Nextra Enterprises, Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended September 30, 2005 |
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission File Number 0-25995
NEXTERA ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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95-4700410
(I.R.S. Employer
Identification Number) |
One Exeter Plaza
699 Boylston Street,
Boston, Massachusetts 02116
(Address of principal executive office, including zip code)
(617) 262-0055
(Registrants 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 þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in rule
12b-2 of the Exchange Act).
Yes o No þ
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of
the Exchange Act).
Yes þ No o
As of October 31, 2005 there were 30,025,441 shares of $0.001 par value Class A Common Stock
outstanding and 3,844,200 shares of $0.001 par value Class B Common Stock outstanding.
NEXTERA ENTERPRISES, INC.
Quarterly Report on Form 10-Q
for the Quarter Ended September 30, 2005
INDEX
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Nextera Enterprises, Inc.
Condensed Consolidated Balance Sheets
(Dollar amounts in thousands, except per share data; unaudited)
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September 30, |
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December 31, |
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2005 |
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2004 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
15,312 |
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$ |
16,713 |
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Prepaid expenses and other current assets |
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231 |
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474 |
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Total current assets |
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15,543 |
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17,187 |
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Property and equipment, net |
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26 |
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39 |
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Other assets |
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47 |
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Total assets |
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$ |
15,616 |
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$ |
17,226 |
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Accounts payable and accrued expenses |
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$ |
736 |
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$ |
843 |
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Current portion of long-term debt |
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337 |
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258 |
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Total current liabilities |
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1,073 |
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1,101 |
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Long-term debt |
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391 |
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470 |
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Other long-term liabilities |
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400 |
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400 |
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Commitments and contingencies |
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Stockholders equity: |
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Preferred Stock, $0.001 par value,
10,000,000 shares authorized, 600,000
authorized shares designated Series A,
48,072 and 45,619 Series A issued and
outstanding at September 30, 2005 and
December 31, 2004, respectively |
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4,807 |
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4,562 |
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Class A Common Stock, $0.001 par value,
95,000,000 shares authorized, 30,025,441
shares issued and outstanding at
September 30, 2005 and December 31, 2004 |
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30 |
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30 |
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Class B Common Stock, $0.001 par value,
4,300,000 shares authorized, 3,844,200
shares issued and outstanding at
September 30, 2005 and December 31, 2004 |
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4 |
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4 |
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Additional paid-in capital |
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161,212 |
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161,453 |
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Accumulated deficit |
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(152,301 |
) |
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(150,794 |
) |
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Total stockholders equity |
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13,752 |
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15,255 |
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Total liabilities and stockholders equity |
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$ |
15,616 |
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$ |
17,226 |
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See Notes to Condensed Consolidated Financial Statements
3
Nextera Enterprises, Inc.
Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share amounts; unaudited)
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Three Months Ended |
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September 30 |
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2005 |
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2004 |
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Net revenues |
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$ |
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$ |
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Cost of revenues |
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Gross profit |
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Selling, general and administrative expenses |
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491 |
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662 |
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Operating loss |
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(491 |
) |
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(662 |
) |
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Interest income, net |
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64 |
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44 |
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Other expense |
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(142 |
) |
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Loss from continuing operations before income taxes |
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(569 |
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(618 |
) |
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Provision for income taxes |
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6 |
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Loss from continuing operations |
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(575 |
) |
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(618 |
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Income from discontinued operations |
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19 |
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Net loss |
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(556 |
) |
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(618 |
) |
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Preferred stock dividends |
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(84 |
) |
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(78 |
) |
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Net loss applicable to common stockholders |
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$ |
(640 |
) |
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$ |
(696 |
) |
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Net loss per common share, basic and diluted |
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Continuing operations |
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$ |
(0.02 |
) |
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$ |
(0.02 |
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Discontinued operations |
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Net loss per common share, basic and diluted |
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$ |
(0.02 |
) |
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$ |
(0.02 |
) |
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Weighted average common shares outstanding, basic and diluted |
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33,870 |
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33,870 |
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See Notes to Condensed Consolidated Financial Statements
4
Nextera Enterprises, Inc.
Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share amounts; unaudited)
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Nine Months Ended |
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September 30 |
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2005 |
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2004 |
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Net revenues |
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$ |
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$ |
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Cost of revenues |
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Gross profit |
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Selling, general and administrative expenses |
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1,623 |
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2,113 |
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Operating loss |
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(1,623 |
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(2,113 |
) |
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Interest income, net |
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182 |
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127 |
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Other expense |
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(179 |
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Loss from continuing operations before income taxes |
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(1,620 |
) |
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(1,986 |
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Provision for income taxes |
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18 |
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Loss from continuing operations |
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(1,638 |
) |
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(1,986 |
) |
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Income from discontinued operations |
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131 |
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Net loss |
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(1,507 |
) |
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(1,986 |
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Preferred stock dividends |
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(245 |
) |
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(229 |
) |
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Net loss applicable to common stockholders |
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$ |
(1,752 |
) |
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$ |
(2,215 |
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Net loss per common share, basic and diluted |
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Continuing operations |
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$ |
(0.06 |
) |
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$ |
(0.07 |
) |
Discontinued operations |
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0.00 |
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Net loss per common share, basic and diluted |
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$ |
(0.05 |
) |
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$ |
(0.07 |
) |
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Weighted average common shares outstanding, basic and diluted |
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33,870 |
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33,870 |
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See Notes to Condensed Consolidated Financial Statements
5
Nextera Enterprises, Inc.
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands; unaudited)
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Nine Months Ended September 30 |
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2005 |
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2004 |
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Operating activities |
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Net loss |
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$ |
(1,507 |
) |
|
$ |
(1,986 |
) |
Adjustments to reconcile net loss to net cash
used in operating activities: |
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Depreciation and amortization |
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13 |
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11 |
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Reversal of allowance |
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(131 |
) |
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Non-cash other |
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4 |
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4 |
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Change in operating assets and liabilities: |
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Accounts receivable |
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528 |
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Prepaid expenses and other assets |
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90 |
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607 |
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Accounts payable and accrued expenses |
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(107 |
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(2,370 |
) |
Restructuring costs |
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(173 |
) |
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Net cash used in operating activities |
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(1,638 |
) |
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(3,379 |
) |
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Investing activities |
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Purchase of property and equipment |
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(40 |
) |
Proceeds from sale of business |
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237 |
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|
828 |
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Net cash provided by investing activities |
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237 |
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788 |
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Net decrease in cash and cash equivalents |
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(1,401 |
) |
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(2,591 |
) |
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Cash and cash equivalents at beginning of period |
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16,713 |
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20,124 |
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Cash and cash equivalents at end of period |
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$ |
15,312 |
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$ |
17,553 |
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See Notes to Condensed Consolidated Financial Statements
6
NEXTERA ENTERPRISES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Nextera Enterprises, Inc.
(Nextera or the Company) have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments) considered necessary for a
fair presentation have been included. Operating results for the three and nine-month periods ended
September 30, 2005 are not necessarily indicative of the results that may be expected for the year
ending December 31, 2005.
The balance sheet as of December 31, 2004 has been derived from the audited financial statements at
that date but does not include all of the information and footnotes required by U.S. 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 managements discussion and analysis of financial condition and results of
operations, contained in the Companys Annual Report on Form 10-K filed by the Company with the
Securities and Exchange Commission on March 25, 2005.
On November 28, 2003, Nextera Enterprises, Inc. sold substantially all of the assets Lexecon and
its subsidiaries used in their economic consulting business (Asset Sale) to FTI Consulting, Inc.
and LI Acquisition Company, LLC, a wholly owned subsidiary of FTI (collectively, FTI). As of
September 30, 2005 and December 31, 2004, Nextera had no business operations.
Krest, LLC (successor to Knowledge Universe, LLC and Knowledge Universe, Inc.) controls a majority
of the voting power of our equity securities through its ownership of our Class A Common Stock,
Class B Common Stock and Series A Cumulative Preferred Stock.
Note 2. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries.
Significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. 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.
7
NEXTERA ENTERPRISES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Stock-Based Compensation and Other Equity Instruments
The Company has adopted the disclosure standards of Statement of Financial Accounting Standards No.
148, Stock-Based Compensation Transition and Disclosure- an amendment of FASB Statement No. 123
(SFAS 148). SFAS 148 amends Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123) to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based compensation and also amends
the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results.
