<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission File Number 0-25995
NEXTERA ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4700410
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Cranberry Hill, Lexington, Massachusetts 02421
(Address of principal executive office, including zip code)
(781) 778-4400
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of October 29, 1999 there were 29,130,952 shares of $.001 par value
Class A Common Stock outstanding and 4,274,630 shares of $.001 par value Class B
Common Stock outstanding.
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NEXTERA ENTERPRISES, INC.
Quarterly Report on Form 10-Q
for the Quarter Ended September 30, 1999
INDEX
PART I. FINANCIAL INFORMATION
Page No.
-------
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998 2
Consolidated Statements of Operations for the
Three Months Ended September 30, 1999 and 1998 3
Consolidated Statements of Operations for the
Nine Months Ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 18
PART II. OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
1
<PAGE> 3
PART I - - FINANCIAL INFORMATION
Item 1. Financial Statements
NEXTERA ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998(1)
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,290 $ 1,496
Accounts receivable, net of allowance for
doubtful accounts of $1,136 at September 30, 1999
and $1,267 at December 31, 1998 40,878 31,094
Costs and estimated earnings in excess of billings 5,442 2,962
Due from affiliates 189 400
Due from officers 488 856
Prepaid expenses and other current assets 3,557 5,709
-------- --------
Total current assets 55,844 42,517
Property and equipment, net 10,016 8,056
Intangible assets, net of accumulated amortization of $5,099
at September 30, 1999 and $1,977 at December 31, 1998 153,282 125,082
Other assets 2,032 1,036
-------- --------
Total assets $221,174 $176,691
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 26,371 $ 23,530
Notes payable to bank 21,861 6,156
Bridge loan payable (including $37,500 payable to
related party at December 31, 1998) -- 75,849
Deferred revenue 1,483 1,193
Due to affiliates 349 1,068
Current portion of long-term debt and capital lease obligations 709 482
-------- --------
Total current liabilities 50,773 108,278
Long-term debt and capital lease obligations 4,052 2,600
Debentures due to affiliates, including accrued interest thereon
at December 31, 1998 30,001 53,149
Other long-term liabilities 1,461 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,
197,813 shares issued and outstanding at September 30, 1999
and December 31, 1998 495 495
Class A Common Stock, $0.001 par value, 50,000,000 shares
authorized, 29,130,952 and 16,811,740 shares issued
and outstanding at September 30, 1999 and December 31, 1998 29 17
Class B Common Stock, $0.001 par value, 4,300,000 shares
authorized, 4,274,630 shares issued and outstanding at
September 30, 1999 and December 31, 1998 4 4
Additional paid-in capital 154,907 31,144
Retained earnings (deficit) (20,548) (20,170)
-------- --------
Total stockholders' equity 134,887 11,490
-------- --------
Total liabilities and stockholders' equity $221,174 $176,691
======== ========
</TABLE>
(1) Derived from audited financial statements as of December 31, 1998.
