10-Q

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, 2002

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
(State or other jurisdiction of
incorporation or organization) 95-4700410
(I.R.S. Employer
Identification Number)

4 Cambridge Center, 3rd Floor, Cambridge, Massachusetts 02142
(Address of principal executive office, including zip code)

(617) 715-0200
(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 31, 2002 there were 31,885,896 shares of $.001 par value Class A Common Stock outstanding and 3,869,570 shares of $.001 par value Class B Common Stock outstanding.

TABLE OF CONTENTS

PART I — - FINANCIAL INFORMATION
	Item 1. Financial Statements
		Consolidated Balance Sheets
		Consolidated Statements of Operations
		Consolidated Statements of Operations
		Consolidated Statements of Cash Flows
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4 Controls and Procedures
PART II — OTHER INFORMATION
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 10.4

NEXTERA ENTERPRISES, INC.
Quarterly Report on Form 10-Q
for the Quarter Ended September 30, 2002

INDEX

			Page No.
PART I.  FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001	3
		Consolidated Statements of Operations for the Three Months Ended September 30, 2002 and 2001	4
		Consolidated Statements of Operations for the Nine Months Ended September 30, 2002 and 2001	5
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001	6
		Notes to Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
	Item 4.	Controls and Procedures	26
PART II.   OTHER INFORMATION
	Item 4.	Submission of Matters to a Vote of Security Holders	27
	Item 6.	Exhibits and Reports on Form 8-K	28
		Signatures	29

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Nextera Enterprises, Inc.

Consolidated Balance Sheets
(In thousands, except share data)

		September 30,			December 31,
		2002			2001
		(unaudited)
Assets
Current assets:
	Cash and cash equivalents	$	1,520		$	4,465
	Restricted cash		2,090			—
	Accounts receivable, net of allowance for doubtful accounts of $2,748 and $2,976 at September 30, 2002 and December 31, 2001, respectively		25,218			19,526
	Due from affiliates		—			65
	Assets held for sale		—			11,509
	Prepaid expenses and other current assets		978			895
Total current assets			29,806			36,460
Property and equipment, net			2,526			4,003
Intangible assets, net of accumulated amortization of $6,225 at September 30, 2002 and December 31, 2001			77,504			77,504
Other assets			1,701			3,215
Total assets		$	111,537		$	121,182
Liabilities and Stockholders’ Equity
Current liabilities:
	Accounts payable and accrued expenses	$	18,062		$	22,744
	Accrued restructuring costs, current portion		1,190			1,738
	Senior credit facility, current portion		8,500			14,500
	Due to affiliate		560			—
	Current portion of long-term debt and capital lease obligations		530			2,618
Total current liabilities			28,842			41,600
Long-term debt and capital lease obligations			885			1,224
Senior credit facility, net of current portion			19,300			23,928
Debentures due to affiliates, including accrued interest			46,571			23,093
Accrued restructuring costs, net of current portion			869			4,404
Other long-term liabilities			3,202			1,434
Stockholders’ equity:
	Preferred Stock, $0.001 par value, 10,000,000 shares authorized, 600,000 authorized shares designated Series A, 38,950 and 229,440 Series A issued and outstanding at September 30, 2002 and December 31, 2001, respectively		3,895			22,944
	Class A Common Stock, $0.001 par value, 95,000,000 shares authorized, 31,885,896 and 31,647,640 shares issued at September 30, 2002 and December 31, 2001, respectively		32			32
	Class B Common Stock, $0.001 par value, 4,300,000 shares authorized, 3,869,570 shares issued and outstanding at September 30, 2002 and December 31, 2001		4			4
	Additional paid-in capital		161,124			162,504
	Treasury Stock, at cost, 228,303 shares Class A Common Stock at December 31, 2001		—			(294	)
	Retained earnings (deficit)		(152,976	)		(158,600	)
	Accumulated other comprehensive income (loss)		(211	)		(1,091	)
Total stockholders’ equity			11,868			25,499
Total liabilities and stockholders’ equity		$	111,537		$	121,182

See Notes to Consolidated Financial Statements

3

Nextera Enterprises, Inc.

Consolidated Statements of Operations
(In thousands, except per share amounts; unaudited)

	Three Months Ended
	September 30
	2002			2001
Net revenues	$	19,353		$	32,424
Cost of revenues		11,543			20,871
Gross profit		7,810			11,553
Selling, general and administrative expenses		4,415			9,339
Amortization expense		—			1,042
Goodwill Impairment		—			38,323
Special charges/(credits)		—			8,804
Income (loss) from operations		3,395			(45,955	)
Interest expense, net		(1,859	)		(2,449	)
Other expense		—			(5,966	)
Income (loss) before income taxes		1,536			(54,370	)
Provision for income taxes		—			99
Net income (loss)		1,536			(54,469	)
Preferred stock dividends		(477	)		(391	)
Net income (loss) applicable to common stockholders	$	1,059		$	(54,860	)
Net income (loss) per common share, basic	$	0.03		$	(1.56	)
Net income (loss) per common share, diluted	$	0.03		$	(1.56	)
Weighted average common shares outstanding, basic		35,756			35,269
Weighted average common shares outstanding, diluted		38,849			35,269

See Notes to Consolidated Financial Statements

4

Nextera Enterprises, Inc.

Consolidated Statements of Operations
(In thousands, except per share amounts; unaudited)

	Nine Months Ended
	September 30
	2002			2001
Net revenues	$	58,368		$	105,717
Cost of revenues		35,120			70,530
Gross profit		23,248			35,187
Selling, general and administrative expenses		13,412			35,365
Amortization expense		—			3,761
Goodwill Impairment		—			64,973
Special charges/(credits)		(740	)		22,258
Income (loss) from operations		10,576			(91,170	)
Interest expense, net		(4,852	)		(6,762	)
Other expense		—			(7,162	)
Income (loss) before income taxes		5,724			(105,094	)
Provision for income taxes		100			541
Net income (loss)		5,624			(105,635	)
Preferred stock dividends		(1,279	)		(1,448	)
Net income (loss) applicable to common stockholders	$	4,345		$	(107,083	)
Net income (loss) per common share, basic	$	0.12		$	(3.07	)
Net income (loss) per common share, diluted	$	0.10		$	(3.07	)
Weighted average common shares outstanding, basic		35,722			34,920
Weighted average common shares outstanding, diluted		59,060			34,920

See Notes to Consolidated Financial Statements

5

Nextera Enterprises, Inc.

Consolidated Statements of Cash Flows
(In thousands, unaudited)

			Nine Months Ended September 30
			2002			2001
Operating activities
Net income (loss)			$	5,624		$	(105,635	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
	Depreciation and amortization			1,366			7,909
	Goodwill write-off			—			64,973
	Provision for bad debts						2,520
	Write-off of Investments			621			7,162
	Write-off of fixed assets			375			5,901
	Gain on sale of business unit			(621	)		—
	Gain on reversal of restructuring charges			(740	)		—
	Interest paid-in-kind			2,186			1,143
	Non-cash charges, other			54			1,540
	Change in operating assets and liabilities:
		Accounts receivable		(5,692	)		4,118
		Due from affiliate		65			(88	)
		Prepaid expenses and other assets		572			4,283
		Accounts payable and accrued expenses		(5,265	)		3,873
		Accrued restructuring costs		(2,722	)		2,298
		Other		1,768			91
Net cash provided by (used in) operating activities				(2,409	)		88
Investing activities
Purchase of property and equipment				(610	)		(2,852	)
Proceeds from sale of business				14,720			—
Changes in restricted cash				(2,090	)		—
Net cash provided by (used in) investing activities				12,020			(2,852	)
Financing activities
Proceeds from issuance of Class A Common Stock				—			100
Due from officers				—			30
Repayments under senior credit facility				(10,628	)		(3,550	)
Proceeds from debentures due to affiliates				560			7,500
Repurchases of Class A Common Stock				—			(323	)
Repayments of debt and capital lease obligations				(2,472	)		(2,943	)
Other				—			(279	)
Net cash provided by (used in) financing activities				(12,540	)		535
Effects of exchange rates on cash and cash equivalents				(16	)		(518	)
Net decrease in cash and cash equivalents				(2,945	)		(2,747	)
Cash and cash equivalents at beginning of period				4,465			4,322
Cash and cash equivalents at end of period			$	1,520		$	1,575

See Notes to Consolidated Financial Statements

6

NEXTERA ENTERPRISES, INC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

The accompanying unaudited 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, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.

The balance sheet as of December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

These financial statements should be read in conjunction with the financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations, contained in the Company’s Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission on April 1, 2002.

Restricted Cash

Restricted cash relates to cash deposits held by the Company’s senior lenders, in accordance with the Amended and Restated Credit Agreement dated March 29, 2002 (Senior Credit Facility), to finance working capital requirements related to employment compensation that is primarily payable in early 2003. The terms of the Senior Credit Facility require the Company to restrict such amounts on a monthly basis based on earned bonus amounts so that a certain percentage of the projected earned bonus is escrowed or paid by the end of 2002. At September 30, 2002, $2.1 million was escrowed to a restricted account for bonuses earned and an additional $1.1 million was escrowed to a restricted account subsequent to September 30, 2002 for bonuses earned through September 30, 2002. Payment of certain portions of the restricted cash is predicated upon extending employment agreements for certain key employees. Failure to extend the employment agreements for certain key employees by January 1, 2003 will be an event of default by the Company under the Senior Credit Facility. Under an event of default, the senior lenders would be able to exercise any remedy available to them, including using all restricted cash in escrow to offset amounts due under the Senior Credit Facility.

Reclassification

Certain reclassifications were made to the 2001 financial statements to make them consistent with the 2002 presentation.

Concentration of Credit Risk

The Company provides its services to customers in diversified industries, primarily in the United States. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses and such losses have been within management’s expectations. No customer accounted for more than 10% of net revenues for the three and nine months ended September 30, 2002 and 2001. One customer represented more than 5% of accounts receivable as of September 30, 2002.

7

Recent Accounting Pronouncements

In November 2001, the Emerging Issues Task Force (“EITF”) of the FASB issued Topic D-103 regarding “Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred”. Under this pronouncement, it was concluded that reimbursements received for “out-of-pocket” expenses should be classified as revenue, and correspondingly cost of revenues, in the income statement. Upon application of the pronouncement, comparative financial statements for prior periods must also be reclassified in order to ensure consistency among all periods presented. The Company has adopted this pronouncement as of January 1, 2002 and has included reimbursements for “out-of-pocket” expenses within net revenues and costs of revenue for all periods presented.

Note 2. Earnings (Loss) per Share

Basic net income (loss) per share (“Basic EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted net income (loss) per common share (“Diluted EPS”) is computed by dividing net income available to common stockholders by the weighted average number of common shares and dilutive common share equivalents then outstanding.

Basic and diluted earnings (loss) per share were calculated as follows:

(In thousands, except per share amounts; unaudited)

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2002			2001			2002			2001
Basic net income (loss) per Common Share
Net income (loss)	$	1,536		$	(54,469	)	$	5,624		$	(105,635	)
Preferred stock dividends		(477	)		(391	)		(1,279	)		(1,448	)
Net income (loss) available to common stockholders	$	1,059		$	(54,860	)	$	4,345		$	(107,083	)
Weighted average common shares outstanding—basic		35,756			35,269			35,722			34,920
Basic net income (loss) per common share	$	0.03		$	(1.56	)	$	0.12		$	(3.07	)
Diluted net income (loss) per Common Share
Net income (loss)	$	1,536		$	(54,469	)	$	5,624		$	(105,635	)
Preferred stock dividends		(477	)		(391	)		—			(1,448	)
Net income (loss) available to common stockholders	$	1,059		$	(54,860	)	$	5,624		$	(107,083	)
Weighted average common shares outstanding—basic		35,756			35,269			35,722			34,920
Dilutive effect of convertible preferred stock		—			—			21,038			—
Dilutive effect of options and warrants		3,093			—			2,300			—
Weighted average common shares outstanding—diluted		38,849			35,269			59,060			34,920
Diluted net income (loss) per common share	$	0.03		$	(1.56	)	$	0.10		$	(3.07	)

8

Note 3. Comprehensive Income (Loss)

Comprehensive income combines net income (loss) and “other comprehensive items,” which represents certain amounts that are reported as components of stockholders’ equity in the accompanying balance sheet, including foreign currency translation adjustments and unrealized gains and losses on available-for-sale investments, net of taxes and reclassification adjustments. During the third quarter of 2002 and 2001, the Company’s comprehensive income totaled $1.5 million and a comprehensive loss of $54.8 million, respectively. For the nine months ended September 30, 2002 and 2001, the Company’s comprehensive income was $6.5 million and a comprehensive loss of $106.3 million.

Note 4. Senior Credit Facility and Debentures Due to Affiliates

Senior Credit Facility

The Company entered into its Senior Credit Facility on March 29, 2002, which amended and restated the Company’s existing credit agreement with its senior lenders. Under the Senior Credit Facility, the Company is required to make an aggregate of $6.5 million and $8.0 million in principal payments in 2002 and 2003, respectively. The debt is due in full on January 2, 2004. Borrowings under the facility will bear interest at the lender’s base rate plus 2.0%, with the potential for the interest rate to be reduced 100 basis points upon Nextera achieving certain financial and operational milestones. In connection with the Senior Credit Facility, the Company agreed to pay a $0.9 million fee to the senior lenders over the next two years and issued the senior lenders additional warrants to purchase 400,000 shares of the Company’s Class A Common Stock at an exercise price of $0.60 per share, exercisable at the senior lenders’ sole discretion at any time prior to 18 months after payment in full of all of the Company’s obligations due under the Senior Credit Facility. The senior lenders can elect in their sole discretion to require the Company to redeem the warrants for a $0.2 million cash payment. An affiliate of Knowledge Universe, an entity that indirectly controls Nextera, has agreed to continue to guarantee $2.5 million of the Company’s obligations under the Senior Credit Facility. The Senior Credit Facility contains covenants related to the maintenance of financial ratios, extending employment agreements with certain key personnel (which begin to expire on December 31, 2002) by January 1, 2003, operating restrictions, restrictions on the payment of dividends, restrictions on cash (see note 1), and disposition of assets. The covenants were based on the Company’s operating plan for 2002 and 2003. The Company is engaged in ongoing discussions with the senior lenders with respect to its future liquidity requirements, debenture subordination terms and related matters. As of September 30, 2002, the Company was in compliance with the covenants contained in the Senior Credit Facility.

Debentures due to affiliates

On July 23, 2002, the Company exchanged $20.0 million of outstanding Series A Cumulative Convertible Preferred Stock for $21.3 million additional debentures due to affiliates, which included $1.3 million of accrued interest.

9

Note 5. Special Charges

The restructuring charges and their utilization as of September 30, 2002 are summarized as follows (in thousands):

										Utilized
																Reserves
	Balance at															established with		Balance at
	December		Q1 2002		Q2 2002			Q3 2002								the sale of		September
	31, 2001		charge		charge/credit			charge		Non-Cash			Cash			business unit*		30, 2002
Severance	$	255	$	—	$	—		$	—	$	—		$	(255	)	$	—	$	—
Facilities		5,579		—		(740	)		—		(1,025	)		(2,158	)		285		1,941
Fixed Assets and other asset write-downs		308		—		—			—		(120	)		(520	)		450		118
	$	6,142	$	—	$	(740	)	$	—	$	(1,145	)	$	(2,933	)	$	735	$	2,059

* In connection with the sale of the human capital consulting business (see note 7), a portion of the proceeds received in excess of the net assets acquired were used to establish restructuring reserves for liabilities and obligations relating to the human capital business that were not assumed by the buyer.

Of the $2.1 million of restructuring reserves recorded at September 30, 2002, approximately $1.2 million of cash is expected to be expended over the next twelve months, primarily related to real estate rental obligations and lease commitments, with the majority of the remainder expected to be paid over the following two years.

During the quarter ended June 30, 2002, the Company recorded a net reversal of $0.7 million of previously recorded restructuring reserves due to the favorable settlement of real estate rental obligations. The reversal had the effect of increasing diluted earnings per share by $0.01 for the second quarter of 2002 and the nine-month period ended September 30, 2002.