As allowed under SFAS 123 and SFAS 148, 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, if the exercise price
of the Companys employee stock options equals or exceeds the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
If the Company had adopted the optional recognition provisions of SFAS 123, as amended by SFAS 148,
for its stock option plans, net loss and net loss per common share would have been changed to the
pro forma amounts indicated below:
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Three months ended |
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Nine months ended |
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September 30 |
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September 30 |
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2005 |
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2004 |
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2005 |
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2004 |
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(Amounts in thousands, except per share data) |
Net loss as reported |
|
$ |
(556 |
) |
|
$ |
(618 |
) |
|
$ |
(1,507 |
) |
|
$ |
(1,986 |
) |
Compensation
expense under SFAS 123 |
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|
(43 |
) |
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|
(278 |
) |
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|
(136 |
) |
|
|
(850 |
) |
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|
Pro forma net loss |
|
$ |
(599 |
) |
|
$ |
(896 |
) |
|
$ |
(1,643 |
) |
|
$ |
(2,836 |
) |
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Net loss per
common share, basic
and diluted: |
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As reported |
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.07 |
) |
|
|
|
Pro forma |
|
$ |
(0.02 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.09 |
) |
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|
The weighted average fair value of options granted during 2005 and 2004 were $0.26 and $0.38,
respectively, at the date of the grants. The 2004 options were granted at an exercise price below
the Companys stock price on the day of the grant. Accordingly, a nominal compensation charge is
being recorded in the financial statements over the vesting period. The fair values of options
were estimated using the Black-Scholes option pricing model utilizing the following assumptions:
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2005 |
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2004 |
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|
Risk-free interest rates |
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|
3.50 |
% |
|
|
3.75 |
% |
Expected lives (years) |
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|
4 |
|
|
|
6 |
|
Expected volatility |
|
|
80 |
% |
|
|
121 |
% |
Dividend rate |
|
|
0 |
% |
|
|
0 |
% |
8
NEXTERA ENTERPRISES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Recently Issued Accounting Pronouncements
In December of 2004, The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 123 (revised 2004), Share Based Payment (SFAS 123R) which revises SFAS
123 and supersedes APB 25. SFAS 123R requires that all share-based payments to employees,
including grants of employee stock options, be recognized in the financial statements based on
their fair value. The pro forma disclosures previously permitted under SFAS 123 will no longer be
an alternative to financial statement recognition. The cost will be recognized in the financial
statements over the period during which the employee is required to provide the service.
On April 14, 2005 the U.S. Securities and Exchange Commission (the SEC) announced a deferral of
the effective date of SFAS 123R for calendar year companies until the beginning of 2006. The
Company is in the process of analyzing FAS 123R and expects to implement this new statement in the
first quarter of 2006.
Note 3. Basic and Diluted Net Income (Loss) per Common Share
Basic net income (loss) per share (basic EPS) is computed by dividing income (loss) from
continuing operations applicable to common
stockholders and net income (loss) applicable to common
stockholders by the weighted average number of common shares outstanding. Diluted net income
(loss) per common share (diluted EPS) is the same as the basic loss per share for the three and
nine-month periods ended September 30, 2005 and 2004 as the computation of diluted income (loss)
per share would have an anti-dilutive effect on loss per share.
Basic and diluted loss per share were calculated as follows:
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|
|
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|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(dollar amounts in thousands, except per share data) |
|
Loss from continuing operations |
|
$ |
(575 |
) |
|
$ |
(618 |
) |
|
$ |
(1,638 |
) |
|
$ |
(1,986 |
) |
Preferred stock dividends |
|
|
(84 |
) |
|
|
(78 |
) |
|
|
(245 |
) |
|
|
(229 |
) |
|
|
|
Loss from continuing operations
applicable to common stockholders |
|
|
(659 |
) |
|
|
(696 |
) |
|
|
(1,883 |
) |
|
|
(2,215 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
19 |
|
|
|
|
|
|
|
131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common
stockholders
|
|
$ |
(640 |
) |
|
$ |
(696 |
) |
|
$ |
(1,752 |
) |
|
$ |
(2,215 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstandingbasic and diluted |
|
|
33,870 |
|
|
|
33,870 |
|
|
|
33,870 |
|
|
|
33,870 |
|
|
|
|
9
NEXTERA ENTERPRISES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
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Three Months Ended |
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Nine Months Ended |
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|
September 30, |
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|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
|
Basic and diluted net loss per
common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.07 |
) |
Income from discontinued operations |
|
|
0.00 |
|
|
|
|
|
|
|
0.00 |
|
|
|
|
|
|
|
|
Net loss per common share, basic
and diluted |
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.07 |
) |
|
|
|
Due to rounding differences, the aggregate net loss per common share for the nine months ended
September 30, 2005 and the net loss per common share from continuing operations for the nine months
ended September 30, 2005 do not equal.