See Notes to Consolidated Financial Statements
2
<PAGE> 4
NEXTERA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts; unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Net revenues $40,094 $17,486
Cost of revenues 22,755 12,641
------- -------
Gross profit 17,339 4,845
Selling, general and administrative expenses 11,531 7,279
Amortization expense 1,243 466
Restructuring costs -- 967
------- -------
Income (loss) from operations 4,565 (3,867)
Interest expense, net (1,222) (1,648)
------- -------
Income (loss) before provision for income taxes 3,343 (5,515)
Provision for income taxes -- --
------- -------
Net income (loss) $ 3,343 $(5,515)
======= =======
Net income (loss) per common share, basic $ 0.10 $ (0.30)
======= =======
Net income (loss) per common share, diluted $ 0.09 $ (0.30)
======= =======
Weighted average common shares outstanding, basic 35,032 18,583
======= =======
Weighted average common shares outstanding, diluted 35,359 18,583
======= =======
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 5
NEXTERA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts; unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Net revenues $112,758 $39,581
Cost of revenues 63,737 27,579
-------- -------
Gross profit 49,021 12,002
Selling, general and administrative expenses 32,279 14,575
Amortization expense 3,433 1,034
Restructuring costs -- 967
Compensation expense - other 6,089 --
-------- -------
Income (loss) from operations 7,220 (4,574)
Interest expense, net (7,596) (4,319)
-------- -------
Loss before provision for income taxes (376) (8,893)
Provision for income taxes 2 200
-------- -------
Net loss $ (378) $(9,093)
======== =======
Net loss per common share, basic and diluted $ (0.01) $ (0.66)
======== =======
Weighted average common shares outstanding, basic and diluted 28,303 13,835
======== =======
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 6
NEXTERA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (378) $ (9,093)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 5,690 1,726
Non-cash compensation charges 6,031 --
Change in operating assets and liabilities, net of
effect of acquired businesses:
Accounts receivable (5,483) (1,818)
Due from affiliate 211 74
Due to affiliate (725) 1,190
Prepaid expenses and other current assets 2,021 (154)
Income tax receivable -- 414
Accounts payable and accrued expenses 1,091 4,279
Costs and estimated earnings in excess of billings (2,481) (780)
Deferred revenue 273 598
Other (692) (1,330)
-------- --------
Net cash provided by (used in) operating activities 5,558 (4,894)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (3,678) (893)
Acquisition of businesses, net of cash acquired (14,007) (64,072)
-------- --------
Net cash used in investing activities (17,685) (64,965)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of Class A and Class B Common Stock 103,722 5,230
Proceeds from issuance of Class B Preferred Stock -- 24,993
Due from officers 387 (849)
Borrowings (repayments) under note payable to bank 15,704 41,799
Borrowings under bridge loan payable 2,000 --
Repayment of bridge loan payable (79,564) --
Repayment of debentures due to affiliates (25,607) --
Repayments of long-term debt and capital lease obligations (721) (305)
-------- --------
Net cash provided by financing activities 15,921 70,868
-------- --------
Net increase in cash and cash equivalents 3,794 1,009
Cash and cash equivalents at beginning of period 1,496 554
-------- --------
Cash and cash equivalents at end of period $ 5,290 $ 1,563
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 6,957 $ 107
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
5
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NEXTERA ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. BASIS OF PRESENTATION
The accompanying financial statements of Nextera Enterprises, Inc.
("Nextera" or the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments and
adjustments related to the Company's 1998 equity recapitalization) considered
necessary for a fair presentation have been included. Operating results for the
three- and nine- month periods ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1999.
The consolidated balance sheet as of December 31, 1998 has been derived
from the consolidated financial statements at that date but does not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
These financial statements should be read in conjunction with the
financial statements and notes thereto, together with management's discussion
and analysis of financial condition and results of operations, contained in the
Company's Registration Statement on Form S-1 filed by the Company with the
Securities and Exchange Commission on May 17, 1999.
ACQUISITIONS
Effective January 5, 1998, Nextera acquired substantially all of the
assets and assumed certain liabilities of SiGMA Consulting, LLC ("SiGMA"), a New
York-based management consulting firm. SiGMA was acquired for $10.0 million in
cash and 669,000 shares of Class A Common Stock. Effective December 31, 1998,
the Company transferred all the membership interests of SiGMA to Nextera
Business Performance Solutions Group, Inc. ("NBPSG"), a wholly owned subsidiary
of the Company.
Effective March 31, 1998, Nextera acquired substantially all of the
assets and assumed certain liabilities of The Planning Technologies Group, Inc.
("PTG"), a Massachusetts-based strategy and management consulting firm. PTG was
acquired for $6.7 million in cash and 214,000 shares of Class A Common Stock.
Effective March 31, 1998, Nextera acquired Pyramid Imaging, Inc.
