischel(5)..... 1,185,713 6.4 4.1 -- -- 1.7 3.6
Andrew M.
Rosenfield(5).......... 1,185,713 6.4 4.1 -- -- 1.7 3.6
Nextera Enterprises
Holdings, Inc.(6)...... 8,810,000 47.4 30.5 3,844,200 89.9 66.0 38.2
Lawrence J. Ellison(6)... 8,810,000 47.4 30.5 3,844,200 89.9 66.0 38.2
Michael R. Milken(6)..... 8,810,000 47.4 30.5 3,844,200 89.9 66.0 38.2
Lowell J. Milken(6)...... 8,810,000 47.4 30.5 3,844,200 89.9 66.0 38.2
All directors and
executive officers as a
group (10 persons)..... 961,203 5.2% 3.3% 329,810 7.7% 5.9% 3.9%
</TABLE>
- ------------------------------
* Indicates beneficial ownership of less than 1.0% of the outstanding Class A
or Class B Common Stock, as applicable.
(1) No shares of Class B Common Stock will be sold in the Offering.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power
with respect to securities. Shares of Common Stock issuable upon the
exercise of stock options exercisable within 60 days hereof are deemed
outstanding and to be beneficially owned by the person holding such option
for purposes of computing such person's percentage ownership, but are not
deemed outstanding for the purposes of computing the percentage ownership of
any other person. Except for shares held jointly with a person's spouse or
subject to applicable community property laws, or as indicated in the
footnotes to this table, each stockholder identified in the table possesses
the sole voting and disposition power with respect to all shares of Common
Stock shown as beneficially owned by such stockholder.
(3) Based on (i) 18,594,994 shares of Class A Common Stock outstanding prior to
the Offering and 28,844,994 shares of Class A Common Stock outstanding after
the Offering, (ii) 4,274,630 shares of Class B Common Stock outstanding both
prior to and after the Offering, and (iii) in each case, includes 197,813
shares of Class A Common Stock issuable upon the exchange of the
Exchangeable Shares, see "The Company--Exchangeable Shares," 53,333 Pyramid
Earn-out Shares and 993,520 Lexecon Contingent Shares to be issued assuming
the price per share of the Class A Common Stock in the Offering is
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$14.00 (the number of Lexecon Contingent Shares to be issued will range from
a minimum of 231,400 shares if the price per share in the Offering is $17.50
or higher to a maximum of 1,450,240 shares if the price per share in the
Offering is $12.50 or less). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Acquisitions.".
(4) Includes 5,000 shares of Class A Common Stock held by the Muldowney Children
Irrevocable Trust. Mr. Muldowney has disclaimed all beneficial ownership of
such shares.
(5) Includes 271,976 Lexecon Contingent Shares to be issued to Mr. Carlton and
309,233 Lexecon Contingent Shares to be issued to each of Messrs. Fischel
and Rosenfield assuming the price per share of the Class A Common Stock in
the Offering is $14.00. The number of Lexecon Contingent Shares to be issued
to Mr. Carlton will vary from a minimum of 63,356 if the price per share in
the Offering is $17.50 or higher to a maximum of 397,003 if the price per
share in the Offering is $12.50 or less. The number of Lexecon Contingent
Shares to be issued to each of Messrs. Fischel and Rosenfield will vary from
a minimum of 72,036 shares if the price per share in the Offering is $17.50
or higher to a maximum of 451,387 if the price per share in the Offering is
$12.50 or less. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Acquisitions."
(6) 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 indirectly
by Knowledge Enterprises through Nextera Holdings. Lawrence J. Ellison,
Michael R. Milken, and Lowell J. Milken may be deemed to be a group within
the meaning of Rule 13d-5 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Lawrence J. Ellison is Chairman and Chief
Executive Officer of Oracle Corporation and a director of KU, LLC, Knowledge
Universe and Knowledge Enterprises. Michael R. Milken is Chairman of the
Board of Directors of KU, LLC, Knowledge Universe and Knowledge Enterprises.
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. On
March 11, 1991, in the action entitled In the Matter of Michael R. Milken,
the Securities and Exchange Commission instituted a proceeding pursuant to
Section 15(b)(6) of the Exchange Act and ordered that Michael R. Milken be
barred from association with any broker, dealer, investment advisor,
investment company, or municipal securities dealer. On April 24, 1990,
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. Drexel Burnham Lambert Incorporated, et al.,
restraining and enjoining Michael R. Milken from engaging in transactions,
acts, practices and courses of business which constitute or would constitute
violations of, or which aid and abet or would aid and abet violations of
Sections 7(c), 7(f), 9(a)(2), 10(b), 13(d), 14(e), 15(c)(3), and 17(a)(1) of
the Exchange Act, and Regulations T and X and Rules 10b-5, 10b-6, 13d-1,
13d-2, 14c-3, 15c3-1, 17a-3, and 17a-4 promulgated thereunder and Section
17(a) of the Securities Act of 1933, as amended. Lowell J. Milken is
Vice-Chairman of the Board of Directors of KU, LLC and Knowledge Universe, a
member of the board of directors of Knowledge Enterprises and the brother of
Michael R. Milken.
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DESCRIPTION OF CAPITAL STOCK
Upon the consummation of the Offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Class A Common Stock, par value
$0.001 per share, 4,300,000 shares of Class B Common Stock, par value $0.001 per
share, and 10,000,000 shares of Preferred Stock, par value $0.001 per share. As
of March 1, 1999, there were 17,350,328 shares of Class A Common Stock issued
and outstanding (excluding the Exchangeable Shares, Pyramid Earn-out Shares and
the Lexecon Contingent Shares) which were held by 103 stockholders, 4,274,630 of
Class B Common Stock issued and outstanding which were held by 17 stockholders
and no shares of Preferred Stock issued and outstanding. The Company has also
agreed to issue (i) 197,813 shares of Class A Common Stock upon the exchange of
the Exchangeable Shares, see "The Company--Exchangeable Shares," (ii) up to
53,333 Pyramid Earn-out Shares assuming Pyramid's satisfaction in full of
certain financial performance criteria for the twelve months ending March 31,
1999 and (iii) the Lexecon Contingent Shares which, assuming the price per share
of the Class A Common Stock in the Offering is $14.00, will consist of 993,520
shares of Class A Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Acquisitions."
COMMON STOCK
Voting Rights. 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 the Company's stockholders,
including in connection with the election of the Board of Directors. Holders of
Class A Common Stock and Class B Common Stock vote together as a single class on
all matters presented to the stockholders for their vote or approval, except as
may be required by Delaware law or as otherwise expressly specified in the
Certificate of Incorporation. The Company, by action of its Board of Directors
and the affirmative vote of the holders of a majority of the voting power of the
Class A Common Stock and Class B Common Stock, voting together as a class, may
increase or decrease the number of authorized shares of Class A Common Stock or
Preferred Stock. The Company, by action of its Board of Directors and the
affirmative vote of both (i) the holders of a majority of the voting power of
the Class A Common Stock and Class B Common Stock, voting together as a class,
and (ii) the holders of a majority of the voting power of the Class B Common
Stock, voting as a separate class, may increase or decrease the number of
authorized shares of Class B Common Stock.
Dividends. Holders of Class A Common Stock and Class B Common Stock are
entitled to receive dividends at the same rate, when and if declared by the
Board of Directors, out of legally available funds. The Company may not make any
dividend or distribution with respect to any class of Common Stock unless at the
same time the Company makes a ratable dividend or distribution with respect to
each outstanding share of Common Stock regardless of class. In the case of a
stock dividend or other distribution payable in shares of a class of Common
Stock, only shares of Class A Common Stock may be distributed with respect to
Class A Common Stock and only shares of Class B Common Stock may be distributed
with respect to Class B Common Stock, and the number of shares of Common Stock
payable per share will be equal for each class.
Split, Subdivision or Combination. None of the Class A Common Stock or the
Class B Common Stock may be subdivided, consolidated, reclassified or otherwise
changed in any manner unless the other class is subdivided, consolidated,
reclassified or otherwise changed in the same proportion.
Conversion Rights. The Class A Common Stock has no conversion rights. Each
share of Class B Common Stock is convertible at any time, at the option of the
holder, into one share of Class A Common Stock. Each share of Class B Common
Stock shall convert automatically into one share of Class A Common Stock upon
its sale, assignment, pledge, gift or other transfer (an "Assignment" or to
"Assign"), other than (a) to a Controlled Affiliate of the transferor; or (b)
pursuant to a Qualified Transfer (as defined below). The term "Controlled
Affiliate" means, with respect to a transferor, any individual or entity that is
controlled directly or indirectly (by ownership of voting securities, contract
or otherwise) by such transferor. "Qualified Transfer" means (i) any transfer of
shares of Class B Common Stock by will or pursuant to the laws of descent and
distribution to any member or members of a stockholder's Family, (ii) any
transfer of shares of Class B Common Stock by a stockholder to a domestic trust
created for the sole benefit of one or more of the stockholder or any member or
members of the stockholder's Family, (iii) any transfer of shares of Class B
Common Stock from a trust described in clause (ii) above to the stockholder (or
former stockholder) who
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transferred shares of Class B Common Stock to such trust, (iv) any transfer to a
domestic limited partnership or a domestic limited liability company if there
are no partners or members of such limited partnership or limited liability
company other than a stockholder and members of a stockholder's Family; (v) any
transfer of Class B Common Stock from a limited partnership or limited liability
company described in clause (iv) above to a stockholder (or former stockholder)
who transferred Class B Common Stock to such limited partnership or limited
liability company; and (vi) any transfer of shares of Class B Common Stock from
one holder of Class B Common Stock to another holder of Class B Common Stock as
of August 31, 1998. "Family" means a person's spouse, lineal descendants,
parents, siblings, and lineal descendants of siblings. Any such relationship by
legal adoption shall be included.
Upon any Assignment of Class B Common Stock by Knowledge Enterprises, other
than to a Controlled Affiliate or pursuant to a Qualified Transfer, a
proportionate amount of the Class B Common Stock held by the other holders of
Class B Common Stock will also automatically convert into Class A Common Stock.
For example, if Knowledge Enterprises Assigns 25% of its Class B Common Stock to
a third party who is not an Affiliate and not pursuant to a Qualified Transfer,
then those shares of Class B Common Stock will automatically convert into Class
A Common Stock on a one-to-one basis and 25% of the Class B Common Stock held by
each other holder of Class B Common Stock will automatically convert into Class
A Common Stock on a one-to-one basis.
In the event that a group comprised of one or more of Michael R. Milken,
Lawrence J. Ellison or Lowell J. Milken cease to control, directly or indirectly
(through the ownership of voting securities, contract or otherwise), Knowledge
Enterprises or any other person or entity that owns any or all of the shares of
Class B Common Stock owned by Knowledge Enterprises on the date hereof, then all
shares of Class B Common Stock shall automatically convert into shares of Class
A Common Stock.
Notwithstanding the foregoing, (i) these automatic conversion provisions
shall not apply in the case of a merger or similar transaction by the Company in
which all the outstanding shares of Common Stock of the Company regardless of
class are purchased by the acquiror, and (ii) any holder of Class B Common Stock
may pledge his shares of Class B Common Stock to a financial institution (the
"Pledgee") pursuant to a bona fide pledge of such shares as collateral security
for indebtedness due to the Pledgee, and, if the Pledgee forecloses or takes
similar action, such pledged shares of Class B Common Stock shall be converted
automatically into shares of Class A Common Stock.
Merger. Upon the merger or consolidation of the Company, holders of each
class of Common Stock will be entitled to receive equal per share payments or
distributions, except that in any transaction in which shares of capital stock
are distributed, such shares may differ only to the extent that the Class A
Common Stock and the Class B Common Stock differ as provided in the Company's
Certificate of Incorporation.
Liquidation Rights. Upon any dissolution or liquidation of the Company, the
holders of the Class A Common Stock and Class B Common Stock will be entitled to
receive ratably all assets of the Company available for distribution to
stockholders, subject to any preferential rights of any then outstanding shares
of Preferred Stock.
Other Provisions. The holders of the Class A Common Stock and Class B
Common Stock are not entitled to preemptive rights. The rights of holders of
Class A Common Stock and Class B Common Stock are subject to the rights of
holders of shares of any series of Preferred Stock that the Company may
designate and issue in the future.
The Certificate of Incorporation provides that each holder of shares of
Common Stock, other than shares of Common Stock acquired in the Offering,
agrees, subject to certain exceptions, not to (i) offer, pledge, sell, contract
to sell, sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of, directly or indirectly, any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common Stock
or (ii) enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, or such other securities, in
cash or
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otherwise) for a period of 180 days after the date of this Prospectus without
the prior written consent of DLJ. In addition, during such period, each holder
of shares of Common Stock, other than shares of Common Stock acquired in the
Offering, agrees, subject to certain exceptions, not to make any demand for, or
exercise any right with respect to, the registration of any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock without DLJ's prior written consent.
PREFERRED STOCK
The Company's Certificate of Incorporation allows the Company to issue
without stockholder approval Preferred Stock having rights senior to those of
the Common Stock. As of the date of this Prospectus, no shares of Preferred
Stock will be outstanding. Therefore, the Board of Directors has the authority,
without further action by the stockholders, to issue up to 10,000,000 shares of
Preferred Stock from time to time in one or more series. Each series of
Preferred Stock will have the number of shares, designations, powers,
preferences, and special or relative rights and privileges as may be determined
by the Board of Directors, which may include dividend rights, voting rights,
redemption and sinking fund provisions, liquidation preferences, and conversion
rights. The authority of the Board of Directors to issue Preferred Stock without
further action by the stockholders provides flexibility in connection with
possible acquisitions and other corporate purposes, but may also result in the
issuance of Preferred Stock with voting, conversion or other rights that could
adversely affect the voting power and other rights of the holders of Common
Stock.
The issuance of Preferred Stock may have the effect of delaying or
preventing a change in control of the Company. The issuance of Preferred Stock
could decrease the amount of earnings and assets available for distribution to
the holders of Common Stock and in some circumstances have the effect of
decreasing the market price of the Common Stock. The Company currently has no
plans to issue any shares of Preferred Stock.
WARRANTS
In connection with the Guaranty, the Company issued the Guaranty Warrants
to purchase 250,000 shares of Class A Common Stock to Knowledge Universe. The
Guaranty Warrants expire on December 31, 2003. See "Certain
Transactions--Guaranty and Warrants to Purchase Class A Common Stock."
EXCHANGEABLE SHARES
In connection with the Sibson Acquisitions, Nextera LLC formed Sibson
Canada Co. a wholly owned Canadian subsidiary, which issued Exchangeable Shares
to the holders of capital stock of Sibson Canada, Inc. The holders of
Exchangeable Shares may exchange such shares at any time for an aggregate of
197,813 shares of Class A Common Stock. The Exchangeable Shares are designed to
provide an opportunity for the shareholders of Sibson Canada, Inc. to achieve a
Canadian tax deferral in certain circumstances. The holders of Exchangeable
Shares are entitled to dividend and other rights equivalent to shares of Class A
Common Stock but are not entitled to vote on matters submitted to the holders of
Class A Common Stock until such time as the holders of Exchangeable Shares
exchange such shares for Class A Common Stock.
CERTAIN PROVISIONS OF DELAWARE LAW AND THE COMPANY'S CERTIFICATE OF
INCORPORATION
The following is a description of certain provisions of the Delaware
General Corporation Law (the "DGCL") and the Company's Certificate of
Incorporation and Bylaws. This summary does not purport to be complete and is
qualified in its entirety by reference to the DGCL, the Certificate of
Incorporation and the Bylaws.
Certain provisions of the Certificate of Incorporation and the Bylaws could
have anti-takeover effects. These provisions are intended to enhance the
likelihood of continuity and stability in the composition of the policies
formulated by the Board of Directors. In addition, these provisions are intended
to ensure that the Board will have sufficient time to act in what the Board of
Directors believes to be the best interests of the Company and its stockholders.
These provisions also are designed to reduce the vulnerability of the Company to
an unsolicited proposal for a takeover of the Company that does not contemplate
the acquisition of all of its
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outstanding shares or an unsolicited proposal for the restructuring or sale of
all or part of the Company. The provisions are also intended to discourage
certain tactics that may be used in proxy fights.
Delaware Anti-Takeover Law. The Company is a Delaware corporation that is
subject to Section 203 of the DGCL. Under Section 203, certain "business
combinations" between a Delaware corporation whose stock generally is publicly
traded or held of record by more than 2,000 stockholders and an "interested
stockholder" are prohibited for a three-year period following the date that such
stockholder became an interested stockholder, unless (i) the corporation has
elected in its Certificate of Incorporation or Bylaws not to be governed by
Section 203 (the Company has not made such an election), (ii) the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder was approved by the board of directors of the corporation
before such stockholder became an interested stockholder, (iii) upon
consummation of the transaction that made such stockholder an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the commencement of the transaction (excluding
voting stock owned by directors who are also officers or held in employee
benefit plans in which the employees do not have a confidential right to tender
stock held by the plan in a tender or exchange offer) or (iv) the business
combination is approved by the board of directors of the corporation and
authorized at a meeting by two-thirds of the voting stock which the interested
stockholder does not own. The three-year prohibition also does not apply to
certain business combinations proposed by an interested stockholder following
the announcement or notification of certain extraordinary transactions involving
the corporation and a person who had not been an interested stockholder during
the previous three years or who became an interested stockholder with the
approval of a majority of the corporation's directors. The term "business
combination" is defined generally to include mergers or consolidations between a
Delaware corporation and an interested stockholder, transactions with an
interested stockholder involving the assets or stock of the corporation or its
majority-owned subsidiaries, and transactions which increase an interested
stockholder's percentage ownership of stock. The term "interested stockholder"
is defined generally as (i) those stockholders who become beneficial owners of
15% or more of a Delaware corporation's voting stock, (ii) those affiliates or
associates of a Delaware corporation who were owners of 15% or more of such
corporation's voting stock within the three-year period prior to the date on
which it is sought to be determined whether such person is an interested
stockholder, and (iii) the affiliates or associates of such stockholders. The
Company does not believe that any of Nextera Holdings, (which will hold 66.0% of
the combined voting power of the outstanding Common Stock upon consummation of
the Offering,) Knowledge Enterprises or their affiliates is an "interested
stockholder."
No Stockholder Action by Written Consent; Special Meetings. The Certificate
of Incorporation provides that stockholder action can only be taken at an annual
or special meeting of stockholders and prohibits stockholder action by written
consent in lieu of a meeting. The Bylaws provide that special meetings of
stockholders may be called only by the Board of Directors, its Chairman or the
President of the Company. Stockholders are not permitted to call a special
meeting of stockholders or to require that the Board of Directors call a special
meeting.
Advance Notice Requirements for Stockholder Proposals and Director
Nominees. The Bylaws establish an advance notice procedure for stockholders to
make nominations of candidates for election as directors or to bring other
business before an annual meeting of stockholders of the Company. The
Stockholder Notice Procedure provides that only persons who are nominated by, or
at the direction of, the Company's notice of meeting, the Board of Directors or
by a stockholder who has given timely written notice to the Secretary of the
Company prior to the meeting at which directors are to be elected, will be
eligible for election as directors of the Company. The Stockholder Notice
Procedure also provides that at an annual meeting only such business may be
conducted as has been brought before the meeting by, or at the direction of, the
Company's notice of meeting, the Board of Directors or by a stockholder who has
given timely written notice to the Secretary of the Company of such
stockholder's intention to bring such business before such meeting. Under the
Stockholder Notice Procedure, if a stockholder desires to submit a proposal or
nominate persons for election as directors at an annual meeting, the stockholder
must submit written notice to the Company not less than 60 days nor more than 90
days prior to the first anniversary of the previous year's annual meeting (or if
the date of the annual meeting is not within 30 days before or after such
anniversary date, then, to be timely, notice must be delivered
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<PAGE> 73
not more than 90 nor less than 60 days prior to such annual meeting or the 10th
day after the earlier of (i) the date notice of the meeting was mailed or (ii)
the date a public announcement of the date of such meeting is first made). In
addition, under the Stockholder Notice Procedure, a stockholder's notice to the
Company proposing to nominate a person for election as a director or relating to
the conduct of business other than the nomination of directors must contain a
brief description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such stockholder and the beneficial owner, if any, on whose
behalf the nomination or proposal is made. If the chairman of a meeting
determines that business was not properly brought before the meeting, in
accordance with the Stockholder Notice Procedure, such business shall not be
discussed or transacted.
Number of Directors; Removal; Filling Vacancies. The Bylaws provide that
the Company's Board of Directors will consist of between seven and thirteen
members, the exact number to be fixed from time to time by resolution adopted by
the affirmative vote of a majority of the directors of the Company. The Board of
Directors currently consists of eight directors. Further, subject to the rights
of the holders of any series of Preferred Stock then outstanding and the
Stockholders Agreement, the Bylaws authorize the Board of Directors to fill
newly created directorships. A director so elected by the Board of Directors
holds office until his successor is elected and qualified. Subject to the rights
of the holders of any series of Preferred Stock then outstanding, the Bylaws
also provide that directors may be removed only for cause and only by the
affirmative vote of holders of 66 2/3% of the outstanding shares of voting
securities then entitled to vote generally in the election of directors, voting
together as a single class. The effect of these provisions is to preclude a
stockholder from removing incumbent directors without cause and simultaneously
gaining control of the Company's Board of Directors by filling the vacancies
created by such removal with its own nominees.
Limitation of Officer and Director Liability and Indemnification
Arrangements. The Company's Certificate of Incorporation provides that an
officer or director of the Company will not be personally liable to the Company
or its stockholders for monetary damages for any breach of his fiduciary duty as
an officer or director, except in certain cases where liability is mandated by
the DGCL. The provision has no effect on any non-monetary remedies that may be
available to the Company or its stockholders, nor does it relieve the Company or
its officers or directors from compliance with federal or state securities laws.
The Bylaws also generally provide that the Company shall indemnify, to the
fullest extent permitted by law, any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit, investigation, administrative hearing or any other proceeding (each, a
"Proceeding") by reason of the fact that he is or was a director or officer of
the Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another entity, against expenses incurred by him
in connection with such Proceeding. An officer or director shall not be entitled
to indemnification by the Company if (i) the officer or director did not act in
good faith and in a manner reasonably believed to be in, or not opposed to, the
best interests of the Company, or (ii) with respect to any criminal action or
proceeding, the officer or director had no reasonable cause to believe his
conduct was unlawful.
Bylaws. The Bylaws are subject to adoption, amendment, alteration, repeal
or rescission either by (a) the Board of Directors or (b) the affirmative vote
of the holders of not less than 66 2/3% of the total voting power of all
outstanding securities of the Company then entitled to vote generally in the
election of directors, voting together as a single class, at any regular meeting
of the Board of Directors or of the stockholders or at any special meeting of
the Board of Directors or of the stockholders if notice of such adoption,
amendment, alteration, repeal or rescission is contained in the notice of such
special meeting.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Class A Common Stock will be
ChaseMellon Shareholder Services, L.L.C.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of the Offering, the Company will have 28,844,994 shares
of Class A Common Stock and 4,274,630 shares of Class B Common Stock
outstanding, assuming (i) no exercise of the Underwriters' over-allotment
option, (ii) no exercise of outstanding options to purchase Class A Common
Stock, (iii) the exchange of all Exchangeable Shares for 197,813 shares of Class
A Common Stock, see "The Company--Exchangeable Shares," (iv) the issuance of
53,333 Pyramid Earn-out Shares, assuming Pyramid's satisfaction in full of
certain financial performance criteria for the twelve months ending March 31,
1999, and (v) the issuance of 993,520 Lexecon Contingent Shares (assuming the
price per share of the Class A Common Stock in the Offering is $14.00). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Acquisitions." Of these shares, the 10,250,000 shares of Class A
Common Stock sold in the Offering are freely tradable without restriction or
further registration under the Securities Act, except that any shares held by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act ("Rule 144"), may generally be sold only in compliance with the
limitations of Rule 144 described below.
SALE OF RESTRICTED SHARES
The remaining shares of Common Stock (including Class A Common Stock
issuable upon exchange of the Exchangeable Shares) are "restricted securities"
as defined under Rule 144. Restricted Securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under the Securities Act. Additionally, Nextera's Certificate of Incorporation
provides that each holder of Common Stock, other than the holders of the shares
of Common Stock acquired in the Offering, agrees not to sell, directly or
indirectly, any Common Stock, subject to certain exceptions, without the prior
consent of DLJ for a period of 180 days from the date of this Prospectus.
Subject to the Lock-up Agreements described below and the foregoing provisions
of the Company's Certificate of Incorporation, and without giving effect to the
registration rights described below, additional shares of Class A Common Stock
(including shares issuable upon conversion of Class B Common Stock, upon the
exchange of the Exchangeable Shares and as Lexecon Contingent Shares assuming
the price per share of the Class A Common Stock in the Offering is $14.00) will
be available for sale in the public market (subject in certain circumstances to
compliance with certain volume and other restrictions under Rule 144) as
follows: (i) 4,588 shares will be eligible for sale 180 days after the date of
this Prospectus; and (ii) 22,865,036 shares will become eligible for sale under
Rule 144 commencing December 31, 1999 upon the expiration of the restrictions
imposed by the Stockholders Agreement and the Lexecon Lock-up Agreements.
In general, under Rule 144, a person (or persons whose shares are
aggregated) including an affiliate, who has beneficially owned shares for at
least one year is entitled to sell, within any three-month period commencing 90
days after the date of this Prospectus, a number of shares of Common Stock that
does not exceed the greater of (i) 1% of the then outstanding shares of Class A
Common Stock (approximately 287,917 shares as of the date of this Prospectus) or
(ii) the average weekly trading volume in the Class A Common Stock during the
four calendar weeks preceding the date on which notice of such sale is filed,
subject to certain restrictions. In addition, a person who is not deemed to have
been an affiliate of the Company at any time during the 90 days preceding a sale
and who has beneficially owned the shares proposed to be sold for at least two
years, would be entitled to sell such shares under Rule 144(k) without regard to
the volume limitations described above.
An employee, officer or director of or consultant to the Company who
purchased his or her shares pursuant to a written compensatory plan or contract
may be entitled to rely on the resale provisions of Rule 701 under the
Securities Act, which permits non-affiliates to sell their Rule 701 shares
without having to comply with the public information, holding period, volume
limitation or notice provisions of Rule 144 and permits affiliates to sell their
Rule 701 shares without having to comply with Rule 144's holding period
restrictions, in each case commencing 90 days after the date of this Prospectus.
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OPTIONS AND WARRANTS
Upon consummation of the Offering, the Company will have outstanding
options and warrants to purchase shares of Class A Common Stock, of which
1,041,432 will be exercisable. Following the Offering, the Company intends to
file a Registration Statement on Form S-8 under the Securities Act to register
the 5,000,000 shares of Class A Common Stock that are issuable upon the exercise
of stock options either outstanding or available for grant pursuant to the 1998
Equity Participation Plan. The Company has also agreed to issue options under
the Limited Purpose Plan, and intends to file one or more registration
statements on Form S-8 to register the shares of Class A Common Stock that are
issuable upon the exercise of such options. Such Registration Statements will
become effective immediately upon filing; however, consistent with the terms of
the 1998 Equity Participation Plan and the Limited Purpose Plan, holders of
options will be unable to sell any shares of Class A Common Stock received upon
the exercise of options granted thereunder until the expiration of 180 days
after the date of this Prospectus without the prior written consent of DLJ.
Shares covered by such Registration Statement will be eligible for sale in the
public market after the effective date of such Registration, subject to Rule 144
limitations applicable to affiliates as well as to the limitations on sale and
vesting described above.
REGISTRATION RIGHTS
Stockholders holding an aggregate of 22,869,624 shares of Class A Common
Stock (including shares issuable upon conversion of Class B Common Stock, upon
exchange of the Exchangeable Shares and as Lexecon Contingent Shares)
("Holders") are entitled to certain registration rights under the Stockholders
Agreement. Commencing 180 days after the Offering, Knowledge Enterprises or an
affiliate that then owns an equity interest in the Company may make a one-time
written request of the Company for registration with the Securities and Exchange
Commission (a "Demand Registration") of all or part of its Class A Common Stock
of the Company, provided, however, that the Company need not effect a Demand
Registration unless it includes at least 10% of the Company's issued and
outstanding Common Stock. The Company may defer such Demand Registration for a
single period not to exceed 180 days, if the Board of Directors determines in
the exercise of its reasonable judgment that effecting such Demand Registration
at such time would have a material adverse effect on the Company. In addition,
Holders who together hold at least 10% of the issued and outstanding Common
Stock of the Company may make a one-time written request of the Company for a
Demand Registration on the same terms as those applicable to Knowledge
Enterprises as set forth above.
The Stockholders Agreement also provides piggyback registration rights to
Holders for their shares of Class A Common Stock ("Registrable Securities"). The
Company must provide prior written notice to those Holders whenever it proposes
to register any Common Stock (or securities convertible into or exchangeable
for, or options to purchase, Common Stock) with the Securities and Exchange
Commission on a form that would permit the registration of Registrable
Securities. The Company will register in such registration all Registrable
Securities requested to be included, provided that if, in the opinion of the
applicable underwriter, the number of securities proposed to be included is
greater that what could be sold without having a material impact on the
offering, the Company will include securities in the following priority: (i)
first, the Common Stock the Company proposes to sell, and (ii) second, the
Registrable Securities requested to be included in such registration by the
holders of Registrable Securities pro rata based on the number of Registrable
Securities that each such stockholder shall have requested to include therein.
The Stockholders Agreement further provides that the Company will bear all
expenses incident to the Company's performance of its registration obligations,
other than the costs or expenses of any selling stockholders for underwriters'
commissions, brokerage fees or transfer taxes, or the fees and expenses of any
counsel, accountants or other representative retained by any selling
stockholder. The Company is obligated, however, to reimburse the selling
stockholders in each Demand Registration for the reasonable fees of one counsel
up to $25,000.
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EFFECT OF SALES OF SHARES
Prior to the Offering, there has been no public market for the Class A
Common Stock, and no precise prediction can be made as to the effect, if any,
that market sales of shares of Class A Common Stock or the availability of
shares of Class A Common Stock for sale will have on the market price of the
Class A Common Stock prevailing from time to time. Nevertheless, the sale of
substantial amounts of the Class A Common Stock in the public market could
adversely affect prevailing market prices and could impair the Company's future
ability to raise capital through the sale of its equity securities.
LOCK-UP AGREEMENTS
Directors, officers and certain stockholders of the Company holding an
aggregate of 16,623,016 shares of Class A Common Stock and 4,266,030 shares of
Class B Common Stock have agreed that they will not, without the prior written
consent of DLJ and subject to certain exceptions, sell or otherwise dispose of
any shares of Common Stock or options to acquire shares of Common Stock during
the 180-day period following the date of this Prospectus. The Company has agreed
not to sell or otherwise dispose of any shares of Class A Common Stock during
the 180-day period following the date of this Prospectus without the prior
written consent of DLJ, except the Company may (i) issue, and grant options to
purchase, shares of Class A Common Stock under the 1998 Equity Participation
Plan and the Limited Purpose Plan and (ii) issue shares of Class A Common Stock
in connection with acquisitions, if the terms of such issuance provide that such
Class A Common Stock shall not be resold prior to the expiration of such 180-day
period. DLJ may release any or all shares from the DLJ Lock-Up Agreements at any
time or from time to time without notice.