Note 4. Special Charges
Accrued restructuring charges and their utilization for the period presented are summarized as
follows (in thousands):
|
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|
|
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|
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Utilized |
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|
Balance at |
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|
|
Balance at |
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|
|
|
|
|
|
|
|
September 30, |
|
|
|
December 31, 2003 |
|
|
Non-Cash |
|
|
Cash |
|
|
2004 |
|
|
|
|
Severance |
|
$ |
77 |
|
|
$ |
|
|
|
$ |
77 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities |
|
|
45 |
|
|
|
|
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|
|
45 |
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|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
Operating lease obligations |
|
|
51 |
|
|
|
|
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
$ |
173 |
|
|
$ |
|
|
|
$ |
173 |
|
|
$ |
|
|
|
|
|
Note
5. Income Taxes
No federal tax benefit was recorded for the three and nine-month periods ended September 30, 2005
and 2004 due to the Companys uncertainty associated with utilizing its net operating losses. The
Company did record de minimis state tax expense for the nine month period ended September 30, 2005.
Note
6. Comprehensive Income (loss)
Comprehensive income (loss) combines net income (loss) and other comprehensive items which
represent certain amounts that are reported as components of stockholders equity in the
accompanying balance sheet. For the three and nine-month periods ended September 30, 2005, the
Company did not have any other comprehensive items; thus, comprehensive loss equaled net loss.
During the three and nine-month periods ended September 30, 2004, comprehensive loss was $0.6
million and $1.8 million, respectively.
10
NEXTERA ENTERPRISES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
7. Commitments and Contingencies
The Company, from time to time, is subject to certain asserted claims arising in the ordinary
course of business. The Company intends to vigorously assert its rights and defend itself in any
litigation that may arise from such claims. While the ultimate outcome of these matters could
affect the results of operations of any one quarter or year when resolved in future periods, and
while there can be no assurance with respect thereto, management believes that after final
disposition, any financial impact to the Company would not be material to the Companys financial
position and results of operations or liquidity.
In connection with the 2003 sale of the Companys economic consulting business, the Company agreed
to indemnify FTI for a number of matters including the breach of its representations, warranties
and covenants contained in the Asset Purchase Agreement. These representations, warranties and
covenants related to organization, corporate, financial statement, business, operational, tax,
legal, insurance, intellectual property, title to assets, employee, labor, leases, environmental,
record keeping, contracts, permits, licenses, authorizations, solvency, cooperation and other
matters. A breach or inaccuracy of any of these representations, warranties and covenants could
lead to an indemnification claim by FTI against the Company. Any such indemnification claims could
require the Company to pay substantial sums and incur related costs and expenses and have a
material adverse effect on our liquidity, financial condition, future prospects and ability to
acquire a new operating business.
11
NEXTERA ENTERPRISES, INC.
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The disclosure and analysis in this quarterly report contain forward-looking statements.
Forward-looking statements give our current expectations or forecasts of future events. These
statements can be identified by the fact that they do not relate strictly to historic or current
facts. They use words such as anticipate, estimate, expect, project, intend, plan,
believe, and other words and terms of similar meaning in connection with any discussion of future
operating or financial performance. In particular, these forward-looking statements include
statements relating to future actions or the outcome of financial results. From time to time, we
also may provide oral or written forward-looking statements in other materials released to the
public. Any or all of the forward-looking statements in this quarterly report and in any other
public statements may turn out to be incorrect. They can be affected by inaccurate assumptions or
by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be
guaranteed. Actual results may vary materially.
Forward-looking statements are based on many factors that may be outside our control, causing
actual results to differ materially from those suggested. These factors include, but are not
limited to, those disclosed below under the heading Factors That May Affect Our Future
Performance. New factors emerge from time to time, and it is not possible for us to predict all
these factors nor can we assess the impact of these factors on our business or the extent to which
any factor or combination of factors may cause actual results to differ materially from those
contained in any forward-looking statements. Given these risks and uncertainties, you should not
place undue reliance on forward-looking statements as a prediction of actual results.