("Pyramid"), a California-based consulting and technology firm. Pyramid was
acquired for $10.0 million in cash and 640,000 shares of Class A Common Stock,
including $0.8 million in cash and 53,333 shares of Class A Common Stock issued
during the three months ended September 30, 1999 as a result of the achievement
of certain revenue and pretax profit targets related to the performance of
Pyramid during the twelve months ending March 31, 1999.
6
<PAGE> 8
Effective August 31, 1998, Nextera acquired substantially all the
assets and assumed certain liabilities of Sibson & Company, L.P. and acquired
Sibson Canada, Inc., (collectively "Sibson") human resources consulting firms
based in New Jersey and Toronto, Canada, respectively. Sibson was acquired for
$37.4 million in cash, 2,613,087 shares of Class A Common Stock and 197,813
Exchangeable Shares 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. Lexecon was acquired
for $31.1 million in cash and 4,266,240 shares of Class A Common Stock,
including 1,450,240 shares of Class A Common Stock (the "Lexecon Contingent
Shares") which were determined based on the price per share in the initial
public offering of the Company's Class A Common Stock (see Note 3).
Effective January 29, 1999, the Company acquired The Alexander
Corporation Limited ("Alexander"), a United Kingdom-based human resources
consulting firm. Alexander was acquired for (pound)300,000 (approximately
$490,000 as of January 29, 1999) and 150,000 shares of Class A Common Stock. In
addition, the Company will pay an earn-out of up to an additional (pound)700,000
over a three-year period depending upon Alexander's satisfaction of certain
performance criteria.
Effective May 18, 1999, the Company acquired NeoEnterprises, Inc.
("NeoEnterprises"), a Connecticut-based electronic commerce, or "e-commerce,"
consulting and development company. NeoEnterprises was acquired for 170,000
shares of Class A Common Stock and was merged into Neonext LLC ("Neonext"), a
newly-formed acquisition subsidiary of the Company, as a part of the
acquisition.
Effective June 1, 1999, the Company acquired substantially all of the
assets and certain liabilities of The Economics Resource Group, Inc. ("ERG"), a
Massachusetts-based consulting firm that provides economic and strategic
services primarily to energy and other regulated industries. ERG was acquired
for $9.6 million of cash and a $2.4 million promissory note payable December 31,
2000, subject to post-closing adjustments based upon certain financial
performance criteria for ERG.
Effective September 30, 1999, the Company, through Sibson AP, LLC, a
newly formed acquisition subsidiary of the Company, acquired substantially all
of the assets of SCCAP Pty Limited ("SCCAP"). SCCAP, an Australian human
resources consulting firm, was acquired for $1.7 million in cash.
7
<PAGE> 9
Note 2. EARNINGS (LOSS) PER SHARE
The Company computes net income (loss) per share in accordance with
Statement of Financial Standards No. 128, "Earnings per Share" ("SFAS 128").
Under the provisions of SFAS 128, basic net income (loss) per share ("Basic
EPS") is computed by dividing net income by the weighted average number of
common shares outstanding. Diluted net income (loss) per common share ("Diluted
EPS") is computed by dividing net income by the weighted average number of
common shares and dilutive common share equivalents then outstanding. SFAS No.
128 requires the presentation of both Basic and Diluted EPS on the face of the
consolidated statement of operations.