In connection with the Lexecon Acquisition, the former stockholders of
Lexecon entered into lock-up agreements which provide that they may not sell or
otherwise dispose of their shares of Class A Common Stock for a six-month period
following the Offering, and that subsequent to such six-month period, those
stockholders will not sell more than one-third of such shares in the subsequent
12-month period and more than two-thirds of such shares in the subsequent
24-month period. A total of 3,809,520 shares of Class A Common Stock are subject
to the Lexecon Lock-up Agreements (assuming the issuance of 993,520 Lexecon
Contingent Shares, which number may vary based upon the price per share of the
Class A Common Stock in the Offering, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Acquisitions").
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UNDERWRITING
Subject to the terms and conditions of an Underwriting Agreement, dated
, 1999 (the "Underwriting Agreement"), the Underwriters named below,
who are represented by Donaldson, Lufkin & Jenrette Securities Corporation,
BancBoston Robertson Stephens Inc., BT Alex. Brown Incorporated, NationsBanc
Montgomery Securities LLC, and Thomas Weisel Partners LLC (collectively, the
"Representatives"), have severally agreed to purchase from the Company the
respective number of shares of Class A Common Stock set forth opposite their
names below.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
BancBoston Robertson Stephens Inc...........................
BT Alex. Brown Incorporated.................................
NationsBanc Montgomery Securities LLC.......................
Thomas Weisel Partners LLC..................................
Total............................................. 10,250,000
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Class A Common
Stock offered hereby are subject to approval by their counsel of certain legal
matters and to certain other conditions. The Underwriters are obligated to
purchase and accept delivery of all the shares of Class A Common Stock offered
hereby (other than those shares covered by the over-allotment option described
below) if any are purchased.
The Underwriters initially propose to offer the shares of Class A Common
Stock in part directly to the public at the initial public offering price set
forth on the cover page of this Prospectus and in part to certain dealers
(including the Underwriters) at such price less a concession not in excess of
$ per share. The Underwriters may allow, and such dealers may re-allow, to
certain other dealers a concession not in excess of $ per share. After the
initial offering of the Class A Common Stock, the public offering price and
other selling terms may be changed by the Representatives at any time without
notice. The Underwriters do not intend to confirm sales to any accounts over
which they exercise discretionary authority.
DLJdirect Inc., an affiliate of Donaldson, Lufkin and Jenrette Securities
Corporation and a member of the selling group, is facilitating the distribution
of the shares sold in the Offering over the Internet. The Underwriters have
agreed to allocate a limited number of shares to DLJdirect Inc. for sale to its
brokerage account holders.
The Company has granted to the Underwriters an option, exercisable within
30 days after the date of this Prospectus, to purchase, from time to time, in
whole or in part, up to an aggregate of 1,537,500 additional shares of Class A
Common Stock at the initial public offering price less underwriting discounts
and commissions. The Underwriters may exercise such option solely to cover
over-allotments, if any, made in connection with the Offering. To the extent
that the Underwriters exercise such option, each Underwriter will become
obligated, subject to certain conditions, to purchase its pro rata portion of
such additional shares proportionate to such Underwriter's underwriting
commitment as indicated in the preceding table.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
The Representatives have agreed to reimburse the Company for certain
amounts in connection with the Offering.
Effective August 31, 1998, the Company and Nextera Funding, Inc., an
affiliate of DLJ, entered into the Bridge Loan which provided for a $40 million
credit facility bearing interest at the rate of LIBOR plus 450 basis points per
annum and maturing on March 1, 1999. Effective December 31, 1998, the Bridge
Loan was amended to change the interest rate to 12% per annum commencing on
December 31, 1998 and extend the
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<PAGE> 78
maturity date to April 30, 1999. The Company borrowed $38.0 million from Nextera
Funding, Inc. under the Bridge Loan to finance the Sibson Acquisitions and paid
Nextera Funding, Inc. a commitment fee of $400,000 and a takedown fee of
$380,000. The Company also agreed to reimburse Nextera Funding, Inc. for all
reasonable out-of-pocket costs, expenses and other payments, including but not
limited to reasonable legal fees and disbursements, incurred or made in
connection with the Bridge Loan. The indebtedness incurred under the Bridge Loan
will be repaid with a portion of the net proceeds from the Offering. As a result
of such arrangements, the Conduct Rules of the National Association of
Securities Dealers, Inc. require that the initial public offering price of the
Class A Common Stock be no higher than that recommended by a qualified
independent underwriter, as defined in Rule 2720 of the Conduct Rules. BT Alex.
Brown Incorporated, one of the Representatives of the Underwriters, will serve
as the qualified independent underwriter and has assumed the responsibilities of
acting as qualified independent underwriter in pricing the Class A Common Stock
offered hereby and conducting "due diligence" in respect thereto. BT Alex. Brown
Incorporated will receive a fee of $5,000 from the Company as compensation to
act as qualified independent underwriter.
DLJ and the Company are parties to a letter agreement dated August 31,
1998, as supplemented on December 31, 1998 (the "Engagement Letter"). Pursuant
to the Engagement Letter, DLJ has the right to act as the Company's lead
placement agent, lead initial purchaser or lead managing underwriter in the
event that the Company determines to sell its securities with the services of an
outside financial advisor or investment bank during the period ending August 31,
1999. In addition, in connection with the Bridge Loan Amendment and in payment
for certain consent and extension fees, DLJ will receive a cash fee of $750,000
at the earlier of the closing of the Offering or April 30, 1999.
Each of the Company, its executive officers and directors and shareholders
of the Company has agreed, subject to certain exceptions, not to (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of, directly or indirectly, any shares
of Class A Common Stock or any securities convertible into or exercisable or
exchangeable for Class A Common Stock or (ii) enter into any swap or other
arrangement that transfers all or a portion of the economic consequences
associated with the ownership of any Class A Common Stock (regardless of whether
any of the transactions described in clause (i) or (ii) is to be settled by the
delivery of Class A Common Stock, or such other securities, in cash or
otherwise) for a period of 180 days after the date of this Prospectus without
the prior written consent of DLJ. In addition, during such period, the Company
has also agreed not to file any registration statement with respect to, and each
of its executive officers, directors and certain shareholders of the Company has
agreed not to make any demand for, or exercise any right with respect to, the
registration of any shares of Class A Common Stock or any securities convertible
into or exercisable or exchangeable for Class A Common Stock without DLJ's prior
written consent.
Prior to the Offering, there has been no established trading market for the
Class A Common Stock. The initial public offering price for the shares of Class
A Common Stock offered hereby will be determined by negotiation among the
Company and the Representatives. The factors to be considered in determining the
initial public offering price include the history of and the prospects for the
industry in which the Company competes, the prospects for future earnings of the
Company, the recent market prices of securities of generally comparable
companies and the general condition of the securities markets at the time of the
Offering.
A portion of the shares offered hereby will be reserved for sale to persons
designated by the Company and the number of shares offered to the public will be
reduced to the extent those persons purchase such shares. The price per share of
the shares to be sold to such persons will be the same as the price to the
public in the Offering. The maximum investment of any such person may be limited
by the Company in its sole discretion. The number of shares to be sold under
this program shall not exceed five percent of the number of shares of Class A
Common Stock offered in connection with the Offering.
Other than in the United States, no action has been taken by the Company or
the Underwriters that would permit a public offering of the shares of Class A
Common Stock offered hereby in any jurisdiction where action for that purpose is
required. The shares of Class A Common Stock offered hereby may not be offered
or sold, directly or indirectly, nor may this Prospectus or any other offering
material or advertisements
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<PAGE> 79
in connection with the offer and sale of any such shares of Class A Common Stock
be distributed or published in any jurisdiction, except under circumstances that
will result in compliance with the applicable rules and regulations of such
jurisdiction. Persons into whose possession this Prospectus comes are advised to
inform themselves about and to observe any restrictions relating to the Offering
and the distribution of this Prospectus. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any shares of Class A Common
Stock offered hereby in any jurisdiction in which such an offer or a
solicitation is unlawful.
In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the Class
A Common Stock. Specifically, the Underwriters may overallot the Offering,
creating a syndicate short position. The Underwriters may bid for and purchase
shares of Class A Common Stock in the open market to cover such syndicate short
position or to stabilize the price of the Class A Common Stock. In addition, the
underwriting syndicate may reclaim selling concessions from syndicate members
and selected dealers if they repurchase previously distributed Class A Common
Stock in syndicate covering transactions, in stabilizing transactions or
otherwise. These activities may stabilize or maintain the market price of the
Class A Common Stock above independent market levels. The Underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
LEGAL MATTERS
The legality of the issuance of the Class A Common Stock offered hereby
will be passed upon for the Company by Latham & Watkins, San Diego, California
and certain other matters will be passed upon for the Company by Maron &
Sandler, Los Angeles, California. See "Management--Directors, Executive Officers
and Other Senior Managers," "--Board Committees" and "Certain
Transactions--Retention of Maron & Sandler" for information concerning Maron &
Sandler's relationship with the Company. Certain legal matters in connection
with the Offering will be passed upon for the Underwriters by Testa, Hurwitz &
Thibeault, LLP, Boston, Massachusetts.
EXPERTS
The Consolidated Financial Statements and schedule of Nextera Enterprises,
Inc. at December 31, 1997 and 1998 and for the period from February 26, 1997 to
December 31, 1997 and the year ended December 31, 1998, the Consolidated
Financial Statements of Symmetrix, Inc. and Subsidiaries at May 31, 1997, and
for the year ended May 31, 1997, and for the period from June 1, 1997 to July
30, 1997 and the Financial Statements of SiGMA Consulting, LLC at December 31,
1996 and 1997 appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon, and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
The Consolidated Financial Statements of Symmetrix, Inc. and Subsidiaries
at May 31, 1996 and for the year then ended appearing in this Prospectus and the
Registration Statement have been audited by BDO Seidman, LLP, independent
auditors, as indicated in their report with respect thereto, and are included in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
The Financial Statements of PTG at December 31, 1996 and 1997 and the years
then ended appearing in this Prospectus and the Registration Statement have been
audited by Harte Carucci & Driscoll, P.C., independent auditors, as indicated in
their report with respect thereto, and are included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
The Consolidated Financial Statements of Sibson & Company, L.P. and
Subsidiaries at December 31, 1996 and 1997 and August 31, 1998 and for each of
the two years in the period ended December 31, 1997 and the eight month period
ended August 31, 1998 appearing in this Prospectus and the Registration
Statement have been audited by Farkouh, Furman & Faccio, independent auditors,
as indicated in their reports with respect thereto, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
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The Financial Statements of Sibson Canada, Inc. at December 31, 1997 and
for the year then ended appearing in this Prospectus and the Registration
Statement have been audited by Grant Thornton, independent auditors, as
indicated in their report with respect thereto, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
The Financial Statements of Pyramid Imaging, Inc. at December 31, 1997 and
for the year then ended appearing in this Prospectus and Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon, and is included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
The Financial Statements of Lexecon Inc. at December 31, 1997 and 1998 and
for each of the three years in the period ended December 31, 1998 appearing in
this Prospectus and Registration Statement have been audited by Ernst Young LLP,
independent auditors, as set forth in their report thereon, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement (of
which this Prospectus is a part and which term shall encompass any amendments
thereto) on Form S-1 pursuant to the Securities Act with respect to the Class A
Common Stock being offered in the Offering. This Prospectus does not contain all
of the information set forth in the Registration Statement, certain portions of
which have been omitted as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Class A
Common Stock, reference is made to the Registration Statement, including the
exhibits and schedules thereto. Statements made in this Prospectus as to the
contents of any contract, agreement or any other document referred to herein are
not necessarily complete; with respect to each such contract, agreement or
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference to
the Registration Statement exhibits filed as a part thereof. The Registration
Statement, including the exhibits and schedules thereto, may be inspected
without charge at the Commission's principle office at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of either of them or any part thereof may be
obtained from such office upon payment of fees prescribed by the Commission. The
Registration Statement, including the exhibits and schedules thereto, are also
available on the Commission's Web Site at http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by an independent accounting firm and
will make available copies of quarterly reports containing unaudited financial
information for the first three quarters of each fiscal year.
79
<PAGE> 81
NEXTERA ENTERPRISES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
HISTORICAL FINANCIAL STATEMENTS:
Consolidated Financial Statements of Nextera Enterprises,
Inc.
Report of Ernst & Young LLP, Independent Auditors...... F-3
Consolidated Balance Sheets -- December 31, 1997 and
1998.................................................. F-4
Consolidated Statements of Operations -- For the period
February 26, 1997 (date of inception) through December
31, 1997 and for the year ended December 31, 1998..... F-5
Consolidated Statements of Stockholders' Equity -- For
the period February 26, 1997 (date of inception)
through December 31, 1997 and for the year ended
December 31, 1998..................................... F-6
Consolidated Statements of Cash Flows -- For the period
February 26, 1997 (date of inception) through December
31, 1997 and for the year ended December 31, 1998..... F-7
Notes to Consolidated Financial Statements............. F-8
HISTORICAL FINANCIAL STATEMENTS OF ACQUIRED COMPANIES:
Consolidated Financial Statements of Symmetrix, Inc.
Report of Ernst & Young LLP, Independent Auditors...... F-20
Consolidated Balance Sheets -- May 31, 1997 and July
30, 1997.............................................. F-21
Consolidated Statements of Operations and Accumulated
Deficit -- For the year ended May 31, 1997 and for the
period June 1, 1997 through July 30, 1997............. F-22
Consolidated Statements of Cash Flows -- For the year
ended May 31, 1997 and for the period June 1, 1997
through July 30, 1997................................. F-23
Notes to Consolidated Financial Statements............. F-24
Consolidated Financial Statements of Symmetrix, Inc.
Independent Auditors' Report........................... F-30
Consolidated Balance Sheet -- May 31, 1996............. F-31
Consolidated Statement of Operations -- For the year
ended May 31, 1996.................................... F-32
Consolidated Statement of Changes in Stockholders'
Equity -- For the year ended May 31, 1996............. F-33
Consolidated Statement of Cash Flows -- For the year
ended May 31, 1996.................................... F-34
Notes to Consolidated Financial Statements............. F-35
Financial Statements of SiGMA Consulting, LLC
Report of Ernst & Young LLP, Independent Auditors...... F-42
Balance Sheets -- December 31, 1996 and 1997........... F-43
Statements of Income -- For the years ended December
31, 1996 and 1997..................................... F-44
Statements of Members' Equity -- For the years ended
December 31, 1996 and 1997............................ F-45
Statements of Cash Flows -- For the years ended
December 31, 1996 and 1997............................ F-46
Notes to Financial Statements.......................... F-47
Financial Statements of The Planning Technologies Group,
Inc.
Report of Independent Auditors......................... F-50
Balance Sheets -- December 31, 1996 and 1997 and March
31, 1998 (unaudited).................................. F-51
Statements of Income and Retained Earnings -- For the
years ended December 31, 1996 and 1997 and for the
three months ended March 31, 1997 and 1998
(unaudited)........................................... F-52
Statements of Cash Flows -- For the years ended
December 31, 1996 and 1997 and for the three months
ended March 31, 1997 and 1998 (unaudited)............. F-53
Notes to Financial Statements.......................... F-54
Financial Statements of Pyramid Imaging, Inc.
Report of Ernst & Young LLP, Independent Auditors...... F-57
Balance Sheets -- December 31, 1997 and March 31, 1998
(unaudited)........................................... F-58
</TABLE>
F-1
<PAGE> 82
NEXTERA ENTERPRISES, INC.
INDEX TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
HISTORICAL FINANCIAL STATEMENTS OF ACQUIRED COMPANIES
(CONTINUED):
Statements of Operations -- For the year ended December
31, 1997 and for the three months ended March 31, 1998
(unaudited)........................................... F-59
Statements of Shareholders' Equity -- For the year
ended December 31, 1997 and for the three months ended
March 31, 1998 (unaudited)............................ F-60
Statements of Cash Flows -- For the year ended December
31, 1997 and for the three months ended March 31, 1998
(unaudited)........................................... F-61
Notes to Financial Statements.......................... F-62
Financial Statements of Sibson & Company, L.P. and
Subsidiaries
Independent Auditor's Report........................... F-68
Consolidated Balance Sheets -- December 31, 1996 and
1997 and August 31, 1998.............................. F-69
Consolidated Statements of Operations and Partners'
Capital -- For the years ended December 31, 1996 and
1997 and for the eight months ended August 31, 1998... F-70
Consolidated Statements of Cash Flows -- For the years
ended December 31, 1996 and 1997 and for the eight
months ended August 31, 1998.......................... F-71
Notes to Consolidated Financial Statements............. F-72
Financial Statements of Sibson Canada, Inc.
Auditors' Report....................................... F-78
Balance Sheets -- December 31, 1997 and August 31, 1998
(unaudited)........................................... F-79
Statements of Operations and Retained Earnings -- For
the year ended December 31, 1997 and for the eight
months ended August 31, 1997 and 1998 (unaudited)..... F-80
Statements of Changes in Financial Position -- For the
year ended December 31, 1997 and for the eight months
ended August 31, 1997 and 1998 (unaudited)............ F-81
Notes to Financial Statements.......................... F-82
Financial Statements of Lexecon Inc.
Report of Ernst & Young LLP, Independent Auditors...... F-86
Balance Sheets -- December 31, 1997 and 1998........... F-87
Statements of Operations -- For the years ended
December 31, 1996, 1997 and 1998...................... F-88
Statements of Shareholders' Equity -- For the years
ended December 31, 1996, 1997 and 1998................ F-89
Statements of Cash Flows -- For the years ended
December 31, 1996, 1997, and 1998..................... F-90
Notes to Financial Statements.......................... F-91
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS:
Basis of Presentation.................................. PF-1
Unaudited Pro Forma Combined Balance Sheet -- December
31, 1998.............................................. PF-2
Unaudited Pro Forma Combined Statement of
Operations -- For the year ended December 31, 1998.... PF-3
Notes to Unaudited Pro Forma Combined Financial
Statements............................................ PF-4
</TABLE>
F-2
<PAGE> 83
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Nextera Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of Nextera
Enterprises, Inc. (the Company) (formerly Nextera Enterprises, L.L.C.) as of
December 31, 1997 and 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for the period from February 26,
1997 (date of inception) through December 31, 1997 and for the year ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1997 and 1998, and the results of its
operations and its cash flows for the period from February 26, 1997 (date of
inception) through December 31, 1997 and for the year ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
February 19, 1999
F-3
<PAGE> 84
NEXTERA ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1997 1998
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 554 $ 1,496
Accounts receivable, net of allowance for doubtful
accounts of $100 at December 31, 1997 and $1,267 at
December 31, 1998...................................... 2,202 31,094
Costs and estimated earnings in excess of billings........ 856 2,962
Due from affiliates....................................... 225 400
Due from officers......................................... -- 856
Prepaid expenses and other current assets................. 368 5,709
Income tax receivable..................................... 414 --
------- --------
Total current assets................................. 4,619 42,517
Long-term receivable........................................ 532 --
Property and equipment, net................................. 1,181 8,056
Intangible assets, net of accumulated amortization of $255
at December 31, 1997 and $1,977 at December 31, 1998...... 15,762 125,082
Other assets................................................ 561 1,036
------- --------
Total assets......................................... $22,655 $176,691
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 2,284 $ 23,530
Notes payable to bank..................................... 1,687 6,156
Bridge loan payable (including $37,500 payable to related
party at December 31, 1998)............................ -- 75,849
Deferred revenue.......................................... 747 1,193
Due to affiliates......................................... 90 1,068
Current portion of long-term debt and capital lease
obligations............................................ 146 482
------- --------
Total current liabilities............................ 4,954 108,278
Long-term debt and capital lease obligations................ 969 2,600
Debentures due to affiliates, including accrued interest
thereon................................................... -- 53,149
Other long-term liabilities................................. -- 1,174
Stockholders' equity:
Preferred Stock, $0.001 par value, 10,000,000 shares
authorized, no shares issued and outstanding........... -- --
Exchangeable shares, no par value, 2,500,000 shares
authorized, zero and 197,813 shares issued and
outstanding at December 31, 1997 and December 31, 1998,
respectively........................................... -- 495
Class A Common Stock, $0.001 par value, 50,000,000 shares
authorized, 7,898,800 and 16,811,740 shares issued and
outstanding at December 31, 1997 and December 31, 1998,
respectively........................................... 8 17
Class B Common Stock, $0.001 par value, zero and 4,274,630
shares authorized, issued and outstanding at December
31, 1997 and December 31, 1998, respectively........... -- 4
Additional paid-in capital................................ 19,739 31,144
Retained earnings (deficit)............................... (3,015) (20,170)
------- --------
Total stockholders' equity........................... 16,732 11,490
------- --------
Total liabilities and stockholders' equity........... $22,655 $176,691
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 85
NEXTERA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 26, 1997
(DATE OF INCEPTION) FOR THE
THROUGH YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER COMMON SHARE DATA)
<S> <C> <C>
Net revenues.............................................. $ 7,998 $ 67,590
Cost of revenues.......................................... 4,718 44,985
------- --------
Gross profit......................................... 3,280 22,605
Selling, general and administrative expenses.............. 5,306 23,103
Amortization expense...................................... 255 1,722
Restructuring costs....................................... -- 1,298
Compensation expense--other............................... -- 6,671
------- --------
Loss from operations................................. (2,281) (10,189)
Interest income........................................... 37 160
Interest expense.......................................... (69) (6,883)
------- --------
Loss before provision for income taxes............... (2,313) (16,912)
Provision for income taxes................................ 702 243
------- --------
Net loss............................................. $(3,015) $(17,155)
======= ========
Net loss per common share, basic and diluted.............. $ (0.74) $ (1.14)
======= ========
Weighted average common shares outstanding, basic and
diluted................................................. 4,061 14,997
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 86
NEXTERA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS B EXCHANGEABLE
COMMON STOCK COMMON STOCK PREFERRED STOCK SHARES
------------------- ------------------ ---------------------- ----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Class A Common
Stock..................... 7,898,800 $ 8 -- $-- -- $ -- -- $ --
Net loss.................... -- -- -- -- -- -- -- --
---------- --- --------- --- ----------- -------- ------- ----
Balance at December 31,
1997...................... 7,898,800 8 -- -- -- -- -- --
Issuance of Class A Common
Stock..................... 2,111,200 2 -- -- -- -- -- --
Issuance of Class A Common
Stock in connection with
acquired businesses....... 6,947,114 7 -- -- -- -- 197,813 495
Recapitalization of
Shares.................... -- -- -- -- 22,977,000 22,977 -- --
Exchange of warrant for
Class B Common Stock...... -- -- 4,300,000 4 -- -- -- --
Issuance of Class B
Preferred Stock........... -- -- -- -- 24,993,000 24,993 -- --
Redemption of Class B
Preferred Stock in
exchange for 10%
Debentures................ -- -- -- -- (47,970,000) (47,970) -- --
Repurchases and cancellation
of Class A and Class B
Common Stock.............. (280,374) -- (83,420) -- -- -- -- --
Issuances of Class A and
Class B Common Stock...... 135,000 -- 58,050 -- -- -- -- --
Net loss.................... -- -- -- -- -- -- -- --
---------- --- --------- --- ----------- -------- ------- ----
Balance at December 31,
1998...................... 16,811,740 $17 4,274,630 $ 4 -- $ -- 197,813 $495
========== === ========= === =========== ======== ======= ====
<CAPTION>
TOTAL
ADDITIONAL RETAINED STOCK-
PAID-IN EARNINGS HOLDERS'
CAPITAL (DEFICIT) EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Issuance of Class A Common
Stock..................... $ 19,739 $ -- $ 19,747
Net loss.................... -- (3,015) (3,015)
-------- -------- --------
Balance at December 31,
1997...................... 19,739 (3,015) 16,732
Issuance of Class A Common
Stock..................... 5,276 -- 5,278
Issuance of Class A Common
Stock in connection with
acquired businesses....... 28,846 -- 29,348
Recapitalization of
Shares.................... (22,977) -- --
Exchange of warrant for
Class B Common Stock...... (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) -- (70)
Issuances of Class A and
Class B Common Stock...... 334 -- 334
Net loss.................... -- (17,155) (17,155)
-------- -------- --------
Balance at December 31,
1998...................... $ 31,144 $(20,170) $ 11,490
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 87
NEXTERA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 26, 1997
(DATE OF INCEPTION) FOR THE
THROUGH YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (3,015) $(17,155)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 417 2,813
Deferred income taxes.................................. 702 --
Non-cash compensation charges.......................... -- 2,670
Change in operating assets and liabilities, net of
effect of acquired businesses:
Accounts receivable.................................. 425 1,923
Due from affiliate................................... (225) (175)
Due to affiliate..................................... 90 978
Prepaid expenses and other current assets............ (272) (3,747)
Income tax receivable................................ -- 414
Accounts payable and accrued expenses................ 517 9,461
Costs and estimated earnings in excess of billings... (761) (2,212)
Deferred revenue..................................... (2,403) (747)
Other................................................ 45 273
-------- --------
Net cash used in operating activities........... (4,480) (5,504)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment........................ (955) (2,209)
Acquisition of businesses, net of cash acquired........... (15,321) (95,168)
-------- --------
Net cash used in investing activities........... (16,276) (97,377)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of Class A and Class B Common
Stock.................................................. 19,747 5,304
Proceeds from issuance of Class B Preferred Stock......... -- 24,993
Repurchases of Class A and B Common Stock................. -- (70)
Due from officers......................................... -- (856)
Borrowings (repayments) under note payable to bank........ 1,606 (324)
Borrowings under Bridge Loan.............................. -- 75,500
Repayments of long-term debt and capital lease
obligations............................................ (43) (724)
-------- --------
Net cash provided by financing activities....... 21,310 103,823
-------- --------
Net increase in cash and cash equivalents................. 554 942
Cash and cash equivalents at beginning of period.......... -- 554
-------- --------
Cash and cash equivalents at end of period................ $ 554 $ 1,496
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................. $ 113 $ 1,240
======== ========
Cash paid during the period for taxes..................... $ -- $ 76
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 88
NEXTERA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Nextera Enterprises, Inc. ("Nextera" or the "Company") provides
leading-edge business strategy, operations improvement, organizational design,
and information technology ("IT") consulting services primarily to Fortune 500
and other multinational companies. The Company provides services in four
practice areas, which enables it to offer a breadth and balance of services that
assist clients in achieving enhanced business performance by anticipating and
addressing their complex, multi-disciplinary consulting needs.
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., a wholly-owned subsidiary of Knowledge Enterprises, Inc. Knowledge
Enterprises, Inc. is controlled by Knowledge Universe, Inc. which, in turn, is
controlled by Knowledge Universe, L.L.C.
Acquisitions
Effective July 30, 1997, the Nextera acquired Symmetrix, Inc.
("Symmetrix"), a management consulting and information technology consulting
company, for cash of approximately $15,500,000. The acquisition was accounted
for under the purchase method of accounting; accordingly, the purchase price was
allocated to the underlying assets and liabilities based on their respective
estimated fair values at the date of the acquisition. Correspondingly,
Symmetrix' results of operations subsequent to the acquisition have been
included in the Company's results of operations. Symmetrix was subsequently
renamed Business Performance Solutions Group, Inc. ("Business Performance
Solutions").
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. Through SiGMA, the Company offered
consulting services focusing on change management and helping organizations
improve core business processes, including product development, manufacturing
and distribution, sales, and enterprise management. SiGMA was acquired for $10.0
million in cash and 669,000 shares of Class A Common Stock. Effective December
31, 1998, the Company transferred all of the membership interests of SiGMA to
Business Performance Solutions.
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. Through
PTG, the Company offers strategy formulation, strategic planning process design,
and business process assessment and redesign services. PTG was acquired for $6.7
million in cash and 214,000 shares of Class A Common Stock.
Effective March 31, 1998, the Nextera acquired Pyramid Imaging, Inc.
("Pyramid"), a California-based consulting and technology firm. Through Pyramid,
the Company offers consulting services focused on providing technology-based
solutions within the areas of knowledge management, electronic commerce,
customer management, and human capital management. Pyramid was acquired for $9.2
million in cash and 586,667 shares of Class A Common Stock. In addition, the
Company agreed to an "earn-out" provision providing for the payment of up to an
additional $0.8 million in cash and 53,333 shares of Class A Common Stock upon
the achievement of certain revenue and pretax profit targets related to the
performance of Pyramid during the twelve months ending March 31, 1999.
F-8
<PAGE> 89
NEXTERA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Through Sibson, the Company
provides human capital consulting services offering human resource strategies,
outsourcing assessments, organizational designs, rewards/incentives programs,
performance management processes and systems, and executive coaching services.
Sibson also serves sales and marketing organizations with sales strategy,
selling process, sales channel and selling effectiveness consulting. Sibson was
acquired for $37.4 million in cash, 2,613,087 shares of Class A Common Stock and
197,813 Exchangeable Shares which may be exchanged at the option of the holders
into 197,813 shares of Class A Common Stock.
Effective December 31, 1998, the Company acquired Lexecon Inc. ("Lexecon"),
an Illinois-based economic consulting firm. Through Lexecon, Nextera provides a
full range of economic consulting services, including economic, financial and
statistical analysis and expert testimony, which are predominately used in
matters relating to complex litigation and regulatory proceedings. Lexecon was
acquired for $31.1 million in cash, 2,816,000 shares of Class A Common Stock and
certain additional shares of Class A Common Stock to be determined based on the
price per share in the Offering of the Class A Common Stock (the "Reserved
Shares"). The number of Reserved Shares to be issued will range from a minimum
of 231,440 shares if the price per share in an initial public offering ("the
Offering") is $17.50 or higher to a maximum of 1,450,240 shares if the price per
share in the Offering is $12.50 or less. However, if the Offering does not occur
on or prior to February 29, 2000, all 1,450,240 Reserved Shares will be deemed
issued and simultaneously redeemed by the Company at a price of $7.65 per share,
which will require the Company to pay approximately $11.1 million in cash to the
former stockholders of Lexecon.
The following information presents the unaudited pro forma condensed
results of operations as if the acquisitions of Symmetrix, SiGMA, PTG, Pyramid,
Sibson and Lexecon had occurred on January 1, 1997. 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, 1997.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------
1997 1998
(IN THOUSANDS,
EXCEPT PER COMMON SHARE DATA)
<S> <C> <C>
Net revenues....................................... $105,275 $135,167
Net loss........................................... (3,567) (12,044)
Net loss per common share, basic and diluted....... $ (0.36) $ (0.61)
</TABLE>
Subsequent to December 31, 1998, the Company acquired the stock of The
Alexander Corporation Limited ("Alexander"). Alexander was acquired for L300,000
(approximately $490,000) and 150,000 shares of Class A Common Stock. The
acquisition of Alexander has been accounted for under the purchase method of
accounting. Accordingly, the purchase price was allocated to the underlying
assets and liabilities based on their respective estimated fair values at the
date of the acquisition.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
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.
F-9
<PAGE> 90
NEXTERA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 all 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.