During the quarter ended March 31, 2001, the Company undertook actions to re-align and re-size the Company’s cost structure, primarily within the technology consulting business, as a result of softening market conditions and reduced demand for technological services. As a result, the Company recorded special charges totaling $5.4 million, consisting of $1.6 million for severance, $0.6 million for the termination of certain Company initiatives, $0.8 million related to the costs of exiting or reducing certain leased premises, and $2.4 million related to certain employee incentives. The headcount reductions included 48 consultants and 7 administrative personnel.

10

During the quarter ended June 30, 2001, the Company recorded special charges totaling $8.0 million, consisting of a $1.8 million severance charge associated with a headcount reduction of 60 professional and support personnel, primarily in the technology consulting services group; a $5.1 million charge to provide for the expected costs of exiting or reducing certain leased premises and an employee incentive-related expense of $1.1 million.

During the quarter ended September 30, 2001, the Company recorded $8.8 million of special charges for restructuring efforts. Included in this charge were $1.1 million severance charge associated with headcount reductions in the quarter; $3.5 million to provide for the expected costs of exiting or reducing certain leased premises; a $4.0 million write-down of assets, substantially fixed assets, and an employee incentive-related expense of $0.2 million.

Note 6. Other Expense

During the quarter ended September 30, 2002, the Company recorded an expense of $0.6 million to write down an investment to fair value which was offset in full by a $0.6 million gain relating to the reversal of reserves established as part of the Company’s sale of it’s human capital consulting business. During the quarter ended September 30, 2001, the Company recorded Other Expense of $6.0 million associated with the write down to fair market value of certain investments. For the nine months ended September 30, 2001, the write down of investments to fair market was $1.2 million.

Note 7. Sale of Human Capital Consulting Business

Effective January 30, 2002, the Company sold substantially all of the assets and certain liabilities of its human capital consulting business. The sales price was $14.7 million in cash with potential additional consideration based on the operating performance of the human capital consulting business over the next two years. The sales price is also subject to a working capital adjustment based on the working capital at the time of the closing. Such adjustment has not yet been finalized. All consultants and support staff of the human capital consulting business were transferred to the acquiring company.

Note 8. Goodwill

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 142 (SFAS 142), “Goodwill and Other Intangible Assets,” which became effective for the Company January 1, 2002. Under the new standard, goodwill and other intangible assets with indefinite useful lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statement.

Based on the Company’s review and an independent third party valuation, the Company does not believe that the currently existing goodwill is impaired. At September 30, 2002, total goodwill related to the Company’s economic consulting business was $77.5 million. Total goodwill amortization for the third quarter 2001 was $1.0 million and the total goodwill amortization for the nine months ended September 30, 2001 was $3.8 million. The following unaudited schedule reconciles net income (loss) per share amounts for the three and nine months ended September 30, 2002 and September 30, 2001 adjusted for SFAS 142 (in thousands, except per share data):

11

		Three Months Ended		Three Months Ended			Nine Months Ended		Nine Months Ended
		September 30, 2002		September 30, 2001			September 30, 2002		September 30, 2001
Net income (loss) as reported		$	1,536	$	(54,469	)	$	5,624	$	(105,635	)
Add back: Goodwill amortization			—		1,042			—		3,761
Adjusted net income (loss)		$	1,536	$	(53,427	)	$	5,624	$	(101,874	)
Basic earnings per common share:
	Net Income (loss)	$	0.03	$	(1.56	)	$	0.12	$	(3.07	)
	Goodwill amortization		—		0.03			—		0.11
Adjusted net income (loss) per common share, basis		$	0.03	$	(1.53	)	$	0.12	$	(2.96	)
Diluted earnings per common share:
	Net Income (loss)	$	0.03	$	(1.56	)	$	0.10	$	(3.07	)
	Goodwill amortization		—		0.03			—		0.11
Adjusted net income (loss) per common share, diluted		$	0.03	$	(1.53	)	$	0.10	$	(2.96	)

Note 9. Income taxes

The Company recorded no federal income tax expense for the three and nine months ended September 30, 2002 due to the availability of net operating loss carryforwards from prior years which are fully reserved.

Note 10. Related Party Transactions

On September 30, 2002, the Company received a $560,000 short-term loan for working capital purposes from an affiliate of its controlling stockholder. This loan, together with interest at the rate of 6.75%, was repaid on October 28, 2002.

During the quarter ended September 30, 2002, the Company recorded a $0.6 million charge for the write down of an investment in an entity which is affiliated with the Company’s controlling stockholder.

Note 11. Commitments and Contingencies

The Company is subject to certain asserted claims arising in the ordinary course of business. The Company intends to vigorously assert its rights and defend itself in any litigation which may arise from such claims. While the ultimate outcome of these matters could affect the results of operations of any one quarter or year when resolved in future periods, and while there can be no assurance with respect thereto, management believes that after final disposition, any financial impact to the Company would not be material to the Company’s financial position and results of operations or liquidity.

12

NEXTERA ENTERPRISES, INC.

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The disclosure and analysis in this quarterly report contain “forward-looking statements.” Forward-looking statements give our current expectations or forecasts of future events. These statements can be identified by the fact that they do not relate strictly to historic or current facts. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these forward-looking statements include statements relating to future actions or the outcome of financial results. From time to time, we also may provide oral or written forward-looking statements in other materials released to the public. Any or all of the forward-looking statements in this quarterly report and in any other public statements may turn out to be incorrect. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual results may vary materially.

Forward-looking statements are based on many factors that may be outside our control, causing actual results to differ materially from those suggested. These factors include, but are not limited to, those disclosed below under the heading “Factors That May Affect Our Future Performance”. New factors emerge from time to time, and it is not possible for us to predict all these factors nor can we assess the impact of these factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, you should not place undue reliance on forward-looking statements as a prediction of actual results.

Overview

Nextera Enterprises exited the technology consulting business during the latter half of 2001 and sold its human capital consulting business (Sibson) on January 30, 2002. After the January 30, 2002 sale, Nextera Enterprises consists of Lexecon, one of the world’s leading economics consulting firms. For 25 years, Lexecon has provided law firms, corporations and regulatory agencies with expert analysis of complex economic issues in connection with legal and regulatory proceedings, strategic planning and other business activities.

Lexecon was founded in 1977. Its professional staff of economists includes many well-known academics and three Nobel laureates. Lexecon’s clients include major law firms and the corporations that they represent, government and regulatory agencies, public and private utilities and national and multinational corporations.

Lexecon’s services involve the application of economic, financial and public policy principles to marketplace issues in a large variety of industries. The firm’s services fall into three broad areas: litigation support, business consulting and public policy studies.

Litigation Support: Lexecon provides expert witness testimony and other litigation-related services in adversarial proceedings in courts and before regulatory bodies and arbitrators. The firm applies economic principles in understanding the specific features of its client’s business and the competitive and regulatory context in which it operates.

Business Consulting: Lexecon assists corporate clients in analyzing business and strategic issues outside the context of litigation or regulation. Lexecon consults on the likely competitive impact of proposed mergers, predicting the likely reaction of regulatory agencies, competitors and customers to possible business combinations. Lexecon also advises on pricing and other strategic decisions, such as entry into new business areas, addition of new production capacity, and by helping firms predict how competitors are likely to react and how these events would affect the nature of future competition.

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Public Policy Studies: Lexecon has performed numerous public policy studies on behalf of individual companies, trade associations and governmental agencies in the United States and internationally. Lexecon’s studies have been submitted to such agencies as the U.S. Department of Transportation, the Securities and Exchange Commission, the National Association of Securities Dealers, the Federal Communications Commission, and the U.S. Department of Commerce.

COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2002 AND THREE MONTHS ENDED SEPTEMBER 30, 2001

Net Revenues. Net revenues decreased $13.1 million, or 40.3%, to $19.4 million for the three months ended September 30, 2002 from $32.4 million for the three months ended September 30, 2001. This decrease was primarily attributable to the sale of our human capital consulting business in January 2002 and, to a lesser extent, to the exiting of the technology consulting business in the second half of 2001. Net revenues from our economic consulting business increased $0.5 million from $18.9 million in the quarter ended September 30, 2001 to $19.4 million for the quarter ended September 30, 2002.

Gross Profit. Gross profit decreased 32.4% to $7.8 million for the three months ended September 30, 2002 from $11.6 million for the three months ended September 30, 2001. Gross profit as a percentage of net revenues increased to 40.4% for the three months ended September 30, 2002 from 35.6% for the three months ended September 30, 2001. The decrease in gross profit was primarily due to the sale of the human capital consulting group in January 2002, which had generated gross profit of $3.8 million in the second quarter of 2001. The gross profit of the economic consulting business increased from $7.5 million in the third quarter of 2001 to $7.8 million in the third quarter of 2002, primarily due to higher net revenues in the third quarter of 2002. The increase in gross profit as a percentage of net revenues was primarily attributed to the absence of the low gross margin from the technology consulting business. The economic consulting business gross profit as a percentage of net revenues increased to 40.4% for the three months ended September 30, 2002 from 39.9% in the third quarter of 2001, due to higher net revenues in the 2002 period.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 52.7% to $4.4 million for the three months ended September 30, 2002 from $9.3 million for the three months ended September 30, 2001. As a percentage of revenues, such expenses decreased to 22.8% for the three months ended September 30, 2002 from 28.8% for the three months ended September 30, 2001. The decrease is attributable to the following components: a decrease of $0.7 million in selling and marketing expense; a $0.9 decrease in compensation, primarily relating to reduced support infrastructure due to exiting the technology consulting business in the second half of 2001 and the sale of the human capital consulting business in January 2002; a decrease of $1.2 million in general office expense, primarily bad debt expense, legal and audit expenses, and costs associated with equipment leases; a $1.9 million decrease in facility cost, attributed to the exiting of certain leased properties; and a $0.2 million decrease in development expenses, primarily recruiting expenses associated with the technology and human capital consulting businesses.

Goodwill Impairment. During the three months ended September 30, 2001, the Company recorded a $38.3 million goodwill impairment charge substantially related to the human capital consulting business and, to a much lesser extent, the technology consulting business.

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Special Charges. The restructuring charges and their utilization as of and for the three months ended September 30, 2002 are summarized as follows (in thousands):

					Utilized
	Balance at June		Q3 2002								Balance at September
	30, 2002		charge		Non-Cash			Cash			30, 2002
Severance	$	—	$	—	$	—		$	—		$	—
Facilities		3,693		—		(1,025	)		(727	)		1,941
Fixed Assets and other asset write-downs		367		—		(120	)		(129	)		118
	$	4,060	$	—	$	(1,145	)	$	(856	)	$	2,059

Of the $2.1 million of restructuring reserves recorded at September 30, 2002, approximately $1.2 million of cash is expected to be expended over the next twelve months, primarily related to real estate rental obligations and lease commitments, with the majority of the remainder expected to be paid over the following two years.

During the quarter ended September 30, 2001, the Company recorded $8.8 million of special charges for restructuring efforts. Included in this charge were $1.1 million severance charge associated with headcount reductions in the quarter; $3.5 million to provide for the expected costs of exiting or reducing certain leased premises; a $4.0 million write-down of assets, substantially fixed assets, and an employee incentive-related expense of $0.2 million.

Interest Expense, Net. Interest expense, net decreased to $1.9 million for the three months ended September 30, 2002 from $2.4 million for the three months ended September 30, 2001. The decrease is primarily a result of lower outstanding debt under the Company’s Senior Credit Facility and lower associated bank fees.

Other Expense. During the quarter ended September 30, 2002, the Company recorded an expense of $0.6 million to write down of an investment to fair value which was offset in full by a $0.6 million gain relating to the reversal of reserves established as part of the Company’s sale of it’s human capital consulting business. During the quarter ended September 30, 2001, the Company recorded Other Expense of $6.0 million associated with the write down to fair market value of certain investments.

Income taxes. No federal tax expense was recorded for the three months ended September 30, 2002 due to the existence of net operating loss carryforwards from prior years which are fully reserved. No federal tax benefit was recorded during the three months ended September 30, 2001 due to the Company’s uncertainty associated with utilizing its net operating losses. State tax expense of $0.1 million was recorded in the three month quarter ending September 30, 2001.

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COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2002 AND NINE MONTHS ENDED SEPTEMBER 30, 2001

Net Revenues. Net revenues decreased 44.8% to $58.4 million for the nine months ended September 30, 2002 from $105.7 million for the nine months ended September 30, 2001. This decrease was attributable to the sale of our human capital consulting business in January 2002 and, to a lesser extent, to the exiting of the technology consulting business in the second half of 2001. Net revenues from our economic consulting business decreased $1.2 million to $56.4 million in the nine months ended September 30, 2002 from $57.6 million in the nine months ended September 30, 2001 due to lower utilization of the professional staff resulting from the timing of project commencements and completions.

Gross Profit. Gross profit decreased 33.9% to $23.2 million for the nine months ended September 30, 2002 from $35.2 million for the nine months ended September 30, 2001. The decrease in gross profit was primarily due to the sale of the human capital consulting group in January 2002. The human capital consulting group gross profit decline in the first nine months of 2002 from the first nine months of 2001 was $11.6 million. The gross profit of the economic consulting business decreased from $23.4 million in the first nine months of 2001 to $22.4 million in the first nine months of 2002, primarily due to lower net revenues in the first nine months of 2002. Gross margin as a percentage of sales increased to 39.8% for the nine months ended September 30, 2002 from 33.3% for the nine months ended September 30, 2001. The increase in gross profit as a percentage of net revenues was primarily attributed to the absence of the low gross margin from the technology consulting business. The economic consulting business gross profit as a percentage of net revenues declined to 39.7% for the nine months ended September 30, 2002 from 40.6% in the first nine months of 2001 due to lower net revenues in the 2002 period.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 62.1% to $13.4 million for the nine months ended September 30, 2002 from $35.4 million for the nine months ended September 30, 2001. As a percentage of revenues, such expenses decreased to 23.0% for the nine months ended September 30, 2002 from 33.5% for the nine months ended September 30, 2001. The decrease is attributable to the following components: a decrease of $4.6 million in selling and marketing expense, primarily travel; a $5.0 decrease in compensation, primarily relating to reduced support infrastructure due to the exiting of the technology consulting business in the second half of 2001 and the sale of the human capital consulting business in January 2002; a decrease of $4.6 million in general office expense, primarily bad debt expense, legal and audit expenses, and costs associated with equipment leases; a $6.6 million decrease in facility cost, attributed to the exiting of certain leased properties; and a $1.2 million decrease in development expenses, primarily recruiting expenses associated with the technology and human capital consulting businesses.

Goodwill Impairment. During the nine months ended September 30, 2001, the Company recorded a $64.9 million goodwill impairment charge related to the human capital and technology consulting businesses.

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Special Charges. The restructuring charges and their utilization as of and for the nine months ended September 30, 2002 are summarized as follows (in thousands):

										Utilized
																Reserves
	Balance at															established with		Balance at
	December		Q1 2002		Q2 2002			Q3 2002								the sale of		September
	31, 2001		charge		charge/credit			charge		Non-Cash			Cash			business unit*		30, 2002
Severance	$	255	$	—	$	—		$	—	$	—		$	(255	)	$	—	$	—
Facilities		5,579		—		(740	)		—		(1,025	)		(2,158	)		285		1,941
Fixed Assets and other asset write-downs		308		—		—			—		(120	)		(520	)		450		118
	$	6,142	$	—	$	(740	)	$	—	$	(1,145	)	$	(2,933	)	$	735	$	2,059

* In connection with the sale of the human capital consulting business, a portion of the proceeds received in excess of the net assets acquired were used to establish restructuring reserves for liabilities and obligations relating to the human capital business that were not assumed by the buyer.

Of the $2.1 million of restructuring reserves recorded at September 30, 2002, approximately $1.2 million of cash is expected to be expended over the next twelve months, primarily related to real estate rental obligations and lease commitments, with the majority of the remainder expected to be paid over the following two years.

During the quarter ended June 30, 2002, the Company recorded a net reversal of $0.7 million of previously recorded restructuring reserves due to the favorable settlement of real estate rental obligations. The reversal had the effect of increasing diluted earnings per share by $0.01 for the second quarter of 2002 and the nine-month period ended September 30, 2002.