OVERVIEW
Nextera Enterprises, Inc. (Nextera or the Company) was formed in 1997 and focused on building a
portfolio of consulting companies through multiple acquisitions. The Company formerly offered
services in three practice areas: technology consulting, human capital consulting, and economic
consulting. The technology consulting business was exited during the latter half of 2001 and the
human capital consulting business was sold on January 30, 2002. On November 28, 2003, Nextera and
its direct and indirect subsidiaries, Lexecon Inc., CE Acquisition Corp. and ERG Acquisition Corp.,
sold substantially all of the assets Lexecon and its subsidiaries used in their economic consulting
business (Asset Sale) to FTI Consulting, Inc. and LI Acquisition Company, LLC, a wholly owned
subsidiary of FTI Consulting, Inc. (collectively, FTI) in accordance with the terms of an asset
purchase agreement dated September 25, 2003 (Asset Purchase Agreement).
As a result of the Asset Sale, Nextera ceased to have business operations. The continuing
operations in the financial statements consist of operating expenses incurred in operating the
corporate entity. Selling, general and administrative expenses consist primarily of salaries and
benefits of certain senior management and other administrative personnel, director fees, insurance,
legal, professional, marketing, and promotional costs, and facility costs. These expenses are
associated with our efforts to identify and develop new business operations and with our
management, finance, marketing and administrative activities.
We are currently actively engaged in the process of identifying acquisition candidates and related
activities. We have retained a financial advisor to assist in these efforts.
Our tax provision has historically varied from the federal statutory rate of 34% predominately due
to deferred tax valuation allowance adjustments, the utilization of net operating losses, and state
and local taxes.
12
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2005 AND THREE MONTHS ENDED
SEPTEMBER 30, 2004
Selling, General and Administrative Expenses. Selling, general and administrative expenses
decreased 25.8%, or $0.2 million, to $0.5 million for the three months ended September 30, 2005
from $0.7 million for the three months ended September 30, 2004. The decrease in selling, general
and administrative expenses from the third quarter of 2004 was primarily attributed to a decrease
in insurance expense, due to a softening of the insurance markets along with reductions in coverage
coupled with insurance refunds, and a decrease in legal and audit expenses due to decreases in
outsourced professional services. The Company anticipates that selling, general, and
administrative expenses will approximate $0.5 million per quarter under the Companys current
structure. If the Company acquires a business during 2005, it is expected that the selling,
general, and administrative expenses will materially exceed the $0.5 million per quarter.
Interest Income, Net. Interest income, net increased 45.5% to $0.06 million for the three
months ended September 30, 2005 from $0.04 million for the three months ended September 30, 2004.
The increase was due in part to the elimination of minor interest expense charges in 2005 that
existed in 2004.
Other Expense. Other expense was $0.14 million for the three months ended September 30, 2005.
Such expenses were incurred for costs paid to third parties in connection with the evaluation of
potential business acquisition opportunities.
Income Taxes. No federal tax benefit was recorded for the three months ended September 30,
2005 and 2004 due to the Companys uncertainty associated with utilizing its net operating losses.
The Company did record de minimis state tax expense for the three month period ended September 30,
2005.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2005 AND NINE MONTHS ENDED
SEPTEMBER 30, 2004
Selling, General and Administrative Expenses. Selling, general and administrative expenses
decreased 23.2%, or $0.5 million, to $1.6 million for the nine months ended September 30, 2005 from
$2.1 million for the nine months ended September 30, 2004. The decrease in selling, general and
administrative expenses from the first nine months of 2004 was primarily attributed to a decrease
of $0.3 million in insurance expenses due to a softening of the insurance markets, reductions in
coverage, coupled with an insurance refund and a $0.2 million decrease in compensation expense and
professional fees which were attributed to decreases in the number of employees, directors, and
outsourced professional services. The Company anticipates that selling, general, and
administrative expenses will approximate $0.5 million per quarter under the Companys current
structure. If the Company acquires a business during 2005, it is expected that the selling,
general, and administrative expenses will materially exceed the $0.5 million per quarter.