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:
<TABLE>
<S> <C>
Furniture and fixtures............................ 5-7 years
Equipment......................................... 3-5 years
Software.......................................... 3 years
</TABLE>
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 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 over 40 years for
all other intangibles. 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. Any impairment is charged to
expense in the period in which the impairment is incurred.
Intangible assets consist of the following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
-------------------
1997 1998
(IN THOUSANDS)
<S> <C> <C>
Goodwill................................ $14,917 $121,751
Intangibles related to personnel........ 1,100 5,308
------- --------
16,017 127,059
Less: accumulated amortization.......... 255 1,977
------- --------
Intangible assets, net.................. $15,762 $125,082
======= ========
</TABLE>
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.
F-10
<PAGE> 91
NEXTERA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1998, no customer accounted for more than 10%
of net revenues. Sales to three significant customers accounted for 36%, 20% and
10% of net revenues during 1997.
Foreign Currency Translation
All 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 in accordance with SFAS No. 52, "Foreign Currency
Translation." Foreign currency transaction gains and losses are included in the
accompanying statement of operations and are not material for all periods
presented.
Basic and Diluted Earnings Per Common Share
On December 31, 1997, the Company adopted Statement of Financial Accounting
Standard No. 128, Earnings Per Share ("SFAS No. 128"). SFAS No. 128 requires the
presentation of two amounts, basic earnings per common share and diluted
earnings per common share. Earnings per common share excludes any dilutive
effects of options, warrants and convertible securities. For the period ended
December 31, 1997 and 1998, basic and diluted earnings per common share are the
same due to the antidilutive effect of potential common shares outstanding.
Income Taxes
Nextera was treated as a partnership for federal and state income tax
purposes through December 31, 1998. Therefore, all items of income, expense, and
tax credit are passed through to the individual unit holders. Accordingly, no
provision for income taxes is required for Nextera. Symmetrix and Pyramid,
wholly owned subsidiaries of the Company, are subject to income taxes and report
their income tax provision using the liability method in accordance with
Financial Accounting Standards Board Statement 109, Accounting for Income Taxes
("Statement 109"). Under Statement 109, deferred income taxes are provided for
differences between the financial reporting and tax bases of assets and
liabilities. Effective December 31, 1998, as a result of the incorporation of
Nextera Enterprises, Inc., the Company became subject to income taxes.
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 follows the provisions of EITF 96-18 in accounting for equity
instruments issued to non-employees in exchange for goods or services.
Accordingly, warrants issued to Knowledge Universe, Inc. in connection with an
acquisition (see Note 7) 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 bivalence 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 is effective beginning in 2000. The adoption of SFAS 133 is not expected to
have a material impact on the financial position or results of operations of the
Company.
F-11
<PAGE> 92
NEXTERA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In March, 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use ("SOP 98-1") SOP 98-1 requires companies to capitalize
qualifying computer software costs that are incurred during the application
development stage and amortize them over the software's estimated useful life.
The Company adopted the provisions of SOP 98-1 effective January 1, 1998 and
capitalized costs totaling $349,000 in accordance with its provisions.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
----------------
1997 1998
(IN THOUSANDS)
<S> <C> <C>
Equipment.......................................... $ 663 $3,409
Software........................................... 55 923
Furniture and fixtures............................. 371 3,380
Leasehold improvements............................. 222 1,620
------ ------
1,311 9,332
Less: accumulated depreciation..................... 130 1,276
------ ------
Property and equipment, net........................ $1,181 $8,056
====== ======
</TABLE>
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
-----------------
1997 1998
(IN THOUSANDS)
<S> <C> <C>
Trade accounts payable............................ $ 720 $ 6,086
Accrued payroll and compensation.................. 837 12,103
Other............................................. 727 5,341
------ -------
$2,284 $23,530
====== =======
</TABLE>
5. FINANCING ARRANGEMENTS
Bridge Loan
In August 1998, the Company secured a $40,000,000 revolving 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). The Bridge Loan is
secured by substantially all of the Company's assets and contains certain
restrictive covenants, with which the Company was in compliance 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 April 30, 1999.
Borrowings under the amended Bridge Loan bear interest at a rate of 12%. As of
December 31, 1998, $75,849,000 was outstanding under the Bridge Loan, including
$349,000 of accrued interest.
Notes Payable to Bank
The Company and its subsidiaries have lines of credit with banks which
provide for an aggregate maximum borrowing capacity of $11.0 million. Lines of
credit with an aggregate maximum borrowing capacity of $10.0 million bear
interest at rates ranging from prime (7.75% at December 31, 1998) plus 0.25% to
prime plus 1%. The balance of the lines bear interest at the commercial paper
rate (approximately 4.8% at December 31, 1998) plus 3.15%. As of December 31,
1998, borrowings outstanding under the lines of credit totaled $6,156,000 and
bore interest at a weighted average rate of 8.49%. The lines contain restrictive
F-12
<PAGE> 93
NEXTERA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
covenants, with which the Company was in compliance at December 31, 1998,
relating to maintenance of financial ratios, operating restrictions and
restrictions on the payment of dividends.
Long-term Debt
Long-term debt excluding certain debentures arising in connection with a
recapitalization occurring in April 1998 (see Note 9 -- Recapitalization)
consists of the following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
----------------
1997 1998
(IN THOUSANDS)
<S> <C> <C>
Unsecured notes payable to former stockholders and
employees of Symmetrix, issued in connection with the
acquisition of common stock of Symmetrix. Interest
accrues at the lower of 10.0% or prime (7.75% at December
31, 1998), payable in bi-annual installments with
principal ranging from $1,152 to $7,560, through July
2002..................................................... $ 172 $ 71
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%................................. 915 873
Other...................................................... 28 30
------ ------
1,115 974
Less: current portion...................................... 146 101
------ ------
Long-term debt............................................. $ 969 $ 873
====== ======
</TABLE>
Annual maturities of long-term debt for the years ending after December 31,
1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999.................................................. $101
2000.................................................. 77
2001.................................................. 64
2002.................................................. 59
2003.................................................. 62
2004 and thereafter................................... 611
----
$974
====
</TABLE>
6. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 26, 1997
(DATE OF INCEPTION) FOR THE
THROUGH YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
(IN THOUSANDS)
<S> <C> <C>
Current:
Federal.................................... $ -- $200
State...................................... -- 43
---- ----
Total current tax provision........ -- 243
---- ----
Deferred:
Federal.................................... 596 --
State...................................... 106 --
---- ----
Total deferred tax provision....... 702 --
---- ----
Total tax provision................ $702 $243
==== ====
</TABLE>
F-13
<PAGE> 94
NEXTERA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets reflect the net tax effect of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
-----------------
1997 1998
(IN THOUSANDS)
<S> <C> <C>
Deferred tax asset:
Reserves................................................ $ 60 $ 525
Other accrued liabilities............................... 363 1,377
Net operating loss carryforwards........................ 2,327 4,680
------ -------
Deferred tax asset................................... 2,750 6,582
Valuation allowance..................................... 2,716 3,628
------ -------
Net deferred tax asset.................................. 34 2,954
Deferred tax liability:
Depreciation............................................ (34) (21)
Deductible goodwill amortization........................ -- (457)
Cash-to-accrual adjustments............................. -- (2,476)
------ -------
Total deferred tax asset........................ $ 0 $ 0
====== =======
</TABLE>
In December 31, 1997, Symmetrix had approximately $5,819,000 of
pre-acquisition tax net operating loss carryforwards which expire through the
year 2012. At December 31, 1998, Symmetrix, Pyramid and Lexecon have tax net
operating loss carryforwards of approximately $9,102,000, $351,000 and
$2,246,000, respectively, which will expire through the year 2018. As a result
of ownership changes, net operating losses are subject to limitations under the
Internal Revenue Code.
The reconciliation of the consolidated effective tax rate of the Company is
as follows:
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 26, 1997
(DATE OF INCEPTION) FOR THE
THROUGH YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
<S> <C> <C>
Tax (benefit) at statutory rate.............. (34)% (34)%
State taxes (benefit), net of federal
benefit.................................... (6) 0
Permanent differences........................ 3 2
Loss treated as partnership flow-through for
tax purposes............................... 54 11
Corporate losses not benefited............... 0 20
Other........................................ 13 2
--- ---
Income tax provision......................... 30% 1%
=== ===
</TABLE>
7. RELATED PARTY TRANSACTIONS
During 1997, the Company entered into a professional services contract with
Productivity Point International, Inc. ("PPI"), a subsidiary of Knowledge
Universe, L.L.C. Revenues from PPI were $225,000 in 1997 and $642,000 in 1998.
The Company also performed additional services for Knowledge Universe, L.L.C.
and TEC Worldwide, Inc., an affiliate of Knowledge Universe, L.L.C., during 1998
and recorded revenues totaling $900,000 and $90,000, respectively. At December
31, 1998, a total of $400,000 was due from PPI, Knowledge Universe, L.L.C. and
TEC Worldwide, Inc.
On July 31, 1995, Symmetrix entered into a four year non-compete agreement
("Agreement") with its then majority stockholder ("Stockholder") in conjunction
with the Stockholder's sale of his holdings in Symmetrix' common stock to a
non-affiliated third party. Symmetrix capitalized the value of the Agreement,
F-14
<PAGE> 95
NEXTERA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$986,000, and is amortizing the amount on a straight-line basis over the life of
the Agreement. At December 31, 1998, the carrying amount was $144,000 and was
included in other assets on the consolidated balance sheet.
In connection with an equity recapitalization, $47,970,000 was recorded as
debentures due to affiliates (see Note 9). In connection with the amendment of
the Bridge Loan, Knowledge Universe, Inc. provided a $37.5 million credit
facility to the Company (see Note 5).
Knowledge Universe, Inc. has guaranteed the Company's contingent obligation
to repurchase certain Reserved Shares arising in connection with the Company's
acquisition of Lexecon (see Note 1--Acquisitions). In consideration for the
issuance of this guaranty, the Company granted to Knowledge Universe, Inc.
warrants to purchase 250,000 shares of Class A Common Stock at an exercise price
of 80% of the initial public offering price per share of the Company's Class A
Common Stock, provided, however, if such public offering does not occur by
August 31, 2000, the exercise price will be $7.65 per share, as adjusted for
stock splits, stock dividends and similar transactions. 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.
Management fees of $90,000 in 1997 and $120,000 in 1998 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. As of December 31,
1998, $210,000 of such fees were unpaid.
8. 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 for the period from February 26, 1997
(date of inception) through December 31, 1997 and for 1998 was approximately
$449,000 and $2,223,000, 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, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
<S> <C> <C>
1999........................................... $ 605 $ 4,545
2000........................................... 1,265 4,368
2001........................................... 468 3,868
2002........................................... 15 3,441
2003........................................... 5 2,314
2004 and thereafter............................ 6,399
------ -------
Total minimum lease payments........... 2,358 $24,935
=======
Less amounts representing interest............. (250)
------
Present value of minimum capitalized lease
payments.................................... 2,108
Current portion................................ (381)
------
Long-term capitalized lease obligation......... $1,727
======
</TABLE>
F-15
<PAGE> 96
NEXTERA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCKHOLDERS' EQUITY
The Company's historical equity structure is described below. As of April
30, 1998, the Company amended and restated its capital structure (see
Recapitalization below). As of December 31, 1998, the Company converted from a
limited liability company to a "C" corporation.
Historical
As of December 31, 1997, the Company was authorized to issue two classes of
stock: Class A Common Stock and Class B Preferred Stock. Each Class A Common
stockholder had one vote per share of Class A Common Stock. The Class B
Preferred Stock was non-voting. At December 31, 1997, the Company had a warrant
outstanding to purchase 5,000,000 shares of Class A Common Stock at an exercise
price of $2.50 per share, with an expiration date of August 1, 2002 (the
"Warrant"). At any time after May 1, 2002, or upon the exercise of the Warrant,
the Class B Preferred stockholders have the right to require the Company to
redeem all of their Class B Preferred Stock for an amount equal to their
adjusted capital balances. The Class B Preferred Stock also had a liquidation
preference equal to their Undistributed Return, as defined in the amended and
restated operating agreement of the limited liability company. The Company had a
right to approve or disapprove any proposed transfer of stock.
Recapitalization
During the period from January 1, 1998 through April 30, 1998, $30,223,000
of additional capital was contributed, bringing the total contributed capital to
$49,970,000. As of April 30, 1998, the Company undertook a recapitalization,
which was unanimously approved by the stockholders of the Company. The net
result of the recapitalization was the redesignation of $47,970,000 of capital
as debentures. As a result of the recapitalization transactions, 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. Accordingly, for the year ended December 31, 1998, the Company incurred
approximately $793,000 of interest expense pursuant to the recapitalization
related to the period ended December 31, 1997. As of December 31, 1998,
$53,149,000 of principal and interest was due under the debentures.
Also, as part of the recapitalization, the stated value of the 10,000,000
Class A Common Stock was reduced to $0.20 per share from $2.50 per share.
Effective December 31, 1998, a par value of $0.001 per share was established for
Class A and Class B Common Stock.
In addition, pursuant to the recapitalization, the Warrant to acquire
5,000,000 shares of Class A Common Stock was amended to provide that the shares
subject to the Warrant were changed to a new class of authorized Class B Common
Stock. The Class B Common Stock has the same economic characteristics as the
Class A Common Stock, except that each Class B Common stockholder has ten votes
per share of Class B Common Stock. The warrant was contributed to the Company in
exchange for 4,300,000 shares of Class B Common Stock on April 30, 1998.
Employee Equity Participation Plan
In 1997, the Company established its Employee Equity Participation Plan
("EPP"), whereby the Board of Directors may make discretionary awards of stock
appreciation rights ("SAR") to employees of the Company. At the exercise date,
the Company may settle its SAR obligations by making either cash payments or
issuing Class A Common Stock equal to the amount of the underlying appreciated
value of the Company's Class A Common Stock from the initial grant date. The
exercise of the SAR is limited by the provisions of each applicable employee
agreement, however, the exercise period cannot exceed seven years. For the
period ended December 31, 1997, 450,000 SARs were granted under the EPP, at an
initial price of $5.00. The Company recognized no compensation expense relating
to the SARs during the period ended December 31, 1997. Pursuant to the EPP,
4,500,000 SARs have been reserved for issuance.
F-16
<PAGE> 97
NEXTERA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subsequent to December 31, 1997, the Board of Directors approved the
conversion of all existing SARs into options pursuant to the provisions of the
EPP. The exercise price of the options was $5.00, which was equal to or exceeded
the fair value on the date of the conversion.
A summary of stock options held by Company employees as of December 31,
1998 and the related transactions for the year ended December 31, 1998,
excluding those related to Lexecon employees as discussed below, is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE REMAINING LIFE
<S> <C> <C> <C>
Outstanding options at December
31, 1997....................... 450,000 $5.00 8.5 years
Granted........................ 2,170,233 6.78 9.7 years
Forfeited...................... (139,993) 6.06 9.2 years
--------- ----- ---------
Outstanding options at December
31, 1998....................... 2,480,240 $6.50 9.4 years
========= ===== =========
</TABLE>
All options detailed above have a 10 year life and vest over a four year
period. As of December 31, 1998, 100,760 options were vested.
In December 1998, the Company entered into agreements with certain
non-stockholder key executives of Lexecon under which payments totaling
$4,248,000 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. Additionally, the Company reserved for issuance to these
key executives options (the "Reserved Options") to purchase Class A Common Stock
at an exercise price of $1.50 per share. The number of shares of Class A Common
Stock subject to the Reserved Options will be determined based on the price per
share in the Offering of the Class A Common Stock, ranging from a minimum of
31,560 shares if the price per share in the Offering is $17.50 or higher, to a
maximum of 197,760 shares if the price per share in the Offering is $12.50 or
less. However, if the Offering does not occur on or prior to February 29, 2000,
all 197,760 Reserved Options will be deemed issued and exercised, and the Class
A Common Stock acquired upon such exercise will be redeemed by the Company at a
price of $7.65 per share, which will require the Company to pay approximately
$1,216,000 in cash to such non-stockholder key executives of Lexecon, net of the
proceeds from the exercise of such options. The Company recorded as
"Compensation expense--other" $6,671,000 in 1998, which represented the cash
paid, which includes the Company's matching medicare obligation on cash paid to
the non-stockholder key executives, 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. The Company will incur additional
compensation expense related to the Reserved Options at the time the number of
shares of Class A Common Stock subject to the Reserved Options is determined.
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
F-17
<PAGE> 98
NEXTERA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recognition provisions of SFAS 123 for its stock option plans, net loss and net
loss per share would have been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 31, 1998
(IN THOUSANDS,
EXCEPT PER SHARE
COMMON DATA)
<S> <C>
Net loss
As reported.............................. $ (17,155)
Pro forma................................ (17,627)
Net loss per common share
As reported.............................. $ (1.14)
Pro forma................................ $ (1.18)
</TABLE>
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 55% and a
risk free interest rate of 5%.
Adoption of the optional recognition provisions of SFAS 123 during 1997
would have had no effect on reported net loss and net loss per common share.
At December 31, 1998, the Company had reserved 9,707,386 unissued shares of
its Class A Common Stock for possible issuances under stock-based compensation
plans, for possible issuances of contingent shares in connection with
acquisitions (see Note 1), for possible issuances in connection with outstanding
warrants, and for possible conversions of exchangeable shares.
10. BASIC AND DILUTED EARNINGS PER COMMON SHARE
The following table sets forth the reconciliation of the numerator and
denominator of the net loss per common share computation:
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 26, 1997
(DATE OF INCEPTION) FOR THE
THROUGH YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER COMMON SHARE DATA)
<S> <C> <C>
Net loss.................................. $(3,015) $(17,155)
Weighted average common shares
outstanding............................. 4,061 14,997
Net loss per common share................. $ (0.74) $ (1.14)
======= ========
</TABLE>
11. 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 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 for 1998 was $1,839,000. There
were no contributions for the period from February 26, 1997 (date of inception)
through December 31, 1997.
12. RESTRUCTURING COSTS
During 1998, the Company recorded restructuring costs of $1,298,000 related
to the combination of Symmetrix and SiGMA resulting in the formation of Business
Performance Solutions. These restructuring
F-18
<PAGE> 99
NEXTERA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
costs consisted principally of $603,000 of severance payments and terminating
costs and $616,000 for vacated leased office space, net of estimated sublease
income. The Company's restructuring plan and its related exit costs have been
accounted for pursuant to EITF 94-3. As of December 31, 1998, $947,000 was
included in accounts payable and accrued expensed related to unpaid
restructuring costs.
13. 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 which 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.
F-19
<PAGE> 100
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Symmetrix, Inc.
We have audited the accompanying consolidated balance sheets of Symmetrix,
Inc. and subsidiaries as of May 31, 1997 and July 30, 1997, and the related
consolidated statements of operations and accumulated deficit and cash flows for
the year ended May 31, 1997 and for the period from June 1, 1997 through July
30, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 Symmetrix,
Inc. and subsidiaries at May 31, 1997 and July 30, 1997, and the results of
their operations and their cash flows for the year ended May 31, 1997 and for
the period from June 1, 1997 through July 30, 1997 in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
April 30, 1998
F-20
<PAGE> 101
SYMMETRIX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF AS OF
MAY 31, 1997 JULY 30, 1997
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 838 $ 543
Accounts receivable, net of allowance for doubtful
accounts of $100 at May 31, 1997 and July 30, 1997..... 2,919 2,560
Costs and estimated earnings in excess of billings........ 471 95
Prepaid expenses and other current assets................. 174 97
Refundable income taxes................................... 416 416
------- -------
Total current assets.............................. 4,818 3,711
Long-term receivable........................................ 600 600
Property and equipment, net................................. 411 387
Other assets................................................ 654 607
------- -------
Total assets...................................... $ 6,483 $ 5,305
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses..................... $ 2,595 $ 6,773
Notes payable to bank..................................... 114 81
Due to affiliate.......................................... 1 3
Deferred revenue.......................................... 3,802 3,150
Current portion of long-term debt......................... 128 128
------- -------
Total current liabilities......................... 6,640 10,135
Long-term debt.............................................. 1,048 1,030
Stockholders' equity (deficit):
Common stock, no par value, 10,000,000 shares authorized,
1,216,921 shares issued and outstanding................ 12 12
Additional paid-in capital................................ 995 995
Accumulated deficit....................................... (2,212) (6,867)
------- -------
Total stockholders' equity (deficit).............. (1,205) (5,860)
------- -------
Total liabilities and stockholders' equity
deficit......................................... $ 6,483 $ 5,305
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 102
SYMMETRIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
YEAR ENDED JUNE 1, 1997
MAY 31, THROUGH
1997 JULY 30, 1997
(IN THOUSANDS)
<S> <C> <C>
Net revenues................................................ $15,052 $ 2,381
Cost of revenues............................................ 13,529 1,994
------- -------
Gross profit........................................... 1,523 387
Selling, general and administrative expenses................ 6,584 887
Compensation expense--repurchase of stock options........... -- (4,126)
------- -------
Loss from operations................................... (5,061) (4,626)
Gain on sale of investment.................................. 1,884 --
Interest income............................................. 53 8
Interest expense............................................ (116) (37)
------- -------
Net loss............................................... (3,240) (4,655)
Retained earnings (accumulated deficit) at beginning of
period.................................................... 1,028 (2,212)
------- -------
Accumulated deficit at end of period........................ $(2,212) $(6,867)
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 103
SYMMETRIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
FOR THE JUNE 1, 1997
YEAR ENDED THROUGH
MAY 31, 1997 JULY 30, 1997
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(3,240) $(4,655)
Adjustments to reconcile net loss to net cash
used in operating activities:
Gain on sale of investment............................. (1,884) --
Depreciation........................................... 261 38
Amortization........................................... 246 53
Change in operating assets and liabilities:
Accounts receivable.................................. (541) 359
Costs and estimated earnings in excess of billings... (13) 376
Long-term receivable................................. (600) --
Due to affiliate..................................... 1 2
Prepaid expenses and other current assets............ 210 77
Refundable taxes..................................... (14) --
Accounts payable and accrued expenses................ 720 4,178
Deferred revenue..................................... 3,541 (652)
Other................................................ (60) (6)
------- -------
Net cash used in operating activities............. (1,373) (230)
------- -------
Cash flows from investing activities:
Purchase of property and equipment........................ (245) (14)
Proceeds from sale of investment.......................... 2,259 --
------- -------
Net cash provided by (used in) investing
activities...................................... 2,014 (14)
------- -------
Cash flows from financing activities:
Borrowings under line of credit........................... 114 --
Repayments of long-term debt.............................. (100) (18)
Repayments under line of credit........................... (164) (33)
------- -------
Net cash used in financing activities............. (150) (51)
------- -------
Net increase (decrease) in cash and cash equivalents...... 491 (295)
Cash and cash equivalents at beginning of period.......... 347 838
------- -------
Cash and cash equivalents at end of period................ $ 838 $ 543
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest............................................... $ 118 $ 23
======= =======
Income taxes........................................... $ 314 $ --
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 104
SYMMETRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND JULY 30, 1997
1. THE COMPANY
Symmetrix, Inc. ("Symmetrix" or the "Company") offers enhanced services in
acquisition due diligence, customer profitability, information technology
strategy assessment and design, construction, and deployment of complete
business systems. Symmetrix primarily offers its services to the financial
services, health care and insurance industries.
On May 26, 1994, Symmetrix Capital Partners I Limited Partnership (the
"Partnership") was formed for the purpose of making investments in entities that
could benefit from the Company's management services. In the absence of any
dissolution events, as defined in the Partnership agreement, the Partnership
shall continue in existence until December 31, 2009, unless otherwise extended.
The Company is the general partner and a Class B Limited Partner. As of May 31,
1996, the Company had provided 74% of the Partnership's capital. During the year
ended May 31, 1995, certain Class B Limited Partners were admitted in place of a
portion of the Company's investment as a Class B Limited Partner. A total of
$125,000 was paid to the Company in return for this portion of the Company's
Class B Limited Partnership interest. To date, the Partnership has not generated
any revenues or expenses. Management intends to dissolve the Partnership.
2. SIGNIFICANT ACCOUNTING POLICIES
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 all 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.
F-24
<PAGE> 105
SYMMETRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MAY 31, 1997 AND JULY 30, 1997
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Furniture and fixtures............................ 5-7 years
Equipment......................................... 3-5 years
Software.......................................... 3 years
</TABLE>
Leasehold improvements are amortized over the lesser of the lease term or
the useful life of the property.
Financial Instruments
The carrying value of financial instruments such as cash equivalents,
accounts receivable, accounts payable and accrued expenses approximates 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. For the year ended May 31, 1997, revenues to three
significant customers accounted for 69% of net revenues. Three customers
accounted for 84% of receivables, net of related deferred revenue at May 31,
1997.
Stock Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price not less than the fair value of the shares at the date of
grant and accounts for stock options granted to employees in accordance with the
provisions of Accounting Principle Board Opinion No. 25, Accounting for Stock
Issued to Employees.
Income Taxes
The Company utilizes the liability method of accounting for income taxes,
as set forth in Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. Under this method, deferred tax liabilities and assets are
recognized for the expected future tax consequences of temporary differences
between the carrying amounts and the tax basis of assets and liabilities.
Deferred tax assets are recognized, net of any valuation allowance, for
deductible temporary differences and net operating loss and tax credit
carryforwards. Deferred tax expense represents the change in the deferred tax
asset or liability balances.
3. INVESTMENT
The Company held an 8.5% investment in Olympic Manufacturing Group, Inc.
("Olympic"), a privately-held manufacturing company. The Company did not have a
controlling interest in Olympic and the investment was valued at cost. The
investment was sold during the year ended May 31, 1997 at a gain of $1,883,927.
F-25
<PAGE> 106
SYMMETRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MAY 31, 1997 AND JULY 30, 1997
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
AS OF AS OF
MAY 31, 1997 JULY 30, 1997
(IN THOUSANDS)
<S> <C> <C>
Equipment.......................................... $1,319 $1,321
Software........................................... 250 262
Furniture and fixtures............................. 230 230
Leasehold improvements............................. 69 69
------ ------
1,868 1,882
Less: accumulated depreciation..................... 1,457 1,495
------ ------
Property and equipment, net........................ $ 411 $ 387
====== ======
</TABLE>
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
AS OF AS OF
MAY 31, 1997 JULY 30, 1997
(IN THOUSANDS)
<S> <C> <C>
Trade accounts payable............................. $ 365 $ 175
Accrued payroll.................................... 320 463
Compensated absences............................... 220 258
Accrued compensation............................... -- 4,126
Profit sharing..................................... 1,234 1,234
Other.............................................. 456 517
------ ------
$2,595 $6,773
====== ======
</TABLE>
6. FINANCING ARRANGEMENTS
Notes Payable to Bank
The Company has a $1,800,000 unsecured line of credit with a bank that
expires on November 30, 1998. Borrowings under the line bear interest at the
bank's prime rate plus 1.0% (9.5% at July 30, 1997) and are limited to a
percentage of specified trade receivables. The agreement provides for an annual
commitment fee of 0.5% of the unused line. The Company had $1,000,000 available
under the line of credit at May 31, 1997 and July 30, 1997. On January 1, 1998,
the Company increased its unsecured line of credit with the bank to $2,000,000.
The line contains restrictive covenants relating to maintenance of financial
ratios, operating restrictions and restrictions on the payment of dividends.
The Company had a $220,000 unsecured declining demand line that expired on
July 1, 1997. The Company also has a $150,000 unsecured line of credit with a
bank that expires on August 31, 1998. Borrowings under the lines bear interest
at the bank's prime rate plus 1.0% (9.5% at May 31, 1997 and July 30, 1997). The
agreement provides for drawdowns through August 31, 1998, with the line
declining by $6,250 per month beginning on September 1, 1996.
F-26
<PAGE> 107
SYMMETRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MAY 31, 1997 AND JULY 30, 1997
Long-term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
AS OF AS OF
MAY 31, 1997 JULY 30, 1997
(IN THOUSANDS)
<S> <C> <C>
Unsecured notes payable to former stockholders and
employees, issued in connection with the repurchase of the
Company's stock. Interest accrues at the lower of 10.0% or
prime (8.5% at May 31, 1997 and July 31, 1997), payable in
bi-annual installments with principal ranging from $1,152
to $8,960, through July 2002.............................. $ 191 $ 175
Unsecured note payable to a former stockholder issued in
connection with a non-competition agreement. Annual
payments of $120,000 are due through May 2010. Interest
accrues annually at 8.7%.................................. 951 951
Other....................................................... 34 32
------ ------
1,176 1,158
Less: current portion....................................... 128 128
------ ------
Long-term debt.............................................. $1,048 $1,030
====== ======
</TABLE>
Annual maturities of long-term debt for the fiscal years ending after July
30, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $128
1999........................................................ 135
2000........................................................ 85
2001........................................................ 72
2002 and thereafter......................................... 738
------
$1,158
======
</TABLE>
7. INCOME TAXES
Deferred tax assets reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
AS OF AS OF
MAY 31, 1997 JULY 30, 1997
(IN THOUSANDS)
<S> <C> <C>
Reserves................................... $ 180 $ 40
Other accrued liabilities.................. 1,000 1,107
Net operating loss carryforwards........... 120 1,996
------- -------
Total............................ 1,300 3,143
Valuation allowance........................ (1,252) (3,114)
------- -------
Net deferred tax asset..................... 48 29
Deferred liability: depreciation........... (48) (29)
------- -------
Total net deferred tax asset..... $ 0 $ 0
======= =======
</TABLE>
The Company has approximately $5,819,000 of net operating loss
carryforwards which expire through the year 2012. The net operating loss
carryforwards arose principally as a result of disqualifying dispositions of the
Company's previously outstanding stock options. As a result of ownership
changes, these net operating losses are subject to limitations under the
Internal Revenue Code.
F-27
<PAGE> 108
SYMMETRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MAY 31, 1997 AND JULY 30, 1997
8. RELATED PARTY TRANSACTIONS
On July 31, 1995, the Company entered into a non-compete agreement
("Agreement") with the then majority stockholder ("Stockholder") in conjunction
with the Stockholder's sale of his holdings in the Company's common stock to a
non-affiliated third party. The Company capitalized the value of the Agreement,
$986,000, and is amortizing the amount on a straight-line basis over the life of
the Agreement. At May 31, 1997 and July 30, 1997, the carrying amounts were
$546,000 and $493,000, respectively, and were included in other assets on the
balance sheet.
9. LEASES
The Company leases its office facility under an operating lease which
expires in April 2002 and has a 5-year renewal option. The lease requires
payments for additional expenses such as taxes, maintenance and utilities. Total
facility rent expense for the year ended May 31, 1997 and for the period June 1,
1997 through July 30, 1997 was approximately $751,000 and $148,000,
respectively.
Future minimum lease payments under noncancelable operating leases, for the
fiscal years ending after July 30, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998................................................ $887
1999................................................ 887
2000................................................ 887
2001................................................ 887
2002 and thereafter................................. 665
------
Total minimum lease payments................. $4,213
======
</TABLE>
10. STOCKHOLDERS' EQUITY
Stock Option Plan
The Company established the 1988 Stock Option Plan (the "Plan"), which
provided for the granting of incentive stock options and non-qualified stock
options to employees. The Plan provided for a maximum of 1,415,298 shares of
common stock of the Company to be granted over ten years from the date the Plan
was adopted.