During the quarter ended March 31, 2001, the Company undertook actions to re-align and re-size the Company’s cost structure, primarily within the technology consulting business, as a result of softening market conditions and reduced demand for technological services. As a result, the Company recorded special charges totaling $5.4 million, consisting of $1.6 million for severance, $0.6 million for the termination of certain Company initiatives, $0.8 million related to the costs of exiting or reducing certain leased premises, and $2.4 million related to certain employee incentives. The headcount reductions included 48 consultants and 7 administrative personnel.

During the quarter ended June 30, 2001, the Company recorded special charges totaling $8.0 million, consisting of a $1.8 million severance charge associated with a headcount reduction of 60 professional and support personnel, primarily in the technology consulting services group; a $5.1 million charge to provide for the expected costs of exiting or reducing certain leased premises and an employee incentive-related expense of $1.1 million.

During the quarter ended September 30, 2001, the Company recorded $8.8 million of special charges for restructuring efforts. Included in this charge were $1.1 million severance charge associated with headcount reductions in the quarter; $3.5 million to provide for the expected costs of exiting or reducing certain leased premises; a $4.0 million write-down of assets, substantially fixed assets, and employee incentive-related expense of $0.2 million.

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Interest Expense, Net. Interest expense, net decreased to $4.9 million for the nine months ended September 30, 2002 from $6.8 million for the nine months ended September 30, 2001. This decrease was primarily due to lower outstanding debt under the Company’s senior credit facility coupled with lower associated bank fees.

Other Expense. During the nine-months ended September 30, 2002, the Company recorded an expense of $0.6 million to write down an investment to fair value which was offset in full by a $0.6 million gain relating to the reversal of reserves established as part of the Company’s sale of it’s human capital consulting business. During the nine months ended September 30, 2001, the Company recorded Other Expense of $7.2 million associated with the write down to fair market value of certain investments.

Income taxes. No federal tax expense was recorded for the nine months ended September 30, 2002 due to the existence of net operating loss carryforwards from prior years which have been fully reserved. The Company recorded $0.1 million in state tax expense for the nine months ended September 30, 2002. No federal tax benefit was recorded during the nine months ended September 30, 2001 due to the Company’s uncertainty associated with utilizing its net operating losses. State tax expense of $0.5 million was recorded for the nine months ended September 30, 2001.

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LIQUIDITY AND CAPITAL RESOURCES

Consolidated working capital was $1.0 million on September 30, 2002, compared to a working capital deficit of $5.1 million on December 31, 2001. Included in working capital were cash and cash equivalents of $1.5 million and $4.5 million on September 30, 2002 and December 31, 2001, respectively.

Net cash used in operating activities was $2.4 million for the nine months ended September 30, 2002. The primary components of net cash used in operating activities was a decrease of $7.9 million in accounts payable and accrued expenses, due primarily to bonus payments and restructuring payments, and an increase of $5.7 million in accounts receivable. These cash outflows were primarily offset in part by net income of $5.6 million, an increase in other long-term liabilities of $1.8 million and non-cash items relating to depreciation and interest paid-in-kind of $3.6 million.

Net cash provided by investing activities was $12.0 million for the nine months ended September 30, 2002, substantially representing proceeds of $14.7 million received from the sale of the human capital consulting business offset by restricted cash of $2.1 million and the purchase of fixed assets of $0.6 million.

Net cash used in financing activities was $12.5 million for the nine months ended September 30, 2002. The primary components of net cash used in financing activities were $10.6 million of repayments under the Company’s Senior Credit Facility and $2.5 million of payments of other debt and capital leases obligations.

Effective March 29, 2002, the Company entered into the Senior Credit Facility with the Company’s senior lenders. Under the Senior Credit Facility, the Company agreed to permanently reduce the borrowings outstanding under the facility by $6.5 million in 2002 and by $8.0 million in 2003. The Senior Credit Facility matures on January 2, 2004. Borrowings under the facility will bear interest at the lender’s base rate plus 2.0%, with the potential for the interest rate to be reduced 100 basis points upon Nextera achieving certain financial and operational milestones. In connection with the Senior Credit Facility, the Company agreed to pay a $0.9 million fee to the senior lenders over the next two years and issued the senior lenders additional warrants to purchase 400,000 shares of the Company’s Class A Common Stock at an exercise price of $0.60 per share, exercisable at the senior lenders’ sole discretion at any time prior to 18 months after payment in full of all of the Company’s obligations due under the Senior Credit Facility. The senior lenders can elect in their sole discretion to require the Company to redeem the warrants for a $0.2 million cash payment. An affiliate of Knowledge Universe, an entity that indirectly controls Nextera, has agreed to continue to guarantee $2.5 million of the Company’s obligations under the Senior Credit Facility. The Senior Credit Facility contains covenants related to the maintenance of financial ratios, extending employment agreements with certain key personnel (which begin to expire on December 31, 2002) by January 1, 2003, operating restrictions, restrictions on the payment of dividends, restrictions on cash, and disposition of assets. The covenants were based on the Company’s operating plan for 2002 and 2003. The Company is engaged in ongoing discussions with the senior lenders with respect to its future liquidity requirements, debenture subordination terms and related matters. As of September 30, 2002, the Company was in compliance with the covenants contained in the Senior Credit Facility.

There is no assurance that the Company will be able to meet all future financial covenants or obtain extensions of the employment agreements of certain key personnel by January 1, 2003. Failure to achieve either of the above will place the Company in default of its bank covenants and could have a material adverse effect on the financial position of the Company. Moreover, if we are able to obtain extension of these employment contracts, the cost associated with the extensions could have a material adverse impact on the financial condition of the Company.

The terms of the Senior Credit Facility require the Company to restrict a portion of its cash on a monthly basis based on earned bonus amounts in order that a certain percentage of projected earned bonus amounts is escrowed or paid by the end of 2002. The escrowed funds may only be used by the Company to pay specified bonuses and the restrictions on cash reduce the Company’s liquidity. At September 30, 2002, Nextera had $2.1 million of cash subject to these escrow arrangements.

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Factors That May Affect Our Future Performance

You should carefully consider the following risk factors in your evaluation of our company. If any of the following risks actually occur it could materially harm our business and impair the price of our stock.

We heavily depend on a small number of senior consulting executives and other key personnel, and the loss of any of them may damage or result in the loss of client relationships and cause our business and reputation to suffer.

Our success is highly dependent upon the efforts, abilities, business generation capabilities and project execution skills of a small number of senior consulting executives and other key personnel. This dependence is particularly important to our business because personal relationships and reputations are a critical element of obtaining and maintaining client engagements. The loss of the services of any of these persons for any reason could have a material adverse effect on our reputation and our ability to secure and complete engagements. A number of our senior consulting executives that are responsible for substantially all of our business are subject to employment and/or non-compete agreements, some of which begin to expire on or about December 31, 2002. We may not be able to retain these persons or to attract suitable replacements or additional personnel if necessary. We generally do not maintain key person life insurance coverage for our employees.

In addition, if any of these key employees joins a competitor or forms a competing business, some of our clients might choose to use the services of that competitor or new company. Further, in the event of the loss of any such personnel, we may not be able to prevent the unauthorized disclosure or use of our technical knowledge, practices or procedures by these personnel. As a result, we might lose existing or potential clients.

Under our Senior Credit Facility, by January 1, 2003 we must obtain extensions of employment agreements of certain key employees through December 31, 2004. Negotiations with certain of the key employees have occurred and are continuing, but no agreement regarding the terms of any such extension have been reached. Failure to extend the employment agreements constitutes an event of default under the Senior Credit Facility and the senior lenders would be entitled to exercise any remedy available to them, including acceleration of amounts due. Such an occurrence would materially and adversely affect our operations and financial condition. Moreover, if we are able to obtain extensions of these employment contracts, the cost associated with the extensions could have a material adverse impact on the financial condition of the Company.

If we fail to attract, retain and train skilled consultants, our reputation will suffer and our revenues and operating profits could decline.

Because our business involves the delivery of professional services, our success depends upon our ability to attract, retain, motivate and train highly skilled consultants. If we fail to do so it could impair our ability to effectively manage and complete our client projects and secure future client engagements, and as a result our reputation could suffer and our future revenues and operating profits could decline.

Even if we are able to retain our current consultants and expand the number of our qualified consultants, the resources required to attract, retain, motivate and train these consultants could adversely affect our operating profits.

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We may be unable to comply with certain covenants under our Senior Credit Facility

The Company entered into the Senior Credit Facility on March 29, 2002, which amended and restated the Company’s existing credit agreement with its senior lenders. Under the Senior Credit Facility, the Company is required to make an aggregate of $6.5 million and $8.0 million in principal payments in 2002 and 2003, respectively. The debt is due in full on January 2, 2004. Additionally, the Company is required to comply with certain financial and operational covenants. Borrowings under the Senior Credit Facility will bear interest at the lender’s base rate plus 2.0%, with the potential for the interest rate to be reduced 100 basis points upon Nextera achieving certain financial and operational milestones. If the Company fails to comply with the covenants contained in the Senior Credit Facility, the interest rate could increase 200 basis points. Additionally, failure of the Company to comply with such covenants, to obtain extensions of employment agreements with certain key personnel (which begin to expire on December 31, 2002), or to make all principal and interest payments to the senior lenders as they become due and payable would be events of default under the Senior Credit Facility and the senior lenders would be entitled to exercise any remedy available to them, including acceleration of all amounts outstanding under the Senior Credit Facility and related costs and expenses. Such an occurrence would materially and adversely affect our operations and financial condition. Please see Part I, Item 2 — Liquidity and Capital Resources.

High Levels of Debt Could Adversely Affect Our Business and Financial Condition

We have very high levels of debt in relation to the size of our business. As of September 30, 2002, we had $27.8 million of outstanding indebtedness under our Senior Credit Facility, $8.5 million of which was classified as a current liability. In addition, as of September 30, 2002, we had $46.6 million of outstanding indebtedness under debentures payable to affiliates.

Our high leverage could have important consequences, including the following:

• a substantial portion of our future cash flows from operations must be dedicated to the servicing of our debt, thus reducing the funds available for operations and investments;

• our ability to obtain additional financing may be impaired;

• our leverage may reduce our ability to adjust rapidly to changing market conditions and may make us more vulnerable to future downturns in the general economy; and

• high levels of debt may reduce the value of stockholders’ investments in Nextera because debt holders have priority regarding our assets in the event of a bankruptcy or liquidation.

We may not have sufficient future cash flows to meet our debt payments, and may not be able to refinance any of our debt at maturity.

We face possible delisting from the Nasdaq SmallCap Market, which would result in a limited public market for our Class A Common Stock.

There are several requirements for the continued listing of our Class A Common Stock on the Nasdaq SmallCap Market including, but not limited to, a minimum stock bid price of $1.00 per share. On February 14, 2002, we received notification from the Nasdaq National Stock Market (“Nasdaq”) that we had failed to maintain a minimum bid price of $1.00 for 30 consecutive days and would be delisted from the Nasdaq National Market unless by May 15, 2002 we complied with the minimum bid price requirement for at least 10 consecutive days. Prior to May 15, 2002, we submitted an application to trade on the Nasdaq SmallCap Market, and on June 3, 2002, we began trading on the Nasdaq SmallCap Market. The Nasdaq SmallCap Market extended us a 180-day grace period to comply with the $1.00 minimum bid price requirement, which expired on August 13, 2002. We received a further 180-day grace period to comply with the $1.00 minimum bid price requirement from the Nasdaq SmallCap Market, which extension will expire on February 13, 2003. If we are unable to satisfy the $1.00 minimum bid price requirement by February 13, 2003, our common stock will be subject to delisting by Nasdaq.

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If we fail to meet our clients’ expectations, we could damage our reputation and have difficulty attracting new business.

Our client engagements often involve projects that are complex and critical to the operation of a client’s business. Our failure or inability to meet a client’s expectations, or the law firm that engaged us, in the performance of our services could result in damage to our reputation, which could adversely affect our ability to attract new business from that client or others. In addition, if we fail to perform adequately on a project, a client could refuse to pay or sue us for economic damages which could further damage our reputation or cause a reduction in future revenues and operating profits.

We may not successfully compete with our competitors, which could result in reduced revenues and operating profits.

The economic and business consulting industry has a large number of competitors comprised of economic consulting firms, individual academics, other accounting firm consulting practices, and general management consulting firms. We believe the principal competitive factors in our industry are reputation, the analytical ability of our professional staff, client service, and industry expertise. We believe that we compete favorably with respect to these factors. However, some of our competitors have greater financial and marketing resources and greater name recognition than Lexecon. In addition, some of these competitors have been operating for a longer period of time than has Lexecon and have established long-term client relationships. We also face competition in our efforts to recruit and retain professional staff. If Lexecon is not successful in competition with its rivals, its future revenues and operating profits could decline.

We have relied and may continue to rely on a limited number of clients and industries for a significant portion of our revenues and, as a result, the loss of or a significant reduction in work performed for any of them could result in reduced revenues.

We have in the past derived, and may in the future derive, a significant portion of our net revenues from a relatively limited number of clients. To the extent that any client or industry uses less of our services or terminates its relationship with us, our revenues could decline accordingly. Lexecon’s 10 largest clients in 2001 accounted for approximately 38% of its net revenues. One client accounted for 17% of its net revenues in 2001. No client represented greater than 10% of net revenues for nine months ended September 30, 2002.

The volume of work we perform for a specific client is likely to vary from year to year, and a significant client in one year may not use our services in another year. Further, the failure to collect a large account receivable from any of these clients could result in significant financial exposure. In addition, any economic conditions or other factors adversely affecting any of the industries or any increase in the size or number of competitors within the industries we service could cause our revenues to decline.

Nextera Enterprises Holdings owns 67.2% of our voting stock and can control matters submitted to our stockholders and its interests may be different from yours.

Nextera Enterprises Holdings owns 8,810,000 shares of Class A Common Stock and 3,844,200 shares of Class B Common Stock, which together represent approximately 67.2% of the voting power of our outstanding common stock. The Class A Common Stock entitles its holders to one vote per share, and the Class B Common Stock entitles its holders to ten votes per share, on all matters submitted to a vote of our stockholders, including the election of the members of the Board of Directors. Accordingly, Nextera Enterprises Holdings will be able to determine the disposition of all matters submitted to a vote of our stockholders, including mergers, transactions involving a change in control and other corporate transactions and the terms thereof. In addition, Nextera Enterprises Holdings will be able to elect all of our directors, except for one director to be elected in accordance with the terms of a stockholders agreement. This control by Nextera Enterprises Holdings could materially adversely affect the market price of the Class A Common Stock or delay or prevent a change in control of our company.

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Nextera Enterprises Holdings is indirectly controlled by Knowledge Universe, Inc. Knowledge Universe, Inc. was formed by Lawrence J. Ellison, Michael R. Milken and Lowell J. Milken to build, through a combination of internal development and acquisitions, leading companies in a broad range of areas relating to career management, technology and education and the improvement of individual and corporate performance. Knowledge Universe, Inc. may form, invest in or acquire other businesses which are involved in these and related areas, among others, which businesses may be operated under the control of Knowledge Universe, Inc. independently of us. Potential conflicts of interest between Knowledge Universe and us may arise and may not be resolved in our favor. These potential conflicts of interest include competitive business activities, indemnity arrangements, registration rights, sales or distributions by Nextera Enterprises Holdings of our Class A and Class B Common Stock and the exercise by Nextera Enterprises Holdings of its ability to control our management and affairs. This control and the potential conflicts of interest it creates could limit our future independence and harm our reputation.

We were formed in February 1997 by entities which were under the direct or indirect control of Lawrence J. Ellison, Michael R. Milken and Lowell J. Milken. After our formation, ownership of our common stock originally held by our founding entities was transferred to Nextera Enterprises Holdings. Lawrence J. Ellison, Michael R. Milken and Lowell J. Milken may each be deemed to have the power to control Knowledge Universe, Inc. As a result, Lawrence J. Ellison, Michael R. Milken and Lowell J. Milken may each be deemed to have the power to direct the voting and disposition of, and to share beneficial ownership of, any shares of common stock owned by Nextera Enterprises Holdings. On February 24, 1998, without admitting or denying any liability, Michael R. Milken consented to the entry of a final judgment in the U.S. District Court for the Southern District of New York in Securities and Exchange Commission v. Michael R. Milken et al., which judgment was entered on February 26, 1998, restraining and enjoining Michael R. Milken from associating with any broker, dealer, investment advisor, investment company, or municipal securities dealer and from violating Section 15(a) of the Exchange Act.