Basic and diluted earnings (loss) per share were calculated as follows:
(In thousands, except per share amounts; unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------------- --------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
BASIC
Net income (loss) $ 3,343 $(5,515) $ (378) $(9,093)
Weighted average shares 35,032 18,583 28,303 13,835
------- ------- ------- -------
Basic earnings (loss) per share $ 0.10 $ (0.30) $ (0.01) $ (0.66)
======= ======= ======= =======
DILUTED
Net income (loss) $ 3,343 $(5,515) $ (378) $(9,093)
Weighted average shares 35,032 18,583 28,303 13,835
Effect of stock options 327 -- -- --
Weighted average shares, as adjusted 35,359 18,583 28,303 13,835
------- ------- ------- -------
Diluted earnings (loss) per share $ 0.09 $ (0.30) $ (0.01) $ (0.66)
======= ======= ======= =======
</TABLE>
Note 3. STOCKHOLDERS' EQUITY
On May 21, 1999, the Company completed its initial public offering (the
Offering) of its Class A Common Stock. The Company sold 11,500,000 shares of
Class A Common Stock and realized net proceeds of $103.0 million. Substantially
all of these net proceeds were used to repay a portion of the Company's then
outstanding short- and long-term debt.
Note 4. SUBSEQUENT EVENTS
On November 1, 1999, Nextera announced that Steven Fink, Vice Chairman
of Knowledge Universe, had been named Chairman and Chief Executive Officer of
Nextera Enterprises, Inc. Mr. Fink, who has been a board member of Nextera since
its inception, replaced Gresham T. Brebach, Jr., in those positions.
8
<PAGE> 10
NEXTERA ENTERPRISES, INC.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The disclosure and analysis in this quarterly report contain
"forward-looking statements." Forward-looking statements give Nextera's current
expectations or forecasts of future events. These statements can be identified
by the fact that they do not relate strictly to historic or current facts. They
use words such as "anticipate," "estimate," "expect," "project," "intend,"
"plan," "believe," and other words and terms of similar meaning in connection
with any discussion of future operating or financial performance. In particular,
these forward-looking statements include statements relating to future actions
or the outcome of financial results. From time to time, Nextera also may provide
oral or written forward-looking statements in other materials released to the
public. Any or all of the forward-looking statements in this quarterly report
and in any other public statements may turn out to be incorrect. They can be
affected by inaccurate assumptions or by known or unknown risks and
uncertainties. Consequently, no forward-looking statement can be guaranteed.
Actual results may vary materially.
Such forward-looking statements are based on many factors that may be
outside Nextera's control, causing actual results to differ materially from
those suggested. Such factors include, but are not limited to, Nextera's limited
operating history, dependence on key personnel, attracting and retaining
qualified consultants, new business solicitation efforts, intense competition,
risks of acquisitions, regulatory changes, and changes in technology. Further
information on these and other potential factors that could affect Nextera's
financial and operating results are included in Nextera's filings with the
Securities and Exchange Commission. New risk factors emerge from time to time,
and it is not possible for Nextera to predict all such risk factors nor can it
assess the impact of all such risk factors on the Company's business or the
extent to which any factor or combination of factors may cause actual results to
differ materially from those contained in any forward-looking statements. Given
these risks and uncertainties, investors should not place undue reliance on
forward-looking statements as a prediction of actual results.
OVERVIEW
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 three 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.
9
<PAGE> 11
The Company's portfolio of practice areas includes Strategy and
Research Services, Human Capital Services, and Information Technology Consulting
and Process Transformation 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 focuses
research on a number of issues of client concern. 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 and Process Transformation Services practice
area 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. Additionally, it also helps clients to solve
complex operational issues through major business transformation programs,
redesigned business processes, and best practices.
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.