Incentive stock options may be issued under the Plan at an option price not
less than the fair market value at the date of grant as determined by the Board
of Directors (110% of fair market value in the case of stockholders having
ownership in excess of 10%). Non-qualified stock options may be issued under the
Plan at an option price as determined by the Board of Directors at the date of
the grant.
The incentive stock options are exercisable for a period not to exceed ten
years from the date of grant (five years in the case of incentive stock options
for the stockholders having ownership in excess of 10%). The non-qualified
options are exercisable in accordance with the terms agreed for each option
granted.
During the year ended May 31, 1997, the Company granted 112,000 options
with exercise prices equal to or exceeding the fair market value at the date of
grant of the Company's common stock, ranging from $2.55 to $5.05. There were
1,025,558 stock options outstanding at May 31, 1997. No stock options were
granted during the two months ended July 30, 1997.
In July 1997, the Board of Directors approved a stock option repurchase
plan whereby all of the outstanding stock options were canceled. The repurchase
amount was accrued at July 30, 1997 at a cost of $4,126,000, which was charged
to operations in the two months ended July 30, 1997. As a result, no stock
F-28
<PAGE> 109
SYMMETRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MAY 31, 1997 AND JULY 30, 1997
options were outstanding at July 30, 1997. Accordingly, the disclosure of pro
forma net loss required by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation has not been presented because such
information is not deemed to be meaningful. The Plan will expire by its own
terms on September 20, 1998.
11. RETIREMENT SAVINGS PLAN
The Company sponsors a Retirement Savings Plan (the "Retirement Plan")
under Section 401(k) of the Internal Revenue Code for the benefit of all
employees meeting certain minimum service requirements. Eligible employees may
elect to contribute to the Retirement Plan subject to limitations established by
the Internal Revenue Code. The trustees of the Retirement Plan select investment
opportunities from which participants may choose to contribute. Matching
contributions are made at the discretion of the Company. The Company made
contributions to the Retirement Plan of $139,000 for the year ended May 31,
1997. There were no contributions to the Retirement Plan by the Company for the
period from June 1, 1997 through July 30, 1997.
12. SUBSEQUENT EVENT
Effective July 30, 1997, all of the outstanding stock of the Company was
acquired by Nextera Enterprises, L.L.C. for cash of $15,500,000.
F-29
<PAGE> 110
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Symmetrix, Inc.
Lexington, Massachusetts
We have audited the accompanying consolidated balance sheet of Symmetrix,
Inc. and subsidiaries as of May 31, 1996, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Symmetrix, Inc.
and subsidiaries at May 31, 1996, and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ BDO SEIDMAN
Boston, Massachusetts
July 19, 1996
F-30
<PAGE> 111
SYMMETRIX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF
MAY 31, 1996
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 347
Accounts receivable, net of allowance for doubtful
accounts of $62........................................ 2,837
Refundable income taxes................................... 402
Other receivables......................................... 198
Prepaid expenses.......................................... 186
Investment................................................ 500
Deferred income taxes..................................... 44
------
Total current assets.............................. 4,514
Property and equipment, net................................. 427
Covenant not to compete, net of accumulated amortization of
$192...................................................... 794
Deposits.................................................... 47
------
Total assets...................................... $5,782
======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank..................................... $ 164
Accounts payable.......................................... 341
Accrued expenses.......................................... 1,550
Deferred revenue.......................................... 261
Current maturities of long-term debt...................... 122
------
Total current liabilities......................... 2,438
Long-term debt, less current maturities..................... 1,152
Deferred income taxes....................................... 32
------
Total liabilities................................. 3,622
Minority interest in consolidated subsidiary................ 125
Commitments (Notes 9 and 11)
Stockholders' equity:
Common stock, $0.01 par value, 10,000,000 shares
authorized, 1,216,921 shares outstanding............... 12
Additional paid-in capital................................ 995
Retained earnings......................................... 1,028
------
Total stockholders' equity........................ 2,035
------
Total liabilities and stockholders' equity........ $5,782
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 112
SYMMETRIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
MAY 31, 1996
(IN THOUSANDS)
<S> <C>
Net revenues................................................ $19,237
Cost of revenues............................................ 9,015
-------
Gross profit........................................... 10,222
Selling, general and administrative expenses................ 10,547
-------
Loss from operations................................... (325)
Interest income............................................. 46
Interest expense............................................ (102)
-------
Net loss before income tax benefit..................... (381)
Income tax benefit.......................................... 247
-------
Net loss............................................... $ (134)
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE> 113
SYMMETRIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK FOREIGN
---------------------- CAPITAL IN CURRENCY TOTAL
NUMBER OF EXCESS OF RETAINED TREASURY TRANSLATION STOCKHOLDERS'
SHARES PAR VALUE PAR EARNINGS STOCK ADJUSTMENT EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1995... 1,877,215 $ 18 $ 1,345 $1,162 $(318) $ 12 $2,219
Shares contributed by
stockholder............. (595,294) (6) 6 -- -- -- 0
Purchase and retirement of
shares.................. (15,000) -- (38) -- -- -- (38)
Retirement of treasury
stock................... (50,000) -- (318) -- 318 -- --
Foreign currency
translation
adjustment.............. -- -- -- -- -- (12) (12)
Net loss.................. -- -- -- (134) -- -- (134)
---------- ---- ------- ------ ----- ---- ------
Balance at May 31, 1996... 1,216,921 $ 12 $ 995 $1,028 -- -- $2,035
========== ==== ======= ====== ===== ==== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE> 114
SYMMETRIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
MAY 31, 1996
(IN THOUSANDS)
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $ (134)
Adjustments to reconcile net loss to net cash used in
operating activities:
Gain on disposal of property and equipment............. (48)
Provision for doubtful accounts........................ 214
Depreciation and amortization.......................... 153
Deferred income taxes.................................. 225
Changes in operating assets and liabilities:
Accounts receivables................................. (1,003)
Refundable income taxes.............................. (381)
Other receivables.................................... (83)
Prepaid expenses..................................... (140)
Other assets......................................... 14
Accounts payable..................................... 78
Accrued expenses..................................... (183)
Deferred revenue..................................... (45)
--------
Net cash used in operating activities............. (1,333)
--------
Cash flows from investing activities:
Proceeds from disposal of property and equipment.......... 69
Purchase of property and equipment........................ (227)
--------
Net cash used in investing activities............. (158)
--------
Cash flows from financing activities
Repayment of obligations under capital lease.............. (16)
Borrowings under line of credit........................... 589
Repayments of line of credit.............................. (425)
Proceeds from issuance of notes payable................... 94
Repayments of notes payable............................... (73)
Purchase of treasury stock................................ (7)
--------
Net cash provided by financing activities......... 162
Effect of exchange rate fluctuations on cash and cash
equivalents............................................ (12)
--------
Net decrease in cash and cash equivalents................. (1,341)
Cash and cash equivalents at beginning of year............ 1,688
--------
Cash and cash equivalents at end of year.................. $ 347
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE> 115
SYMMETRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996
1. THE COMPANY
Symmetrix, Inc. ("Symmetrix" or the "Company") offers enhanced services in
acquisition due diligence, customer profitability, information technology
strategy assessment and design construction, and deployment of complete business
systems. Symmetrix primarily offers its services to the financial services,
health care and insurance industries.
On May 26, 1994, Symmetrix Capital Partners I Limited Partnership ("the
Partnership") was formed for the purpose of making investments in entities that
could benefit from the Company's management services. In the absence of any
dissolution events, as defined in the Partnership agreement, the Partnership
shall continue in existence until December 31, 2009, unless otherwise extended.
The Company is the general partner and a Class B Limited Partner. As of May 31,
1996, the Company had provided 74% of the Partnership's capital. During the year
ended May 31, 1995, certain Class B Limited Partners were admitted in place of a
portion of the Company's investment as a Class B Limited Partner. A total of
$125,000 was paid to the Company in return for this portion of the Company's
Class B Limited Partnership interest. To date, the Partnership has not generated
any revenues or expenses.
On January 1, 1995, Symmetrix European Holdings, Inc. ("Symmetrix
Holdings") (a Delaware corporation) and Symmetrix Europe, SA ("Symmetrix
Europe") (a French corporation) were formed for the purpose of conducting
business in Europe. The Company holds 80% of the outstanding stock of Symmetrix
Holdings, which holds 99.9% of the outstanding stock of Symmetrix Europe.
Activity for these subsidiaries has been consolidated into the Company's
financial statements for the year ended May 31, 1996. In November 1995, the
Board of Directors approved the abandonment of the operating activities of
Symmetrix Holdings and Symmetrix Europe.
The Partnership, Symmetrix Holdings and Symmetrix Europe have calendar
year-ends and thus for purposes of consolidation, the accounts of these
subsidiaries are based on a period which corresponds with the fiscal period of
the Company.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
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 and assumptions.
Foreign Currency Translation and Transaction Gains and Losses
Assets and liabilities of the Company's foreign operation are translated
into U.S. dollars at the exchange rate in effect as of the balance sheet date
and revenue and expenses are translated at average exchange rates during the
period. The resultant translation adjustment is reflected as a separate
component of stockholders' equity. Transaction gains and losses are reflected in
the consolidated statement of operations.
F-35
<PAGE> 116
SYMMETRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MAY 31, 1996
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 all 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 from
fixed-price contracts. Deferred revenue represents billings in excess of
revenues earned. Revenues include reimbursable expenses charged to clients.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and demand deposit
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. The Company's cash equivalents
consist of an overnight repurchase agreement that is managed by a financial
institution with a strong credit rating. Accordingly, management believes the
investment is subject to minimal credit and market risk.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Furniture and fixtures........................... 5-7 years
Equipment........................................ 3-5 years
Software......................................... 3 years
</TABLE>
Leasehold improvements are amortized over the lesser of the lease term or
the useful life of the property.
Financial Instruments
The carrying value of financial instruments such as cash equivalents,
accounts receivable, accounts payable and accrued expenses approximates their
fair values based on 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 Significant Customers
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. Sales to four significant customers accounted for
14%, 14%, 13% and 13%, respectively, of revenues for the year ended May 31,
1996.
Income Taxes
The Company utilizes the liability method of accounting for income taxes,
as set forth in Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. Under this method, deferred tax liabilities and assets are
recognized for the expected future tax consequences of temporary differences
between the carrying amounts and the tax basis of assets and liabilities.
Deferred tax assets are recognized, net of any valuation allowance, for
deductible temporary differences and net operating loss and tax credit
carryforwards. Deferred tax expense represents the change in the deferred tax
asset or liability balances.
F-36
<PAGE> 117
SYMMETRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MAY 31, 1996
3. INVESTMENT
The Partnership has an investment in Olympic Manufacturing Group, Inc.
("Olympic"), a privately held manufacturing company. The Company does not have a
controlling interest in Olympic and the investment is carried at cost. The value
of $499,966 does not necessarily represent an amount which would be realized
upon the sale or other disposition of the investment.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
AS OF
MAY 31, 1996
(IN THOUSANDS)
<S> <C>
Equipment...................................... $1,083
Computer software.............................. 248
Furniture and fixtures......................... 223
Leasehold improvements......................... 68
------
1,622
Less: accumulated depreciation and
amortization................................. 1,195
------
Property and equipment, net.................... $ 427
======
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
AS OF
MAY 31, 1996
(IN THOUSANDS)
<S> <C>
Accrued profit sharing......................... $ 710
Accrued compensation........................... 380
Other.......................................... 460
------
$1,550
======
</TABLE>
For the year ended May 31, 1996, the Company made distributions to
employees under a discretionary profit-sharing plan amounting to $723,499.
6. FINANCING ARRANGEMENTS
Short-term Borrowings -- Lines of Credit
The Company has a $220,000 unsecured declining demand line of credit that
expires on July 1, 1997. Borrowing under the line bear interest at the bank's
prime rate plus 1% (9.25% at May 31, 1996). The agreement provides for drawdowns
through September 30, 1995 with the line declining by $10,000 per month
beginning on October 1, 1995. As of May 31, 1996, the Company had borrowings
outstanding of $164,025.
In addition, the Company has a $1,000,000 unsecured line of credit with a
bank. Borrowing under the line bear interest at the bank's prime rate plus 1%
(9.25% at May 31, 1996) and are limited to an advance rate of specified trade
receivables. The agreement provides for a commitment fee of 0.5% of unused line.
The maximum borrowings outstanding during the year were $374,129. There were no
borrowings outstanding at May 31, 1996.
F-37
<PAGE> 118
SYMMETRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MAY 31, 1996
Long-term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
AS OF
MAY 31, 1996
(IN THOUSANDS)
<S> <C>
Secured installment note, interest at 8.69%. Principal and
interest payments are payable in equal annual installments
of $120,000 through August 2010. As security, the Company
pledged and granted the stockholder a security interest in
all of its rights, title and interest in all the shares of
capital stock of another entity in which the stockholder
has an equity interest (See Note 12)...................... $ 985
Secured installment note, interest at 13.3%. Principal and
interest payments are payable in equal monthly
installments of $1,106 through March, 2000. The note is
secured by a copier with a net book value of $55,638 at
May 31, 1996.............................................. 42
Unsecured note payable to a former stockholders issued in
connection with the repurchase of the Company's stock.
Principal payments range from $3,600 to $7,560 bi-annually
and are payable through July, 2000. Interest accrues at
the lower of 10% or prime (8.25% at May 31, 1996)......... 148
Unsecured note payable to a former employee issued in
connection with a bonus. Principal of $8,960 plus accrued
interest is payable semi-annually in January and July with
final payment due in January, 1999. Interest accrues at
the lower of 10 percent or prime (8.25% at May 31,
1996)..................................................... 54
Unsecured note payable to a former employee issued in
connection with a non-compete agreement. Semi-annual
principal payments of $5,000 are due through July, 2000.
Interest accrues at the lower of 10 percent or prime
(8.25% at May 31, 1996)................................... 45
------
1,274
Less: current maturities.................................... 122
------
Long-term debt.............................................. $1,152
======
</TABLE>
Annual maturities of long-term debt for the fiscal years ending after May
31, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
1997........................................... $ 122
1998........................................... 127
1999........................................... 116
2000........................................... 72
2001........................................... 56
Thereafter..................................... 781
------
$1,274
======
</TABLE>
F-38
<PAGE> 119
SYMMETRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MAY 31, 1996
7. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
MAY 31, 1996
(IN THOUSANDS)
<S> <C>
Current:
Federal...................................... $(434)
State........................................ (38)
-----
(472)
-----
Deferred:
Federal...................................... 172
State........................................ 53
-----
225
-----
Income tax benefit............................. $(247)
=====
</TABLE>
The difference between the effective tax rate and the statutory tax rate of
34% relates primarily to the worthlessness of Symmetrix Europe stock.
Deferred tax assets relate to receivable and liability reserves. The
deferred tax liability relates to the basis difference of property and
equipment.
8. RELATED PARTY TRANSACTION
The Company entered into a contract with Olympic and provided services
through February 1996. The Company bills Olympic on a monthly basis at cost for
the time and materials incurred on the project. The total costs reimbursed on
the project were approximately $95,000 for the year ended May 31, 1996.
9. LEASES
The Company leases its office facility under an operating lease which
expires in April 2002 and has a 5-year renewal option. The lease requires
payments for additional expenses such as taxes, maintenance and utilities. Total
facility rent expense for the year ended May 31, 1996 was approximately
$783,000. Future minimum lease payments under this noncancelable operating lease
for the fiscal years ending after May 31, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
1997........................................... $ 824
1998........................................... 824
1999........................................... 824
2000........................................... 824
2001........................................... 824
Thereafter..................................... 755
------
Total minimum lease payments......... $4,875
======
</TABLE>
10. STOCKHOLDERS' EQUITY
On July 31, 1995, a stockholder contributed 595,294 shares of common stock
in conjunction with his sale of an equivalent number of shares of capital stock.
In addition, on July 31, 1995, the Board of Directors authorized an increase in
the authorized shares of common stock from 2,352,020 shares to 10,000,000
shares.
F-39
<PAGE> 120
SYMMETRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MAY 31, 1996
During the year ended May 31, 1996, the Company purchased 15,000 shares of
its common stock from a former employee for $38,250. Notes payable in the amount
of $30,600 were issued in connection with the purchase of the shares. In
addition, during the year ended May 31, 1996 the 15,000 shares purchased above,
and the 50,000 shares of common stock held as treasury stock at May 31, 1995, as
well as the 595,294 shares contributed above, were canceled and common stock and
additional paid-in capital were accordingly reduced by $6,604 and $349,439,
respectively.
Stock Option Plan
The Company established the 1988 Stock Option Plan (the "Plan"), which
provided for the granting of incentive stock options and non-qualified stock
options to employees. The plan provided for a maximum of 1,415,298 shares of
common stock of the Company to be granted over ten years from the date the Plan
was adopted.
Incentive stock options may be issued under the Plan at an option price not
less than the fair market value at the date of grant as determined by the Board
of Directors (110% of fair market value in the case of stockholders having
ownership in excess of 10%). Non-qualified stock options may be issued under the
Plan at an option price as determined by the Board of Directors at the date of
the grant.
The incentive stock options are exercisable for a period not to exceed ten
years from the date of grant (five years in the case of incentive stock options
for the stockholders having ownership in excess of 10%). The non-qualified
options are exercisable in accordance with the terms agreed for each option
granted.
During the year ended May 31, 1996, the Company amended the Plan. Stock
option activity is summarized as follows:
<TABLE>
<CAPTION>
OPTION PRICE PER
SHARES SHARE
<S> <C> <C> <C> <C>
Outstanding, May 31, 1995................. 311,600 $2.80 - $6.85
Granted................................... 1,010,408 2.55
Canceled.................................. (251,600) 2.80-6.85
Redeemed.................................. (77,350) 2.55
------------- ---------------
Outstanding, May 31, 1996................. 993,058 $2.80 - $2.90
============= ===============
</TABLE>
With respect to the redemption of 77,350 stock options during the year
ended May 31, 1996, the Company recognized $197,243 of compensation expense.
At May 31, 1996, 473,379 options were exercisable and 142,041 shares were
available for future grant. In addition, an additional 280,199 shares are
available for grant if the Company meets certain growth targets in accordance
with a Preemptive Rights Agreement.
11. RETIREMENT SAVINGS PLAN
The Company sponsors a Retirement Savings Plan (the "Retirement Plan")
under Section 401(k) of the Internal Revenue Code for the benefit of all
employees meeting certain minimum service requirements. Eligible employees may
elect to contribute to the Retirement Plan subject to limitations established by
the Internal Revenue Code. The trustees of the Retirement Plan select investment
opportunities from which participants may choose to contribute. Matching
contributions are made at the discretion of the Company. There were no
contributions to the plan by the Company during the year ended May 31, 1996.
F-40
<PAGE> 121
SYMMETRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MAY 31, 1996
12. COVENANT NOT TO COMPETE
On July 31, 1995, the Company entered into a noncompete agreement (the
"Noncompete Agreement") with the then majority stockholder (the "Stockholder")
in conjunction with the Stockholder selling a portion of his holdings of the
Company's common stock to a non-affiliated third party. The Noncompete Agreement
provides for, among other things, that the Stockholder not compete, as defined
with the Company through August 22, 1999. In consideration of the covenants and
agreements contained within the Noncompete Agreement, the Company agreed to pay
an aggregate of $1,800,000 in equal annual installments of $120,000 through May
2010. The Company capitalized the value of the Noncompete Agreement at $985,000
and is amortizing the amount on a straight-line basis over the life of the
Noncompete Agreement. As security for the payment and performance of all payment
obligations under the Noncompete Agreement, the Company pledged and granted the
Stockholder a security interest in all of its rights, title and interest in all
of its shares of capital stock of another entity in which the Stockholder has an
equity interest.
13. SUPPLEMENTAL CASH FLOW INFORMATION
Payments for interest and income taxes amounted to $31,526 and $21,484,
respectively, for the year ended May 31, 1996.
During the year ended May 31, 1996, the Company issued notes payable in
exchange for the purchase of treasury stock for $30,600.
14. SUBSEQUENT EVENTS
On July 1, 1996, the Company obtained a $150,000 unsecured declining demand
line of credit for acquiring equipment that expires on August 31, 1998.
Borrowings under the line bear interest at the bank's prime rate plus 1%. The
agreement provides for drawdowns through August 31, 1996 with the line declining
by $6,250 per month beginning on September 1, 1996.
F-41
<PAGE> 122
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
SiGMA Consulting, LLC
We have audited the accompanying balance sheets of SiGMA Consulting, LLC
(the Company) as of December 31, 1996 and 1997, and the related statements of
income, members' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SiGMA Consulting, LLC at
December 31, 1996 and 1997, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
August 31, 1998
F-42
<PAGE> 123
SIGMA CONSULTING, LLC
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
----------------------
1996 1997
(IN THOUSANDS, EXCEPT
UNIT DATA)
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable, net of allowance for doubtful
accounts of $0 and $314 at December 31, 1996 and 1997,
respectively........................................... $1,831 $2,931
Costs and estimated earnings in excess of billings........ 25 42
Due from affiliates....................................... 34 48
------ ------
Total current assets.............................. 1,890 3,021
Property and equipment, net................................. 55 164
Other assets................................................ 13 40
------ ------
Total assets...................................... $1,958 $3,225
====== ======
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Overdraft liability....................................... $ 212 $ 267
Accounts payable and accrued expenses..................... 192 1,091
Note payable to bank...................................... 375 --
Due to affiliates......................................... 130 --
Deferred revenue.......................................... -- 389
Distributions payable..................................... -- 114
------ ------
Total current liabilities......................... 909 1,861
Other liabilities........................................... -- 98
Members' equity:
Member units, no par value, 100,503 units authorized,
100,503 and 88,137 units issued and outstanding at
December 31, 1996 and 1997, respectively............... 206 207
Retained earnings......................................... 843 1,059
------ ------
Total members' equity............................. 1,049 1,266
------ ------
Total liabilities and members' equity............. $1,958 $3,225
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE> 124
SIGMA CONSULTING, LLC
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------
1996 1997
(IN THOUSANDS)
<S> <C> <C>
Net revenues................................................ $7,455 $10,051
Cost of revenues............................................ 5,431 7,552
------ -------
Gross profit.............................................. 2,024 2,499
Selling, general and administrative expenses................ 1,092 1,151
------ -------
Income from operations.................................... 932 1,348
Interest income............................................. 4 7
Interest expense............................................ (37) (34)
------ -------
Net income................................................ $ 899 $ 1,321
====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE> 125
SIGMA CONSULTING, LLC
STATEMENTS OF MEMBERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK MEMBER UNITS
---------------- ----------------- RETAINED TOTAL
SHARES AMOUNT UNITS AMOUNT EARNINGS EQUITY
(IN THOUSANDS, EXCEPT SHARE AND UNIT DATA)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995....... 9,500 $ 1 -- $ -- $ 205 $ 206
Reorganization as an LLC......... (9,500) (1) 100,503 206 (205) --
Distributions.................... -- -- -- -- (56) (56)
Net income....................... -- -- -- -- 899 899
------ --- ------- ---- ------ ------
Balance at December 31, 1996....... -- -- 100,503 206 843 1,049
Redemption of member units....... -- -- (12,366) (2) (312) (314)
Distributions.................... -- -- -- -- (790) (790)
Net income....................... -- -- -- -- 1,321 1,321
------ --- ------- ---- ------ ------
Balance at December 31, 1997....... -- $-- 88,137 $204 $1,062 $1,266
====== === ======= ==== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE> 126
SIGMA CONSULTING, LLC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
1996 1997
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 899 $ 1,321
Adjustments to reconcile net income to net cash provided
by
(used in) operating activities:
Depreciation........................................... 21 43
Change in operating assets and liabilities:
Accounts receivable.................................. (607) (1,100)
Costs and estimated earnings in excess of billings... 48 (17)
Overdraft liability.................................. 102 55
Accounts payable and accrued expenses................ (149) 899
Due from affiliate................................... 14 (14)
Deferred revenue..................................... (368) 389
Other................................................ 7 (27)
----- -------
Net cash provided by (used in) operating
activities....................................... (33) 1,549
----- -------
Cash flows from investing activities:
Purchase of property and equipment........................ (15) (53)
----- -------
Net cash used in investing activities............. (15) (53)
----- -------
Cash flows from financing activities:
Redemption of members' units.............................. -- (315)
Due to affiliates......................................... 130 (130)
Repayments of note payable................................ (26) (375)
Distributions............................................. (56) (676)
----- -------
Net cash provided by (used in) financing
activities....................................... 48 (1,496)
----- -------
Net change in cash........................................ -- --
Cash at beginning of year................................. -- --
----- -------
Cash at end of year....................................... $ -- $ --
===== =======
Non-cash transactions:
Capital lease obligations................................. $ -- $ 98
===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE> 127
SIGMA CONSULTING, LLC
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
SiGMA Consulting, LLC ("SiGMA" or the "Company"), formed effective January
1, 1996 as a successor company to SiGMA Consulting, Inc., offers consulting
services focusing on change management and helping organizations improve core
business processes, including product development, manufacturing and
distribution, sales, and enterprise management. SiGMA primarily offers its
services to the manufacturing, high technology, entertainment, and
transportation industries.
2. SIGNIFICANT ACCOUNTING POLICIES
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 primarily derives its revenues from consulting services under
time and materials, capped-fee and fixed-price billing arrangements. Under time
and material 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 all direct labor and expenses
related to the contract performance. Costs and estimated earnings in excess of
billings represents revenue recognized in excess of amounts billed from
fixed-price contracts. Deferred revenue represents billings in excess of
revenues recognized. Net revenues exclude reimbursable expenses charged to
clients.
Property and Equipment
Property and equipment are stated at cost. Depreciation has been provided
using the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Furniture and fixtures........................... 5-7 years
Equipment........................................ 3-5 years
</TABLE>
Leasehold improvements are amortized over the lesser of the lease term or
the useful life of the property, whichever is shorter.
Financial Instruments
The carrying value of financial instruments such as accounts receivable,
accounts payable and accrued expenses and notes payable to bank approximate
their fair values based on the short-term maturities of these 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. Revenues from three significant customers accounted
for 49% of net revenues for each of the
F-47
<PAGE> 128
SIGMA CONSULTING, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
years ended December 31, 1996 and 1997, respectively. Two customers accounted
for 31% and 52% of total receivables, as of December 31, 1996 and 1997,
respectively.
Income Taxes
The Company is treated as a partnership for federal and state income tax
purposes. Therefore, all items of income, expense, and tax credit are passed
through to the individual unit holders. Accordingly, no provision for income
taxes is required.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
---------------
1996 1997
(IN THOUSANDS)
<S> <C> <C>
Equipment.................................................. $101 $ 250
Furniture and fixtures..................................... 9 12
Leasehold improvements..................................... 2 2
---- -----
112 264
Less: accumulated depreciation............................. 57 100
---- -----
Property and equipment, net................................ $ 55 $ 164
==== =====
</TABLE>
Equipment includes an asset acquired under a capital lease for $98,000 in
1997.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
----------------
1996 1997
(IN THOUSANDS)
<S> <C> <C>
Trade accounts payable.................................... $ 49 $ 37
Accrued pension........................................... 125 162
Accrued bonuses........................................... -- 664
Accrued contractor fees................................... 10 201
Other..................................................... 8 27
---- ------
$192 $1,091
==== ======
</TABLE>
5. FINANCING ARRANGEMENTS
Note Payable to Bank
The Company had a line of credit with a bank, providing the lesser of
$1,000,000 or 75% of eligible trade receivables. The line of credit was secured
by substantially all of the assets of the Company and expired in February 1998.
Borrowings under the line bear interest at the bank's prime rate plus 0.75%
(9.25% at December 31, 1996 and 1997).
In February 1998, the Company renewed its line of credit with the bank
("New Line"), which provides the lesser of $1,000,000 or 65% of eligible trade
receivables. The New Line is secured by substantially all of the assets of the
Company and has no expiration date. Borrowings under the line bear interest at
the bank's prime rate plus 0.75%.
F-48
<PAGE> 129
SIGMA CONSULTING, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. EMPLOYEE BENEFITS
The Company sponsors a Retirement Savings Plan (the "Retirement Plan")
under Section 401(k) of the Internal Revenue Code for the benefit all employees
meeting certain minimum service requirements. Eligible employees may elect to
contribute to the Retirement Plan subject to limitations established by the
Internal Revenue Code. The trustees of the Retirement Plan select investment
opportunities from which participants may choose to contribute. Matching
contributions are made at the discretion of the Company. The total cost
recognized under the Retirement Plan during the years ended December 31, 1996
and 1997 amounted to approximately $224,000 and $303,000, respectively.
7. RELATED PARTY TRANSACTIONS
During 1997, the Company paid legal fees totaling $34,000 on the behalf of
certain members of the Company. At December 31, 1997, this amount was included
on the balance sheet as due from affiliates.
During 1996, the Company received advances totaling $130,000 from certain
members of the Company. At December 31, 1996, this amount was included on the
balance sheet as due to affiliates. The advances were non-interest bearing and
were repaid in 1997.
During 1995, the Company made a non-interest bearing $40,000 loan to a
shareholder. At December 31, 1996, $34,000 was outstanding, which was repaid in
1997.
8. SUBSEQUENT EVENT
Effective January 5, 1998, the Company agreed to be acquired by Nextera
Enterprises, L.L.C. for cash of $10,000,000 and 669,000 Class A Common Units, as
well as the assumption of certain liabilities.
F-49
<PAGE> 130
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
The Planning Technologies Group, Inc.
Lexington, Massachusetts
We have audited the accompanying balance sheets of The Planning
Technologies Group, Inc. as of December 31, 1996 and 1997 and the related
statements of income and retained earnings, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Planning Technologies
Group, Inc. at December 31, 1996 and 1997, and the results of its operations and
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
HARTE CARUCCI & DRISCOLL, P.C.
Woburn, Massachusetts
February 19, 1998, except for Note 8,
which is April 4, 1998.