We may not be able to obtain the additional capital necessary for us to carry out our business strategy, which could hinder our growth. In addition, the terms of any additional capital may be unfavorable to us or our stockholders.

For us to expand or to pursue other business opportunities, we would likely require access to capital. We may require additional financing in amounts that we cannot determine at this time. If our plans or assumptions change or are inaccurate, we may be required to seek capital sooner than anticipated. We may need to raise funds through public or private debt or equity financings.

If funds are raised through the issuance of equity securities, the percentage ownership of our then-current stockholders may be reduced and the holders of new equity securities may have rights, preferences or privileges senior to those of the holders of our common stock. If additional funds are raised through a bank credit facility or the issuance of debt securities, the holder of this indebtedness would have rights senior to the rights of the holders of our common stock and the terms of this indebtedness could impose restrictions on our operations. If we need to raise additional funds, we may not be able to do so on terms favorable to us, or at all. If we cannot raise adequate funds on acceptable terms, we may be unable to continue to fund our operations.

Our quarterly revenues and operating results have varied significantly and, if they continue to do so, the market price of our stock could decline.

Our operating results have varied significantly from quarter to quarter and may continue to do so in the future. Our quarterly financial results could be impacted significantly by the timing, mix and number of active client projects commenced and completed during a quarter, the variations in utilization rates and average billing rates for our consultants and the accuracy of our estimates of resources required to complete our ongoing projects. Our operating expenses are based on anticipated revenue levels in the short-term, are relatively fixed, and are incurred throughout the quarter. As a result, if expected revenues are not realized as anticipated, our quarterly financial results could be materially harmed.

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Our engagements may result in professional liability

Our services typically involve difficult analytical assignments and carry risks of professional and other liability. Many of our engagements involve matters that could have a severe impact on the client’s business, cause the client to lose significant amounts of money, or prevent the client from pursuing desirable business opportunities. Accordingly, if a client is dissatisfied with our performance, the client could threaten or bring litigation in order to recover damages or to contest its obligation to pay our fees. Litigation alleging that we performed negligently or otherwise breached our obligations to the client could expose us to significant liabilities and tarnish our reputation. These liabilities could harm our business.

We have a history of losses

Since our inception in February 1997, we have incurred, on an historical basis, net losses of $3.0 million and $17.2 million for the years ended December 31, 1997 and 1998, net income of $3.1 million for the year ended December 31, 1999 and net losses of $24.0 million and $117.5 million for the years ended December 31, 2000 and 2001. Although we have achieved net income in the first nine months of 2002, there can be no assurances that we will obtain or sustain profitability in the future.

Government regulation and legal uncertainty relating to our markets could result in decreased demand for our services, increased costs or otherwise harm our business causing a reduction in revenues.

We derive substantially all of our net revenues from economic and litigation consulting services related to antitrust matters, public policy and regulatory matters, mergers and acquisitions and other securities matters. A substantial portion of these net revenues were derived from engagements relating to United States antitrust and securities laws. Changes in these laws, changes in judicial interpretations of these laws or less vigorous enforcement of these laws by the United States Department of Justice, the United States Federal Trade Commission or other federal agencies as a result of changes in philosophy, political decisions, priorities or other reasons could materially reduce the magnitude, scope, number or duration of engagements available to us in these areas.

In addition, adverse changes in general economic conditions or conditions influencing merger and acquisition activity could have an adverse impact on engagements in which we assist clients in connection with these types of transactions. Any reductions in the number of our securities, antitrust and mergers and acquisitions consulting engagements could cause a reduction in our revenues.

If a large client project or a significant number of other client projects are terminated or reduced, we may have a large number of employees who are not generating revenue.

Our clients engage us on a project-by-project basis, primarily without a written contract, and a client can generally terminate an engagement with little or no notice to us and without penalty. When a client defers, modifies or cancels a project, we must be able to rapidly deploy our consultants to other projects in order to minimize the underutilization of our employees. In addition, our operating expenses are relatively fixed and cannot be reduced on short notice to compensate for unanticipated variations in the number or size of projects in progress. Thus, any termination, significant reduction or modification of our business relationships with any of our significant clients or with a number of smaller clients would have an adverse impact on our ability to generate revenue. As a result, we believe that the number of our clients or the number and size of our existing projects may not be reliable indicators or measures of future net revenues.

Loss of or limitations on our net operating loss carryforward.

The Company has a substantial net operating loss carryforward that may be used in the future to reduce the Company's federal tax liability. The Company established a full valuation allowance against the net operating loss carryforward, along with all other deferred tax assets to reflect the uncertainty of the recoverability of this asset. The utilization of this asset in the future is dependent upon the Company having positive earnings. Furthermore, the likelihood of an annual limitation on our ability to utilize our net operating loss carryforward to offset future U.S. federal taxable income is increased by (i) the issuance of certain convertible preferred stock, options, warrants or other securities exercisable for common stock, (ii) changes in our equity ownership occurring in the last three years and (iii) potential future changes in our equity ownership. The amount of an annual limitation can vary significantly based on certain factors existing at the date of the ownership change. If such limitations were imposed, they could have a material adverse impact on our results of operations and cash flows.

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Potential conflicts of interests reduce the number of both potential clients and engagements.

We provide economic and litigation consulting services primarily in connection with significant or complex transactions, disputes or other matters that are usually adversarial or that involve sensitive client information. Our engagement by a client to provide such services frequently precludes us from accepting engagements with other entities involved in the same matter. In addition, we may decide to decline engagements due to clients’ expectations of loyalty, perceived conflicts of interests or other reasons. Accordingly, the number of both potential clients and potential engagements is limited, particularly in the economic consulting and litigation services markets.

Potential write-off of goodwill and other intangible assets relating to personnel could reduce our operating results.

As of September 30, 2002, our intangible assets, net of accumulated amortization, were approximately $77.5 million. Intangible assets at September 30, 2002, net of accumulated amortization, included $77.0 million of goodwill and $0.5 million for intangibles relating to personnel. Intangible assets had been amortized by us on a straight-line basis principally over 40 years for goodwill and over five years for intangibles relating to personnel. We ceased amortizing goodwill and intangible assets relating to personnel commencing January 1, 2002 in accordance with Statements of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.

In accordance with accounting guidelines, we periodically evaluate the recoverability of goodwill when indications of possible impairment are present by reviewing the anticipated undiscounted future cash flows from operations and comparing such cash flows to the carrying value of the associated goodwill. If goodwill becomes impaired, we will be required to write down the carrying value of the goodwill and incur a related charge to our operations. A write down of goodwill would result in a reduction in our net income.

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 in our and similar industries have risen and fallen in response to a variety of factors, including:

• quarter-to-quarter variations in operating results;

• entering into, or failing to enter into or renew, a material contract or order;

• acquisitions of, or strategic alliances among, companies within our industry;

• changes in investor perceptions of the acceptance or profitability of consulting; and

• market conditions in the industry and the economy as a whole.

The market price for our common stock may also be affected by our ability to meet investors’ or securities analysts’ expectations. Any failure to meet these expectations, even slightly, may result in a material decline in the market price of our common stock. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of these companies. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against that company. If similar litigation were instituted against us, it could result in substantial costs and a diversion of our management’s attention and resources.

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.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

The Company is exposed to changes in interest rates primarily from our senior credit facility. We do 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, 2002.

Foreign Currency Risk

Currently, substantially all of the Company’s sales and expenses are denominated in U.S. dollars and as a result we have not experienced significant foreign exchange gains and losses to date.

Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized 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 necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation.

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PART II — OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

On June 13, 2002, an annual meeting of the stockholders of Nextera was held in Cambridge, Massachusetts. At the meeting, each director that was a member of the Board of Directors immediately prior to the Annual Meeting was re-elected. The matters voted upon and the votes cast at the annual meeting were as follows:

Election of Directors	Votes For		Votes Withheld
Gregory J. Clark		61,807,577		172,093
Ralph Finerman		61,806,319		173,351
Steven B. Fink		61,615,478		364,192
Keith D. Grinstein		61,343,686		635,984
Stanley E. Maron		61,804,227		175,443
Richard V. Sandler		61,708,133		271,537
Richard L. Sandor		61,423,497		556,173
David Schneider		61,308,030		671,640
Karl L. Sussman		61,808,516		171,154

				Votes		Broker
Other Matters Voted Upon		For		Against	Abstentions	Non-Votes
1.	Approval of an amendment and restatement of the Amended and Restated 1998 Equity Participation Plan of Nextera Enterprises, Inc. to increase the total number of shares authorized for issuance thereunder from 19,000,000 to 38,000,000.		49,933,789	2,085,789	123,683		0
2.	Ratification of the selection of Ernst & Young LLP as the independent auditors for the fiscal year ending December 31, 2002.		61,487,578	87,376	404,716		0

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Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

     10.1 Funding Agreement dated as of September 27, 2002 among Nextera Enterprises, Inc., Fleet National Bank, Bank of America, N.A. and Knowledge Enterprises, Inc.

     10.2 Exchange Debenture of Nextera Enterprises, Inc. in the principal amount of $21,292,550.00 dated as of July 23, 2002.

     10.3 Guarantee and Security Agreement dated as of July 23, 2002 among Nextera Enterprises, Inc., Knowledge Universe, Inc. and the entities listed on the signature pages thereto.

     10.4 Subordination Agreement dated as of July 23, 2002 among Nextera Enterprises, Inc., Knowledge Universe, Inc. and Knowledge Universe Capital Co., LLC.

(b)  Reports on Form 8-K

On August 14, 2002, the Company filed a report on Form 8-K disclosing the certification of the Form 10-Q by the Company’s Chief Executive Officer and Chief Financial Officer for the quarterly period ending June 30, 2002.

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 14, 2002	By:   /s/   David M. SchneiderDavid M. Schneider Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)
		NEXTERA ENTERPRISES, INC. (Registrant)
Date:	November 14, 2002	By:   /s/   Michael P. MuldowneyMichael P. Muldowney Chief Financial Officer (Principal Financial and Accounting Officer)

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I, David M. Schneider, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Nextera Enterprises, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002

By:   /s/   David M. Schneider Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)

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I, Michael P. Muldowney, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Nextera Enterprises, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002

By:   /s/   Michael P. MuldowneyChief Financial Officer
(Principal Financial and Accounting Officer)