10
<PAGE> 12
SEQUENTIAL QUARTERLY TRENDS AND 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 Company's annual 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>
FOR THE THREE MONTHS ENDED
---------------------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
1998 1998 1998 1998 1999 1999 1999
------- ------- ------------ ----------- -------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 8,186 $13,909 $17,486 $28,009 $36,145 $36,519 $40,094
Cost of revenues 5,623 9,315 12,641 17,406 20,512 20,470 22,755
------- ------- ------- ------- ------- ------- -------
Gross profit 2,563 4,594 4,845 10,603 15,633 16,049 17,339
Selling, general and
administrative expenses 2,886 4,410 7,279 8,528 10,154 10,594 11,531
Amortization expense 224 344 466 688 1,034 1,156 1,243
Restructuring costs -- -- 967 331 -- -- --
Compensation expense --
Other -- -- -- 6,671 4,384 1,705 --
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations (547) (160) (3,867) (5,615) 61 2,594 4,565
Interest expense, net (1,567) (1,104) (1,648) (2,404) (3,783) (2,591) (1,222)
------- ------- ------- ------- ------- ------- -------
Income (loss) before
provision for income taxes (2,114) (1,264) (5,515) (8,019) (3,722) 3 3,343
Provision for income taxes 125 75 -- 43 -- 2 --
------- ------- ------- ------- ------- ------- -------
Net income (loss) $(2,239) $(1,339) $(5,515) $(8,062) $(3,722) $ 1 $ 3,343
======= ======= ======= ======= ======= ======= =======
</TABLE>
The following table sets forth, for periods indicated, the percentage
relationship to net revenues of the Company's results of operations.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
--------------------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
1998 1998 1998 1998 1999 1999 1999
-------- ------- ------------ ----------- -------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues 100% 100% 100% 100% 100% 100% 100%
Cost of revenues 69 67 72 62 57 56 57
--- --- --- --- --- --- ---
Gross profit 31 33 28 38 43 44 43
Selling, general and
administrative expenses 35 32 42 30 28 29 29
Amortization expense 3 2 3 2 3 3 3
Restructuring costs -- -- 6 1 -- -- --
Compensation expense --
Other -- -- -- 24 12 5 --
--- --- --- --- --- --- ---
Income (loss) from operations (7) (1) (22) (20) -- 7 11
Interest expense, net (19) (8) (9) (9) (10) (7) (3)
--- --- --- --- --- --- ---
Income (loss) before
provision for income taxes (26) (9) (32) (29) (10) -- 8
Provision for income taxes 1 1 -- -- -- -- --
--- --- --- --- --- --- ---
Net income (loss) (27)% (10)% (32)% (29)% (10)% 0% 8%
=== === === === === === ===
</TABLE>
11
<PAGE> 13
RESULTS OF OPERATIONS
In light of the number and significance of acquisitions completed since
January 1, 1998, management has decided to present a comparison of results for
(i) the three months ended September 30, 1999 versus the three months ended June
30, 1999 and (ii) the three months ended June 30, 1999 versus the three months
ended March 31, 1999 and (iii) the three months ended March 31, 1999 versus the
three months ended December 31, 1998 because it believes that such comparisons
are the most meaningful presentation of the Company's financial results.
All acquisitions completed by Nextera have been accounted for under the
purchase method of accounting. Accordingly, the Consolidated Financial
Statements of the Company include operating results of the acquired companies
only from the effective date of each respective acquisition.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1999 AND THREE MONTHS ENDED
JUNE 30, 1999
Net Revenues. Net revenues increased 10% to $40.1 million for the three
months ended September 30, 1999 from $36.5 million for the three months ended
June 30, 1999. This increase was primarily attributable to an increase in
e-commerce and e-business revenues and to the inclusion of revenues generated by
ERG, which was acquired effective June 1, 1999, offset in part by a reduction in
revenues related to enterprise resource planning ("ERP") services performed
during the quarter.
Gross Profit. Gross profit increased 8.0% to $17.3 million for the
three months ended September 30, 1999 from $16.0 million for the three months
ended June 30, 1999. Gross margin as a percentage of sales decreased to 43.2%
for the three months ended September 30, 1999 from 43.9% for the three months
ended June 30, 1999. The decrease in gross margin was due primarily to lower
chargeability from junior level resources due to seasonal training and vacation
schedules.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 8.8% to $11.5 million for the three months
ended September 30, 1999 from $10.6 million for the three months ended June 30,
1999. As a percentage of revenues, such expenses decreased slightly to 28.8% for
the three months ended September 30, 1999 from 29.0% for the three months ended
June 30, 1999.