F-50
<PAGE> 131
THE PLANNING TECHNOLOGIES GROUP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF
---------------- MARCH 31,
1996 1997 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE
DATA)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 262 $ 92 $ 959
Accounts receivable....................................... 662 1,663 855
Accounts receivable-other................................. -- 78 36
Interest receivable....................................... -- 1 3
Prepaid expenses.......................................... 34 29 25
------ ------ ------
Total current assets.............................. 958 1,863 1,878
Property and equipment, net................................. 225 226 230
Security deposits........................................... 108 78 78
------ ------ ------
Total assets...................................... $1,291 $2,167 $2,186
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1 $ 6 $ 150
Accrued expenses.......................................... 196 564 775
Deferred revenue.......................................... 209 506 143
------ ------ ------
Total current liabilities......................... 406 1,076 1,068
Commitments and contingencies............................... -- -- --
Stockholders' equity:
Common stock, no par value, $1.00 stated value, 200,000
shares authorized, 126, 136 and 136 shares issued and
126, 136 and 126 shares outstanding at December 31,
1996, December 31, 1997 and March 31, 1998,
respectively........................................... 0 0 0
Additional paid-in-capital................................ 86 140 140
Retained earnings......................................... 799 951 1,278
Less: 10 shares held in treasury, at cost................. -- -- (300)
------ ------ ------
Total stockholders' equity........................ 885 1,091 1,118
------ ------ ------
Total liabilities and stockholders' equity........ $1,291 $2,167 $2,186
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE> 132
THE PLANNING TECHNOLOGIES GROUP, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE FOR THE
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------- ------------------
1996 1997 1997 1998
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues............................................ $4,534 $5,244 $1,398 $1,700
Cost of revenues........................................ 3,579 4,036 1,029 1,125
------ ------ ------ ------
Gross profit.................................. 955 1,208 369 575
General and administrative expense...................... 887 941 231 259
------ ------ ------ ------
Income from operations........................ 68 267 138 316
Loss on disposal of equipment........................... (3) (21) -- (1)
Interest income......................................... 36 42 4 12
------ ------ ------ ------
Net income.................................... $ 101 $ 288 $ 142 $ 327
Retained earnings, beginning of period.................. $ 698 $ 799 $ 799 $ 951
Distributions to stockholders........................... -- (136) (136) --
------ ------ ------ ------
Retained earnings, end of period........................ $ 799 $ 951 $ 805 $1,278
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 133
THE PLANNING TECHNOLOGIES GROUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------- ------------------
1996 1997 1997 1998
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 101 $ 288 $ 142 $ 327
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss on disposal of equipment..................... 3 21 -- 1
Depreciation...................................... 58 69 15 19
Changes in operating assets and liabilities:
Accounts receivable............................... 402 (1,001) (672) 808
Accounts receivable-other......................... -- (78) -- 42
Interest receivable............................... -- (2) -- (1)
Advance to employees and shareholders............. 15 -- -- --
Prepaid expenses.................................. (15) 5 15 4
Security deposits................................. -- 30 -- --
Accounts payable.................................. (53) 6 130 143
Accrued expense................................... (211) 368 411 211
Deferred revenue.................................. 40 297 (54) (363)
----- ------- ----- ------
Net cash provided by (used in) operating
activities................................. 340 3 (13) 1,191
----- ------- ----- ------
Cash flows from investing activities:
Proceeds from disposition of equipment............... -- 2 -- 1
Purchase of property and equipment................... (96) (93) (16) (25)
----- ------- ----- ------
Net cash used in investing activities........ (96) (91) (16) (24)
----- ------- ----- ------
Cash flows from financing activities:
Distributions to stockholders........................ -- (136) (126) --
Proceeds from issuance of stock...................... -- 54 54 --
Purchase of treasury stock........................... -- -- -- (300)
----- ------- ----- ------
Net cash used in financing activities........ -- (82) (72) (300)
----- ------- ----- ------
Net (decrease) increase in cash and cash equivalents... 244 (170) (101) 867
Cash and cash equivalents at beginning of period....... 18 262 262 92
----- ------- ----- ------
Cash and cash equivalents at end of period............. $ 262 $ 92 $ 161 $ 959
===== ======= ===== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE> 134
THE PLANNING TECHNOLOGIES GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY
The Planning Technologies Group, Inc. ("PTG" or the "Company") offers
strategy formulation, strategic planning process design, and business process
assessment and redesign services. PTG primarily offers its services to the
health care, insurance, financial services, consumer products, manufacturing and
high technology industries.
2. SIGNIFICANT ACCOUNTING POLICIES
Reclassification
Certain prior year amounts have been reclassified to conform to the current
year presentation.
Interim Financial Statements (Unaudited)
The balance sheet at March 31, 1998 and the statements of income and
retained earnings, and cash flows for the three months ended March 31, 1997 and
1998 are unaudited, and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the Company's consolidated financial position, results of
operations and cash flows.
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 billing arrangements. Revenues are recognized as the services are
provided. Deferred revenue represents billings in excess of revenues recognized.
Net revenues exclude reimbursable expenses charged to clients.
Cash and Cash Equivalents
The Company considers all highly liquid investments and other short-term
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.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the following estimated useful lives of the assets
as follows:
<TABLE>
<S> <C>
Equipment........................................... 5 years
Furniture and fixtures.............................. 7 years
</TABLE>
Leasehold improvements are amortized over the lesser of the lease term or
the useful life of the property, whichever is shorter.
F-54
<PAGE> 135
THE PLANNING TECHNOLOGIES GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
Concentration of Significant Customers
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. Sales to three
significant customers accounted for 32%, 29% and 20%, respectively, of net
revenues for the year ended December 31, 1997.
Income Taxes
The Company has elected to be taxed under the provisions of Subchapter "S"
of the Internal Revenue Code. Accordingly, no provision for federal income taxes
has been provided in the financial statements as all income of the Company is
taxed directly to the shareholders.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
--------------
1996 1997
(IN THOUSANDS)
<S> <C> <C>
Equipment................................................... $240 $291
Furniture and fixtures...................................... 89 90
---- ----
329 381
Less: accumulated depreciation.............................. 104 155
---- ----
Property and equipment, net................................. $225 $226
==== ====
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
--------------
1996 1997
(IN THOUSANDS)
<S> <C> <C>
Accrued profit sharing contribution......................... $100 $116
Accrued bonuses............................................. 92 441
Other....................................................... 4 7
---- ----
$196 $564
==== ====
</TABLE>
5. COMMITMENTS
The Company leases its facilities under an operating lease, which expires
in the year 2001. Rent expense charged to operations for the years ended
December 31, 1996 and 1997 was $163,264 and $176,618, respectively.
The Company is currently leasing vehicles under operating leases expiring
September 2000. Lease expense charged to operations for the years ended December
31, 1996 and 1997 was $18,950 and $21,843,
F-55
<PAGE> 136
THE PLANNING TECHNOLOGIES GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
respectively. Also, the Company has an operating lease for certain equipment.
Lease expense for this equipment charged to operations for the years ended
December 31, 1996 and 1997, was $0 and $2,500, respectively.
Minimum future payments under the operating leases having remaining terms
in excess of one year as of December 31, 1997 for each of the fiscal years
ending after December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998.............................................. $ 194
1999.............................................. 191
2000.............................................. 183
2001.............................................. 148
2002.............................................. --
--------
$ 716
========
</TABLE>
6. STOCKHOLDERS' EQUITY
During 1997, the Company issued ten shares of common stock to an employee
of the company. Accordingly, common stock has been increased by $10.00 per share
and additional paid-in-capital has been increased by $53,600, representing the
excess of the cost over the stated value of the common stock issued.
At December 31, 1996 and 1997, the Company had 126 and 136 shares of no par
value common stock issued and outstanding, respectively. Common shares are
voting and dividends are paid at the discretion of the Board of Directors. All
common shares are restricted from transfer with the Company being offered the
first right to repurchase all of the shares proposed, but not less than all, at
the book value per share, as defined by the Company. Within one (1) year of
termination, the stockholder may elect to require the Company to purchase all
(but not less than all) of the shares of the stock.
7. PROFIT SHARING PLAN
The Company sponsors a combination profit sharing 401(k) plan that covers
all eligible employees. The 401(k) provision allows the employee to make
contributions to the plan based on the percent of pre-tax earnings chosen by the
employee up to a maximum of 15% of gross wages. Any Company contributions to the
profit sharing plan are at the discretion of the Board of Directors. The Company
contributed $99,607 and $116,854 to the profit sharing plan in 1996 and 1997,
respectively.
8. SUBSEQUENT EVENTS
Effective March 31, 1998, the Company sold substantially all of its assets
to and certain liabilities were assumed by Nextera Enterprises, L.L.C.
("Nextera") in exchange for cash of $6,710,000 and 214,000 Class A Common Units
of Nextera.
F-56
<PAGE> 137
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Pyramid Imaging, Inc.
We have audited the accompanying balance sheet of Pyramid Imaging, Inc. as
of December 31, 1997 and the related statement of operations, shareholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pyramid Imaging, Inc. at
December 31, 1997 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
San Francisco, California
September 25, 1998
F-57
<PAGE> 138
PYRAMID IMAGING, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1997 MARCH 31, 1998
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash...................................................... $ 2 $ 2
Trade accounts receivable, net of $50 allowance for
doubtful accounts...................................... 1,926 2,498
Prepaid taxes............................................. 234 226
Inventory................................................. 28 7
Prepaid expenses and other current assets................. 38 37
Deferred income taxes -- current.......................... 42 42
------ ------
Total current assets........................................ 2,270 2,812
Property and equipment, net................................. 361 389
Deferred income taxes -- noncurrent......................... 36 44
Other....................................................... 11 --
------ ------
Total assets...................................... $2,678 $3,245
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 789 $ 856
Accrued expenses.......................................... 117 334
Line of credit............................................ 203 342
Distributions payable to shareholders..................... 150 --
Customer deposits......................................... 26 --
Advances from affiliate................................... -- 840
------ ------
Total current liabilities................................... 1,285 2,372
Shareholders' equity:
Voting common stock, no par value; 10,000 shares
authorized, 3,000 shares issued and outstanding........ 530 530
Retained earnings......................................... 863 343
------ ------
Total shareholders' equity.................................. 1,393 873
------ ------
Total liabilities and shareholders' equity........ $2,678 $3,245
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE> 139
PYRAMID IMAGING, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Net revenues.............................................. $6,925 $2,471
Cost of revenues.......................................... 4,360 1,350
------ ------
Gross profit............................................ 2,565 1,121
Selling, general and administrative....................... 2,714 796
Compensation expense--repurchase of stock options......... -- 840
------ ------
Loss from operations.................................... (149) (515)
Interest income........................................... 23 --
Interest expense.......................................... (15) (5)
Other expenses............................................ (20) --
------ ------
Loss before taxes....................................... (161) (520)
Income tax benefit........................................ 60 --
------ ------
Net loss................................................ $ (101) $ (520)
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE> 140
PYRAMID IMAGING, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CAPITAL STOCK TOTAL
------------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
--------- ------ -------- -------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, December 31, 1996....................... 3,000,000 $530 $1,114 $1,644
Distributions to shareholders.................. -- -- (150) (150)
Net loss....................................... -- -- (101) (101)
--------- ---- ------ ------
Balance, December 31, 1997....................... 3,000,000 530 863 1,393
--------- ---- ------ ------
Net loss (unaudited)........................... -- -- (520) (520)
--------- ---- ------ ------
Balance, March 31, 1998 (unaudited).............. 3,000,000 $530 $ 343 $ 873
========= ==== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE> 141
PYRAMID IMAGING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................. $ (101) $(520)
Adjustment to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization....................... 206 78
Deferred income taxes............................... (64) (8)
Loss on disposal of equipment....................... 21 --
Changes in operating assets and liabilities:
Accounts receivable............................... 223 (572)
Prepaid taxes..................................... (234) 8
Inventories....................................... 45 21
Prepaid expenses and other assets................. (24) 12
Accounts payable.................................. (15) 67
Accrued expenses.................................. 100 217
Accrued income taxes payable...................... (409) --
Interest payable.................................. (15) --
Sales tax payable................................. (61) --
Customer deposits................................. 21 (26)
------- -----
Net cash used in operating activities.................... (307) (723)
Investing activities:
Purchases of property and equipment................. (300) (106)
Repayments on receivables from shareholders......... 20 --
------- -----
Net cash used in investing activities............. (280) (106)
Financing activities:
Proceeds from borrowings under line of credit....... 2,779 139
Repayments on borrowings under line of credit....... (2,576) --
Repayments of loans to shareholders................. (250) (150)
Borrowings from affiliate........................... -- 840
------- -----
Net cash used in financing activities............. (47) 829
------- -----
Net decrease in cash and cash equivalents................ (634) --
Cash at beginning of period.............................. 636 2
------- -----
Cash at end of period.................................... $ 2 $ 2
======= =====
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes........................................ $ 625 $ --
======= =====
Interest............................................ $ 15 $ 5
======= =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE> 142
PYRAMID IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Pyramid Imaging, Inc. ("Pyramid" or the "Company") was formed in 1993 with
offices in San Francisco, California; New York, New York; and Dallas, Texas. The
Company offers consulting services focused on providing technology within the
areas of knowledge management, electronic commerce, customer management, and
human capital management. Pyramid primarily offers its services to the health
care, insurance, financial services, consumer products, manufacturing and high
tech industries.
2. ACQUISITION OF COMPANY
Pursuant to the Purchase Agreement, (the "Agreement") dated March 31, 1998
(the "closing"), Nextera Enterprises, LLC ("Nextera"), acquired all of the
outstanding capital stock of the Company (4,009,971 shares of common stock
outstanding as of the closing) from the holders of the Company's stock (the
"Holders"). At closing, all outstanding options to purchase the Company's common
stock were canceled pursuant to an Option Cancellation Agreement entered into
with each optionholder of the Company. In return for the contribution of the
Company's outstanding shares and the cancellation of the outstanding options,
the Holders received $8,091,667 in cash and 520,667 Class A Common Units issued
pursuant to the Limited Liability Company Agreement of Nextera dated April 9,
1997, as amended on January 6, 1998.
Additional consideration to the Holders of the Company's common stock have
been provided per the Agreement in the form of a Revenue Earn-Out, as defined in
the Agreement, for the twelve month period ending March 31, 1999. The additional
consideration is not to exceed $833,333 and 53,333 Class A units.
Pursuant to the Agreement, the holders have agreed to indemnify Nextera
against certain breaches of the representations, warranties and covenants made
by the Company and the holders in the Agreement. To secure payment of the
holders indemnification obligations, an additional $825,000 in cash and 66,000
Class A units are being held in escrow.
In accordance with the Agreement, a certain level of shareholders' equity
of the Company must exist as of March 31, 1998 in order for the full purchase
consideration, as discussed above, to be paid by Nextera. If threshold is not
met, Nextera will deduct any shortfall from the escrowed funds.
3. SIGNIFICANT ACCOUNTING POLICIES
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting services primarily under
time and materials and, to a lesser extent, fixed price billing arrangements.
Under time and materials arrangements, revenues are recognized as the services
are provided.
Revenues on fixed price billing arrangements are recognized based on the
achievement of agreed upon milestones described in each contract, which
approximates percentage of completion. Contract costs include all direct labor
and expenses related to the contract performance.
Inventories
Inventories, consisting primarily of computer-related equipment are stated
at the lower of cost (determined using the specific identification method) or
market.
F-62
<PAGE> 143
PYRAMID IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets, which range
from 3 to 7 years.
Advertising Costs
The Company incurs advertising costs in connection with printed material
and trade shows. All costs associated with advertising are expensed as incurred.
The Company expensed approximately $55,000 for the year ended December 31, 1997.
Research and Development
The Company incurred approximately $92,000 in software-related research and
development costs for the year ended December 31, 1997. All costs relating to
research and development have been expensed as incurred.
Concentration of Credit Risk
The Company provides its services in the United States. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral. For the year ended December 31, 1997, the Company had four
customers representing approximately 67% of net revenues and 69% of total
receivables.
Stock-Based Compensation
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 because, as
discussed in Note 9, the alternative fair value accounting provided for under
FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires the
use of option valuation models that were not developed for use in valuing
employee stock options.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under this method,
deferred tax liabilities and assets are recognized for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of assets and liabilities.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1997
(IN THOUSANDS)
<S> <C>
Equipment................................................... $ 662
Software.................................................... 82
Furniture and fixtures...................................... 19
-----
763
Less: accumulated depreciation and amortization............. (402)
-----
Property and equipment, net................................. $ 361
=====
</TABLE>
F-63
<PAGE> 144
PYRAMID IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. CREDIT FACILITY
The Company maintains a $750,000 line of credit with a financial
institution that expires on May 31, 1998. Borrowings under the line of credit
bear interest at the 30-day commercial paper rate plus 3.15%. The line of credit
is secured by the assets of the Company and is guaranteed by two shareholders.
Outstanding borrowings under the line of credit were $202,602 at December 31,
1997.
The Company is obligated to comply with certain financial and other
covenants under the terms of its credit facility.
Because the interest rate on the credit facility is variable and resets
frequently, management believes that the carrying value of the Company's credit
facility approximates fair market value.
Subsequent to December 31, 1997, the line of credit was extended through
May 31, 1999.
6. INCOME TAXES
The provision (benefit) for income taxes consisted of the following
components:
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 31, 1997
(IN THOUSANDS)
<S> <C>
Current:
Federal................................................... $ 2
State..................................................... 1
----
3
Deferred:
Federal................................................... (49)
State..................................................... (14)
----
(63)
----
Total provision (benefit) for income tax.................... $(60)
====
</TABLE>
The provision (benefit) for income taxes differs from the amount computed
by applying the federal statutory income tax rate to the Company's income before
taxes as follows:
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 31, 1997
(IN THOUSANDS)
<S> <C>
Income tax provision (benefit) at federal statutory rate.... $(55)
State income tax, net of federal tax effect................. (8)
Nondeductible expenses...................................... 3
----
Provision (benefit) for income taxes........................ $(60)
====
</TABLE>
F-64
<PAGE> 145
PYRAMID IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1997
(IN THOUSANDS)
<S> <C>
Deferred tax assets:
Accruals and reserves..................................... $42
Depreciation.............................................. 36
---
Total deferred tax assets................................... 78
Deferred tax liabilities.................................... --
---
Total net deferred tax assets..................... $78
===
Recorded as:
Current deferred tax assets............................... 42
Noncurrent deferred tax assets............................ 36
---
$78
===
</TABLE>
Deferred tax assets and liabilities are classified in the balance sheet
based on the classification of the related asset or liability. Management has
concluded that no valuation allowance is required based on its assessment that
historical levels of taxable income are sufficient to realize the tax assets.
7. RELATED PARTY TRANSACTIONS
In 1993, the Company granted a five year, 6%, $250,000 note payable due to
a shareholder. The note was paid in full during 1997.
In October 1995, the Company issued a 10%, $333,000 note payable due to a
shareholder. Payments under the note were to commence October 2000. Effective
March 1996, the note was converted to 125 shares of the Company's common stock
at $2,664 per share.
In January 1996, the Company sold its wholly-owned subsidiary, Pyramid
Interactive, Inc. to two shareholders of the Company. In connection with the
sale, the Company granted a five year, 8%, $20,000 note receivable to these
shareholders. The note was paid in full in 1997.
8. LEASES
The Company leases its office facilities and certain office equipment under
operating leases. Certain office leases provide for renewal options at the
discretion of the lessee. Rental expense amounted to $171,529 for the year ended
December 31, 1997. Future minimum lease payments under noncancelable operating
leases for the years ending after December 31, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1998........................................................ $20
1999........................................................ 20
2000........................................................ 8
---
$48
===
</TABLE>
F-65
<PAGE> 146
PYRAMID IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. SHAREHOLDERS' EQUITY
Stock Option Plan
Effective January 1997, the Company established the 1997 Equity Incentive
Plan ("the Plan"). The Plan provides employees, outside directors and
consultants eligibility for incentive stock options, nonstatutory stock options,
stock bonuses, rights to purchase restricted stock and stock appreciation
rights. The exercise price of nonstatutory stock options shall not be less than
85% of the fair market value of the stock at the date of grant. The exercise
price of the incentive stock options shall not be less than the fair market
value of the stock at the date of grant. The fair market value of the stock
appreciation rights are based on calculated fair market values outlined in the
agreement. The Company authorized 3,000,000 shares of common stock for issuance
under the Plan. The term of the option shall not exceed ten years from the date
of grant. Options vest at predetermined intervals based on the grantee's tenure
with the Company or upon the Company's meeting certain performance objectives
specified within each grantee's option agreement, but not to exceed five years.
Shares awarded under options which have not vested are subject to repurchase by
the Company at amounts equal to the exercise prices which would have been paid
by the employees upon exercise.
Stock-Based Compensation
"Pro forma" information regarding net income is required by Statement No.
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using a minimum value option
pricing model with the following weighted-average assumptions for the year ended
December 31, 1997: risk-free interest rate of 6.29%; and a weighted-average
expected life of the option of 9.2 years.
The minimum value option valuation model was developed for use in
estimating the fair value of traded options. Option valuation models require the
input of subjective assumptions, including the expected life of the option.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of "pro forma" disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The effects of
applying Statement No. 123 on "pro forma" net income (loss) are not likely to be
representative of the effects on reported net income (loss) for future years.
The Company's reported and "as adjusted" information is as follows for the year
ended December 31, 1997 (in thousands):
<TABLE>
<S> <C>
Net income (loss), as reported.............................. $(101)
Net income (loss), as adjusted.............................. (181)
</TABLE>
F-66
<PAGE> 147
PYRAMID IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Stock Option Activity
The Company's stock option activity and related information under the Plan
for the year ended December 31, 1997 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
<S> <C> <C>
Options outstanding -- beginning of year.................... -- $ --
Granted................................................... 2,991,000 .51
Exercised................................................. -- --
Forfeited................................................. 624,000 .50
--------- ----------
Options outstanding -- end of year.......................... 2,367,000 $ .51
========= ==========
Options exercisable at end of year.......................... 1,738,000 $ .51
========= ==========
Weighted average fair value of options granted during the
year with exercise prices equal to market value on date of
grant..................................................... $ .23
Weighted average fair value of options granted during the
year with exercise prices in excess of market value on the
date of grant............................................. $ .10
Weighted average remaining contractual life................. 8.07 years
</TABLE>
Subsequent to December 31, 1997, 105,000 stock options were granted and
1,009,972 options were exercised.
As mentioned in note 2, effective March 30, 1998, all outstanding stock
options to purchase the Company's common stock were cancelled pursuant to the
Agreement. The Company paid $840,132, which will be charged against operations
in 1998, to all option holders as consideration for the cancellation of the
options.
10. RETIREMENT SAVINGS PLAN
The Company maintains a defined contribution plan under section 401(K) of
the Internal Revenue Code. The plan covers all employees who have been employed
for 30 days and work more than 30 hours per week. The plan provides for up to
15% contributions of a covered employee's eligible pay with no matching
contribution by the employer.
Effective March 30, 1998, the Company's Board of Directors approved the
termination of the defined contribution plan.
11. SUBSEQUENT EVENTS
Effective March 31, 1998, a contract with a significant customer
representing 21% of 1997 revenues was terminated. In connection with the
termination, the Company received a termination fee of $635,700 which was
recorded and earned in 1998.
12. YEAR 2000 (UNAUDITED)
The Company has began an assessment of its computer systems with respect to
dates in the Year 2000 and thereafter. Currently, the Company is unable to
assess whether there will be significant adverse effects on the Company's
systems and operations.
F-67
<PAGE> 148
INDEPENDENT AUDITOR'S REPORT
To the Partners of
Sibson & Company, L.P.
We have audited the accompanying consolidated balance sheets of Sibson &
Company, L.P. and Subsidiaries as of December 31, 1996 and 1997 and August 31,
1998 and the related consolidated statements of operations and partners' capital
and cash flows for each of the two years in the period ended December 31, 1997
and for the eight month period ended August 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 Sibson &
Company, L.P. and Subsidiaries as at December 31, 1996 and 1997 and August 31,
1998, and the results of their operations and their cash flows for each of the
two years in the period ended December 31, 1997 and for the eight month period
ended August 31, 1998, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, at the close of
business on August 31, 1998, the Company sold and transferred all of its assets
subject to its liabilities in exchange for cash and other consideration. The
Company ceased operations thereafter. These financial statements reflect the
financial position of the Company prior to this transaction.
/s/ FARKOUH, FURMAN & FACCIO
New York, New York
December 29, 1998
F-68
<PAGE> 149
SIBSON & COMPANY, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, AUGUST 31,
------------------ ----------
1996 1997 1998
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ 1,030 $ 1,633 $ 377
Accounts receivable (less allowance for doubtful accounts
of $194 in 1996, $483 in 1997 and $298 in 1998)....... 9,166 9,610 13,811
Notes receivable from affiliates......................... 315 464 277
Prepaid expenses and other current assets................ 545 344 524
------- ------- -------
Total current assets............................. 11,056 12,051 14,989
Fixed assets, at cost (less depreciation of $790 in 1996,
$1,168 in 1997 and $1,475 in 1998)....................... 961 1,607 2,895
Notes receivable from affiliates, less current portion..... 13
Other assets (net of amortization of $359 in 1996, $413 in
1997 and $450 in 1998)................................... 268 313 345
------- ------- -------
Total............................................ $12,298 $13,971 $18,229
======= ======= =======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Cash overdraft........................................... $ 738 $ 14 $ 1,074
Accounts payable, accrued expenses and taxes............. 306 626 973
Commissions payable...................................... 387 139 294
Fee advances payable..................................... 1,293 1,302 786
Profit sharing plan payable.............................. 1,399 1,552 1,499
Accrued compensation..................................... 2,478 3,597 4,311
Loan payable--bank....................................... -- -- 2,550
Other current liabilities................................ 222 421 616
------- ------- -------
Total current liabilities........................ 6,823 7,651 12,103
Accrued compensation and benefits.......................... 1,110 951 458
Other long-term liabilities................................ 226 288 561
------- ------- -------
Total liabilities................................ 8,159 8,890 13,122
Minority interest.......................................... -- (1) (3)
Partners' capital.......................................... 4,139 5,082 5,110
------- ------- -------
Total liabilities and partners' capital.......... $12,298 $13,971 $18,229
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-69
<PAGE> 150
SIBSON & COMPANY, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE
DECEMBER 31, EIGHT MONTHS ENDED
-------------------- AUGUST 31,
1996 1997 1998
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues.............................................. $29,178 $34,650 $29,192
Cost of revenues...................................... 21,674 25,629 21,637
------- ------- -------
Gross profit................................ 7,504 9,021 7,555
Selling, general and administrative expenses.......... 6,769 7,575 6,394
------- ------- -------
Income from operations...................... 735 1,446 1,161
Interest income....................................... 65 95 51
Interest expense...................................... (94) (86) (146)
Post retirement healthcare cost....................... (135) (140) (96)
Other income (expense)................................ 33 8 (5)
------- ------- -------
Net income.................................. 604 1,323 965
Partners' capital at beginning of period.............. 3,650 4,139 5,082
Partners' capital contributions....................... 118 334 27
Partners' capital withdrawals......................... (233) (714) (964)
------- ------- -------
Partners' capital end of period....................... $ 4,139 $ 5,082 $ 5,110
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
F-70
<PAGE> 151
SIBSON & COMPANY, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE
DECEMBER 31, EIGHT MONTHS ENDED
-------------------- AUGUST 31,
1996 1997 1998
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 604 $ 1,323 $ 965
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization......................... 470 505 574
Donation of fixed assets.............................. 9
Minority interest in net (loss) of consolidated
subsidiaries....................................... (1) (2)
(Gain) or loss on sale of furniture, fixtures and
equipment.......................................... (53) (8) 13
Changes in operating assets and liabilities:
Accounts receivable................................ (2,178) (444) (4,201)
Prepaid expenses and other assets.................. 155 206 (193)
Accounts payable, accrued expenses and taxes....... 36 320 347
Commissions payable................................ 32 (628) 155
Accrued postretirement healthcare benefit.......... 128 131 96
Fee advances payable............................... 709 9 (516)
Profit sharing plan payable........................ 205 153 (53)
Accrued compensation............................... 1,013 1,212 127
Other current liabilities.......................... 4 (4) 126
------- ------- -------
Net cash provided by (used in) operating
activities..................................... 1,125 2,774 (2,553)
------- ------- -------
Cash flows from investing activities:
Purchase of fixed assets.................................. (409) (704) (1,158)
Proceeds from sale of furniture, fixtures and equipment... 53 8 69
Other..................................................... (47) (104) (56)
------- ------- -------
Net cash (used in) investing activities.......... (403) (800) (1,145)
------- ------- -------
Cash flows from financing activities:
(Decrease) or increase in cash overdraft.................. 172 (724) 1,060
Notes receivable from affiliates, net..................... 246 (36) 109
Proceeds from general partner capital contributions....... 109
Partners' capital withdrawals............................. (233) (513) (964)
Payment of capitalized lease obligations.................. (203) (207) (313)
Proceeds from revolving line of credit.................... 3,850 2,350 5,400
Repayment of revolving line of credit..................... (3,850) (2,350) (2,850)
------- ------- -------
Net cash provided by (used in) financing
activities..................................... (18) (1,371) 2,442
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 704 603 (1,256)
Cash and cash equivalents at beginning of period............ 326 1,030 1,633
------- ------- -------
Cash and cash equivalents at end of period.................. $ 1,030 $ 1,633 $ 377
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest...................................... $ 92 $ 79 $ 135
======= ======= =======
Supplemental schedule of noncash investing and financing
activities:
Employees purchase of limited partnership interests funded
through notes receivable.................................. $ 66 $ 24 $ --
======= ======= =======
General partners' capital contributions funded through note
receivable................................................ $ 52 $ 201 $ 27
======= ======= =======
Capital lease obligations incurred for fixed assets......... $ 116 $ 393 $ 757
======= ======= =======
Note payable on redemption of general partners' partnership
interest.................................................. $ -- $ 201 $ --
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-71
<PAGE> 152
SIBSON & COMPANY, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SALE AND TRANSFER OF COMPANY ASSETS
Effective at the close of business on August 31, 1998, Sibson & Company,
L.P. (the "Company") sold 85% of its assets subject to certain of its
liabilities in exchange for $34,764,000. In addition, the Company transferred
15% of its assets subject to certain of its liabilities in exchange for
2,613,087 Class A Common Units of Nextera Enterprises, LLC. The Company,
subsequently ceased operations and changed its name to Castor, L.P.
2. THE COMPANY
Prior to the sale and transfer of its assets, Sibson & Company, L.P., a
limited partnership, provided human capital consulting services offering human
resource strategies, outsourcing assessments, organizational designs,
rewards/incentives programs, performance management processes and systems, and
executive coaching services. The Company also served sales and marketing
organizations with sales strategy, selling process, sales channel and selling
effectiveness consulting.
3. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Sibson &
Company, L.P. and its 99% owned subsidiary, Sibson Europe, LLC and its 100%
owned subsidiary, Sibson UK Limited. All significant intercompany accounts and
transactions have been eliminated in consolidation.
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 derived its revenues from consulting services primarily under
time and materials billing arrangements. Under time and materials arrangements,
revenues are recognized as the services are provided. Revenues exclude
reimbursable expenses charged to clients.
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity
of three months or less when purchased to be cash equivalents.
Fixed Assets
Fixed assets are stated at cost. Depreciation is provided using accelerated
methods over estimated useful lives of five to seven years. Leasehold
improvements are amortized over the lesser of the lease term or the estimated
life of the improvements, whichever is shorter.
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
F-72
<PAGE> 153
SIBSON & COMPANY, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
instruments. The carrying value of long-term debt approximates its fair value
based on references to similar instruments.
Income Taxes
Since the partnership is not subject to income taxes, the results of
partnership operations are included in the income tax returns of the partners.
Taxes, if any, are payable directly by the partners, accordingly, no provision
for income taxes is included in the attached financial statements. The
partnership files its tax returns on the cash basis of accounting.
The partnership, however, is liable for certain state taxes as a result of
the sale transaction described in Note 1. These financial statements do not give
effect to these state taxes due by the Company or its partners as a result of
the transaction.