30 EX-10.1 3 a85918exv10w1.txt EXHIBIT 10.1 EXHIBIT 10.1 FUNDING AGREEMENT This Funding Agreement ("Agreement") is entered into by and among Fleet National Bank, Bank of America, N.A., Nextera Enterprises, Inc., a Delaware corporation (the "Company") and Knowledge Enterprises, Inc., a Delaware corporation ("KE"), effective as of September 27, 2002. 1. Credit Agreement. Fleet National Bank, as administrative agent (in such capacity, the "Agent"), and Fleet National Bank and Bank of America, N.A., each as lenders (in such capacity, the "Lenders"), have entered into an Amended and Restated Credit Agreement dated as of March 29, 2002 (the "Credit Agreement") with the Company and certain subsidiaries of the Company from time to time a party thereto (the "Subsidiaries"). Capitalized terms used herein and not defined herein shall have the meaning given to such terms in the Credit Agreement. 2. Funds Requirement. The Company has an immediate need for approximately Five Hundred Sixty Thousand Dollars ($560,000) in immediately available funds (the "Funds") to meet current expenses. The Lenders are willing to allow KE to lend such Funds to the Company pursuant to and as part of the Credit Agreement on the terms and conditions set forth in this Agreement. The parties agree that additional documentation will be entered into by the parties with respect to such loan on or prior to October 11, 2002, which documentation shall incorporate and be consistent with this Agreement. Notwithstanding the foregoing agreement to enter into additional documentation, this Agreement is intended to be binding and enforceable on its terms, and shall be so binding and enforceable even if the additional documentation is not consummated. 3. Funds Flow. KE shall wire the Five Hundred Sixty Thousand Dollars ($560,000) directly to the Company (the "Additional Amount"); provided, however, that the parties hereto agree and acknowledge that such direct transfer is being done for administrative convenience purposes only and that such funds are being lent to the Company pursuant to the Credit Agreement and shall be a "Term Loan" as defined in the Credit Agreement. The Agent agrees to reflect the Additional Amount as a Term Loan under the Credit Agreement and the parties hereto agree and acknowledge that the Additional Amount is a Term Loan and entitled to all of the protection and features of the Credit Agreement including, but not limited, to being secured by the assets of the Company and certain of its Subsidiaries as set forth in the Credit Agreement. 4. Repayment. Such Additional Amount shall be due and payable from the Company on October 30, 2002 and shall bear interest at the same rate and under the same terms as the interest under the terms of the Credit Agreement applicable to Term Loans. The Company shall pay such amounts directly to KE; provided, however that the parties hereto agree and acknowledge that such direct payment is being done for administrative convenience purposes only and that such repayment is pursuant to the terms of the Credit Agreement, as amended. 5. Order of Priority. The payment of any and all amounts due under the Credit Agreement, as amended, shall be as follows: (a) First, the principal due to the Agent on September 30, 2002 and the interest due to the Agent on October 1, 2002, shall be paid in full; (b) Second, the Additional Amount, plus interest, due to KE on October 30, 2002 shall be paid in full; provided, however, that to the extent that any portion of such amount remains unpaid on October 31, 2002 (the "Deficiency"), then the payment of the principal due to the Agent on October 31, 2002, and the payment of the interest due to the Agent on November 1, 2002, shall take priority over the payment of the Deficiency; and (c) Third, at such time as the principal due to the Agent on October 31, 2002 and the interest due to the Agent on November 1, 2002 have been paid in full, then the payment of the Deficiency (including the continuing accrual of interest on the Deficiency) shall have priority over any claim that the Agent and/or the Lenders have with respect to the Credit Agreement. 6. Amendment of Credit Agreement. The Company, the Agent and the Lenders shall amend the Credit Agreement to incorporate the following: a. the limits on the amount of Term Loans and the Maximum Amount of Term Credit shall be increased by an amount not less than the amount of the Additional Amounts; b. the payment of the Additional Amount, plus interest, on October 30, 2002; and c. other changes necessary to effectuate the terms of this Agreement. 6. Fees and Expenses. The Company shall pay to the Agent, the Lenders and KE all of their respective reasonable costs and expenses incurred by them in connection with the drafting and negotiation of this Agreement and the further documentation contemplated by this Agreement. IN WITNESS WHEREOF the parties have executed and delivered this Agreement as of the date first set forth above. FLEET NATIONAL BANK FLEET NATIONAL BANK as Administrative Agent as Lender By: /s/ Michael F. O'Neill By: /s/ Michael F. O'Neill ------------------------- ---------------------------- Title: Senior Vice President Title: Senior Vice President ------------------------- ----------------------------- BANK OF AMERICA, N.A. KNOWLEDGE ENTERPRISES, INC. By: /s/ Michael R. Heredia By: s/ Ralph Finerman ------------------------- ---------------------------- Title: Managing Director Title: Secretary ------------------------- ---------------------------- NEXTERA ENTERPRISES, INC. By: /s/ Michael P. Muldowney ------------------------- Title: CFO ------------------------- EX-10.2 4 a85918exv10w2.txt EXHIBIT 10.2 EXHIBIT 10.2 $21,292,550.00 JULY 23, 2002 EXCHANGE DEBENTURE 1. For value received, Nextera Enterprises, Inc., a Delaware corporation ("Borrower"), promises to pay to the order of Knowledge Universe, Inc., a Delaware corporation, or its assigns ("Lender"), the principal sum of Twenty-One Million Two Hundred Ninety-Two Thousand Five Hundred Fifty Dollars ($21,292,550.00) (the "Principal Amount"). Interest shall accrue from the date hereof on the outstanding principal at ten percent (10%) per annum, compounded quarterly, based on the calendar year, but in no case shall the interest rate exceed the maximum rate allowed by law. 2. The Maturity Obligations shall be due and payable on January 2, 2004 (the "Maturity Date"). As used herein, "Maturity Obligations" shall mean the entire outstanding principal amount, together with all accrued but unpaid interest thereon, and all other sums due and unpaid hereunder. 3. The Maturity Obligations shall be secured by all of Borrower's assets and all of Borrower's subsidiaries' assets pursuant to that certain Guarantee and Security Agreement of even date herewith between Lender, Borrower, and Borrower's subsidiaries which are a party thereto. 4. This Exchange Debenture and the payment of any portion of the Maturity Obligations is and shall be expressly subordinated and junior in right of payment to the prior payment in full of: (i) all obligations owed by Borrower to Fleet National Bank for itself and the other lenders under the Amended And Restated Credit Agreement dated March 29, 2002; (ii) all obligations owed to Knowledge Universe Capital Co. LLC pursuant to the debenture dated January 5, 1998 evidencing indebtedness in the original principal amount of $24,970,000 (with a current balance of approximately $12,809,094); and (iii) all obligations owed to Knowledge Universe Capital Co. LLC pursuant to the debenture dated December 15, 2000 evidencing indebtedness in the original principal amount of $10,000,000 (with a current balance of approximately $11,601,200). 5. All payments due under this Exchange Debenture are payable in lawful money of the United States of America at Lender's office at 844 Moraga Drive, Los Angeles, California 90049 or at such other place as Lender or other holder hereof shall notify Borrower in writing. 6. All payments received by Lender on this Exchange Debenture shall be applied by Lender as follows: first, to the payment of accrued and unpaid interest; and second, to the reduction of the principal amount. 7. Any portion of the principal amount, or interest unpaid at maturity, or when the entire amount of this Exchange Debenture is otherwise due and payable, shall thereafter accrue interest at a rate of fifteen percent (15%) per annum (the "Delinquency Rate"). The Delinquency Rate shall be effective both before and after any judgment as may be rendered in a court of competent jurisdiction provided, however, that if such Delinquency Rate is deemed to be interest in excess of the amount permitted to be charged to Borrowers under applicable law, Lender shall be entitled to collect a Delinquency Rate only at the highest rate permitted by law, and any interest actually collected by Lender in excess of such lawful amount shall be deemed a payment in reduction of the principal amount then outstanding under this Exchange Debenture and shall be so applied. 8. Borrower may prepay this Exchange Debenture in whole or in part without any premium or penalty. 9. In the event this Exchange Debenture is turned over to an attorney at law for collection after default, in addition to the Maturity Obligations, Lender shall be entitled to collect all costs of collection, including but not limited to reasonable attorneys' fees incurred, whether or not suit on this Exchange Debenture is filed, and all such costs and expenses shall be payable on demand. 10. This Exchange Debenture may not be changed orally, but only by an agreement in writing signed by the party against whom such agreement is sought to be enforced. 11. Borrower, for itself and its successors and assigns, and each endorser or guarantor of this Exchange Debenture, for its heirs, successors, and assigns, hereby waives presentment, protest, demand, diligence, notice of dishonor and of nonpayment, and waives and renounces all rights to the benefits of any statute of limitations and any moratorium, appraisement, and exemption now provided or which may hereafter be provided by any federal or state statute, including but not limited to exemptions provided by or allowed under the Bankruptcy Reform Act of 1978, both as to itself and as to all of its property, whether real or personal, against the enforcement and collection of the obligations evidenced by this Exchange Debenture and any and all extensions, renewals, and modifications hereof. 12. It is the intention of the parties to conform strictly to applicable usury laws from time to time in force, and all agreements between Borrower and Lender, whether now existing or hereafter arising and whether oral or written, are hereby expressly limited so that in no contingency or event whatsoever shall the amount paid or agreed to be paid to Lender or the holder hereof, or collected by Lender or such holder, for the use, forbearance, or detention of the money to be lent hereunder or otherwise, exceed the maximum amount permissible under applicable usury laws. If under any circumstances whatsoever fulfillment of any provision hereof at the time performance of such provision shall be due, shall involve transcending the limit of validity prescribed by law, then ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity; and if under any circumstances Lender or other holder hereof shall ever receive an amount deemed interest, by applicable law, which would exceed the highest lawful rate, such amount that would be excessive interest under applicable usury laws shall be applied to the reduction of the principal amount owing hereunder and not to the payment of interest, or if such excessive interest exceeds the unpaid principal amount and other indebtedness, the excess shall be deemed to have been a payment made by mistake and shall be refunded to Borrower or to any other person making such payment on Borrower's behalf. The terms and provisions of this paragraph shall control and supersede every other provision of all agreements between Lender and Borrower and any endorser or guarantor of this Exchange Debenture. 13. This Exchange Debenture shall be governed by and construed under the laws of the State of California. Borrower hereby submits to personal jurisdiction within the State of California for the enforcement of Borrower's obligations hereunder, and waives any and all personal rights under the law of any other state to object to jurisdiction within the State of California for the purposes of litigation to enforce such obligation of Borrower. IN WITNESS WHEREOF, Borrower, intending to be legally bound hereby, has caused this Exchange Debenture to be duly executed. "BORROWER" Nextera Enterprises, Inc., a Delaware corporation By: /s/ Michael Muldowney -------------------------------------------- Michael Muldowney Its Chief Financial Officer THIS INSTRUMENT IS SUBJECT TO THE SUBORDINATION AGREEMENT DATED AS OF JULY 23, 2002, AS FROM TIME TO TIME IN EFFECT, AMONG THE MAKER, THE PAYEE, AND FLEET NATIONAL BANK, AS AGENT, WHICH, AMONG OTHER THINGS, SUBORDINATES THE OBLIGATIONS OF THE OBLIGOR HEREUNDER TO THE PRIOR PAYMENT OF CERTAIN OBLIGATIONS OF THE OBLIGOR TO THE HOLDERS OF SENIOR INDEBTEDNESS AS DEFINED THEREIN. THIS INSTRUMENT IS SUBJECT TO THE SUBORDINATION AGREEMENT DATED AS OF JULY 23, 2002, AS FROM TIME TO TIME IN EFFECT, AMONG THE MAKER, THE PAYEE, AND KNOWLEDGE UNIVERSE CAPITAL CO. LLC, WHICH, AMONG OTHER THINGS, SUBORDINATES THE OBLIGATIONS OF THE OBLIGOR HEREUNDER TO THE PRIOR PAYMENT OF CERTAIN OBLIGATIONS OF THE OBLIGOR TO KNOWLEDGE UNIVERSE CAPITAL CO. LLC AS PROVIDED THEREIN. EX-10.3 5 a85918exv10w3.txt EXHIBIT 10.3 EXHIBIT 10.3 July 23, 2002 GUARANTEE AND SECURITY AGREEMENT This Guarantee and Security Agreement (this "Agreement") is entered into as of July 23, 2002, by and among Nextera Enterprises, Inc. ("Borrower"), whose address is 4 Cambridge Center, 3rd Floor, Cambridge, Massachusetts 02142, the subsidiaries of the Company who are signatories hereto (individually, the "Subsidiary", together, the "Subsidiaries") and Knowledge Universe Inc. ("Lender"), whose address is 844 Moraga Drive, Los Angeles, California 90049. Recitals A. Borrower has issued to Lender a debenture dated July 23, 2002 evidencing indebtedness in the principal amount of $21,292,550 (the "Debenture"). B. As a condition precedent to the effectiveness of the Debenture, Lender has required Borrower and its Subsidiaries to execute and deliver this Agreement. Agreement NOW, THEREFORE, in consideration of the above recitals and the mutual covenants hereinafter set forth, the parties hereto agree as follows: I. Creation of Security Interest. Borrower and its Subsidiaries hereby assign, pledge, and grant to Lender, a security interest in all of Borrower's and its Subsidiaries' right, title, and interest in and to the following properties and assets of Borrower and its Subsidiaries, (collectively, the "Collateral") in each case whether now owned or hereafter acquired by Borrower and its Subsidiaries: All property and assets of Borrower or its Subsidiaries of every nature and kind whatsoever, including, without limitation, all machinery, equipment and supplies, appliances, computers and related equipment, tools, tooling, furniture, furnishings, fixtures, goods, inventory, raw materials, work in process, finished goods and materials owned by Borrower or its Subsidiaries, accounts, accounts receivable, general intangibles, names, trademarks, service marks, intellectual property, chattel paper, documents, instruments (whether negotiable or non-negotiable), deposit accounts, investment property, securities, securities entitlements, money, contract rights and rights to payment of every kind; all of the foregoing, whether now owned or hereafter at any time acquired by Borrower or its Subsidiaries and wherever located, and all products, additions, accessions, replacements and substitutions for and of all such Collateral; and all books and records of Borrower or its Subsidiaries with respect to all such Collateral; and all proceeds, which includes: (i) whatever is now or hereafter receivable or received by Borrower or its Subsidiaries upon the sale, exchange, collection or other disposition of any item of Collateral, whether voluntary or involuntary, whether such proceeds constitute accounts, inventory, general intangibles, equipment, intellectual property or other assets; (ii) any such items which are now or hereafter acquired by Borrower or its Subsidiaries with any proceeds of Collateral hereunder; and (iii) any insurance or payments under any indemnity, warranty or guaranty now or hereafter payable by reason of damage or loss or otherwise with respect to any item of Collateral or any proceeds thereof, in order to secure the payment and performance of the Secured Obligations (as defined below) The definition of Collateral shall not include more than 66% of the outstanding voting stock or other voting equity in any foreign subsidiary of the Borrower to the extent that the pledge of voting stock or other voting equity above such amount would result in a repatriation of foreign earnings under the Internal Revenue Code (including the "deemed dividend" provisions of section 956 of the Internal Revenue Code). II. Secured Obligations. For purposes of this Agreement, "Secured Obligations" shall mean the Debenture. III. Representation and Warranties. Borrower and its Subsidiaries represent and warrant as follows: A. Location of Collateral. The Collateral will at all times be located within the jurisdiction in which it is located as of the date hereof. B. Existence and Power. Borrower and each of its Subsidiaries is a duly organized and validly existing corporation or limited liability company, as the case may be, in good standing under the laws of the jurisdiction of its incorporation or formation, as the case may be, and each has the corporate power and authority to own its property and assets and to execute and deliver, and perform its obligations under, this Agreement. C. Enforceability. This Agreement has been duly authorized, executed and delivered by Borrower and its Subsidiaries and constitutes the legal, valid and binding obligation of Borrower and its Subsidiaries enforceable against Borrower and its Subsidiaries in accordance with its terms. D. No Conflict. Except as set forth below, the execution, delivery and performance of this Agreement by Borrower and its Subsidiaries and the consummation of the transactions contemplated hereby will not (i) conflict with or result in a breach of any of the terms and provisions of, or constitute a default (or an event which with the giving of notice or the lapse of time or both would constitute a default) under, any agreement, indenture, mortgage, deed of trust, equipment lease, instrument or other document to which Borrower or a Subsidiary is a party; or (ii) conflict with any law, order, rule or regulation of any court or any federal or state government, regulatory body or administrative agency, or any other governmental body having jurisdiction over Borrower or its properties or a Subsidiary or its properties, as the case may be. The consent of the Lenders under the Credit Agreement dated December 30, 1999, as amended, is required for the Company to execute and deliver the Debenture and this Agreement. IV. Covenants. Borrower and its Subsidiaries covenant and agree as follows: A. Change in Address or Corporate Structure. Borrower and its Subsidiaries shall not change their names, identities, or corporate structures, move all or any portion of the Collateral or relocate their chief executive offices without the prior consent of Lender and, at the request of Lender, the prior filing of a financing statement with the proper office and in the proper form to perfect or continue the perfection of the security interests (without loss of priority) created herein which filing shall be satisfactory in form, substance and location to Lender prior to such filing. B. Payment of Taxes and Liens. Borrower and its Subsidiaries shall pay and discharge all taxes, assessments and charges or levies against the Collateral prior to delinquency thereof. C. Insurance. Borrower and its Subsidiaries, at their own expense, shall have and maintain insurance at all times with respect to all Collateral against such risks and liabilities, with such carrier and in such amounts as Lender may require. Such insurance shall be payable to Lender and to Borrower or its Subsidiaries as their interests may appear, shall include a mortgagee's loss payable endorsement, and shall not be subject to cancellation or reduction in coverage without thirty (30) days' prior written notice to Lender. Borrower and its Subsidiaries shall supply evidence of such insurance to Lender upon request. D. No Transfer. Except for sales of inventory in the ordinary course of Borrower's or a Subsidiaries business, as the case may be, Borrower and its Subsidiaries shall not sell, assign (by operation of law or otherwise), exchange or otherwise voluntarily or involuntarily transfer or dispose of all or any portion of the Collateral or encumber, or hypothecate, or create or permit to exist any lien, security interest, charge or encumbrance or adverse claim upon or other interest in all or any portion of the Collateral without the prior written consent of Lender. E. Reports. Borrower and its Subsidiaries shall promptly deliver to Lender all financial statements, reports and information concerning Borrower, its Subsidiaries and/or the Collateral as may be requested by Lender from time to time. V. Guarantee. A. Guarantee of Secured Obligations. Borrower and each Subsidiary unconditionally guarantee that the Secured Obligations will be performed and paid in full in cash when due and payable, whether at the stated or accelerated maturity thereof or otherwise, this guarantee being a guarantee of payment and not of collectability and being absolute and in no way conditional or contingent. In the event any part of the Secured Obligations shall not have been so paid in full when due and payable, Borrower and each Subsidiary will, immediately upon notice by the Lender or, without notice, immediately upon the occurrence of a default due to bankruptcy, pay or cause to be paid to the Lender the amount of such Secured Obligations which are then due and payable and unpaid. The obligations of Borrower and each Subsidiary hereunder shall not be affected by the invalidity, unenforceability or irrecoverability of any other guarantor thereof. For purposes hereof, the Secured Obligations shall be due and payable when and as the same shall be due and payable under the terms of the Debenture notwithstanding the fact that the collection or enforcement thereof may be stayed or enjoined under the Bankruptcy Code or other applicable law. If, notwithstanding any other provision of this Agreement, including the obligations incurred by it under this Agreement and the rights granted to it by Section 5.10, enforcement of the obligations of Borrower and each Subsidiary under this Agreement for the full amount of the Secured Obligations to which Borrower and each Subsidiary is liable would constitute an unlawful transfer under any applicable fraudulent conveyance or fraudulent transfer law or any comparable law, then the obligations of Borrower and each Subsidiary hereunder shall be reduced to the highest amount for which such obligations may then be enforced without resulting in an unlawful transfer under any such law. B. Continuing Obligation. Borrower and each Subsidiary acknowledges that the Lender has entered into the Debenture in reliance on this Section 5 being a continuing irrevocable agreement, and Borrower and each Subsidiary agrees that its guarantee may not be revoked in