Interest Expense, Net. Interest expense, net decreased to $1.2 million
for the three months ended September 30, 1999 from $2.6 million for the three
months ended June 30, 1999. This decrease was due primarily to the repayment of
a portion of the Company's outstanding indebtedness with the proceeds from the
Company's initial public offering of Class A Common Stock, which was completed
on May 21, 1999.
Compensation Expense - Other. The Company recorded a non-cash
compensation expense of $1.7 million in the three months ended June 30, 1999,
which represented the difference between the fair value of fully-vested options
granted to certain non-stockholder employees of Lexecon on the date of grant of
$10.00 per share, and the $1.50 exercise price of the options.
12
<PAGE> 14
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 AND THREE MONTHS ENDED
MARCH 31, 1999
Net Revenues. Net revenues increased to $36.5 million for the three
months ended June 30, 1999 from $36.1 million for the three months ended March
31, 1999. This increase was primarily attributable to an increase in e-commerce
and e-business revenues and to the inclusion of revenues generated by ERG, which
was acquired effective June 1, 1999, offset in part by a reduction in revenues
related to ERP services performed during the quarter. As a result of the reduced
demand for ERP services, the Company utilized a lower level of outside
contractors during the three months ended June 30, 1999.
Gross Profit. Gross profit increased 2.6% to $16.0 million for the
three months ended June 30, 1999 from $15.6 million for the three months ended
March 31, 1999. Gross margin as a percentage of sales increased to 43.9% for the
three months ended June 30, 1999 from 43.3% for the three months ended March 31,
1999. The increase in gross margin was due primarily to higher margins on
e-commerce and e-business services than those earned on ERP-related business.
The Company has historically utilized subcontractors to perform a significant
portion of ERP services and, in most instances, has recorded lower gross margins
on revenue related to such subcontracted services than on work performed by
internal consultant resources.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 4.3% to $10.6 million for the three months
ended June 30, 1999 from $10.2 million for the three months ended March 31,
1999. As a percentage of revenues, such expenses increased slightly to 29.0% for
the three months ended June 30, 1999 from 28.1% for the three months ended March
31, 1999.
Interest Expense, Net. Interest expense, net decreased to $2.6 million
for the three months ended June 30, 1999 from $3.8 million for the three months
ended March 31, 1999. This decrease was due primarily to the repayment of a
portion of the Company's outstanding indebtedness with the proceeds from the
Company's initial public offering of Class A Common Stock, which was completed
on May 21, 1999.
Compensation Expense - Other. The Company granted to certain
non-stockholder employees of Lexecon fully-vested options to purchase 197,760
shares of Class A Common Stock at an exercise price of $1.50 per share effective
as of May 1999. The Company recorded an expense of $1.7 million in the three
months ended June 30, 1999, which represented the difference between the fair
value of the options on the date of grant of $10.00 per share, and the exercise
price of the options.
In March 1999, the Company granted to certain non-employee consultants
of Lexecon fully-vested options to purchase 445,245 shares of Class A Common
Stock at an exercise price of $14.00 per share. The Company recorded a non-cash
compensation charge of $4.4 million related to the grant of these options in the
three months ended March 31, 1999.
13
<PAGE> 15
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 AND THREE MONTHS ENDED DECEMBER
31, 1998
Net Revenues. Net revenues increased 29.1% to $36.1 million for the
three months ended March 31, 1999 from $28.0 million for the three months ended
December 31, 1998. This increase was primarily attributable to the inclusion of
revenues generated by Lexecon, which was acquired effective December 31, 1998,
and by Alexander, which was acquired effective January 29, 1999.
Gross Profit. Gross profit increased 47.4% to $15.6 million for the
three months ended March 31, 1999 from $10.6 million for the three months ended
December 31, 1998. Gross margin as a percentage of sales increased to 43.3% for
the three months ended March 31, 1999 from 37.9% for the three months ended
December 31, 1998. The increase in gross profit and gross margin was due
primarily to the acquisition of Lexecon (the "Lexecon Acquisition").