Interest Income, Net. Interest income, net increased from $0.13 million for the nine months
ended September 30, 2004 to $0.18 million for the nine months ended September 30, 2005. The
increase was due in part to the elimination of minor interest expense charges in 2005 that existed
in 2004.
Other Expense. Other expense was $0.18 million for the nine months ended September 30, 2005.
Such expenses were incurred for costs paid to third parties in connection with the evaluation of
potential business acquisition opportunities.
Income Taxes. No federal tax benefit was recorded for the nine months ended September 30, 2005
and 2004 due to the Companys uncertainty associated with utilizing its net operating losses. The
Company did record de minimis state tax expense for the nine month period ended September 30, 2005.
13
LIQUIDITY AND CAPITAL RESOURCES
Consolidated working capital was $14.5 million on September 30, 2005, compared with working capital
of $16.1 million on December 31, 2004. Included in working capital were cash and cash equivalents
of $15.3 million and $16.7 million on September 30, 2005 and December 31, 2004, respectively.
Net cash used in operating activities was $1.6 million for the nine months ended September 30,
2005. The primary component of net cash used in operating activities was the net loss of $1.5
million, a decrease in accounts payable of $0.1 million, a $0.1 million increase in prepaid
expenses and $0.1 million from the reversal of an allowance for funds that were held in escrow.
Net cash provided by investing activities was $0.2 million for the nine months ended September 30,
2005 relating to the partial collection of the Asset Sale proceeds that were held in escrow. The
Company anticipates that its capital expenditures for 2005 will be immaterial, unless it acquires
business operations. In such case, capital expenditures may be materially increased.
The Companys primary source of liquidity is cash on hand. The Company believes that its current
cash on hand is sufficient to meet all expenditures over the next twelve months. The Company is in
the process of identifying opportunities to acquire one or more operating businesses and expects
that it will use a combination of cash on hand, third party debt, and the Companys equity
securities to acquire any such on-going businesses or operations. We believe that additional
liquidity sources, if necessary, could be obtained by borrowing funds from a third party or raising
equity through a public or private transaction.
Critical Accounting Policies
Our Condensed Consolidated Financial Statements have been prepared in accordance with U.S.
generally accepted accounting principles. The preparation of these financial statements requires
management to make judgments and estimates that affect the reported amounts of assets, liabilities,
revenues and expense, and related disclosure of contingent assets and liabilities. On an on-going
basis, the Company evaluates its estimates. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. Results may differ
from these estimates under different assumptions or conditions. A summary of significant
accounting polices and a description of accounting policies that are considered critical may be
found in our 2004 Annual Report on Form 10-K, filed on March 25, 2005, in the Notes to the
Consolidated Financial Statements, Note 2 and the Critical Accounting Policies Section.
14
FACTORS THAT MAY AFFECT OUR FUTURE PERFORMANCE
You should carefully consider the following risk factors in your evaluation of our company. If any
of the following risks actually occur it could materially harm our business and impair the price of
our stock.
We will likely liquidate if we are unable to acquire a new business.
We are in the process of identifying new business acquisition candidates and related activities in
order to maximize the use of our assets and balance sheet. If we are unable to acquire new
business operations, we will commence a process to liquidate, however, no timeframe has been set
for completion of our acquisition efforts. If we decide to liquidate, we expect to commence
liquidation proceedings shortly thereafter. No assurance can be given as to the amount or timing
of when funds will be available to distribute to our stockholders if we liquidate.
The Asset Purchase Agreement exposes us to contingent liabilities.
In accordance with the Asset Purchase Agreement, we agreed to indemnify FTI for a number of matters
including the breach of our representations, warranties and covenants contained in the Asset
Purchase Agreement. These representations, warranties and covenants related to organization,
corporate, financial statement, business, operational, tax, legal, insurance, intellectual
property, title to assets, employee, labor, leases, environmental, record keeping, contracts,
permits, licenses, authorizations, solvency, cooperation and other matters. A breach or inaccuracy
of any of these representations, warranties and covenants could lead to an indemnification claim by
FTI against us. Any such indemnification claims could require us to pay substantial sums and incur
related costs and expenses and have a material adverse effect on our liquidity, financial
condition, future prospects and ability to acquire a new operating business.
Our ability to utilize our net operating loss carryforwards may be limited or eliminated in its entirety.