4. ESCROW ACCOUNT
In accordance with an employment agreement, the Company is required to
escrow unpaid commissions totaling $223,251 as of August 31, 1998. The funded
escrow amount was not available for use by the Company other than for the
payment of these commissions. As a result of the sale and transfer transaction
as described in Note 1, the employment agreement has been terminated.
5. NOTES RECEIVABLE FROM AFFILIATES
Notes receivable from affiliates consist of:
Limited Partners
The notes receivable from limited partners ($123,000 at December 31, 1996,
$111,000 at December 31, 1997 and $11,500 at August 31, 1998) provided for
interest at rates ranging from 8.75% to 10%. The $11,500 note receivable was
repaid subsequent to August 31, 1998.
Shareholder of Sibson Canada, Inc.
The note receivable from a shareholder of Sibson Canada, Inc. ($75,000 at
December 31, 1996 and 1997 and $15,000 at August 31, 1998) provided for interest
at 10% and was repaid subsequent to August 31, 1998.
Sibson Canada, Inc. (a Licensee Company)
The note receivable from Sibson Canada, Inc. ($60,000 at December 31, 1996)
was repaid in 1997.
Sibson South Africa (a Licensee Company)
The note receivable from Sibson South Africa ($50,000 at December 31, 1997)
was repaid in 1998.
General Partner
The notes receivable from the general partner ($130,000 at December 31,
1996, $288,000 at December 31, 1997 and $250,050 at August 31, 1998) provided
for interest at rates ranging from 8.75% to 10% and were repaid subsequent to
August 31, 1998.
F-73
<PAGE> 154
SIBSON & COMPANY, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. FIXED ASSETS
Fixed assets consisted of the following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF
---------------- AUGUST 31,
1996 1997 1998
(IN THOUSANDS)
<S> <C> <C> <C>
Furniture and office equipment......................... $ 572 $1,030 $1,681
Telephone equipment.................................... 195 253 315
Computer equipment..................................... 742 1,094 1,850
Leasehold improvements................................. 227 379 482
Artwork................................................ 15 19 33
Automobile............................................. -- -- 9
------ ------ ------
1,751 2,775 4,370
Less: accumulated depreciation......................... (790) (1,168) (1,475)
------ ------ ------
Fixed assets, net...................................... $ 961 $1,607 $2,895
====== ====== ======
</TABLE>
7. NOTE PAYABLE TO BANK
As of August 31, 1998, the Company had a revolving $4,000,000 line of
credit with a bank with interest at the prime rate. The Company shall pay a fee
equal to 0.25% per annum on the amount of the unused line of credit, if any. The
agreement expired August 31, 1998. All tangible and intangible property of the
Company has been pledged to secure any outstanding bank debt, which is also
guaranteed by the general partner. The line of credit contains covenants
regarding various financial statement amounts, ratios and activities of the
Company. Advances under the revolving credit agreement are subject to adequate
collateral.
As part of the revolving line of credit, the bank has made available a
maximum of $2,000,000, which the Company may utilize in the form of letters of
credit or to finance leases. Outstanding letters of credit or lease obligations
under the agreement will proportionately reduce the maximum revolving line
available. As of August 31, 1998, letters of credit outstanding and lease
obligations totalled $1,164,558.
8. CAPITALIZED LEASE OBLIGATIONS
The Company leases certain equipment under capital leases expiring in
various years through April 2003. Obligations under capital leases have been
recorded in the accompanying financial statements at the present value of future
minimum lease payments, discounted at interest rates ranging from 8.5% to 15.5%.
Obligations under capital leases consisted of the following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF
-------------- AUGUST 31,
1996 1997 1998
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion........................................... $178 $275 $ 447
Long-term portion......................................... 199 288 561
---- ---- ------
Total..................................................... $377 $563 $1,008
==== ==== ======
</TABLE>
F-74
<PAGE> 155
SIBSON & COMPANY, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The future minimum lease payments under the capital leases and the net
present value of the future minimum lease payments for the years ending after
August 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $ 516
2000........................................................ 432
2001........................................................ 145
2002........................................................ 16
2003........................................................ 10
------
Total future minimum lease payments......................... 1,119
Less amount representing interest........................... 111
------
Present value of future minimum lease payments.............. $1,008
======
</TABLE>
9. EMPLOYEE BENEFIT PLANS
Profit Sharing Plan
The Company maintains a Profit Sharing and Salary Reduction Plan (the
"Plan") which covers all eligible employees. Employees may defer a portion of
their annual compensation up to the maximum amount permitted under the Internal
Revenue Code.
Under the terms of the Plan, the Company may contribute an amount equal to
the maximum amount, which is deductible for federal income tax purposes.
Employer contributions to the Plan were $1,390,965, and $1,546,641 for the years
ended December 31, 1996 and 1997, respectively. For the eight months ended
August 31, 1998, the contributions to the Plan were $1,496,529. In addition, the
Company pays a supplemental profit sharing contribution, as wages, to those
employees whose compensation is in excess of the maximum amount permitted under
the Internal Revenue Code.
Post-retirement Healthcare Benefit
The Company presently provides a post-retirement healthcare benefits plan
which provides for 75% of the annual cost of medical coverage for a retiree with
at least 15 years of service and who is between 50 and 64 years of age. Coverage
ceases once the retiree reaches age 65.
Effective January 1, 1995, the Company adopted SFAS No. 106, Employers
Accounting for Postretirement Benefits Other Than Pensions ("SFAS No. 106").
This statement requires the Company to accrue, during the employee's years of
service, the expected cost of providing benefits. The cost of providing these
benefits was previously recognized in the period in which the benefits were
paid.
The Company adopted SFAS No. 106 on a prospective basis. The net transition
obligation represents the difference between the Company's January 1, 1995
accrued post-retirement healthcare costs prior to the adoption of SFAS No. 106
and the unfunded liability for these costs as of that date. The Company does not
fund these costs. The net transition liability at January 1, 1995 was $684,766
and will be amortized over 20 years.
F-75
<PAGE> 156
SIBSON & COMPANY, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of net periodic post-retirement healthcare benefit cost are
as follows:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
--------------
1996 1997
(IN THOUSANDS)
<S> <C> <C>
Service cost................................................ $ 47 $ 46
Interest cost............................................... 54 59
Amortization of net transition liability over 20 years...... 34 35
---- ----
Net post-retirement healthcare benefit cost................. $135 $140
==== ====
</TABLE>
A reconciliation of the accumulated post-retirement healthcare benefit
obligation to the accrued postretirement healthcare benefit liability recognized
in the balance sheet is as follows:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
--------------
1996 1997
(IN THOUSANDS)
<S> <C> <C>
Accumulated post-retirement healthcare benefit obligations:
Active participants....................................... $ 395 $ 414
Fully eligible participants............................... 86 60
Retirees.................................................. 321 299
----- -----
802 773
Unrecognized transition obligation........................ (616) (582)
----- -----
186 191
Unrecognized net gain....................................... 76 202
----- -----
Accrued post-retirement healthcare benefit liability........ $ 262 $ 393
===== =====
</TABLE>
The assumed healthcare cost trend rate used in measuring the accumulated
post-retirement obligation was 7% with subsequent annual decrements of 0.15% to
an ultimate trend rate of 3.5%. A 1.0% increase in the assumed healthcare cost
trend rate for each year would increase the accumulated post-retirement
healthcare benefit obligation by approximately 11% and the net post-retirement
cost by approximately 15%. The discount rate used in determining the accumulated
post-retirement healthcare benefit liability was 7%.
For the eight month period ended August 31, 1998, the Company has estimated
the net periodic post-retirement healthcare benefit cost as $96,000. The
estimated accrued post-retirement healthcare benefit liability as at August 31,
1998 is $489,000.
10. EMPLOYMENT AGREEMENT
The Company had an employment agreement under which an employee was
entitled to compensation based upon the collections from business specifically
generated by the employee. In addition, the employee was entitled to
compensation based upon certain other business. The employment agreement was due
to expire on April 30, 2000, however, as a result of the sale and transfer of
assets provided in Note 1, the employment agreement has been cancelled effective
after August 31, 1998.
F-76
<PAGE> 157
SIBSON & COMPANY, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. OPERATING LEASES
The Company leased office space in six locations under leases expiring at
various times through August 2007. The leases provided for escalations based
upon increases in real estate taxes, operating expenses and cost of living
increases.
The future minimum annual lease payments for the fiscal years ending after
August 31, 1998 were as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $1,534
2000........................................................ 1,657
2001........................................................ 1,329
2002........................................................ 1,096
2003........................................................ 905
Thereafter.................................................. 3,368
------
$9,889
======
</TABLE>
Rent expense included in the attached statement of operations was
$1,654,229 net of sublease income of $180,123 in 1996, $1,576,053 net of
sublease income of $37,830 in 1997 and $1,205,657 net of sublease income of
$21,690 in 1998.
The Company's obligation under two of the leases is secured by letters of
credit totaling $650,000.
The Company leased various equipment on operating leases with terms through
2002. Monthly rental payments on these leases were approximately $30,000.
As a result of the sale and transfer of assets provided in Note 1, all
leases were assigned to the acquiring entity.
12. LICENSING AGREEMENTS
The Company had granted licenses to companies in South Africa, Canada,
Australia, New Zealand and the United Kingdom to use the name "Sibson &
Company". These licenses provided for royalties payable to the Company equal to
5% of their respective revenues.
13. UNINSURED CASH BALANCES
The Company maintains its cash in several banks. The bank balances on
deposit which are in excess of the FDIC insurance limits was approximately
$670,000 at August 31, 1998.
F-77
<PAGE> 158
AUDITORS' REPORT
To the Directors of
Sibson Canada, Inc.
We have audited the balance sheet of Sibson Canada, Inc. as at December 31,
1997 and the statements of operations and retained earnings and changes in
financial position for the year then ended. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at December 31, 1997 and the
results of its operations and changes in its financial position for the year
then ended in accordance with accounting principles generally accepted in Canada
which differ in certain respects from accounting principles generally accepted
in the United States (See Note 10).
/s/ GRANT THORNTON
Chartered Accountants
Toronto, Canada
September 1, 1998
F-78
<PAGE> 159
SIBSON CANADA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1997 AUGUST 31, 1998
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 44 $ 51
Receivables............................................... 800 856
Prepaids.................................................. 18 122
---- ------
Total current assets.............................. 862 1,029
Equipment, net.............................................. 32 21
---- ------
Total assets...................................... $894 $1,050
==== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness......................................... $ 0 $ 175
Payables and accruals..................................... 45 301
Bonus payable............................................. 354 205
License fee payable....................................... 112 10
Income taxes payable...................................... 20 0
Deferred income........................................... 35 23
---- ------
Total current liabilities......................... 566 714
Due to shareholders......................................... 65 59
Shareholders' equity:
Capital stock............................................. 93 93
Retained earnings......................................... 170 184
---- ------
Total shareholders' equity........................ 263 277
---- ------
Total liabilities and shareholders' equity........ $894 $1,050
==== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-79
<PAGE> 160
SIBSON CANADA, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE
FOR THE EIGHT MONTHS ENDED
YEAR ENDED AUGUST 31,
DECEMBER 31, --------------------------
1997 1997 1998
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues............................................ $2,939 $1,976 $2,006
Cost of revenues........................................ 2,053 1,388 1,287
------ ------ ------
Gross profit....................................... 886 588 719
Selling, general and administrative..................... 762 511 684
------ ------ ------
Income before income taxes......................... 124 77 35
Income taxes............................................ 38 25 21
------ ------ ------
Net income......................................... $ 86 $ 52 $ 14
====== ====== ======
Retained earnings, beginning of period.................. $ 84 $ 84 $ 170
Retained earnings, end of period........................ $ 170 $ 136 $ 184
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-80
<PAGE> 161
SIBSON CANADA, INC.
STATEMENTS OF CHANGES IN FINANCIAL POSITION
<TABLE>
<CAPTION>
FOR THE
EIGHT MONTHS ENDED
FOR THE AUGUST 31,
YEAR ENDED -------------------------
DECEMBER 31, 1997 1997 1998
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 86 $ 52 $ 14
Depreciation....................................... 12 8 6
Change in operating assets and liabilities:
Trade receivables................................ (237) (289) (56)
Shareholders receivables......................... (41) 0 (6)
Other receivables................................ (19) 0 0
Prepaids......................................... 3 3 (104)
Payables and accruals............................ (91) (78) 256
Bonus payable.................................... 354 363 (149)
License fee payable.............................. 56 59 (102)
Income taxes payable............................. 20 21 (20)
Deferred income.................................. 35 37 (12)
Payable to affiliate............................. -- -- 175
----- ----- -----
Net cash provided by operating activities..... 178 176 2
----- ----- -----
Cash flows from investing activities:
Purchase of equipment, net......................... (5) (2) 5
----- ----- -----
Net cash used in investing activities......... (5) (2) 5
----- ----- -----
Net increase in cash.................................... 173 174 7
Cash (bank indebtedness) at beginning of period......... (129) (129) 44
----- ----- -----
Cash (bank indebtedness) at end of period............... $ 44 $ 45 $ 51
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-81
<PAGE> 162
SIBSON CANADA, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. THE COMPANY
Sibson Canada, Inc. (the "Company") provides human capital consulting
services including human resource strategies, outsourcing assessments,
organizational designs, rewards and incentives programs, performance management
processes and systems, and executive coaching services. The Company also serves
sales and marketing organizations with sales strategy, selling process, sales
channel and selling effectiveness consulting.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements have been prepared by management in accordance
with accounting principles generally accepted in Canada. See Note 10 for
differences between these principles and those generally accepted in the United
States. All amounts in the financial statements are expressed in United States
dollars unless noted otherwise.
Interim Financial Statements (Unaudited)
The balance sheet at August 31, 1998, and the statements of operations and
retained earnings and changes in financial position for the eight months ended
August 31, 1998 and 1997 are unaudited, and, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the Company's financial position, results
of operations and cash flows.
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 billing arrangements. Revenues are recognized as services are
provided. Deferred income relates to funds received from clients for future
projects.
Depreciation
Rates and bases of depreciation applied to write-off the cost less
estimated salvage value of property and equipment over their estimated lives are
as follows:
<TABLE>
<S> <C>
Furniture and
fixtures.............. 20%, declining balance
Office equipment........ 20%, declining balance
Computer hardware....... 30%, declining balance
Computer software....... 30%, declining balance
</TABLE>
Translation of Foreign Currencies
Monetary assets and liabilities denominated in foreign currencies are
translated at year-end exchange rates and revenue and expenses are translated at
average rates. Translation gains and losses are included in earnings.
F-82
<PAGE> 163
SIBSON CANADA, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Financial Instruments
The carrying values of the financial assets and liabilities approximate
their fair values based on the short-term maturities of these instruments.
3. RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1997
(IN THOUSANDS)
<S> <C>
Trade....................................................... $726
Shareholders................................................ 52
Income taxes................................................ --
Other....................................................... 22
----
$800
====
</TABLE>
4. EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1997
(IN THOUSANDS)
<S> <C>
Furniture and fixtures...................................... $ 6
Office equipment............................................ 10
Computer hardware........................................... 62
Computer software........................................... 22
---
100
Less: accumulated depreciation.............................. 68
---
Property and equipment, net................................. $32
===
</TABLE>
5. BANK INDEBTEDNESS
As of December 31, 1997, the Company has an authorized bank line of credit
of Canadian $289,000 of which there have been no drawdowns. Any loan balance
outstanding bears interest at the bank prime rate plus 1% per annum and is
payable on demand. As security, the Company has provided a registered general
assignment of book debts, a registered general security agreement, an assignment
of fire insurance and key man life insurance.
6. LICENSE FEE
The Company has entered into an agreement with Sibson & Co., L.P., to pay
5% of its revenues in exchange for support services and the right to use the
name. The agreement is automatically renewed on an annual basis unless written
notice is provided by either party indicating they wish to terminate the
agreement. The license fee expense for the year ended December 31, 1997 is
$127,183 of which $112,136 remains payable at year-end.
F-83
<PAGE> 164
SIBSON CANADA, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
7. DUE TO SHAREHOLDERS
Amounts due to shareholders are non-interest bearing and due on demand. The
amounts are classified as long-term as it is not the intention of the
shareholders to demand repayment in the upcoming year.
8. CAPITAL STOCK
Common shares, unlimited number authorized, 1,307 issued for proceeds of
$70,855; Class A common shares, unlimited number authorized, 230 issued for
proceeds of $22,408.
Holders of Class A common shares are entitled to a dividend per share equal
to the amount of any declared common share dividend per share, convertible to
common shares at the option of the holder upon approval by the Board of
Directors and upon payment to the company of additional amounts of money, if
any, as specified in the resolution approving the conversion.
9. COMMITMENTS
The Company has entered into agreements to lease its premises and various
pieces of office and computer equipment. The current premises lease expires
October 1998, and a new lease has been entered into subsequent to year end for a
further 10 year period. The equipment leases are for various periods to 2001.
Minimum commitments for each of the next five years and thereafter are as
follows (in thousands):
<TABLE>
<S> <C>
1998........................................... $174
1999........................................... 127
2000........................................... 126
2001........................................... 104
2002........................................... 83
Thereafter..................................... 495
</TABLE>
10. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
The accounting principles utilized in the preparation of these financial
statements conform in all material respects with those generally accepted in the
United States ("US GAAP"), except as indicated below.
The statement of changes in financial position included herein was prepared
in accordance with Canadian generally accepted accounting principles. Under US
GAAP, the bank indebtedness position would be reported as a financing item
rather than being included in the cash position. The 1997 statement of changes
in financial position would disclose a decrease in financing of $129,426, and
cash at the beginning of the year at $0.
11. SUBSEQUENT EVENTS
On August 17, 1998, the Company and one of its corporate shareholders
continued as Nova Scotia corporations. Subsequently, the Company, the corporate
shareholder and a newly incorporated unlimited liability company, were
amalgamated under the laws of Nova Scotia and continued operating as Sibson
Canada Co.
Effective August 31, 1998, all of the Company's Shareholders sold all of
their stock to Nextera Enterprises, L.L.C. in exchange for cash of $2,611,000
and 197,813 Exchangeable Shares. The Exchangeable Shares are exchangeable at any
time by the holders thereof for Class A Common Stock of Nextera Enterprises,
L.L.C.
F-84
<PAGE> 165
SIBSON CANADA, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
12. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems, which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure, which
could affect an entity's ability to conduct normal business operations. It is
not possible to be certain that all aspects of the Year 2000 Issue affecting the
Company, including those related to the efforts of customers, suppliers, or
other third parties, will be fully resolved.
F-85
<PAGE> 166
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Lexecon Inc.
We have audited the accompanying balance sheets of Lexecon Inc. (effective
December 31, 1998, a wholly-owned subsidiary of Nextera Enterprises, Inc.) as of
December 31, 1997 and 1998, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Lexecon Inc. at December 31,
1997 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
February 2, 1999
F-86
<PAGE> 167
LEXECON INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
------------------
1997 1998
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 15 $ 68
Accounts receivable, less allowance for doubtful accounts
of $200 in 1997 and 1998............................... 10,578 9,301
Loans and advances........................................ 179 108
Prepaid expenses.......................................... 169 173
Equipment held for sale, net.............................. -- 25
------- -------
Total current assets.............................. 10,941 9,675
Fixed assets, net........................................... 1,265 2,058
Deferred income tax benefit................................. 12 18
Deposits.................................................... 70 70
Prepaid expenses............................................ 203 129
------- -------
Total assets...................................... $12,491 $11,950
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable -- Bank...................................... $ 1,600 $ 1,725
Current maturities of long-term obligations............... 200 304
Accounts payable.......................................... 487 856
Accrued expenses.......................................... 877 744
Deferred income tax liability............................. 143 121
------- -------
Total current liabilities......................... 3,307 3,750
------- -------
Long-term obligations, net of current maturities............ -- 624
Deferred rent............................................... 842 908
Lease termination fee....................................... 143 123
Security deposits........................................... 45 45
Shareholders' equity:
Common stock, no par value, $17.50 stated value, 12,000
shares authorized, 1,000 shares issued and
outstanding............................................ 18 18
Additional paid-in capital................................ 85 85
Retained earnings......................................... 8,051 6,397
------- -------
Total shareholders' equity........................ 8,154 6,500
------- -------
Total liabilities and shareholders' equity........ $12,491 $11,950
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-87
<PAGE> 168
LEXECON INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues................................................ $27,061 $31,974 $35,199
Cost of services............................................ 20,734 24,055 30,611
------- ------- -------
Gross profit.............................................. 6,327 7,919 4,588
General and administrative expenses......................... 5,247 5,660 6,337
------- ------- -------
Income (loss) from operations............................. 1,080 2,259 (1,749)
Interest expense............................................ (123) (63) (46)
Interest income............................................. 49 53 113
------- ------- -------
Income (loss) before income taxes......................... 1,006 2,249 (1,682)
Provision (benefit) for income taxes........................ 25 27 (28)
------- ------- -------
Net income (loss)......................................... $ 981 $ 2,222 $(1,654)
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-88
<PAGE> 169
LEXECON INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995..................... 1,000 $18 $85 $ 4,848 $ 4,951
Net income..................................... -- -- -- 981 981
----- --- --- ------- -------
Balance at December 31, 1996..................... 1,000 18 85 5,829 5,932
Net income..................................... -- -- -- 2,222 2,222
----- --- --- ------- -------
Balance at December 31, 1997..................... 1,000 18 85 8,051 8,154
Net loss....................................... -- -- -- (1,654) (1,654)
----- --- --- ------- -------
Balance at December 31, 1998..................... 1,000 $18 $85 $ 6,397 $ 6,500
===== === === ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-89
<PAGE> 170
LEXECON INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income........................................... $ 981 $ 2,222 $(1,654)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 490 489 552
Deferred rent............................................. 65 59 66
Deferred taxes............................................ 25 27 (28)
Provision for doubtful accounts........................... 73 (20) --
(Gain) loss on sale of property and equipment............. (3) -- 29
Changes in operating assets and liabilities:
Accounts receivable.................................... 727 (2,412) 1,277
Loans and advances..................................... (3) (139) 71
Prepaid expenses....................................... (405) 219 70
Accounts payable and accrued expenses.................. 144 131 236
Deferred compensation.................................. (1,998) -- --
Lease termination fee.................................. (16) (16) (20)
------- ------- -------
Net cash provided by operating activities................... 80 560 599
Cash flows from investing activities:
Capital expenditures paid in cash......................... (512) (434) (424)
Proceeds from sale of property and equipment.............. 15 -- 5
------- ------- -------
Net cash used in investing activities....................... (497) (434) (419)
Cash flows from financing activities:
Borrowings on long-term obligations....................... 600 -- --
Cash paid on long-term obligations........................ (237) (218) (252)
Borrowings on notes payable............................... 1,550 1,600 1,725
Cash paid on notes payable................................ (1,500) (1,550) (1,600)
------- ------- -------
Net cash (used) provided by financing activities............ 413 (168) (127)
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ (4) (42) 53
Cash and cash equivalents at beginning of year.............. 61 57 15
Cash and cash equivalents at end of year.................... $ 57 $ 15 $ 68
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................... $ 65 $ 63 $ 46
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-90
<PAGE> 171
LEXECON INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY
Lexecon Inc. ("Lexecon" or the "Company") provides a full range of economic
consulting services including economic, financial and statistical analysis and
expert testimony, which are predominately used in matters relating to complex
litigation and regulatory proceedings. Lexecon provides expertise in areas of
antitrust, contracts, regulatory issues, corporate finance, intellectual
property, international trade, securities, taxation and employment practices.
Lexecon serves clients across a broad range of industries, including
telecommunications, high technology and government.
2. SALE OF COMPANY AND BASIS OF PRESENTATION
Effective December 31, 1998, the Company's stock was contributed to Nextera
Enterprises, Inc. ("Nextera") in exchange for $31.1 million of cash and
2,816,000 of Nextera Class A Common Stock (the "Contribution Agreement").
Additional equity of up to 1,450,240 shares of Nextera Class A Common Stock will
be reserved for issuance to the shareholders of the Company in the event of a
Nextera initial public offering, the amount of which is contingent upon the
timing and per share offering price of such public offering. Certain
nonshareholders released the Company concurrently with the consummation of the
Contribution Agreement of all liabilities or claims for prior compensation of
any nature including any described herein. The Company also entered into
employment agreements with certain senior executives providing for the payment
of cash and stock options to them as bonus compensation in consideration of
their entering into the employment agreements. In addition, at the time of the
acquisition, one shareholder of the Company entered into a Service Agreement, as
defined, with the Company.
These financial statements reflect the operations and financial position of
the Company immediately prior to the Contribution Agreement, which was effective
at the close of business on December 31, 1998.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The process of preparing 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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
respective reporting periods. Actual results could differ from those estimates.
Revenue Recognition
Revenues from engagements are recognized as services are provided based
upon hours worked and agreed-upon hourly rates, net of estimated fee
adjustments. Lexecon's revenues also include other charges billed to clients,
which include outside consultants, travel and other out-of-pocket expenses,
charges for support staff, computer usage, and other reimbursable charges. An
allowance is provided for any amounts considered uncollectible.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
F-91
<PAGE> 172
LEXECON INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Fixed Assets
Fixed assets are stated at cost. Depreciation is provided using
straight-line and accelerated methods over the useful life of the assets which
is generally three to seven years. Leasehold improvements are being amortized
using the straight-line method over their useful lives or the term of the lease,
whichever is shorter.
Income Taxes
Effective May 1, 1991, the shareholders of the Company elected to be
treated as an "S" Corporation under the provisions of the Internal Revenue Code.
Accordingly, each shareholder reports the taxable income or loss of the Company
on their individual tax returns. The Company continues to be subject to the
Illinois replacement tax.
The "S" Corporation election was terminated upon the sale of the Company
(see Note 2).
Deferred Income Taxes
Deferred income taxes, representing the Illinois Replacement Tax, arise
from timing differences resulting from income and expense items reported for
financial accounting and tax purposes in different periods. The principal
sources of timing differences are the use of the accrual basis of accounting in
the accompanying financial statements and the use of the cash basis of
accounting for tax purposes, leasehold improvements being amortized over their
useful lives or the term of the lease whichever is shorter for financial
statement purposes and lives prescribed by the Internal Revenue Code for tax
purposes and rent being expensed on a straight line method for financial
statement purposes and being expensed as paid for tax purposes.
Concentration of Credit Risk
The Company's customer base consists of a broad range of clients in a
variety of industries located throughout the United States and in certain other
countries. No client comprised more than 10% of net revenues in 1996. In 1997
and 1998, one client comprised approximately 18% and 21% of net revenues,
respectively. In 1998, another client comprised 10% of net revenues. The Company
performs a credit evaluation of each of its clients to minimize its
collectibility risk.
The Company provides an allowance for doubtful accounts to provide for
potentially uncollectible amounts. Activity in the allowance for doubtful
accounts is as follows:
<TABLE>
<CAPTION>
FOR THE
YEARS ENDED DECEMBER 31,
--------------------------
1996 1997 1998
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year.......................... $148 $221 $200
Charge to cost and expenses........................... 88 41 --
Amounts written off................................... (15) (62) --
---- ---- ----
Balance at end of year................................ $221 $200 $200
==== ==== ====
</TABLE>
F-92
<PAGE> 173
LEXECON INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
----------------
1997 1998
(IN THOUSANDS)
<S> <C> <C>
Furniture fixtures and equipment........................... $4,150 $5,324
Leasehold improvements..................................... 1,507 1,502
------ ------
5,657 6,826
Accumulated depreciation and amortization.................. 4,392 4,768
------ ------
$1,265 $2,058
====== ======
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
----------------
1997 1998
(IN THOUSANDS)
<S> <C> <C>
Salaries and payroll taxes................................. $ 420 $ 392
Profit-sharing contribution................................ 267 263
Current portion of lease termination fee................... 16 18
------ ------
Other...................................................... 174 71
------ ------
$ 877 $ 744
====== ======
</TABLE>
6. NOTES PAYABLE -- BANK
The Company has a line of credit which permits borrowings of up to
$2,000,000 with interest at the bank's base rate, as defined (7.75% at December
31, 1998), plus 0.25% and is secured by the Company's accounts receivable and
other sundry assets.
The Company also had an outstanding standby letter of credit at December
31, 1998, in the amount of $500,000 which was issued in lieu of a security
deposit on the Company's leased office space.
7. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
----------------
1997 1998
(IN THOUSANDS)
<S> <C> <C>
Capital lease payable in monthly installments of $30,966
including principal and interest at 8.5% due October
2001..................................................... $ -- $ 928
Note payable in monthly installments of $16,667 plus
interest at 7.94%........................................ 200 --
------ ------
200 928
Less: current maturities................................... 200 304
------ ------
$ -- $ 624
====== ======
</TABLE>
F-93
<PAGE> 174
LEXECON INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. LEASES
The Company conducts its operations in facilities that are leased under an
operating lease expiring February 14, 2007. The lease also requires payments of
additional amounts to cover operating expenses and real estate taxes. The
Company also has operating leases for certain equipment. Effective October 26,
1998, the Company entered into a capital lease for new computer hardware and
software, the net present value of the initial future lease payments was
$980,000.
Following is a summary of future minimum payments under capitalized leases
and under operating leases that have initial or remaining noncancelable lease
terms for the fiscal years ending after December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
CAPITALIZED OPERATING
LEASES LEASES
<S> <C> <C>
1999........................................... $ 372 $ 514
2000........................................... 372 516
2001........................................... 304 655
2002........................................... -- 750
2003........................................... -- 754
Thereafter..................................... -- 2,403
------ ------
Total minimum lease payments......... $1,048 $5,592
======
Less amounts representing interest............. (120)
------
Present value of minimum capitalized lease
payments..................................... 928
Current portion................................ 304
------
Long-term capitalized lease obligations........ $ 624
======
</TABLE>
Equipment recorded under capital leases of $898,000 (net of accumulated
amortization of $82,000) is included in Property and Equipment as of December
31, 1998.
Rent expense under operating leases for the years ended December 31, 1996,
1997 and 1998, amounted to approximately $617,000, $617,000, and $648,000,
respectively. Deferred rent represents the excess of amortization of rent
expenses over the term of the lease on a straight-line basis over required
rental payments for base rents.
On October 17, 1994, the Company's existing office lease agreement was
amended in order to allow the Company to vacate certain leased space that it
held. As a result of this amendment, the Company is required to pay as
additional rent $300,000 payable in 120 equal monthly installments of $2,500.
The net present value of this obligation, discounted at 8.00%, in the amount of
$205,334 was charged to expense as of December 31, 1994. The unamortized
discount is reflected on the balance sheet as lease termination fee.
9. PROFIT-SHARING PLAN
The Company maintains a profit-sharing plan for all eligible employees.
Contributions to the Plan are at the discretion of the Company's Board of
Directors. The Company does not maintain any interest in its contribution but
reserves the right to modify or discontinue the Plan. Contributions to the Plan
for the years ending December 31, 1996, 1997, and 1998 amounted to $251,561,
$267,804, and $263,565, respectively.
10. OTHER COMPENSATION ARRANGEMENTS
On December 31, 1993, the Company entered into a deferred compensation plan
for its shareholders for services previously rendered to the Company. Under the
terms of the Plan the officers received a total of
F-94
<PAGE> 175
LEXECON INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
$6,000,000 payable in annual installments of $2,000,000 beginning in 1994 with
interest on the unpaid balance at a rate of 7%.