whole or in part. The obligations of the Borrowers and each Subsidiary hereunder shall terminate when the Secured Obligations have been indefeasibly paid in full in cash and discharged; provided, however, that: (1) if a claim is made upon the Lender at any time for repayment or recovery of any amounts or any property received by the Lender from any source on account of any of the Secured Obligations and the Lender repays or returns any amounts or property so received (including interest thereon to the extent required to be paid by the Lender) or (2) if the Lender becomes liable for any part of such claim by reason of (i) any judgment or order of any court or administrative authority having competent jurisdiction, or (ii) any settlement or compromise of any such claim (provided that, except after the occurrence and during the continuance of an Event of Default, the Borrower shall have consented to such settlement or compromise, such consent not to be unreasonably withheld), then the Borrower and each Subsidiary shall remain liable under this Agreement for the amounts so repaid or property so returned or the amounts for which the Lender becomes liable (such amounts being deemed part of the Secured Obligations) to the same extent as if such amounts or property had never been received by the Lender, notwithstanding any termination hereof or the cancellation of any instrument or agreement evidencing any of the Secured Obligations. Not later than five days after receipt of notice from the Lender, the Borrower and each Subsidiary shall pay to the Lender an amount equal to the amount of such repayment or return for which the Lender has so become liable. Payments hereunder by the Borrower and each Subsidiary may be required by the Lender on any number of occasions. C. Waivers with Respect to Secured Obligations. Except to the extent expressly required by the Debenture, Borrower and each Subsidiary waives, to the fullest extent permitted by the provisions of applicable law, all of the following (including all defenses, counterclaims and other rights of any nature based upon any of the following): (1) presentment, demand for payment and protest of nonpayment of any of the Secured Obligations, and notice of protest, dishonor or nonperformance; (2) notice of acceptance of this guarantee and notice that credit has been extended in reliance on Borrower's and each Subsidiary's guarantee of the Secured Obligations; (3) notice of any Event of Default or of any inability to enforce performance of the obligations of the Borrower or its Subsidiaries under the Debenture; (4) demand for performance or observance of, and any enforcement of any provision of the Debenture or any pursuit or exhaustion of rights or remedies with respect to the Debenture or against the Borrower or its Subsidiaries in respect of the Debenture or any requirement of diligence or promptness on the part of the Lender in connection with any of the foregoing; (5) any act or omission on the part of the Lender which may impair or prejudice the rights of Borrower and its Subsidiaries, including rights to obtain subrogation, exoneration, contribution, indemnification or any other reimbursement from Borrower or its Subsidiaries, or otherwise operate as a deemed release or discharge; (6) failure or delay to perfect or continue the perfection of any security interest in Secured Obligations or any other action which harms or impairs the value of, or any failure to preserve or protect the value of, the Secured Obligations; (7) any statute of limitations or any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than the obligation of the principal; (8) any "single action" or "anti-deficiency" law which would otherwise prevent the Lender from bringing any action, including any claim for a deficiency, against Borrower or its Subsidiaries before or after the Lender's commencement or completion of any foreclosure action, whether judicially, by exercise of power of sale or otherwise, or any other law which would otherwise require any election of remedies by the Lender; and (9) all demands and notices of every kind with respect to the foregoing. Borrower and each Subsidiary represents that each has obtained the advice of counsel as to the extent to which suretyship and other defenses may be available to it with respect to its obligations hereunder in the absence of the waivers contained in this Section 5.3. No delay or omission on the part of the Lender in exercising any right under Debenture or under any other guarantee of the Secured Obligations shall operate as a waiver or relinquishment of such right. No action which the Lender or the Borrower and its Subsidiaries may take or refrain from taking with respect to the Secured Obligations shall affect the provisions of this Agreement or the obligations of Borrower and its Subsidiaries hereunder. None of the Lender's rights shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of Borrower or its Subsidiaries, or by any noncompliance by Borrower or its Subsidiaries under the Debenture, regardless of any knowledge thereof which the Lender may have or otherwise be charged with. D. Lender's Power to Waive, etc. Borrower and each Subsidiary grants to the Lender full power in its discretion, without notice to or consent of Borrower and each Subsidiary, such notice and consent being expressly waived to the fullest extent permitted by applicable law, and without in any way affecting the liability of Borrower and its Subsidiaries under its guarantee hereunder: (1) To waive compliance with, and any Event of Default under, and to consent to any amendment to or modification or termination of any provision of, or to give any waiver in respect of, the Secured Obligations or any guarantee thereof (as from time to time in effect); (2) To grant any extensions of the Secured Obligations (for any duration), and any other indulgence with respect thereto, and to effect any total or partial release (by operation of law or otherwise), discharge, compromise or settlement with respect to the obligations of Borrower and its Subsidiaries in respect of the Secured Obligations, whether or not rights against Borrower and its Subsidiaries under this Agreement are reserved in connection therewith; (3) To take security in any form for the Secured Obligations, and to consent to the addition to or the substitution, exchange, release or other disposition of, or to deal in any other manner with, any part of any property or asset contained in the Collateral whether or not the property, if any, received upon the exercise of such power shall be of a character or value the same as or different from the character or value of any property disposed of, and to obtain, modify or release any present or future guarantees of the Secured Obligations and to proceed against any of the Collateral or such guarantees in any order; (4) To collect or liquidate or realize upon any of the Secured Obligations or the Collateral in any manner or to refrain from collecting or liquidating or realizing upon any of the Secured Obligations or the Collateral; and (5) To extend credit under the Debenture or otherwise in such amount as the Lender may determine, including increasing the amount of credit and the interest rate and fees with respect thereto, even though the condition of the Borrower and its Subsidiaries (financial or otherwise, on an individual or consolidated basis) may have deteriorated since the date hereof. E. Certain Representations by Borrower and each Subsidiary. Borrower and each Subsidiary represents that: (1) it is in its best interest and in pursuit of the purposes for which it was organized as an integral part of the business conducted and proposed to be conducted by Borrower and each Subsidiary, and reasonably necessary and convenient in connection with the conduct of the business conducted and proposed to be conducted by them, to induce the Lender to enter into the Debenture and by making the Guarantee contemplated by this Section 5; (2) the amount of cash available under the Debenture will directly or indirectly inure to its benefit; (3) after giving effect to the foregoing considerations, the assets and liabilities of Borrower and each Subsidiary and rights of contribution among Borrower and each Subsidiary, including the rights provided in Section 5.10: (i) it will not be rendered insolvent as a result of entering into this Agreement; (ii) after giving effect to the transactions contemplated by this Agreement, it will have assets having a fair saleable value in excess of the amount required to pay its probable liability on its existing debts as such debts become absolute and matured; (iii) it has, and will have, access to adequate capital for the conduct of its business; and (iv) it has the ability to pay its debts from time to time incurred in connection therewith as such debts mature; (4) it has been advised by the Lender that the Lender is unwilling to enter into the Debenture unless the Guarantee contemplated by this Section 5 is given by it; and (5) except as otherwise permitted pursuant to the Debenture, in the case of each Subsidiary, all of its equity or ownership interests are owned, directly or indirectly, by the Borrower. F. Subrogation. Borrower and each Subsidiary agrees that, until the Secured Obligations are paid in full, they will not exercise any right of reimbursement, subrogation, contribution, offset or other claims against the Borrower or the other Subsidiaries, as the case may be, arising by contract or operation of law in connection with any payment made or required to be made by Borrower or each Subsidiary under this Agreement. After the payment in full of the Secured Obligations, Borrower and each Subsidiary shall be entitled to exercise against the Borrower and the other Subsidiaries, as the case may be, all such rights of reimbursement, subrogation, contribution and offset, and all such other claims, to the fullest extent permitted by law. G. Subordination. Borrower and each Subsidiary covenants and agrees that all indebtedness, claims and liabilities then or thereafter owing by the Borrower and each Subsidiary whether arising hereunder or otherwise are subordinated to the prior payment in full of the Secured Obligations and are so subordinated as a claim against Borrower and each Subsidiary or any of their assets, whether such claim be in the ordinary course of business or in the event of voluntary or involuntary liquidation, dissolution, insolvency or bankruptcy, so that no payment with respect to any such indebtedness, claim or liability will be made or received while any Event of Default exists; provided, however, that the foregoing provisions shall not limit the right of Borrower or each Subsidiary to receive payments in respect of such indebtedness, claims or liabilities so long as no Event of Default exists. H. Future Subsidiaries; Further Assurances. The Borrower will from time to time cause (a) any present wholly owned subsidiary that is not a Subsidiary within 30 days after notice from the Lender or (b) any future wholly owned subsidiary within 30 days after any such person becomes a wholly owned subsidiary, to join this Agreement pursuant to a joinder agreement in form and substance satisfactory to the Lender; provided, however, that in the event such a wholly owned subsidiary is prohibited by any valid law, statute, rule or regulation from guaranteeing the Secured Obligations, or if such a guarantee by any foreign subsidiary would result in a repatriation of foreign earnings under the Internal Revenue Code (including the "deemed dividend" provisions of section 956 of the Internal Revenue Code), (i) such guarantee will be limited to the extent necessary to comply with such prohibition or to prevent such repatriation of foreign earnings or (ii) if such limitation on the guaranteed amount is not sufficient to avoid such prohibition or repatriation, the Borrower and its other Subsidiaries will pledge the stock of such wholly owned subsidiary (or as much of such stock as may be pledged without resulting in such a repatriation) to the Lender to secure the Secured Obligations pursuant to a pledge agreement in form and substance satisfactory to the Lender. Borrower and each Subsidiary will, promptly upon the request of the Lender from time to time, execute, acknowledge and deliver, and file and record, all such instruments, and take all such action, as the Lender deems necessary or advisable to carry out the intent and purpose of this Section 5. I. Contribution Among Guarantors. Borrower and each Subsidiary agree that, as among themselves in their capacity as guarantors of the Secured Obligations, the ultimate responsibility for repayment of the Secured Obligations, in the event that the Borrower fails to pay when due its Secured Obligations, shall be equitably apportioned among the Borrower and each Subsidiary (a) in the proportion that each, in its capacity as a guarantor, has benefited from the extensions of credit to the Borrower by the Lender under the Debenture, or (b) if such equitable apportionment cannot reasonably be determined or agreed upon among Borrower and each Subsidiary, in proportion to their respective net worths determined on or about the date hereof (or such later date as such party becomes party hereto). In the event that Borrower or a Subsidiary, in its capacity as a guarantor, pays an amount with respect to the Secured Obligations in excess of its proportionate share as set forth in this Section 5.10, Borrower or each other Subsidiary, as the case may be, shall, to the extent consistent with the Debenture, make a contribution payment to such party in an amount such that the aggregate amount paid by Borrower and each Subsidiary reflects its proportionate share of the Secured Obligations. In the event of any default by any Borrower or Subsidiary under this Section 5.10, Borrower and each other Subsidiary, as the case may be, will bear, to the extent consistent with the Debenture, its proportionate share of the defaulting party's obligation under this Section 5.10. This Section 5.10 is intended to set forth only the rights and obligations of the Borrower and each Subsidiary among themselves and shall not in any way affect the obligations of Borrower and each Subsidiary to the Lender under the Debenture or this Agreement (which obligations shall at all times constitute the joint and several obligations of Borrower and each Subsidiary). VI. Right to Enter. Lender shall have, at all times, with or without notice, the right to enter into and upon any premises where any of the Collateral or records with respect thereto are located for the purpose of inspecting the same, performing an audit, making copies of records, observing the use of any part of the Collateral, protecting Lender's security interest in the Collateral, or otherwise determining whether Borrower and its Subsidiaries are in compliance with the terms of this Agreement. VII. Further Assurances. Borrower and its Subsidiaries shall execute and file any financing or continuation statement, or amendments thereto, and such other instruments or notices as may be necessary or desirable, which Lender may reasonably request in order to perfect and preserve the perfection and the priority of the security interests granted or purported to be granted under this Agreement. Borrower and its Subsidiaries agree that, at Lender's option, this Agreement, or a photocopy hereof, may be filed by Lender as a financing statement, and that Borrower's and its Subsidiaries execution hereof shall constitute the execution by Borrower and its Subsidiaries of a financing statement. Borrower and its Subsidiaries hereby irrevocably make, constitutes, and appoints Lender (and any of Lender's officers, employees, or agents designated by Lender) as Borrower's and its Subsidiaries' true and lawful attorney, with power to: (a) sign the name of Borrower and its Subsidiaries on any and all documents to be executed, recorded, or filed in order to perfect or continue perfected Lender's security interest in the Collateral including, without limitation, any UCC financing statements; (b) endorse Borrower's and its Subsidiaries' names on any checks, notices, acceptances, money orders, drafts, or other item of payment or security that may come into Lender's possession; (c) at any time after a default has occurred make, settle, and adjust all claims under Borrower's or its Subsidiaries' policies of insurance in respect of the Collateral and make all determinations and decisions with respect to such policies of insurance. The appointment of Lender as Borrower's and its Subsidiaries' attorney, and each and every one of Lender's rights and powers, being coupled with an interest, is irrevocable until all of the Secured Obligations have been fully repaid and performed. VIII. Defaults. Borrower and its Subsidiaries shall be in default under this Agreement upon the happening of any one or more of the following events: A. Payments. Except as prohibited or restricted by the Subordination Agreement dated July 23, 2002, with respect to the Debenture, Borrower or a Subsidiary shall fail to make any payment; B. Representations and Warranties. Any representation or warranty made by Borrower or a Subsidiary in this Agreement or the Debenture or which is contained in any certificate, document, financial or other written statement furnished at any time pursuant hereto or thereto shall prove to have been untrue, incorrect or misleading in any material respect when made; C. Other Covenants. Borrower or a Subsidiary shall fail duly to observe or perform any covenant or agreement contained in any agreement to which Borrower or a Subsidiary, as the case may be, and Lender are parties; D. Collateral. Borrower or a Subsidiary shall fail to pay and discharge any judgment or levy of any attachment, execution or other process against any all or any portion of the Collateral and such judgment shall not be satisfied, or such levy or other process shall not be removed within twenty (20) calendar days after the entry or levy thereof, or at least five (5) calendar days prior to the time of any proposed sale under any such judgment levy; or E. Insolvency. Borrower or a Subsidiary commences or proposes to commence any bankruptcy, reorganization or insolvency proceeding, or other proceeding under any federal, state or other law for the relief of debtors; Borrower or a Subsidiary fails to obtain the dismissal, within thirty (30) days after the commencement thereof, of any bankruptcy, reorganization or insolvency proceeding, or other proceeding under any law for the relief of debtors, instituted by one or more third parties, fails actively to oppose any such proceeding, or, in any such proceeding, defaults or files an answer admitting the material allegations upon which the proceeding was based or alleges its willingness to have an order for relief entered or its desire to seek liquidation, reorganization or adjustment of its debts; or any receiver, trustee or custodian is appointed to take possession of all or any substantial portion of the assets of Borrower or a Subsidiary, as the case may be, or any committee of Borrower's or a Subsidiary, as the case may be, creditors, or any class thereof, is formed for the purpose of monitoring or investigating the financial affairs of Borrower or a Subsidiary, as the case may be, or enforcing such creditors' rights. Upon such default, Lender may declare all Secured Obligations to be immediately due and payable. Lender shall have the remedies of a secured party under the California Uniform Commercial Code and may require Borrower and its Subsidiaries to assemble the Collateral and turn it over to Lender at a place designated by Lender. Borrower and its Subsidiaries hereby expressly waive and release all rights to have any of the Collateral marshalled upon the exercise of any remedies under this Agreement. IX. Costs and Expenses. Borrower and its Subsidiaries agree to pay on demand all costs and expenses, including legal fees, incurred or paid by Lender in preparing, executing or amending this Agreement, and in exercising its rights and remedies or protecting its interests hereunder. X. Right of Set Off. In addition to and not in limitation of any other right or remedy hereunder, Lender shall have, at any time, the right to set off any indebtedness or obligation of Borrower or its Subsidiaries against any indebtedness or obligation of Lender to Borrower or its Subsidiaries, without notice to or demand upon Borrower or its Subsidiaries, any guarantor of any such indebtedness or obligation or any other person, whether or not such Obligation or indebtedness is liquidated, contingent or mature at the time of such offset and however such indebtedness or obligations were created or incurred. XI. Notices. All notices, requests and other communications required or permitted to be made hereunder shall, except as otherwise provided, be in writing and may be delivered personally or sent by telegram, telecopy, telex, overnight courier or certified mail, postage prepaid, to the parties addressed as set forth in the first paragraph hereof. Such notices, requests and other communications sent shall be effective upon receipt, unless sent by (i) overnight courier, in which case they shall be effective exactly one (1) business day after deposit with such overnight courier, or (ii) mail, in which case they shall be effective exactly three (3) business days after deposit in the United States mail. Either party may change its address or other information by giving notice thereof to the other party hereto in conformity with this section. XII. Termination of Security Agreement. This Security Agreement and the security interest hereunder shall terminate upon the full and final payment in cash and performance of all the Secured Obligations. Notwithstanding anything to the contrary herein, this Security Agreement (including all representations, warranties and covenants contained herein) shall continue to be effective or be reinstated, as the case may be, if at any time any amount received by Lender in respect of the Secured Obligations is rescinded or must otherwise be restored or returned by Lender upon or in connection with the insolvency, bankruptcy, dissolution, liquidation or reorganization of Borrower or a Subsidiary or otherwise, all as though such payment had not been made. XIII. Headings. The various headings in this Agreement are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or any provision hereof. XIV. Amendments. This Agreement or any provision hereof may be changed, waived, or terminated only by a statement in writing signed by the party against which such change, waiver or termination is sought to be enforced, and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. XV. Entire Agreement. This Agreement and the Debenture are intended by the parties as a final expression of their agreement and is intended as a complete and exclusive statement of the terms and conditions thereof. Acceptance of or acquiescence in a course of performance rendered under this Agreement shall not be relevant to determine the meaning of this Agreement even though the accepting or acquiescing party had knowledge of the nature of the performance and opportunity for objection. XVI. Severability. If any provision or obligation of this Agreement should be found to be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions and obligations or any other agreement executed in connection herewith, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby and shall nonetheless remain in full force and effect to the maximum extent permitted by law. XVII. Successors and Assigns. All rights of Lender hereunder shall inure to the benefit of its successor and assigns. Borrower and its Subsidiaries shall not assign any of their interest under this Agreement without the prior written consent of Lender. Any purported assignment inconsistent with this provision shall, at the option of Lender, be null and void. XVIII. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without giving effect to the principles thereof relating to conflicts of law. XIX. Delay; Waiver. No delay in enforcing or failing to enforce any right under this Agreement by Lender shall constitute a waiver by Lender of such right. No waiver by Lender of any default hereunder shall be effective unless in writing, nor shall any waiver operate as a waiver of any other default or of the same default on a future occasion. XX. Time of Essence. Time is of the essence of each provision of this Agreement of which time is an element. XXI. Survival of Representations and Warranties. All representations, warranties and covenants of Borrower and its Subsidiaries contained herein shall survive the execution and delivery of this Agreement, and shall terminate only upon the full payment and performance by Borrower of the Secured Obligations. XXII. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but all of which shall together constitute one and the same agreement. IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed and delivered by their respective officers as of the date first above written. NEXTERA ENTERPRISES, INC. By: /s/ Michael P. Muldowney --------------------------------- Name: Michael P. Muldowney --------------------------------- Title: Chief Financial Officer --------------------------------- CE ACQUISITION CORP. ERG ACQUISITION CORP. LEXECON INC. NETNEXT, INC. NEXTERA BUSINESS PERFORMANCE SOLUTIONS GROUP, INC. NEXTERA INTERACTIVE, INC. SCANADA, INC. NEXTERA & COMPANY, LLC NEXTERA INTERNATIONAL, LLC By: /s/ Michael P. Muldowney --------------------------------- As an authorized officer of each of the foregoing corporations and limited liability companies KNOWLEDGE UNIVERSE INC., a Delaware corporation By: /s/ Stanley E. Maron ------------------------------- Name: Stanley E. Maron -------------------------------- Title: Secretary -------------------------------- EX-10.4 6 a85918exv10w4.txt EXHIBIT 10.4 EXHIBIT 10.4 NEXTERA ENTERPRISES, INC. SUBORDINATION AGREEMENT This Agreement, dated as of July 23, 2002, is among Nextera Enterprises, Inc., a Delaware corporation (the "Company"), Knowledge Universe Inc., a Delaware corporation ("Knowledge Universe"), and Knowledge Universe Capital Co. LLC, a Delaware limited liability company ("KU Cap Co"). The parties agree as follows: 1. Definitions. Certain capitalized terms are used in this Agreement as specifically defined in this Section 1 as follows: "Exchange Debenture" means the debenture in the original principal amount of $21,292,550 dated July 23, 2002, executed by the Company in favor of Knowledge Universe. "Junior Creditor" means Knowledge Universe and each other Person becoming a party to this Agreement (or to a subordination agreement in substantially the form of this Agreement) pursuant to Section 9.1. "KU Cap Co Debentures" means that certain debenture owed to KU Cap Co by the Company, dated January 5, 1998, evidencing indebtedness in the original principal amount of $24,970,000 (with a current balance of approximately $12,809,094) and that certain debenture owed to KU Cap Co by the Company, dated December 15, 2000, evidencing indebtedness in the original principal amount of $10,000,000 (with a current balance of approximately $11,601,200). "Reorganization" means any voluntary or involuntary dissolution, winding-up, liquidation, reorganization by judicial proceedings, bankruptcy, insolvency, receivership, or other statutory or common law proceedings, including any proceeding under the federal Bankruptcy Code or any similar law of any other jurisdiction, involving the Company or any guarantor of the Senior Indebtedness or any of their present or future domestic subsidiaries or any of their respective properties or the readjustment of the respective liabilities of the Company or any such other Person or any assignment for the benefit of creditors or any marshaling of the assets or liabilities of the Company or any such other Person. "Senior Indebtedness" means: (i) The obligation to pay the KU Cap Co Debentures; (ii) Obligations to pay interest owing under the KU Cap Co Debentures, whether such obligations arise before or after the institution of any Reorganization and whether or not such obligations are allowed claims in such Reorganization; and (iii) All renewals, extensions, and refinancings of the items described in clauses (i) and (ii) above. "Subordinated Indebtedness" means: (a) The principal of and interest on the Exchange Debenture and all other indebtedness of the Company and its subsidiaries to the Junior Creditor; and (b) All other obligations of the Company and its subsidiaries to the Junior Creditor with respect to the items in clause (a), whether now existing or hereafter arising, including intercompany advances and any claim against the Company and its subsidiaries in respect of rescission, indemnification, expenses, damages, or otherwise. 2. Subordination Covenants. Each of the Company and the Junior Creditor covenants that, so long as any part of the Senior Indebtedness is outstanding, each of them will comply with the following provisions: 3. Subordination. To the extent and in the manner provided in this Agreement, the payment of any Subordinated Indebtedness is and shall be expressly subordinated and junior in right of payment to the prior payment in full of all Senior Indebtedness, and the Subordinated Indebtedness is subordinated as a claim against the Company, any of its subsidiaries, any guarantor of the Senior Indebtedness or any of their respective assets to the prior payment in full of the Senior Indebtedness, in each case whether such claim is (a) in the ordinary course of business or (b) in the event of any Reorganization. 4. Restricted Payments. Without the written consent of KU Cap Co, the Company and its subsidiaries will not make, and the Junior Creditor will not accept or receive, any payment of any Subordinated Indebtedness, whether in cash, securities, or other property or by way of conversion, exchange or set-off or otherwise, and no such payment shall become due. 5. Reorganization. In the event of any Reorganization, all Senior Indebtedness shall first be paid in full before any payment is made on account of any Subordinated Indebtedness. In any proceedings seeking to effect a Reorganization any payment or distribution of any kind or character, whether in cash, property, or securities, which may be payable or deliverable in respect of any such Subordinated Indebtedness shall be paid or delivered directly to KU Cap Co for application to payment of the Senior Indebtedness, unless and until all Senior Indebtedness shall have been paid in full. 6. Specific Powers in Reorganization. In any proceedings with respect to any Reorganization, the Junior Creditor irrevocably authorizes KU Cap Co: 7. To prove and enforce any claims on the Subordinated Indebtedness owed by the Company and its subsidiaries to the Junior Creditor; 8. To vote claims comprising any such Subordinated Indebtedness and to accept or reject on behalf of the Junior Creditor any plan proposed in connection with any such Reorganization; 9. To accept and execute receipts for any payment or distribution made with respect to any such Subordinated Indebtedness and to apply such payment or distribution to the payment of the Senior Indebtedness; and 10. To take any action and to execute any instruments necessary to effectuate the foregoing. 11. Payments Held in Trust. If, notwithstanding the foregoing, any payment or distribution of the assets of the Company or any of its present or future subsidiaries of any kind or character (other than payments permitted by Section 2.2) shall be received, by way of set-off or otherwise, by the Junior Creditor before all Senior Indebtedness is paid in full, such payment or distribution and the amount of any such set-off shall be held in trust by the Junior Creditor and promptly paid over to KU Cap Co (who shall have the right to convert any such assets into cash) for application to the payment of Senior Indebtedness until all such Senior Indebtedness shall have been paid in full, after giving effect to any concurrent payment or distribution to the holders of Senior Indebtedness. 12. Restrictions on Acceleration. Notwithstanding any contrary provision of any Subordinated Indebtedness or of any agreement or instrument relating thereto, (a) no Subordinated Indebtedness (other than payments permitted by Section 2.2) shall become or be declared to be due and payable prior to the date on which the Senior Indebtedness becomes or is declared to be due and payable and (b) if any Senior Indebtedness shall have become or been declared to be due and payable prior to its stated maturity, the Subordinated Indebtedness shall become immediately due and payable. 13. Effect of Provisions; Subrogation. 14. Effect of Provisions; Relative Rights. The provisions hereof as to subordination are solely for the purpose of defining the relative rights of the holders of Senior Indebtedness on one hand and the Junior Creditor on the other hand, and such provisions shall not impair as between the Company and the Junior Creditor the obligation of the Company, which is unconditional and absolute, to pay to the Junior Creditor the principal of any Subordinated Indebtedness owed by the Company to the Junior Creditor and interest thereon, and all other amounts in respect thereof, nor shall any such provisions prevent the Junior Creditor from exercising all remedies otherwise permitted by applicable law or under the terms of such Subordinated Indebtedness upon the occurrence and during the continuance of a default thereunder, except to the extent prohibited by this Agreement. 15. Subrogation. When all Senior Indebtedness then outstanding has been paid in full, the Junior Creditor shall be subrogated to the rights of the holders of Senior Indebtedness to receive payments or distributions of assets of the Company or any of its subsidiaries that would be deemed payable on the Senior Indebtedness until the Subordinated Indebtedness shall be paid in full. For the purposes of such subrogation, no payments or distributions to the holders of Senior Indebtedness of any cash, property, or securities to which the Junior Creditor would be entitled except for the provisions of this Agreement, and no payment over pursuant to the provisions of this Agreement to the holders of Senior Indebtedness by the Junior Creditor, shall, as between the Company or any of its subsidiaries and their creditors other than the holders of Senior Indebtedness, on one hand, and the Junior Creditor, on the other hand, be deemed to be a payment by the Company or any of its subsidiaries to or on account of Senior Indebtedness. 16. Legend, etc. Each of the Company and the Junior Creditor covenants to cause each instrument or certificate representing or evidencing any of the Subordinated Indebtedness to have affixed upon it a legend substantially as follows: "This instrument is subject to the Subordination Agreement dated as of July 23, 2002, as from time to time in effect, among the maker, the payee, and Knowledge Universe Capital Co. LLC, which, among other things, subordinates the obligations of the obligor hereunder to the prior payment of certain obligations of the obligor to the holders of Senior Indebtedness as defined therein." The Company shall cause any financial statement describing or listing or otherwise reflecting the existence of any Indebtedness included in the Subordinated Indebtedness to indicate clearly the subordinated character thereof. 17. Further Assurances. Each of the Company and the Junior Creditor covenants to execute and deliver to KU Cap Co such further instruments and to take such further action as KU Cap Co may at any time or times reasonably request in order to carry out the provisions and intent of this Agreement. 18. Representations and Warranties. In order to induce KU Cap Co to enter into this Agreement, the Company represents and warrants that: 19. Organization and Business. The Company is a duly organized and validly existing entity, in good standing under the laws of the jurisdiction of its organization, with all power and authority necessary (a) to enter into and perform this Agreement and (b) to own its properties and carry on the business now conducted or proposed to be conducted by it. Certified copies of the Charter and By-laws of the Company have been previously delivered to KU Cap Co and are correct and complete. 20. Authorization and Enforceability. The Company has taken all corporate action required to execute, deliver and perform this Agreement. This Agreement constitutes the legal, valid, and binding obligation of the Company, enforceable against the Company in accordance with its terms. 21. No Legal Obstacle to Agreements. Neither the execution and delivery of this Agreement, nor the consummation of any transaction referred to in or contemplated by this Agreement, nor the fulfillment of the terms hereof or thereof or of any other agreement, instrument, deed, or lease referred to in this Agreement, has constituted or resulted, or will constitute or result, in: 22. Any breach or termination of the provisions of any agreement, instrument, deed or lease to which the Company is a party or by which it is bound, or of the Charter or By-laws of the Company; or 23. The violation of any law, statute, judgment, decree, or governmental order, rule, or regulation applicable to the Company. No approval, authorization, or other action by, or declaration to or filing with, any governmental or administrative authority or any other Person is required to be obtained or made by the Company in connection with the execution, delivery, and performance of this Agreement or the transactions contemplated hereby. 24. Litigation. No litigation, at law or in equity, or any proceeding before any court, board, or other governmental or administrative agency or any arbitrator is pending or, to the knowledge of the Company, threatened which may involve any material risk of any final judgment, order, or liability which, after giving effect to any applicable insurance, has resulted, or creates a material risk of resulting, in any material adverse change in the Company's business, assets, financial condition, income, or prospects or which seeks to enjoin the consummation, or which questions the validity, of any of the transactions contemplated by this Agreement. No judgment, decree, or order of any court, board, or other governmental or administrative agency or any arbitrator has been issued against or binds the Company which has resulted, or creates a material risk of resulting, in any material adverse change in the Company's business, assets, financial condition, income, or prospects. 25. Information Regarding the Company. The Junior Creditor expressly acknowledges and agrees that it has made such investigation as it deems desirable of the risks undertaken by it in entering into this Agreement and is fully satisfied that it understands all such risks. The Junior Creditor waives any obligation which may now or hereafter exist on the part of KU Cap Co or any holder of any Senior Indebtedness to inform the Junior Creditor of the risks being undertaken by entering into this Agreement or of any changes in such risks and the Junior Creditor undertakes to keep itself informed of such risks and any changes therein. The Junior Creditor expressly waives (except to the extent prohibited by applicable law which cannot be waived) any duty which may now or hereafter exist on the part of KU Cap Co or any holder of any Senior Indebtedness to disclose to the Junior Creditor any matter related to the business, operations, character, collateral, credit, condition (financial or otherwise), income, or prospects of the Company or its affiliates, properties, or management, whether now or hereafter known by any KU Cap Co. The Junior Creditor represents, warrants, and agrees that it assumes sole responsibility for obtaining from the Company and its affiliates all information concerning and other information as to the Company and its subsidiaries and their respective affiliates, properties, or management or anything relating to any of the above as it deems necessary or desirable. 26. Continuing Agreement; Lender Powers; etc. 27. Continuing Agreement, etc. This Agreement shall be a continuing agreement, shall be irrevocable by the Junior Creditor, and shall remain in full force and effect until the payment in full of the Senior Indebtedness. 28. No Impairment by Company, KU Cap Co, etc. No right of KU Cap Co or any present or future holder of any Senior Indebtedness shall at any time be prejudiced or impaired by any conduct on the part of the Company, including any noncompliance by the Company with the terms of this Agreement, or by any conduct, in good faith, by KU Cap Co or any such holder, regardless of any knowledge thereof which KU Cap Co or any such holder may have or otherwise be charged with. 29. Specific Performance. KU Cap Co is authorized to demand specific performance of this Agreement at any time when the Company or the Junior Creditor shall have failed to comply with any provision hereof applicable to it, and each of them irrevocably waives any defense based on the adequacy of a remedy at law which might be asserted as a bar to the remedy of specific performance hereof in any action brought therefor by KU Cap Co. 30. Transfers; Successors and Assigns. 31. Transfers. The Junior Creditor will not sell, assign, transfer, or otherwise dispose of any Subordinated Indebtedness except to another Person which shall have entered into this Agreement or another agreement with KU Cap Co, in a form satisfactory to KU Cap Co, providing for subordination of such Subordinated Indebtedness to the prior payment of the Senior Indebtedness on the terms provided in this Agreement. 32. Successors and Assigns. The provisions of this Agreement shall inure to the benefit of KU Cap Co and its successors and assigns and shall be binding upon each of the Company and the Junior Creditor and their respective successors and assigns. The Company and the Junior Creditor may not assign their rights or obligations under this Agreement except to the extent provided in Section 9.1. 33. Notices. Any notice or other communication in connection with this Agreement shall be deemed to be given if given in writing (including facsimile) addressed as provided below (or to the addressee at such other address as the addressee shall have specified by notice actually received by the addressor), and if either (a) actually delivered in fully legible form to such address (evidenced in the case of a facsimile by receipt of a confirmation thereof) or (b) in the case of a letter, five business days shall have elapsed after the same shall have been deposited in the United States mails, with first-class postage prepaid and registered or certified. If to the Company, to it at 4 Cambridge Center, 3rd Floor, Cambridge, Massachusetts 02142, to the attention of its chief financial officer. If to Knowledge Universe, to it at 844 Moraga Drive, Los Angeles, California 90049, to the attention of Stanley Maron. If to Knowledge Universe Capital Co. LLC, to it at 844 Moraga Drive, Los Angeles, California 90049, to the attention of Ralph Finerman. 34. Venue; Service of Process. Each of the Company, the Junior Creditor, and KU Cap Co: 35. Irrevocably submits to the nonexclusive jurisdiction of the state courts of The Commonwealth of Massachusetts and to the nonexclusive jurisdiction of the United States District Court for the District of Massachusetts for the purpose of any suit, action or other proceeding arising out of or based upon this Agreement or the subject matter hereof or thereof; 36. Waives to the extent not prohibited by applicable law, and agrees not to assert, by way of motion, as a defense or otherwise, in any such proceeding brought in any of the above-named courts, any claim that it is not subject personally to the jurisdiction of such court, that its property is exempt or immune from attachment or execution, that such proceeding is brought in an inconvenient forum, that the venue of any such proceeding is improper, or that this Agreement, or the subject matter hereof or thereof, may not be enforced in or by such court; and 37. Consents to service of process in any such proceeding in any manner permitted by Chapter 223A of the General Laws of The Commonwealth of Massachusetts and agrees that service of process by registered or certified mail, return receipt requested, at its address specified in or pursuant to Section 10 is reasonably calculated to give actual notice. 38. WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED, EACH OF KU CAP CO, THE COMPANY, AND THE JUNIOR CREDITOR WAIVES, AND COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT, OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, OR ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT, OR THE SUBJECT MATTER HEREOF OR IN ANY WAY CONNECTED WITH THE DEALINGS OF KU CAP CO, THE COMPANY, OR THE JUNIOR CREDITOR IN CONNECTION WITH ANY OF THE ABOVE, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER IN CONTRACT OR TORT OR OTHERWISE. Each of the Company and the Junior Creditor acknowledges that it has been informed by KU Cap Co that the provisions of this Section 12 constitute a material inducement upon which KU Cap Co has relied, is relying, and will rely in entering into this Agreement, and that it has reviewed the provisions of this Section 12 with its counsel. KU Cap Co, the Company, or the Junior Creditor may file an original counterpart or a copy of this Section 12 with any court as written evidence of the consent of KU Cap Co, the Company, and the Junior Creditor to the waiver of the right to trial by jury. 39. General. All covenants, agreements, representations, and warranties made in this Agreement shall be deemed to have been relied on by KU Cap Co, notwithstanding any investigation made by KU Cap Co on its behalf, and shall survive the execution and delivery to KU Cap Co. The invalidity or unenforceability of any provision hereof shall not affect the validity or enforceability of any other provision hereof, and any invalid or unenforceable provision shall be modified so as to be enforced to the maximum extent of its validity or enforceability. The headings in this Agreement are for convenience of reference only and shall not limit, alter, or otherwise affect the meaning hereof. This Agreement constitutes the entire understanding of the parties with respect to the subject matter hereof and thereof and supersede all prior and current understandings and agreements, whether written or oral. This Agreement may be executed in any number of counterparts, which together shall constitute one instrument. This Agreement shall be governed by and construed in accordance with the laws (other than the conflict of laws rules) of The Commonwealth of Massachusetts. Each of the undersigned has caused this Agreement to be executed and delivered by its duly authorized officer as of the date first written above. NEXTERA ENTERPRISES, INC. By: /s/ Michael P. Muldowney --------------------------------- Title: Chief Financial Officer KNOWLEDGE UNIVERSE CAPITAL CO. LLC By: /s/ Stanley E. Maron --------------------------------- Title: Secretary KNOWLEDGE UNIVERSE INC. By: /s/ Stanley E. Maron --------------------------------- Title: Secretary -----END PRIVACY-ENHANCED MESSAGE-----