As of September 30, 2005, we had approximately $53.0 million of net operating loss carryforwards
that begin to expire in 2021, for which a 100% valuation allowance has been recorded. The
utilization of the net operating loss carryforwards in the future is dependent upon our having U.S.
federal taxable income. Currently, we have no business operations and are unable to generate U.S.
federal taxable income to utilize the net operating loss carryforwards. We will need to acquire an
operating business in order to generate such taxable income. Even if we are able to acquire an
operating business, there can be no assurance that we will be able to generate taxable income in
the future. Furthermore, the likelihood of an annual limitation on our ability to utilize the net
operating loss carryforwards to offset future U.S. federal taxable income is increased by (1) the
issuance of common stock, certain convertible preferred stock, options, warrants, or other
securities exercisable for common stock, (2) changes in the equity ownership occurring in the last
three years and (3) potential future changes in the equity ownership. The amount of an annual
limitation can vary significantly based on factors existing at the date of an ownership change. A
substantial portion of the net operating loss was used to offset our federal tax liability, other
than alternative minimum tax, generated by the Asset Sale. If the net operating loss carryforwards
were determined to be subject to annual limitations prior to its utilization to offset the taxable
gain from the Asset Sale, our federal tax liability and the net operating loss carryforwards could
be materially different and our financial position could be adversely affected. Such limitations
could have a material adverse impact on our financial condition, results of operations and cash
flows.
The delisting of our Class A Common Stock from the Nasdaq SmallCap Market may make our Class A
Common Stock more difficult to trade, harm our business reputation and adversely affect our ability
to raise funds in the future.
Our Class A Common Stock was delisted from the Nasdaq SmallCap Market on November 28, 2003 due to
our failure to have an operating business after the Asset Sale. As a result of the delisting, our
common stock may be more difficult to trade and we may suffer harm to our general business
reputation and have greater difficulty in the future raising funds in the capital markets. Each of
these consequences could have a material adverse effect on our business, results of operations and
financial condition. We currently do not meet Nasdaqs initial listing requirements to be re-listed
on the Nasdaq SmallCap Market because we do not have business operations and do not satisfy the
minimum bid price requirement.
15
Krest, LLC (successor to Knowledge Universe, LLC and Knowledge Universe, Inc.) controls 71.9% of
the voting power of our stock and can control all matters submitted to our stockholders and its
interests may be different from yours.
Krest, LLC owns 8,810,000 shares of Class A Common Stock, 3,844,200 shares of Class B Common Stock,
and 48,072 shares of our Series A Preferred Stock, which combined represents approximately 71.9% of
the voting power of our outstanding common and preferred stock. The Class A Common Stock entitles
its holders to one vote per share, and the Class B Common Stock entitles its holders to ten votes
per share, on all matters submitted to a vote of our stockholders, including the election of the
members of the Board of Directors. Holders of Series A Preferred Stock are entitled to 145 votes
per share, which equals the number of whole shares of Class A Common Stock into which one share of
Series A Preferred Stock is convertible. Accordingly, Krest, LLC will be able to determine the
disposition of all matters submitted to a vote of our stockholders, including mergers, transactions
involving a change in control and other corporate transactions and the terms thereof. In addition,
Krest, LLC will be able to elect all of our directors. This control by Krest, LLC could materially
adversely affect the market price of the Class A Common Stock or delay or prevent a change in
control of our company.
Krest, LLC was formed by Lawrence J. Ellison, Michael R. Milken and Lowell J. Milken to build,
through a combination of internal development and acquisitions, leading companies in a broad range
of areas relating to career management, technology and education and the improvement of individual
and corporate performance. Krest, LLC may form, invest in or acquire other businesses which are
involved in these and related areas, among others, which businesses may be operated under the
direct or indirect control of Krest, LLC independently of us. Potential conflicts of interest
between Krest, LLC and us may arise and may not be resolved in our favor. These potential conflicts
of interest include competitive business activities, indemnity arrangements, registration rights,
sales or distributions by Krest, LLC of our Class A Common Stock, Class B Common Stock or Series A
Preferred Stock and the exercise by Krest, LLC of its ability to control our management and
affairs. This control and the potential conflicts of interest it creates could adversely affect our
future prospects and results of operations.
We were formed in February 1997 by entities which were under the direct or indirect control of
Lawrence J. Ellison, Michael R. Milken and Lowell J. Milken. After our formation, ownership of our
common stock originally held by our founding entities was transferred to Krest, LLC. Lawrence J.