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 19.1% to $10.2 million for the three months
ended March 31, 1999 from $8.5 million for the three months ended December 31,
1998. As a percentage of revenues, such expenses decreased to 28.1% for the
three months ended March 31, 1999 from 30.4% for the three months ended December
31, 1998. The dollar increase was due primarily to the inclusion of the Lexecon
Acquisition for the three months ended March 31, 1999, offset in part by the
inclusion in the three months ended December 31, 1998 of $0.4 million of a
supplemental management fee charged by Knowledge Universe, Inc.
("Knowledge Universe").
Interest Expense, Net. Interest expense, net increased to $3.8 million
for the three months ended March 31, 1999 from $2.4 million for the three months
ended December 31, 1998. This increase was due primarily to borrowings incurred
to fund the Lexecon Acquisition.
Restructuring. During the three months ended December 31, 1998 the
Company recorded restructuring costs of $0.3 million related to severance
obligations incurred in connection with the combination of two of the Company's
operating subsidiaries, Symmetrix, Inc. ("Symmetrix") and SiGMA, into NBPSG.
Compensation Expense - Other. The Company granted to certain
non-employee consultants of Lexecon options to purchase 445,245 shares of Class
A Common Stock at an exercise price of $14.00 per share in March 1999. Such
options were fully-vested upon grant. The Company accounted for the issuance of
such options in accordance with EITF 96-18 and recorded 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
Consolidated working capital was $5.1 million on September 30, 1999,
compared with a working capital deficit of $65.8 million on December 31, 1998.
Included in working capital were cash and cash equivalents of $5.3 million and
$1.5 million on September 30, 1999 and December 31, 1998, respectively. The
increase in working capital was primarily attributable to
14
<PAGE> 16
the completion of the Company's initial public offering on May 21, 1999, which
resulted in net proceeds to the Company of $103.0 million. A portion of such
proceeds were used to retire amounts outstanding under a short-term bridge loan,
with the balance used to repay a portion of the Company's outstanding long-term
indebtedness and certain management and initial public offering fees.
Net cash provided by operating activities was $5.6 million for the nine
months ended September 30, 1999. The primary components of net cash provided by
operating activities were a net loss of $0.4 million and an increase in accounts
receivables and costs and estimated earnings in excess of billings of $8.0
million, offset by depreciation and amortization expense of $5.7 million, a
non-cash compensation charge of $6.0 million and a decrease in prepaid expenses
of $2.0 million.
Net cash used in investing activities was $17.7 million for the nine
months ended September 30, 1999. The primary components of cash used in
investing activities were the acquisitions of Alexander in January 1999, the
acquisition of ERG in June 1999, the acquisition of SCCAP in September 1999 and
the payment of an earnout to the former owners of Pyramid in aggregate totaling
$14.0 million, exclusive of $0.3 million of cash acquired, and expenditures of
$3.7 million for furniture, equipment and leasehold improvements.
Net cash provided by financing activities was $15.9 million for the
nine months ended September 30, 1999. The primary components of cash generated
from financing activities were $103.0 million of net proceeds from the
completion of the Company's initial public offering of common stock, offset by
$79.6 million of cash utilized to repay bridge loan borrowings and $25.6 million
of cash utilized to repay a portion of the Company's outstanding indebtedness.
Additionally, borrowings under notes payables to banks totaled $15.7 million, of
which $14.0 million was incurred in connection with acquisitions completed
during 1999.
The Company has an aggregate borrowing capacity of $30.0 million under
a Discretionary Demand Credit Facility as of September 30, 1999. Interest on the
Discretionary Demand Credit Facility is based on the lender's base rate, which
was 8.25% as of September 30, 1999. This facility has a final maturity date of
January 5, 2000. As of September 30, 1999, the Company had borrowings
outstanding under this facility totaling $21.9 million. This facility is secured
by substantially all of the Company's assets.