In 1996, the Company informed certain of its nonshareholder senior
executives that it was in the process of implementing, for their benefit, a
program to provide them in the event of the sale or merger of the Company, a
compensatory interest as a shareholder in a participation pool aggregating 12%
of the value of the Company in excess of book value (see Note 2).
On an annual basis, the Company pays discretionary bonuses to employees
which are authorized by the Board of Directors. In addition, pursuant to a
shareholders agreement, see Note 10, the shareholders are entitled to receive
annual bonuses based on income, as defined. Bonus expense including employees
and shareholders for the years ended December 31, 1996, 1997, and 1998 was
$9,136,600, $11,387,300, and $17,611,000, respectively, and is included in cost
of services on the statement of income.
11. COMMITMENTS AND CONTINGENCIES
The shareholders of the Company entered into a shareholder agreement and
employment termination agreements, each as amended in December 1990. Under the
terms of the agreements, in the event of the death or disability of a
shareholder or other "terminating event" as defined in the agreement, the
Company is to repurchase from the terminated shareholder or his estate all
shares held by the shareholder or estate. The purchase price for each share will
be the base purchase price per share as defined in the agreement plus or minus
the increase or decrease in the book value per share from the base date, as
defined. The purchase price shall be payable in cash; however, the Company shall
have the option to pay at least 25% of the purchase price in cash and deliver a
promissory note payable in three equal annual installments with interest payable
annually on the unpaid balance at the lowest appropriate applicable federal rate
of the Internal Revenue Code at the time of issuance. In connection with the
sale of the Company (see Note 2), the aforementioned shareholder agreement and
employment termination agreements were canceled.
During the period ended December 31, 1991, the Company entered into a Suite
License Agreement with Metro-Chicago Sports Stadium Joint Venture. No expense
has been recorded under this agreement since the Company has been reimbursed by
one of its shareholders and other unrelated parties for substantially all costs
incurred under this agreement. On September 1, 1998, the Company renewed its
Suite License Agreement. The terms of the new agreement require payments
aggregating approximately $1,000,000 payable in annual installments of
approximately $200,000 from 1999 through 2004.
The Company is involved in claims and suits arising in the ordinary course
of business. In the opinion of management, the ultimate resolution of such
pending legal proceedings will not have a material effect on the Company's
results of operations or financial position.
12. YEAR 2000 (UNAUDITED)
The Company is in process of evaluating its information systems to
determine their compliance with the Year 2000 issue. Based on information
currently available, the Company believes that all necessary changes will occur
on a timely basis and that expenditures relating to the Year 2000 will not have
a significant impact on the Company's result of operations or financial
position.
F-95
<PAGE> 176
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following Unaudited Pro Forma Combined Financial Statements give effect
to the Company's acquisitions of (i) Symmetrix, Inc. (renamed Nextera Business
Performance Solutions Group, Inc. ("Business Performance Solutions")) effective
July 31, 1997, (ii) SiGMA Consulting, LLC ("SiGMA") effective January 5, 1998,
(iii) The Planning Technologies Group, Inc. ("PTG") effective March 31, 1998,
(iv) Pyramid Imaging, Inc. ("Pyramid") effective March 31, 1998, (v) Sibson &
Company, L.P. and Sibson Canada, Inc. (collectively, "Sibson") effective August
31, 1998 (the "Sibson Acquisitions") and (vi) Lexecon Inc. ("Lexecon") effective
December 31, 1998 (the "Lexecon Acquisition"). Business Performance Solutions,
SiGMA, PTG, Pyramid, Sibson and Lexecon are referred to collectively as the
"Acquired Companies." Each of these acquisitions is being accounted for under
the purchase method of accounting. Each of the Acquired Companies has a December
31 fiscal year end.
The following Unaudited Pro Forma Combined Balance Sheet of the Company at
December 31, 1998 is adjusted to reflect the initial public offering of the
Company's Class A Common Stock (the "Offering") and the application of the
estimated net proceeds therefrom, including the repayment of certain
indebtedness, as if the Offering had occurred on December 31, 1998.
The following Unaudited Pro Forma Combined Statements of Operations of the
Company for the year ended December 31, 1998 has been prepared to give effect to
(i) the acquisitions of the Acquired Companies (excluding Symmetrix, Inc. which
was acquired effective July 31, 1997) as of January 1, 1998 and (ii) the
Offering and the application of the estimated net proceeds therefrom, including
the repayment of certain indebtedness, as if such transactions had occurred as
of January 1, 1998. The Alexander Corporation Limited was acquired by the
Company in January 1999 and is not material to the Company's financial position
or results of operations and is excluded from the Unaudited Pro Forma Combined
Statements of Operations.
The Unaudited Pro Forma Combined Financial Statements may not be indicative
of the results that would have been obtained if the transactions reflected
therein had occurred on the dates indicated or which may be realized in the
future. The Unaudited Pro Forma Combined Financial Statements should be read in
conjunction with the historical financial statements of Nextera Enterprises,
Inc. and the Acquired Companies included elsewhere in this Prospectus.
PF-1
<PAGE> 177
NEXTERA ENTERPRISES, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1998
ASSETS
<TABLE>
<CAPTION>
ACTUAL OFFERING
(A) ADJUSTMENTS AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................ $ 1,496 $ 3,832(B) $ 5,328
Accounts receivable, net............................. 31,094 -- 31,094
Costs and estimated earnings in excess of billings... 2,962 -- 2,962
Due from affiliates.................................. 400 -- 400
Due from officers.................................... 856 (856)(B) --
Prepaid expenses and other current assets............ 5,709 -- 5,709
-------- -------- --------
Total current assets.............................. 42,517 2,976 45,493
Property and equipment, net............................ 8,056 -- 8,056
Intangible assets, net of accumulated amortization..... 125,082 13,909(B) 138,991
Other assets........................................... 1,036 -- 1,036
-------- -------- --------
Total assets...................................... $176,691 $ 16,885 $193,576
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................ $ 23,530 $ (750)(B) $ 22,780
Notes payable to bank................................ 6,156 -- 6,156
Bridge loan payable.................................. 75,849 (75,849)(B) --
Deferred revenue..................................... 1,193 -- 1,193
Due to affiliates.................................... 1,068 (210)(B) 858
Current portion of long-term debt and capital lease
obligations....................................... 482 -- 482
-------- -------- --------
Total current liabilities......................... 108,278 (76,809) 31,469
Long-term debt and capital lease obligations........... 2,600 -- 2,600
Other long-term liabilities............................ 1,174 -- 1,174
Debentures due to affiliates, including accrued
interest thereon..................................... 53,149 (53,149)(B) --
Stockholders' equity:
Common stock and exchangeable shares................. 31,660 146,843(B) 178,503
Retained earnings (deficit).......................... (20,170) -- (20,170)
-------- -------- --------
Total stockholders' equity........................ 11,490 146,843 158,333
-------- -------- --------
Total liabilities and stockholders' equity........ $176,691 $ 16,885 $193,576
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
financial statements.
PF-2
<PAGE> 178
NEXTERA ENTERPRISES, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------- --------------------------------------------------------
ACQUISITION PRO FORMA OFFERING PRO FORMA
COMPANY ACQUISITIONS ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
(C) (D)
(IN THOUSANDS, EXCEPT PER COMMON SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net revenues......... $ 67,590 $67,577 $ -- $135,167 $ -- $135,167
Cost of revenues..... 44,985 46,689 (15,360)(E) 76,314 -- 76,314
-------- ------- -------- -------- ------- --------
Gross profit.... 22,605 20,888 15,360 58,853 -- 58,853
-------- ------- -------- -------- ------- --------
Selling, general and
administrative
expenses........... 23,103 20,902 -- 44,005 -- 44,005
Amortization
expense............ 1,722 -- 2,604(F) 4,326 348(B) 4,674
Restructuring
costs.............. 1,298 -- -- 1,298 -- 1,298
Compensation
expense--
other(G)........... 6,671 840 -- 7,511 1,694(H) 9,205
-------- ------- -------- -------- ------- --------
Income (loss)
from
operations.... (10,189) (854) 12,756 1,713 (2,042) (329)
-------- ------- -------- -------- ------- --------
Interest income
(expense), net..... (6,723) (21) (6,777)(I) (13,521) 13,378(J) (143)
-------- ------- -------- -------- ------- --------
Income (loss)
before income
tax expense
(benefit)..... (16,912) (875) 5,979 (11,808) 11,336 (472)
-------- ------- -------- -------- ------- --------
Income tax expense
(benefit).......... 243 (7) --(K) 236 -- 236
-------- ------- -------- -------- ------- --------
Net income
(loss)........ $(17,155) $ (868) $ 5,979 $(12,044) $11,336 $ (708)
======== ======= ======== ======== ======= ========
Net income (loss) per
common share, basic
and diluted........ $ (1.14) $ (0.61) $ (0.02)
======== ======== ========
Weighted average
common shares
outstanding, basic
and diluted........ 14,997 19,891 31,134
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
financial statements.
PF-3
<PAGE> 179
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(A) Represents the historical consolidated balance sheet of the Company as
of December 31, 1998.
(B) Represents the adjustments to record the Offering and the application
of the estimated net proceeds therefrom, including the repayment of certain
indebtedness. See "Use of Proceeds." Also assumes the presumed issuance of an
additional 993,520 shares of Class A Common Stock in connection with the Lexecon
Acquisition based upon an estimated initial public offering price of $14.00 per
share. Such shares have been reflected in As Adjusted intangible assets and
equity at $14.00 per share, the estimated initial public offering price.
(C) Represents the historical consolidated statement of operations of the
Company for the year ended December 31, 1998. The Company's statement of
operations for the year ended December 31, 1998 reflects the results of
operations of Symmetrix and SiGMA for the entire period, of Pyramid and PTG for
periods after March 31, 1998, and of Sibson for the period after August 31,
1998, the effective date of their acquisition by the Company. Revenues and
expenses of Sibson Canada, Inc. have been translated from Canadian dollars to
U.S. dollars at the average exchange rate in effect for the period.
(D) Represents the historical statements of operations of Pyramid and PTG
for the three months ended March 31, 1998, the historical consolidated
statements of operations of Sibson (including Sibson Canada, Inc.) for the eight
months ended August 31, 1998 and the historical statement of operations for
Lexecon for the year ended December 31, 1998. Certain reclassifications have
been made to the historical statements of income and operations to conform with
the Company's classifications.
(E) In connection with the Sibson Acquisitions, the Lexecon Acquisition and
the acquisition of PTG, written agreements were entered into which governed the
calculations of management bonuses. In each case, the bonus calculation was
changed from a discretionary amount to a formula based on revenue and operating
income performance. The new bonus provision was documented and the revenue and
operating income targets and bonuses percentages were specified. The pro forma
adjustment represents the difference between the actual bonuses paid or accrued
for the year ended December 31, 1998 and the amount that would have been paid
based on the new formulas set forth in the respective employment agreements.
Management believes that the prospective effect of changes to pre-acquisition
bonus formulas, coupled with the post-acquisition inclusion of key employees in
the Company's equity participation plans, will not have a material adverse
effect on the future operations of the Company.
(F) Represents the adjustments to amortization expense to reflect the
allocation of the purchase price for the PTG and Pyramid acquisitions for the
three months ended March 31, 1998, the Sibson Acquisitions for the eight months
ended August 31, 1998, and the Lexecon Acquisition for the year ended December
31, 1998, in each case using five years for intangibles related to personnel and
40 years for goodwill.
(G) Includes $840,000 from the cancellation and repurchase of all of
outstanding options to purchase Pyramid stock in connection with its acquisition
by the Company and $6,671,000 from agreements executed on December 31, 1998 with
certain non-stockholder key executives of Lexecon under which payments totaling
$4,248,000 in cash were made and fully-vested options to purchase 384,000 shares
of Class A Common Stock at an exercise price of $1.50 were granted.
(H) Based upon an estimated initial public offering price of $14.00 per
share, fully-vested options to purchase 135,480 shares of Class A Common Stock
at an exercise price of $1.50 per share would be granted to certain
non-stockholder key executives of Lexecon. The Offering Adjustment represents
the difference between the assumed initial public offering price and the
exercise price, multiplied by the number of options granted.
(I) Represents the adjustments to record the interest expense for the year
ended December 31, 1998, resulting from the $38,000,000 borrowing incurred in
connection with the Sibson Acquisitions and from the $31,146,000 borrowing
incurred in connection with the Lexecon Acquisition. The borrowings bear
interest at the assumed rate of 12% per annum and mature on April 30, 1999.
PF-4
<PAGE> 180
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(J) Represents the adjustments to eliminate the interest expense for the
indebtedness repaid with a portion of the estimated net proceeds from the
Offering, calculated as the actual amount of interest incurred by the Company on
an historical basis, incurred on borrowings to be repaid from the net proceeds
of the Offering, plus interest calculated on a pro forma basis arising in
connection with the acquisitions detailed in Note I above. See "Use of
Proceeds."
(K) The pro forma tax provision for the year ended December 31, 1998 is
recorded for Pyramid, which is a taxable operating unit, and is based upon pro
forma loss for the year ended December 31, 1998, applied to the effective tax
rate of Pyramid.
PF-5
<PAGE> 181
- ------------------------------------------------------------
- ------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS NOT CONTAINED HEREIN MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE
UNDERWRITERS OR BY ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN
THE SHARES OF CLASS A COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY, TO ANY PERSON IN ANY JURISDICTION WHICH IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 5
Risk Factors............................... 8
The Company................................ 19
Use of Proceeds............................ 21
Dividend Policy............................ 21
Capitalization............................. 22
Dilution................................... 23
Selected Consolidated and Pro Forma
Combined Financial Data.................. 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 25
Business................................... 37
Management................................. 50
Certain Transactions....................... 61
Principal Stockholders..................... 66
Description of Capital Stock............... 68
Shares Eligible for Future Sale............ 73
Underwriting............................... 76
Legal Matters.............................. 78
Experts.................................... 78
Available Information...................... 79
Index to Financial Statements.............. F-1
</TABLE>
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
10,250,000 SHARES
[NEXTERA ENTERPRISES, INC. LOGO]
CLASS A COMMON STOCK
---------------------
PROSPECTUS
---------------------
DONALDSON, LUFKIN & JENRETTE
BANCBOSTON ROBERTSON STEPHENS
BT ALEXS BROWN
NATIONSBANC MONTGOMERY
SECURITIES LLC
THOMAS WEISEL PARTNERS LLC
---------------------
DLJDIRECT INC.
, 1999
- ------------------------------------------------------------
- ------------------------------------------------------------
<PAGE> 182
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is list of estimated expenses to be incurred by the Company
in connection with the issuance and distribution of the Class A Common Stock.
All such expenses will be paid by the Company.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 50,633
NASD filing fee............................................. 19,000
Nasdaq National Market listing fee.......................... 80,000
Legal fees and expenses..................................... 850,000
----------
Accounting fees and expenses................................ 500,000
Printing and engraving expenses............................. 400,000
Blue Sky fees and expenses.................................. 10,000
Transfer agent and registrar fees........................... 10,000
Miscellaneous............................................... 180,367
----------
TOTAL............................................. $2,100,000
==========
</TABLE>
- ------------------------------
All of the above items are estimates, except the Securities and Exchange
Commission registration fee and the NASD filing fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law, the Company has
broad powers to indemnify its directors and officers against liabilities they
may incur in such capacities, including liabilities under the Securities Act.
The Company's Certificate of Incorporation and Bylaws provide that the
Company will indemnify its directors and officers to the fullest extent
permitted by Delaware law. Delaware law permits, but does not require, a
corporation to indemnify officers, directors, employees or agents and expressly
provides that the indemnification provided for under Delaware law shall not be
deemed exclusive of any indemnification right under any bylaw, vote of
stockholders or disinterested directors, or otherwise. Delaware law permits
indemnification against expenses and certain other liabilities arising out of
legal actions brought or threatened against such persons for their conduct on
behalf of the Company, provided that each such person acted in good faith and in
a manner that he or she reasonably believed was in or not opposed to the
Company's best interests and in the case of a criminal proceeding, had no
reasonable cause to believe his or her conduct was unlawful. Delaware law does
not allow indemnification of directors in the case of an action by or in the
right of the Company (including stockholder derivative suits) unless the
directors successfully defend the action or indemnification is ordered by the
court.
The Company is a party to indemnification agreements with each of its
directors and officers. In addition, the form of Underwriting Agreement filed as
Exhibit 1.1 hereto provides for the indemnification of the Company and its
directors and officers against certain liabilities, including liabilities under
the Securities Act.
The Company maintains directors' and officers' liability insurance covering
its executive officers and directors. The policies have limits of up to $15
million in the aggregate, subject to retentions of up to $100,000 in the
aggregate.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
No securities of the Company, which were not registered under the
Securities Act, have been issued or sold by the Company within the past three
years, except as follows:
(a) On March 20, 1997, the Company issued to NEH 316,800 Class A Common
Units for consideration of $63,360 and 728,640 Class B Preferred Units for
consideration of $728,640. This transaction was
II-1
<PAGE> 183
undertaken in reliance upon the exemption from the registration requirements of
the Securities Act afforded by Section 4(2) of the Securities Act.
(b) On March 20, 1997, the Company issued 3,200 Class A Common Units to EDU
for consideration of $8,000. This transaction was undertaken in reliance upon
the exemption from the registration requirements of the Securities Act afforded
by Section 4(2) of the Securities Act.
(c) On April 9, 1997, the Company issued a warrant to NEH (the "Warrant")
to purchase 5,000,000 Class A Common Units of the Company at an exercise price
of $2.50 per unit in connection with the initial capitalization of the Company.
The Warrant had an expiration date of August 1, 2002. On April 30, 1998, the
Company amended the Warrant to provide for the issuance of Class B Common Units
upon exercise of the Warrant rather than Class A Common Units. On April 30,
1998, the Warrant was exchanged for 4,300,000 Class B Common Units. These
transactions were undertaken in reliance upon the exemption from the
registration requirements of the Securities Act afforded by Section 4(2) of the
Securities Act.
(d) On April 18, 1997, the Company issued to NEH 100,000 Class A Common
Units for consideration of $20,000 and 230,000 Class B Preferred Units for
consideration of $230,000. This transaction was undertaken in reliance upon the
exemption from the registration requirements of the Securities Act afforded by
Section 4(2) of the Securities Act.
(e) On May 19, 1997, the Company issued to NEH 120,000 Class A Common Units
for consideration of $24,000 and 276,000 Class B Preferred Units for
consideration of $276,000. This transaction was undertaken in reliance upon the
exemption from the registration requirements of the Securities Act afforded by
Section 4(2) of the Securities Act.
(f) On June 17, 1997, the Company issued to NEH 120,000 Class A Common
Units for consideration of $24,000 and 276,000 Class B Preferred Units for
consideration of $276,000. This transaction was undertaken in reliance upon the
exemption from the registration requirements of the Securities Act afforded by
Section 4(2) of the Securities Act.
(g) On July 23, 1997, the Company issued to NEH 6,000,000 Class A Common
Units for consideration of $1,200,000 and 13,800,000 Class B Preferred Units for
consideration of $13,800,000. This transaction was undertaken in reliance upon
the exemption from the registration requirements of the Securities Act afforded
by Section 4(2) of the Securities Act.
(h) On July 23, 1997, the Company issued 6,800 Class A Common Units to EDU
for consideration of $17,000. This transaction was undertaken in reliance upon
the exemption from the registration requirements of the Securities Act afforded
by Section 4(2) of the Securities Act.
(i) On August 15, 1997, the Company issued to NEH 400,000 Class A Common
Units for consideration of $80,000 and 920,000 Class B Preferred Units for
consideration of $920,000. This transaction was undertaken in reliance upon the
exemption from the registration requirements of the Securities Act afforded by
Section 4(2) of the Securities Act.
(j) On September 9, 1997, the Company issued to NEH 72,000 Class A Common
Units for consideration of $14,400 and 165,600 Class B Preferred Units for
consideration of $165,600. This transaction was undertaken in reliance upon the
exemption from the registration requirements of the Securities Act afforded by
Section 4(2) of the Securities Act.
(k) On September 30, 1997, the Company issued to NEH 120,000 Class A Common
Units for consideration of $24,000 and 276,000 Class B Preferred Units for
consideration of $276,000. This transaction was undertaken in reliance upon the
exemption from the registration requirements of the Securities Act afforded by
Section 4(2) of the Securities Act.
(l) On October 14, 1997, the Company issued to NEH 120,000 Class A Common
Units for consideration of $24,000 and 276,000 Class B Preferred Units for
consideration of $276,000. This transaction was undertaken in reliance upon the
exemption from the registration requirements of the Securities Act afforded by
Section 4(2) of the Securities Act.
II-2
<PAGE> 184
(m) On November 4, 1997, the Company issued to NEH 120,000 Class A Common
Units for consideration of $24,000 and 276,000 Class B Preferred Units for
consideration of $276,000. This transaction was undertaken in reliance upon the
exemption from the registration requirements of the Securities Act afforded by
Section 4(2) of the Securities Act.
(n) On November 21, 1997, the Company issued to NEH 400,000 Class A Common
Units for consideration of $80,000 and 920,000 Class B Preferred Units for
consideration of $920,000. This transaction was undertaken in reliance upon the
exemption from the registration requirements of the Securities Act afforded by
Section 4(2) of the Securities Act.
(o) On January 5, 1998, the Company issued to NEH 2,101,700 Class A Common
Units for consideration of $420,240 and 9,708,560 Class B Preferred Units for
consideration of $9,708,560. This transaction was undertaken in reliance upon
the exemption from the registration requirements of the Securities Act afforded
by Section 4(2) of the Securities Act.
(p) On January 5, 1998, the Company issued 669,000 Class A Common Units to
SiGMA Consulting, LLC in exchange for all of the issued and outstanding
ownership units of SiGMA Consulting, LLC. This transaction was undertaken in
reliance upon the exemption from the registration requirements of the Securities
Act afforded by Rule 506 of Regulation D promulgated under the Securities Act.
(q) On January 29, 1998, the Company issued to NEH 150,000 Class B
Preferred Units for consideration of $150,000. This transaction was undertaken
in reliance upon the exemption from the registration requirements of the
Securities Act afforded by Section 4(2) of the Securities Act.
(r) On February 11, 1998, the Company issued to NEH 100,000 Class B
Preferred Units for consideration of $100,000. This transaction was undertaken
in reliance upon the exemption from the registration requirements of the
Securities Act afforded by Section 4(2) of the Securities Act.
(s) On February 13, 1998, the Company issued to NEH 150,000 Class B
Preferred Units for consideration of $150,000. This transaction was undertaken
in reliance upon the exemption from the registration requirements of the
Securities Act afforded by Section 4(2) of the Securities Act.
(t) On February 26, 1998, the Company issued to NEH 300,000 Class B
Preferred Units for consideration of $300,000. This transaction was undertaken
in reliance upon the exemption from the registration requirements of the
Securities Act afforded by Section 4(2) of the Securities Act.
(u) On March 23, 1998, the Company issued to NEH 300,000 Class B Preferred
Units for consideration of $300,000. This transaction was undertaken in reliance
upon the exemption from the registration requirements of the Securities Act
afforded by Section 4(2) of the Securities Act.
(v) Effective March 31, 1998, the Company issued 214,000 Class A Common
Units to The Planning Technologies Group, Inc. as a part of the purchase price
for the assets of The Planning Technologies Group, Inc. This transaction was
undertaken in reliance upon the exemption from the registration requirements of
the Securities Act afforded by Rule 506 of Regulation D under the Securities
Act.
(w) Effective March 31, 1998, the Company issued an aggregate of 586,667
Class A Common Units to the former stockholders of Pyramid Imaging, Inc. as a
part of the purchase price for all of the issued and outstanding capital stock
of Pyramid Imaging, Inc. This transaction was undertaken in reliance upon the
exemption from the registration requirements of the Securities Act afforded by
Section 4(2) of the Securities Act.
(x) On April 7, 1998, the Company issued to NEH 6,710,000 Class B Preferred
Units for consideration of $6,710,000. This transaction was undertaken in
reliance upon the exemption from the registration requirements of the Securities
Act afforded by Section 4(2) of the Securities Act.
(y) On April 8, 1998, the Company issued to NEH 9,750,000 Class B Preferred
Units for consideration of $9,750,000. This transaction was undertaken in
reliance upon the exemption from the registration requirements of the Securities
Act afforded by Section 4(2) of the Securities Act.
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<PAGE> 185
(z) On April 10, 1998, the Company issued to NEH 10,000 Class A Common
Units for consideration of $2,000 and 23,000 Class B Preferred Units for
consideration of $23,000. This transaction was undertaken in reliance upon the
exemption from the registration requirements of the Securities Act afforded by
Section 4(2) of the Securities Act.
(aa) On April 30, 1998, the Company issued to NEH 2,634,200 Class B
Preferred Units for consideration of $2,634,200. This transaction was undertaken
in reliance upon the exemption from the registration requirements of the
Securities Act afforded by Section 4(2) of the Securities Act.
(bb) Effective as of April 30, 1998, approximately $48.0 million of the
Company's contributed capital was redesignated as debt in the form of two
debentures issued to NEH. The first debenture is dated March 20, 1997 with a
principal amount of $23.0 million, which matures on May 1, 2002 and bears
interest at a rate of 10% per annum. The second debenture is dated January 5,
1998 with a principal amount of $25.0 million, which matures on May 1, 2002 and
bears interest at a rate of 10% per annum. This transaction was undertaken in
reliance upon the exemption from the registration requirements of the Securities
Act afforded by Section 4(2) of the Securities Act.
(cc) On August 31, 1998, the Company issued to Gresham T. Brebach, Jr.
49,500 Class A Common Units and 21,285 Class B Common Units for aggregate
consideration of $9,900. This transaction was undertaken in reliance upon the
exemption from the registration requirements of the Securities Act afforded by
Section 4(2) of the Securities Act.
(dd) On August 31, 1998, the Company issued to Ronald K. Bohlin 49,500
Class A Common Units and 21,285 Class B Common Units for aggregate consideration
of $9,900. This transaction was undertaken in reliance upon the exemption from
the registration requirements of the Securities Act afforded by Section 4(2) of
the Securities Act.
(ee) On August 31, 1998, the Company issued to Michael P. Muldowney 9,000
Class A Common Units and 3,870 Class B Common Units for aggregate consideration
of $1,800. This transaction was undertaken in reliance upon the exemption from
the registration requirements of the Securities Act afforded by Section 4(2) of
the Securities Act.
(ff) On August 31, 1998, the Company issued to Debra I. Bergevine 9,000
Class A Common Units and 3,870 Class B Common Units for aggregate consideration
of $1,800. This transaction was undertaken in reliance upon the exemption from
the registration requirements of the Securities Act afforded by Section 4(2) of
the Securities Act.
(gg) On August 31, 1998, the Company issued to David Fritts 9,000 Class A
Common Units and 3,870 Class B Common Units for aggregate consideration of
$1,800. This transaction was undertaken in reliance upon the exemption from the
registration requirements of the Securities Act afforded by Section 4(2) of the
Securities Act.
(hh) On August 31, 1998, the Company issued to Belden Menkus 9,000 Class A
Common Units and 3,870 Class B Common Units for aggregate consideration of
$1,800. This transaction was undertaken in reliance upon the exemption from the
registration requirements of the Securities Act afforded by Section 4(2) of the
Securities Act.
(ii) Effective August 31, 1998, the Company issued an aggregate of
2,613,087 Class A Common Units to Sibson & Company, L.P. as a part of the
purchase price for the assets of Sibson & Company, L.P. This transaction was
undertaken in reliance upon the exemption from the registration requirements of
the Securities Act afforded by Rule 506 of Regulation D under the Securities
Act.
(jj) Effective August 31, 1998, the Company issued an aggregate of 48,360
Class A Common Units to certain employees pursuant to employment agreements
between SC/NE, LLC, Sibson Canada Co. or Sibson UK Limited and such employees,
each dated as of August 31, 1998, for aggregate consideration of $6,770. These
transactions were undertaken in reliance upon the exemption from the
registration requirements of the Securities Act afforded by Rule 506 of
Regulation D under the Securities Act.
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<PAGE> 186
(kk) Effective December 31, 1998, the Company issued 11,382,653 shares of
Class A Common Stock and 4,274,630 shares of Class B Common Stock to the former
members of Nextera LLC other than the Sibson Entities in exchange for 11,382,653
Class A Common Units of Nextera LLC and 4,274,630 Class B Common Units of
Nextera LLC. This transaction was undertaken in reliance upon the exemption from
the registration requirements of the Securities Act afforded by Section 4(2) of
the Securities Act.
(ll) Effective December 31, 1998, the Company issued 2,613,087 shares of
Class A Common Stock to the former stockholders of the Sibson Entities in
exchange for all of the outstanding capital stock of the Sibson Entities. The
Sibson Entities held 2,613,087 Class A Common Units of Nextera LLC at the time
of such exchange. This transaction was undertaken in reliance upon the exemption
from the registration requirements of the Securities Act afforded by Section
4(2) of the Securities Act.
(mm) Effective December 31, 1998, the Company issued 2,816,000 shares of
Class A Common Stock and agreed to issue up to 1,450,240 shares of Class A
Common Stock depending on the timing of this Offering and the price per share of
the Class A Common Stock in the Offering to the former stockholders of Lexecon
as partial consideration for the exchange of all of the capital stock of
Lexecon. This transaction was undertaken in reliance upon the exemption from the
registration requirements of the Securities Act afforded by Rule 506 of
Regulation D under the Securities Act.
(nn) Effective December 31, 1998, the Company granted to certain employees
of Lexecon fully-exercisable options to purchase 384,000 shares of Class A
Common Stock at an exercise price of $1.50 per share as a signing bonus to such
employees in connection with employment agreements entered into between such
employees and Lexecon at the time of the Lexecon Acquisition. Also effective
December 31, 1998, the Company agreed to grant to such employees of Lexecon
fully-exercisable options to purchase up to 197,760 shares of Class A Common
Stock at an exercise price of $1.50 per share depending on the timing of this
Offering and the price per share of the Class A Common Stock in the Offering.
This transaction was undertaken in reliance upon the exemption from the
registration requirements of the Securities Act afforded by Rule 506 of
Regulation D under the Securities Act.
(oo) Effective December 31, 1998, the Company issued warrants to purchase
250,000 shares of Class A Common Stock to Knowledge Universe in return for the
Guaranty by Knowledge Universe. The exercise price of the warrants is equal to
80% of the initial public offering price of the Class A Common Stock, provided,
however, if such initial public offering does not occur by August 31, 2000, the
exercise price will be $7.65 per share, as adjusted for stock splits, stock
dividends and similar transactions. The warrants expire on December 31, 2003.
This transaction was undertaken in reliance upon the exemption from the
registration requirements of the Securities Act afforded by Rule 506 of
Regulation D under the Securities Act.