Ellison, Michael R. Milken and Lowell J. Milken may each be deemed to have the power to control
Krest, 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 Krest, LLC.
We have a history of losses and there is no assurance that we can achieve or sustain profitability
in the future.
Since our inception in February 1997, we have incurred, on an historical basis, net losses of $3.0
million and $17.2 million for the years ended December 31, 1997 and 1998, respectively, and net
losses of $24.0 million, $117.5 million, and $2.3 million for the years ended December 31, 2000,
2001, and 2004, respectively.
Currently, we have no business operations and are not profitable. There is no assurance that even
if we are able to acquire business operations that we will be profitable in the future.
Our stock price may be volatile and you could lose all or part of your investment.
We expect that the market price of our common stock will be volatile. Stock prices have risen and
fallen in response to a variety of factors, including:
|
|
|
quarter-to-quarter variations in operating results; and |
|
|
|
|
market conditions in the economy as a whole. |
The market price for our common stock may also be affected by our ability to meet investors or
securities analysts expectations. Any failure to meet these expectations, even slightly, may
result in a decline in the market price of our common stock. Furthermore, because our common stock
has limited volume, the stock
16
price may be subject to extreme volatility based on a limited number of transactions. In addition,
the stock market is subject to extreme price and volume fluctuations. This volatility has had a
significant effect on the market prices of securities issued by many companies for reasons
unrelated to the operating performance of these companies. In the past, following periods of
volatility in the market price of a companys securities, securities class action litigation has
often been instituted against that company. If similar litigation were instituted against us, it
could result in substantial costs and a diversion of our managements attention and resources.
Provisions in our charter documents and Delaware law may delay or prevent an acquisition of us,
which could decrease the value of our common stock.
Provisions of our certificate of incorporation and bylaws and provisions of Delaware law could
delay, defer or prevent an acquisition or change of control of us or otherwise decrease the price
of our common stock. These provisions include:
|
|
|
authorizing our board of directors to issue additional preferred stock; |
|
|
|
|
prohibiting cumulative voting in the election of directors; |
|
|
|
|
limiting the persons who may call special meetings of stockholders; |
|
|
|
|
prohibiting stockholder actions by written consent; and |
|
|
|
|
establishing advance notice requirements for nominations for election to the Board of
Directors or for proposing matters that can be acted on by stockholders at stockholder
meetings. |
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are not currently exposed to changes in interest rates because we do not have any borrowings
that have variable rates.
Foreign Currency Risk
We are not currently exposed to foreign currency risk because we do not currently have business
operations and related sales and expenses.
17
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the Companys Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms and that such information is accumulated and communicated to the
Companys management, including its President and Chief Financial Officer, as appropriate, to allow
for timely decisions regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and
with the participation of the Companys management, including the Companys President and Chief
Financial Officer, of the effectiveness of the design and operation of the Companys disclosure
controls and procedures as of the end of the period covered by this report. Based on the foregoing,
the Companys President and Chief Financial Officer concluded that the Companys disclosure
controls and procedures were effective at the reasonable assurance level.
There has been no change in the Companys internal controls over financial reporting during the
Companys most recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Companys internal controls over financial reporting.
18
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
|
31 |
|
Rule 13a-14(a)/15(d)-14(a) Certification |
|
|
32 |
|
Section 1350 Certification |
(b) Reports on Form 8-K
|
1. |
|
A Current Report on Form 8-K filed on July 21, 2005 regarding a press release
issued with financial information for the second quarter ended June 30, 2005. |
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.
|
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NEXTERA ENTERPRISES, INC.
|
|
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|
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(Registrant) |
|
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|
|
Date: November 3, 2005
|
|
By: /s/ Michael P. Muldowney |
|
|
|
|
|
|
|
|
|
Michael P. Muldowney |
|
|
|
|
President and Chief Financial Officer |
|
|
|
|
(Principal Executive Officer and Principal Financial Officer) |
|
|
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|
|
|
|
Date: November 3, 2005
|
|
By: /s/ Michael J. Dolan |
|
|
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|
|
Michael J. Dolan |
|
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|
|
Chief Accounting Officer and Corporate Controller |
|
|
|
|
(Principal Accounting Officer) |
|
|
19