Effective September 29, 1999, Nextera signed a letter of intent to
acquire the business and assets of a consulting firm that provides economic
consulting services. Subject to the satisfaction of certain conditions
precedent, the consulting firm will be acquired for approximately $10.5 million
in cash. No assurances 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.
Nextera believes that cash flow from operations, along with available
borrowings under the Discretionary Demand Credit Facility, will be sufficient to
meet short-term liquidity requirements, excluding cash which may be required for
future acquisitions. The Company intends to replace the Discretionary Demand
Credit Facility with a new arrangement to provide working capital and financing
for potential acquisitions. Towards this end, the Company has executed a
commitment letter and term sheet with BankBoston,
15
<PAGE> 17
N.A., Bank of America, N.A., BancBoston Robertson Stephens Inc. ("BRS") and Banc
of America Securities LLC ("BancAmerica") for a committed revolving credit and
acquisition facility of $55 million. Additionally, BRS and BancAmerica have
agreed to use reasonable best efforts to syndicate the credit facility to other
lenders willing to increase the credit facility from $55 million to up to $80
million. If this new credit facility is consummated, the Company would become
subject to certain restrictive covenants relating to maintenance of financial
ratios, restrictions on indebtedness and permitted acquisitions, operating
restrictions and restrictions on the payment of dividends to the Company's
stockholders. There can be no assurances that the Company will be successful in
securing such a facility, 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
assurances 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 dates beginning on or
after January 1, 2000 from dates beginning prior to January 1, 2000. 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 its subsidiaries, for Year 2000 compliance. The Company
relies upon microprocessor-based personal computers and commercially available
applications software. Nextera is in the process of upgrading its existing
computer software and IT systems as well as those of its subsidiaries. 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 its subsidiaries, 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
16
<PAGE> 18
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 September 30, 1999, 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.
17
<PAGE> 19
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Interest Rate Risk
Nextera is exposed to changes in interest rates primarily from its
Demand Discretionary Credit Facility. Nextera does not currently use interest
rate derivative instruments to manage exposure to interest rate changes. A
hypothetical 100 basis point adverse move in interest rates along the interest
rate yield curve would not have a material adverse effect on interest sensitive
financial instruments at September 30, 1999.
Foreign Currency Risk
Currently, the majority of Nextera's sales and expenses are denominated
in U.S. dollars and as a result the Company has not experienced significant
foreign exchange gains and losses to date. While Nextera is conducting some
transactions in foreign currencies during 1999, the Company does not anticipate
that foreign exchange gains or losses will be significant. Nextera has not
engaged in foreign currency hedging activities to date.
PART II. Other Information
Item 2. Changes in Securities and Use of Proceeds
Effective July 15, 1999, Nextera issued 53,333 shares of Class A Common
Stock to the former stockholders of Pyramid pursuant to earn-out provisions in
connection with the acquisition of Pyramid and upon the achievement of certain
revenue and pre-tax profit targets during the twelve months ended March 31,
1999. 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. The foregoing transaction did not involve a distribution or
public offering. Nextera did not engage any underwriters in connection with the
foregoing transaction and did not pay any underwriting discounts or commissions.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company
during the three months ended September 30, 1999.
18
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEXTERA ENTERPRISES, INC.
(Registrant)
Date: November 12, 1999 By: /s/ Steven B. Fink
-------------------------------------
Steven B. Fink
President and Chief Executive Officer
(Principal Executive Officer)
NEXTERA ENTERPRISES, INC.
(Registrant)
Date: November 12, 1999 By: /s/ Michael P. Muldowney
-------------------------------------
Michael P. Muldowney
Chief Financial Officer
(Principal Financial and Accounting
Officer)
19
<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
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