(pp) Effective April 1997, the Company granted to certain employees options
to purchase 134,400 Class A Common Units at an exercise price of $0.50 per unit
under the Amended and Restated Employee Equity Participation Plan of Nextera LLC
(the "Nextera LLC Equity Participation Plan"). Effective April 1997 through
February 1998, the Company granted to certain employees options to purchase
864,431 Class A Common Units at an exercise price of $5.00 per unit under the
Nextera LLC Equity Participation Plan. Effective January 1998 through December
1998, the Company granted to certain employees options to purchase 1,472,233
Class A Common Units at an exercise price of $7.50 per unit under the Nextera
LLC Equity Participation Plan. Each of the options vests one-fourth per year
over a four-year period. These transactions were undertaken in reliance upon the
exemptions from the registration requirements of the Securities Act afforded by
Rule 701 under the Securities Act or Section 4(2) of the Securities Act.
(qq) Effective December 31, 1998, the Company agreed in connection with the
Lexecon transaction to grant options to purchase a total of 2,455,997 shares of
Class A Common Stock to certain personnel of Lexecon under the Limited Purpose
Plan, assuming the price per share of the Class A Common Stock in the Offering
is $14. Of these options, the Company expects to grant to certain non-employee
consultants of Lexecon fully-exercisable options to purchase an aggregate of
445,149 shares of Class A Common Stock at an exercise price of $14.00 per share
in March 1999. The Company expects to grant the remainder of these options to
certain employees of Lexecon immediately prior to the Offering. The precise
number of options to be granted to employees of Lexecon by the Company will
depend on the price per share in the Offering. Each
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<PAGE> 187
of the options granted to employees of Lexecon will vest at the rate of
one-third each year over a three year period. The exercise price of the options
granted to employees of Lexecon will equal the price per share of the Class A
Common Stock in the Offering. This transaction was undertaken in reliance upon
the exemption from the registration requirements of the Securities Act afforded
by Rule 701 under the Securities Act or Section 4(2) of the Securities Act.
(rr) Effective December 31, 1998, the Company issued a total of 2,471,064
options to purchase Class A Common Stock under the 1998 Equity Participation
Plan to certain employees to replace options previously granted under the
Nextera LLC Equity Participation Plan on the same general terms and conditions
as the previously granted options. This transaction was undertaken in reliance
upon the exemption from the registration requirements of the Securities Act
afforded by Rule 701 under the Securities Act or Section 4(2) of the Securities
Act.
(ss) Effective January 26, 1999, the Company granted to employees of the
Company and its subsidiaries options to purchase an aggregate of 313,000 shares
of Class A Common Stock at an exercise price of $11.00 per share under the 1998
Equity Participation Plan. Each of the options vests one-fourth per year over a
four-year period. These transactions were undertaken in reliance upon the
exemption from the registration requirements of the Securities Act afforded by
Rule 701 under the Securities Act or Section 4(2) of the Securities Act.
(tt) Effective January 29, 1999, the Company issued an aggregate of 150,000
shares of Class A Common Stock to the former stockholders of Alexander as a part
of the purchase price for all of the issued and outstanding capital stock of
Alexander. This transaction was undertaken in reliance upon the exemption from
the registration requirements of the Securities Act afforded by Rule 506 of
Regulation D under the Securities Act.
(uu) Effective January 29, 1999, the Company granted to certain employees
of Alexander options to purchase an aggregate of 300,000 shares of Class A
Common Stock at an exercise price of $11.00 per share. This transaction was
undertaken in reliance upon the exemption from the registration requirements of
the Securities Act afforded by Rule 701 under the Securities Act or Section 4(2)
of the Securities Act.
(vv) In January 1999, the Company granted options to purchase 15,000 shares
of Class A Common Stock at an exercise price of $11.00 per share to each of the
Company's independent directors under the 1998 Equity Participation Plan. Such
independent directors include Ralph Finerman, Steven B. Fink, Stanley E. Maron,
Michael D. Rose and Richard V. Sandler. These transactions were undertaken in
reliance upon the exemption from the registration requirements of the Securities
Act afforded by Rule 701 under the Securities Act or Section 4(2) of the
Securities Act.
(ww) In January 1999, the Company issued an aggregate of 384,000 shares of
Class A Common Stock to the holders of certain options to purchase Class A
Common Stock upon exercise of such options and payment of the exercise price
thereof. Such options were granted to certain employees of Lexecon on December
31, 1998. These transactions were undertaken in reliance upon the exemption from
the registration requirements of the Securities Act afforded by Rule 506 of
Regulation D under the Securities Act.
(xx) In January and February 1999, the Company issued an aggregate of 4,588
shares of Class A Common Stock to the holders of certain options to purchase
Class A Common Stock upon exercise of such options and payment of the exercise
price thereof. Such options were granted under the 1998 Equity Participation
Plan. These transactions were undertaken in reliance upon the exemption from the
registration requirements of the Securities Act afforded by Rule 701 under the
Securities Act or Section 4(2) of the Securities Act.
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<PAGE> 188
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<S> <C>
1.1(3) Form of Underwriting Agreement.
3.1(1) Amended and Restated Certificate of Incorporation.
3.2(1) Amended and Restated Bylaws.
4.1(3) Form of Class A Common Stock Certificate.
5.1(3) Opinion of Latham & Watkins.
10.1(1) 1998 Equity Participation Plan.
10.2(3) Form of Nextera/Lexecon Limited Purpose Stock Option Plan.
10.3(1) 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(1) Escrow Agreement dated as of July 30, 1997 by and among
Nextera Enterprises, L.L.C., Symmetrix, Inc., the
stockholders and certain option holders of Symmetrix, Inc.
listed on the signature pages thereto and State Street Bank
and Trust Company.
10.5(1) 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.
10.6(1) Escrow 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, the
members of SiGMA Consulting, LLC listed on the signature
pages thereto and Chase Manhattan Trust Company.
10.7(1) 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.
10.8(1) 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.
10.9(1) Escrow Agreement dated as of March 31, 1998 by and among
Nextera Enterprises, L.L.C., Pyramid Imaging, Inc., the
stockholders of Pyramid Imaging, Inc. listed on the
signature pages thereto and Chase Manhattan Trust Company.
10.10(1) 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.
10.11(1) Escrow Agreement dated as of March 31, 1998 by and among The
Planning Technologies Group, LLC, Nextera Enterprises,
L.L.C., Nextera Enterprises Holdings, L.L.C., The Planning
Technologies Group, Inc., the shareholders of The Planning
Technologies Group, Inc. listed on the signature pages
thereto and Chase Manhattan Trust Company.
10.12(1) 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.
</TABLE>
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<PAGE> 189
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<S> <C>
10.13(1) 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.
10.14(1) 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.
10.15(1) 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.
10.16(1) Escrow Agreement dated as of August 31, 1998 by an 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.
10.17(1) 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.
10.18(1) 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 (previously
filed as Exhibit 4.3 to this Registration Statement as filed
with the Commission on September 18, 1998).
10.19(1) 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 (previously
filed as Exhibit 4.4 to Amendment No. 2 to this Registration
Statement as filed with the Commission on January 21, 1999).
10.20(1) Letter dated December 15, 1998 from Nextera Enterprises,
Inc. to certain stockholders of Nextera Enterprises, Inc.
(previously filed as Exhibit 4.5 to Amendment No. 2 to this
Registration Statement as filed with the Commission on
January 21, 1999).
10.21(1) Securities Purchase Agreement dated as of August 31, 1998
between Nextera Enterprises, L.L.C. and Nextera Funding,
Inc.
10.22(1) Senior Secured Note dated September 1, 1998 of Nextera
Enterprises, L.L.C. in favor of Nextera Funding, Inc.
10.23(1) Consent and Amendment dated as of December 31, 1998 to the
Securities Purchase Agreement dated as of August 31, 1998 by
and among Nextera Enterprises, L.L.C., Nextera Funding,
Inc., Nextera Enterprises, Inc. and Knowledge Universe, Inc.
10.24(1) Assumption Agreement dated as of December 31, 1998 by
Nextera Enterprises, Inc. in favor of Nextera Funding, Inc.
10.25(1) Assignment Agreement dated as of December 31, 1998 by and
between Nextera Funding, Inc. and Knowledge Universe, Inc.
10.26(1) Senior Secured Note dated December 31, 1998 of Nextera
Enterprises, Inc. in favor of Knowledge Universe, Inc.
10.27(1) 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.
10.28(1) 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.
</TABLE>
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<PAGE> 190
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<S> <C>
10.29(1) Warrant to Purchase Class A Common Stock of Nextera
Enterprises, Inc. dated as of December 31, 1998 issued to
Knowledge Universe, Inc.
10.30(1) Senior Secured Note dated January 28, 1999 of Nextera
Enterprises, Inc. in favor of Nextera Funding, Inc.
10.31(3) Amended and Restated Security and Pledge Agreement by and
between Nextera Enterprises, Inc. and Nextera Funding, Inc.
10.32(3) Amended and Restated Security and Pledge Agreement by and
between Pyramid Imaging, Inc. and Nextera Funding, Inc.
10.33(3) Amended and Restated Security and Pledge Agreement by and
between The Planning Technologies Group, L.L.C. and Nextera
Funding, Inc.
10.34(3) Amended and Restated Security and Pledge Agreement by and
between Nextera Business Performance Solutions Group, Inc.
and Nextera Funding, Inc.
10.35(3) Amended and Restated Security and Pledge Agreement by and
between Sibson & Company, LLC and Nextera Funding, Inc.
10.36(3) Amendment to Subsidiary Guaranty by each of the corporations
listed on Annex A Attached thereto
10.37(1) 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.
10.38(1) Supplemental Deferred Consideration Agreement dated as of
January 29, 1999 by and among Nextera Enterprises, Inc.,
Graham Alexander and Arthur Morgan.
10.39(1) Loan Note Instrument dated as of January 29, 1999 of Nextera
Enterprises, Inc.
10.40(1) Tax Deed of Covenant dated as of January 29, 1999 by and
among Nextera Enterprises, Inc. and the persons listed on
the Schedule thereto.
10.41(1) Charge of Shares dated as of January 29, 1999 by the persons
listed on Schedule I thereto in favor of Nextera
Enterprises, Inc.
10.42(1) Debenture of Nextera Enterprises, L.L.C. dated March 20,
1997 in the principal amount of $23,000,000.
10.43(1) Debenture of Nextera Enterprises, L.L.C. dated January 5,
1998 in the principal amount of $24,970,000.
10.44(1) Assignment effective April 30, 1998 with respect to
Debenture of Nextera Enterprises, L.L.C. in the principal
amount of $23,000,000.
10.45(1) Assignment effective April 30, 1998 with respect to
Debenture of Nextera Enterprises, L.L.C. in the principal
amount of $24,970,000.
10.46(1) Assignment effective August 5, 1998 with respect to
Debenture of Nextera Enterprises, L.L.C. in the principal
amount of $23,000,000.
10.47(1) Assignment effective August 5, 1998 with respect to
Debenture of Nextera Enterprises, L.L.C. in the principal
amount of $24,970,000.
10.48(1) Amended and Restated Debenture of Nextera Enterprises, Inc.
in the principal amount of $22,966,411.50 dated as of
December 31, 1997.
10.49(1) Amended and Restated Debenture of Nextera Enterprises, Inc.
in the principal amount of $24,933,543.66 dated as of
December 31, 1997.
10.50(1) Employment Agreement dated as of March 3, 1997 by and
between Education Technology Consulting Holdings, L.L.C. and
Gresham T. Brebach, Jr.
</TABLE>
II-9
<PAGE> 191
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<S> <C>
10.51(1) Employment Agreement dated as of April 1, 1997 by and
between Nextera Enterprises Holdings, L.L.C. and Ronald K.
Bohlin.
10.52(1) Employment Agreement dated as of April 15, 1997 by and
between Nextera Enterprises, L.L.C. and Michael P.
Muldowney.
10.53(1) Employment Agreement dated as of April 25, 1997 by and
between Debra Bergevine and Education Technology Consulting,
L.L.C.
10.54(1) Employment Agreement dated as of August 31, 1998 by and
between Roger Brossy and SC/NE, LLC.
10.55(1) Noncompete, Non-solicitation, Proprietary Information,
Confidentiality and Inventions Agreement dated as of August
31, 1998 between Roger Brossy and Nextera Enterprises,
L.L.C.
10.56(1) Agreement dated as of December 31, 1998 by and between
Lexecon Inc. and Andrew M. Rosenfield.
10.57(1) Confidentiality and Proprietary Rights Agreement dated as of
December 31, 1998 between Lexecon Inc. and Daniel R.
Fischel.
10.58(1) Confidentiality and Proprietary Rights Agreement dated as of
December 31, 1998 between Lexecon Inc. and Dennis W.
Carlton.
10.59(1) 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.
10.60(1) 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.
10.61(1) 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.
21.1(1) List of Subsidiaries.
23.1.1(2) Consent of Ernst & Young LLP, Independent Auditors.
23.1.2(2) Consent of Ernst & Young LLP, Independent Auditors.
23.1.3(2) Consent of BDO Seidman, LLP, Independent Certified Public
Accountants.
23.1.4(2) Consent of Ernst & Young LLP, Independent Auditors.
23.1.5(2) Consent of Harte Carucci & Driscoll, P.C., Independent
Auditors.
23.1.6(2) Consent of Farkouh, Furman & Faccio, Independent Auditors.
23.1.7(2) Consent of Grant Thornton.
23.1.8(2) Consent of Ernst & Young LLP, Independent Auditors
23.1.9(2) Consent of Ernst & Young LLP, Independent Auditors
23.2(3) Consent of Latham & Watkins (contained in Exhibit 5.1).
24.1(1) Power of Attorney.
24.2(1) Power of Attorney.
27.1(2) Financial Data Schedule.
</TABLE>
- ------------------------------
(1) Previously filed.
(2) Filed herewith.
(3) To be filed by amendment.
(b) Financial Statements.
All required Financial Statements are included in the Prospectus.
II-10
<PAGE> 192
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the Closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the Company has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the Offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
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<PAGE> 193
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 4 to the Registration Statement on Form S-1
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Lexington, State of Massachusetts, on March 15, 1999.
NEXTERA ENTERPRISES, INC.
By: /s/GRESHAM T. BREBACH, JR.
------------------------------------
Gresham T. Brebach, Jr.
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 to the Registration Statement on Form S-1 has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<C> <S> <C>
/s/ GRESHAM T. BREBACH, JR. President, Chief Executive March 15, 1999
- ----------------------------------------------------- Officer and Chairman of the
Gresham T. Brebach, Jr. Board of Directors (Principal
Executive Officer)
/s/ MICHAEL P. MULDOWNEY Chief Financial Officer March 15, 1999
- ----------------------------------------------------- (Principal Financial and
Michael P. Muldowney Accounting Officer)
/s/ RONALD K. BOHLIN Chief Operating Officer and March 15, 1999
- ----------------------------------------------------- Director
Ronald K. Bohlin
ROGER BROSSY* Director March 15, 1999
- -----------------------------------------------------
Roger Brossy
RALPH FINERMAN* Director March 15, 1999
- -----------------------------------------------------
Ralph Finerman
STEVEN B. FINK* Director March 15, 1999
- -----------------------------------------------------
Steven B. Fink
STANLEY E. MARON* Director March 15, 1999
- -----------------------------------------------------
Stanley E. Maron
RICHARD V. SANDLER* Director March 15, 1999
- -----------------------------------------------------
Richard V. Sandler
MICHAEL D. ROSE* Director March 15, 1999
- -----------------------------------------------------
Michael D. Rose
</TABLE>
*By: /s/ GRESHAM T. BREBACH,
JR.
Gresham T. Brebach,
Jr.
Attorney-in-Fact
II-12
<PAGE> 194
SCHEDULE II
NEXTERA ENTERPRISES, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING OF CHARGED TO BALANCE AT
DESCRIPTION PERIOD OPERATIONS ACQUISITIONS DEDUCTIONS END OF PERIOD
----------- ------------ ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Period ended December 31, 1997
Allowance for uncollectible
accounts.................. $ -- $ -- 100,000 $ -- $ 100,000
Year ended December 31, 1998
Allowance for uncollectible
accounts.................. $100,000 304,000 863,000 -- $1,267,000
</TABLE>
S-1
<PAGE> 195
EXHIBIT INDEX
The following exhibits are filed as part of this Form S-1 Registration
Statement.
<TABLE>
<CAPTION>
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EXHIBIT NUMBERING
NUMBER DESCRIPTION OF DOCUMENT SYSTEM
<S> <C> <C>
1.1(3) Form of Underwriting Agreement..............................
3.1(1) Amended and Restated Certificate of Incorporation...........
3.2(1) Amended and Restated Bylaws.................................
4.1(3) Form of Class A Common Stock Certificate....................
5.1(3) Opinion of Latham & Watkins.................................
10.1(1) 1998 Equity Participation Plan..............................
10.2(3) Form of Nextera/Lexecon Limited Purpose Stock Option Plan...
10.3(1) 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(1) Escrow Agreement dated as of July 30, 1997 by and among
Nextera Enterprises, L.L.C., Symmetrix, Inc., the
stockholders and certain option holders of Symmetrix, Inc.
listed on the signature pages thereto and State Street Bank
and Trust Company...........................................
10.5(1) 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...............................................
10.6(1) Escrow 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, the
members of SiGMA Consulting, LLC listed on the signature
pages thereto and Chase Manhattan Trust Company.............
10.7(1) 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.....................................
10.8(1) 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. ..........................................
10.9(1) Escrow Agreement dated as of March 31, 1998 by and among
Nextera Enterprises, L.L.C., Pyramid Imaging, Inc., the
stockholders of Pyramid Imaging, Inc. listed on the
signature pages thereto and Chase Manhattan Trust Company...
10.10(1) 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. ...............................
10.11(1) Escrow Agreement dated as of March 31, 1998 by and among The
Planning Technologies Group, LLC, Nextera Enterprises,
L.L.C., Nextera Enterprises Holdings, L.L.C., The Planning
Technologies Group, Inc., the shareholders of The Planning
Technologies Group, Inc. listed on the signature pages
thereto and Chase Manhattan Trust Company...................
</TABLE>
<PAGE> 196
<TABLE>
<CAPTION>
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<S> <C> <C>
10.12(1) 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..............................
10.13(1) 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. ................................
10.14(1) 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.............
10.15(1) 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.....................................
10.16(1) Escrow Agreement dated as of August 31, 1998 by an 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.............
10.17(1) 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.......................
10.18(1) 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 (previously
filed as Exhibit 4.3 to this Registration Statement as filed
with the Commission on September 18, 1998)..................
10.19(1) 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 (previously
filed as Exhibit 4.4 to Amendment No. 2 to this Registration
Statement as filed with the Commission on January 21,
1999).......................................................
10.20(1) Letter dated December 15, 1998 from Nextera Enterprises,
Inc. to certain stockholders of Nextera Enterprises, Inc.
(previously filed as Exhibit 4.5 to Amendment No. 2 to this
Registration Statement as filed with the Commission on
January 21, 1999) ..........................................
10.21(1) Securities Purchase Agreement dated as of August 31, 1998
between Nextera Enterprises, L.L.C. and Nextera Funding,
Inc. .......................................................
10.22(1) Senior Secured Note dated September 1, 1998 of Nextera
Enterprises, L.L.C. in favor of Nextera Funding, Inc. ......
10.23(1) Consent and Amendment dated as of December 31, 1998 to the
Securities Purchase Agreement dated as of August 31, 1998 by
and among Nextera Enterprises, L.L.C., Nextera Funding,
Inc., Nextera Enterprises, Inc. and Knowledge Universe,
Inc. .......................................................
10.24(1) Assumption Agreement dated as of December 31, 1998 by
Nextera Enterprises, Inc. in favor of Nextera Funding,
Inc. .......................................................
10.25(1) Assignment Agreement dated as of December 31, 1998 by and
between Nextera Funding, Inc. and Knowledge Universe,
Inc. .......................................................
</TABLE>
<PAGE> 197
<TABLE>
<CAPTION>
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BY
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EXHIBIT NUMBERING
NUMBER DESCRIPTION OF DOCUMENT SYSTEM
<S> <C> <C>
10.26(1) Senior Secured Note dated December 31, 1998 of Nextera
Enterprises, Inc. in favor of Knowledge Universe, Inc. .....
10.27(1) 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.....................................................
10.28(1) 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............
10.29(1) Warrant to Purchase Class A Common Stock of Nextera
Enterprises, Inc. dated as of December 31, 1998 issued to
Knowledge Universe, Inc. ...................................
10.30(1) Senior Secured Note dated January 28, 1999 of Nextera
Enterprises, Inc. in favor of Nextera Funding, Inc. ........
10.31(3) Amended and Restated Security and Pledge Agreement by and
between Nextera Enterprises, Inc. and Nextera Funding,
Inc. .......................................................
10.32(3) Amended and Restated Security and Pledge Agreement by and
between Pyramid Imaging, Inc. and Nextera Funding, Inc. ....
10.33(3) Amended and Restated Security and Pledge Agreement by and
between The Planning Technologies Group, L.L.C. and Nextera
Funding, Inc. ..............................................
10.34(3) Amended and Restated Security and Pledge Agreement by and
between Nextera Business Performance Solutions Group, Inc.
and Nextera Funding, Inc. ..................................
10.35(3) Amended and Restated Security and Pledge Agreement by and
between Sibson & Company, LLC and Nextera Funding, Inc. ....
10.36(3) Amendment to Subsidiary Guaranty by each of the corporations
listed on Annex A Attached thereto..........................
10.37(1) 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.....................................................
10.38(1) Supplemental Deferred Consideration Agreement dated as of
January 29, 1999 by and among Nextera Enterprises, Inc.,
Graham Alexander and Arthur Morgan..........................
10.39(1) Loan Note Instrument dated as of January 29, 1999 of Nextera
Enterprises, Inc. ..........................................
10.40(1) Tax Deed of Covenant dated as of January 29, 1999 by and
among Nextera Enterprises, Inc. and the persons listed on
the Schedule thereto........................................
10.41(1) Charge of Shares dated as of January 29, 1999 by the persons
listed on Schedule I thereto in favor of Nextera
Enterprises, Inc. ..........................................
10.42(1) Debenture of Nextera Enterprises, L.L.C. dated March 20,
1997 in the principal amount of $23,000,000.................
10.43(1) Debenture of Nextera Enterprises, L.L.C. dated January 5,
1998 in the principal amount of $24,970,000.................
10.44(1) Assignment effective April 30, 1998 with respect to
Debenture of Nextera Enterprises, L.L.C. in the principal
amount of $23,000,000.......................................
10.45(1) Assignment effective April 30, 1998 with respect to
Debenture of Nextera Enterprises, L.L.C. in the principal
amount of $24,970,000.......................................
10.46(1) Assignment effective August 5, 1998 with respect to
Debenture of Nextera Enterprises, L.L.C. in the principal
amount of $23,000,000.......................................
</TABLE>
<PAGE> 198
<TABLE>
<CAPTION>
PAGINATION
BY
SEQUENTIAL
EXHIBIT NUMBERING
NUMBER DESCRIPTION OF DOCUMENT SYSTEM
<S> <C> <C>
10.47(1) Assignment effective August 5, 1998 with respect to
Debenture of Nextera Enterprises, L.L.C. in the principal
amount of $24,970,000.......................................
10.48(1) Amended and Restated Debenture of Nextera Enterprises, Inc.
in the principal amount of $22,966,411.50 dated as of
December 31, 1997...........................................
10.49(1) Amended and Restated Debenture of Nextera Enterprises, Inc.
in the principal amount of $24,933,543.66 dated as of
December 31, 1997...........................................
10.50(1) Employment Agreement dated as of March 3, 1997 by and
between Education Technology Consulting Holdings, L.L.C. and
Gresham T. Brebach, Jr. ....................................
10.51(1) Employment Agreement dated as of April 1, 1997 by and
between Nextera Enterprises Holdings, L.L.C. and Ronald K.
Bohlin......................................................
10.52(1) Employment Agreement dated as of April 15, 1997 by and
between Nextera Enterprises, L.L.C. and Michael P.
Muldowney...................................................
10.53(1) Employment Agreement dated as of April 25, 1997 by and
between Debra Bergevine and Education Technology Consulting,
L.L.C. .....................................................
10.54(1) Employment Agreement dated as of August 31, 1998 by and
between Roger Brossy and SC/NE, LLC.........................
10.55(1) Noncompete, Non-solicitation, Proprietary Information,
Confidentiality and Inventions Agreement dated as of August
31, 1998 between Roger Brossy and Nextera Enterprises,
L.L.C. .....................................................
10.56(1) Agreement dated as of December 31, 1998 by and between
Lexecon Inc. and Andrew M. Rosenfield.......................
10.57(1) Confidentiality and Proprietary Rights Agreement dated as of
December 31, 1998 between Lexecon Inc. and Daniel R.
Fischel.....................................................
10.58(1) Confidentiality and Proprietary Rights Agreement dated as of
December 31, 1998 between Lexecon Inc. and Dennis W.
Carlton.....................................................
10.59(1) 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. ...............................
10.60(1) 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. ...............................
10.61(1) 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. ...............................
21.1(1) List of Subsidiaries........................................
23.1.1(2) Consent of Ernst & Young LLP, Independent Auditors..........
23.1.2(2) Consent of Ernst & Young LLP, Independent Auditors..........
23.1.3(2) Consent of BDO Seidman, LLP, Independent Certified Public
Accountants.................................................
23.1.4(2) Consent of Ernst & Young LLP, Independent Auditors..........
23.1.5(2) Consent of Harte Carucci & Driscoll, P.C., Independent
Auditors....................................................
23.1.6(2) Consent of Farkouh, Furman & Faccio, Independent Auditors...
23.1.7(2) Consent of Grant Thornton...................................
23.1.8(2) Consent of Ernst & Young LLP, Independent Auditors..........
23.1.9(2) Consent of Ernst & Young LLP, Independent Auditors..........
</TABLE>
<PAGE> 199
<TABLE>
<CAPTION>
PAGINATION
BY
SEQUENTIAL
EXHIBIT NUMBERING
NUMBER DESCRIPTION OF DOCUMENT SYSTEM
<S> <C> <C>
23.2(3) Consent of Latham & Watkins (contained in Exhibit 5.1)......
24.1(1) Power of Attorney...........................................
24.2(1) Power of Attorney...........................................
27.1(2) Financial Data Schedule.....................................
</TABLE>
- ------------------------------
(1) Previously filed.
(2) Filed herewith.
(3) To be filed by amendment.
<PAGE> 1
EXHIBIT 23.1.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Experts" and
"Selected Consolidated Financial Data" and to the use of our report dated
February 19, 1999, in Amendment No. 4 to the Registration Statement (Form S-1)
and related Prospectus of Nextera Enterprises, Inc. for the registration of
shares of its Class A common stock.
Our audits also included the financial statement schedule of Nextera
Enterprises, Inc. included in Amendment No. 4 to the Registration Statement.
This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on the schedule based on our audit. In
our opinion, the financial statement schedule referred to above, 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
March 12, 1999
<PAGE> 1
EXHIBIT 23.1.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated April 30, 1998, with respect to the 1997 financial
statements of Symmetrix, Inc., included in Amendment No. 4 to the Registration
Statement (Form S-1) and related Prospectus of Nextera Enterprises, Inc., for
the registration of shares of its Class A common stock.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 12, 1999
<PAGE> 1
EXHIBIT 23.1.3
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting a part of this
Pre-effective Amendment No. 4 to the Registration Statement of our report dated
July 19, 1996, relating to the May 31, 1996 consolidated financial statements of
Symmetrix, Inc. and Subsidiaries, which is contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ B.D.O. SEIDMAN LLP
Boston, Massachusetts
March 12, 1999
<PAGE> 1
EXHIBIT 23.1.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated August 31, 1998, with respect to the financial
statements of SiGMA Consulting, LLC, included in Amendment No. 4 to the
Registration Statement (Form S-1) and related Prospectus of Nextera
Enterprises, Inc., for the registration of shares of its Class A common stock.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 12, 1999
<PAGE> 1
EXHIBIT 23.1.5
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 19, 1998, except for Note 8 which is April 4,
1998, with respect to the financial statements of The Planning Technologies
Group, Inc., included in the Pre-effective Amendment No. 4 to the Registration
Statement (Form S-1) and related Prospectus of Nextera Enterprises, Inc., for
the registration of shares of its Class A common stock.
/s/ HARTE CARUCCI & DRISCOLL, P.C.
Woburn, Massachusetts
March 12, 1999
<PAGE> 1
EXHIBIT 23.1.6
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated December 29, 1998 with respect to the financial
statements of Sibson & Company, L.P., and Subsidiaries, included in the
Pre-effective Amendment No. 4 to the Registration Statement (Form S-1) and
related Prospectus of Nextera Enterprises, Inc., for the registration of shares
of its Class A common stock.
/s/ FARKOUH, FURMAN & FACCIO
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
March 12, 1999
<PAGE> 1
EXHIBIT 23.1.7
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated September 1, 1998 with respect to the financial
statements of Sibson Canada, Inc., included in the Pre-effective Amendment No. 4
to the Registration Statement (Form S-1) and related Prospectus of Nextera
Enterprises, Inc., for the registration of shares of its Class A common stock.
/s/ GRANT THORNTON
Chartered Accountants
Toronto, Ontario
March 12, 1999
<PAGE> 1
EXHIBIT 23.1.8
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 2, 1999, with respect to the financial
statements of Lexecon, Inc., included in Amendment No. 4 to the Registration
Statement (Form S-1) and related Prospectus of Nextera Enterprises, Inc., for
the registration of shares of its Class A common stock.
/s/ Ernst & Young LLP
Chicago, Illinois
March 12, 1999
<PAGE> 1
EXHIBIT 23.1.9
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated September 25, 1998, with respect to the 1997 financial
statements Pyramid Imaging, Inc., included in Amendment No. 4 to the
Registration Statement (Form S-1) and related Prospectus of Nextera Enterprises,
Inc., for the registration of shares of its Class A common stock.
/s/ Ernst & Young LLP
San Francisco, California
March 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS, AND NOTES THERETO, INCLUDED IN THE
COMPANY'S REGISTRATION STATEMENT, TO WHICH THIS SCHEDULE IS AN EXHIBIT, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> FEB-26-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 DEC-31-1998
<CASH> 554 1,496
<SECURITIES> 0 0
<RECEIVABLES> 2,302 32,361
<ALLOWANCES> 100 1,267
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,619 42,517
<PP&E> 1,311 9,332
<DEPRECIATION> 130 1,276
<TOTAL-ASSETS> 22,655 176,691
<CURRENT-LIABILITIES> 4,954 108,278
<BONDS> 0 0
0 0
0 0
<COMMON> 19,747 31,660
<OTHER-SE> (3,015) (20,170)
<TOTAL-LIABILITY-AND-EQUITY> 16,732 176,691
<SALES> 7,998 67,590
<TOTAL-REVENUES> 7,998 67,590
<CGS> 4,718 44,985
<TOTAL-COSTS> 5,561 26,123
<OTHER-EXPENSES> 0 6,671
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 32 6,723
<INCOME-PRETAX> (2,313) (16,912)
<INCOME-TAX> 702 243
<INCOME-CONTINUING> (3,015) (17,155)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,015) (14,997)
<EPS-PRIMARY> (0.74) (1.14)
<EPS-DILUTED> (0.74) (1.14)
</TABLE>