EX-10.1

                                                                    EXHIBIT 10.1

                                FUNDING AGREEMENT

     This Funding Agreement ("Agreement") is entered into by and among Fleet
National Bank, Bank of America, N.A., Nextera Enterprises, Inc., a Delaware
corporation (the "Company") and Knowledge Enterprises, Inc., a Delaware
corporation ("KE"), effective as of September 27, 2002.

     1. Credit Agreement. Fleet National Bank, as administrative agent (in such
capacity, the "Agent"), and Fleet National Bank and Bank of America, N.A., each
as lenders (in such capacity, the "Lenders"), have entered into an Amended and
Restated Credit Agreement dated as of March 29, 2002 (the "Credit Agreement")
with the Company and certain subsidiaries of the Company from time to time a
party thereto (the "Subsidiaries"). Capitalized terms used herein and not
defined herein shall have the meaning given to such terms in the Credit
Agreement.

     2. Funds Requirement. The Company has an immediate need for approximately
Five Hundred Sixty Thousand Dollars ($560,000) in immediately available funds
(the "Funds") to meet current expenses. The Lenders are willing to allow KE to
lend such Funds to the Company pursuant to and as part of the Credit Agreement
on the terms and conditions set forth in this Agreement. The parties agree that
additional documentation will be entered into by the parties with respect to
such loan on or prior to October 11, 2002, which documentation shall incorporate
and be consistent with this Agreement. Notwithstanding the foregoing agreement
to enter into additional documentation, this Agreement is intended to be binding
and enforceable on its terms, and shall be so binding and enforceable even if
the additional documentation is not consummated.

     3. Funds Flow. KE shall wire the Five Hundred Sixty Thousand Dollars
($560,000) directly to the Company (the "Additional Amount"); provided, however,
that the parties hereto agree and acknowledge that such direct transfer is being
done for administrative convenience purposes only and that such funds are being
lent to the Company pursuant to the Credit Agreement and shall be a "Term Loan"
as defined in the Credit Agreement. The Agent agrees to reflect the Additional
Amount as a Term Loan under the Credit Agreement and the parties hereto agree
and acknowledge that the Additional Amount is a Term Loan and entitled to all of
the protection and features of the Credit Agreement including, but not limited,
to being secured by the assets of the Company and certain of its Subsidiaries as
set forth in the Credit Agreement.

     4. Repayment. Such Additional Amount shall be due and payable from the
Company on October 30, 2002 and shall bear interest at the same rate and under
the same terms as the interest under the terms of the Credit Agreement
applicable to Term Loans. The Company shall pay such amounts directly to KE;
provided, however that the parties hereto agree and acknowledge that such direct
payment is being done for administrative convenience purposes only and that such
repayment is pursuant to the terms of the Credit Agreement, as amended.








     5.   Order of Priority. The payment of any and all amounts due under the
Credit Agreement, as amended, shall be as follows: (a) First, the principal due
to the Agent on September 30, 2002 and the interest due to the Agent on October
1, 2002, shall be paid in full; (b) Second, the Additional Amount, plus
interest, due to KE on October 30, 2002 shall be paid in full; provided,
however, that to the extent that any portion of such amount remains unpaid on
October 31, 2002 (the "Deficiency"), then the payment of the principal due to
the Agent on October 31, 2002, and the payment of the interest due to the Agent
on November 1, 2002, shall take priority over the payment of the Deficiency; and
(c) Third, at such time as the principal due to the Agent on October 31, 2002
and the interest due to the Agent on November 1, 2002 have been paid in full,
then the payment of the Deficiency (including the continuing accrual of interest
on the Deficiency) shall have priority over any claim that the Agent and/or the
Lenders have with respect to the Credit Agreement.

     6.   Amendment of Credit Agreement. The Company, the Agent and the Lenders
shall amend the Credit Agreement to incorporate the following:

          a.   the limits on the amount of Term Loans and the Maximum Amount of
Term Credit shall be increased by an amount not less than the amount of the
Additional Amounts;

          b.   the payment of the Additional Amount, plus interest, on
October 30, 2002; and

          c.   other changes necessary to effectuate the terms of this
Agreement.

     6.   Fees and Expenses. The Company shall pay to the Agent, the Lenders and
KE all of their respective reasonable costs and expenses incurred by them in
connection with the drafting and negotiation of this Agreement and the further
documentation contemplated by this Agreement.

     IN WITNESS WHEREOF the parties have executed and delivered this Agreement
as of the date first set forth above.

        FLEET NATIONAL BANK                  FLEET NATIONAL BANK
        as Administrative Agent              as Lender

        By:    /s/ Michael F. O'Neill        By:    /s/ Michael F. O'Neill
               -------------------------            ----------------------------
        Title: Senior Vice President         Title: Senior Vice President
               -------------------------           -----------------------------


        BANK OF AMERICA, N.A.                KNOWLEDGE ENTERPRISES, INC.

        By:    /s/ Michael R. Heredia        By:    s/ Ralph Finerman
               -------------------------            ----------------------------
        Title:       Managing Director       Title: Secretary
               -------------------------            ----------------------------

        NEXTERA ENTERPRISES, INC.

        By:    /s/ Michael P. Muldowney
               -------------------------
        Title: CFO
               -------------------------

EX-10.2

                                                                    EXHIBIT 10.2

$21,292,550.00                                                     JULY 23, 2002


                               EXCHANGE DEBENTURE

     1.   For value received, Nextera Enterprises, Inc., a Delaware corporation
("Borrower"), promises to pay to the order of Knowledge Universe, Inc., a
Delaware corporation, or its assigns ("Lender"), the principal sum of Twenty-One
Million Two Hundred Ninety-Two Thousand Five Hundred Fifty Dollars
($21,292,550.00) (the "Principal Amount"). Interest shall accrue from the date
hereof on the outstanding principal at ten percent (10%) per annum, compounded
quarterly, based on the calendar year, but in no case shall the interest rate
exceed the maximum rate allowed by law.

     2.   The Maturity Obligations shall be due and payable on January 2, 2004
(the "Maturity Date"). As used herein, "Maturity Obligations" shall mean the
entire outstanding principal amount, together with all accrued but unpaid
interest thereon, and all other sums due and unpaid hereunder.

     3.   The Maturity Obligations shall be secured by all of Borrower's assets
and all of Borrower's subsidiaries' assets pursuant to that certain Guarantee
and Security Agreement of even date herewith between Lender, Borrower, and
Borrower's subsidiaries which are a party thereto.

     4.   This Exchange Debenture and the payment of any portion of the Maturity
Obligations is and shall be expressly subordinated and junior in right of
payment to the prior payment in full of: (i) all obligations owed by Borrower to
Fleet National Bank for itself and the other lenders under the Amended And
Restated Credit Agreement dated March 29, 2002; (ii) all obligations owed to
Knowledge Universe Capital Co. LLC pursuant to the debenture dated January 5,
1998 evidencing indebtedness in the original principal amount of $24,970,000
(with a current balance of approximately $12,809,094); and (iii) all obligations
owed to Knowledge Universe Capital Co. LLC pursuant to the debenture dated
December 15, 2000 evidencing indebtedness in the original principal amount of
$10,000,000 (with a current balance of approximately $11,601,200).

     5.   All payments due under this Exchange Debenture are payable in lawful
money of the United States of America at Lender's office at 844 Moraga Drive,
Los Angeles, California 90049 or at such other place as Lender or other holder
hereof shall notify Borrower in writing.

     6.   All payments received by Lender on this Exchange Debenture shall be
applied by Lender as follows: first, to the payment of accrued and unpaid
interest; and second, to the reduction of the principal amount.

     7.   Any portion of the principal amount, or interest unpaid at maturity,
or when the entire amount of this Exchange Debenture is otherwise due and
payable, shall thereafter accrue interest at a rate of fifteen percent (15%) per
annum (the "Delinquency Rate"). The Delinquency Rate shall be effective both
before and after any judgment as may be rendered in a court of competent
jurisdiction provided, however, that if such Delinquency Rate is deemed to be
interest in excess of the amount permitted to be charged to Borrowers under
applicable law, Lender shall be entitled to collect a Delinquency Rate only at
the highest rate permitted by law, and any interest actually collected by Lender
in excess of such lawful amount shall be deemed a payment in reduction of the
principal amount then outstanding under this Exchange Debenture and shall be so
applied.

     8.   Borrower may prepay this Exchange Debenture in whole or in part
without any premium or penalty.

     9.   In the event this Exchange Debenture is turned over to an attorney at
law for collection after default, in addition to the Maturity Obligations,
Lender shall be entitled to collect all costs of collection, including but not
limited to reasonable attorneys' fees incurred, whether or not suit on this
Exchange Debenture is filed, and all such costs and expenses shall be payable on
demand.

     10.  This Exchange Debenture may not be changed orally, but only by an
agreement in writing signed by the party against whom such agreement is sought
to be enforced.

     11.  Borrower, for itself and its successors and assigns, and each endorser
or guarantor of this Exchange Debenture, for its heirs, successors, and assigns,
hereby waives presentment, protest, demand, diligence, notice of dishonor and of
nonpayment, and waives and renounces all rights to the benefits of any statute
of







limitations and any moratorium, appraisement, and exemption now provided or
which may hereafter be provided by any federal or state statute, including
but not limited to exemptions provided by or allowed under the Bankruptcy
Reform Act of 1978, both as to itself and as to all of its property,
whether real or personal, against the enforcement and collection of the
obligations evidenced by this Exchange Debenture and any and all
extensions, renewals, and modifications hereof.

     12.  It is the intention of the parties to conform strictly to applicable
usury laws from time to time in force, and all agreements between Borrower and
Lender, whether now existing or hereafter arising and whether oral or written,
are hereby expressly limited so that in no contingency or event whatsoever shall
the amount paid or agreed to be paid to Lender or the holder hereof, or
collected by Lender or such holder, for the use, forbearance, or detention of
the money to be lent hereunder or otherwise, exceed the maximum amount
permissible under applicable usury laws. If under any circumstances whatsoever
fulfillment of any provision hereof at the time performance of such provision
shall be due, shall involve transcending the limit of validity prescribed by
law, then ipso facto, the obligation to be fulfilled shall be reduced to the
limit of such validity; and if under any circumstances Lender or other holder
hereof shall ever receive an amount deemed interest, by applicable law, which
would exceed the highest lawful rate, such amount that would be excessive
interest under applicable usury laws shall be applied to the reduction of the
principal amount owing hereunder and not to the payment of interest, or if such
excessive interest exceeds the unpaid principal amount and other indebtedness,
the excess shall be deemed to have been a payment made by mistake and shall be
refunded to Borrower or to any other person making such payment on Borrower's
behalf. The terms and provisions of this paragraph shall control and supersede
every other provision of all agreements between Lender and Borrower and any
endorser or guarantor of this Exchange Debenture.

     13.  This Exchange Debenture shall be governed by and construed under the
laws of the State of California. Borrower hereby submits to personal
jurisdiction within the State of California for the enforcement of Borrower's
obligations hereunder, and waives any and all personal rights under the law of
any other state to object to jurisdiction within the State of California for the
purposes of litigation to enforce such obligation of Borrower.

     IN WITNESS WHEREOF, Borrower, intending to be legally bound hereby, has
caused this Exchange Debenture to be duly executed.

                               "BORROWER"

                               Nextera Enterprises, Inc., a Delaware corporation

                               By: /s/ Michael Muldowney
                                   --------------------------------------------
                                   Michael Muldowney
                                   Its Chief Financial Officer

     THIS INSTRUMENT IS SUBJECT TO THE SUBORDINATION AGREEMENT DATED AS OF JULY
23, 2002, AS FROM TIME TO TIME IN EFFECT, AMONG THE MAKER, THE PAYEE, AND FLEET
NATIONAL BANK, AS AGENT, WHICH, AMONG OTHER THINGS, SUBORDINATES THE OBLIGATIONS
OF THE OBLIGOR HEREUNDER TO THE PRIOR PAYMENT OF CERTAIN OBLIGATIONS OF THE
OBLIGOR TO THE HOLDERS OF SENIOR INDEBTEDNESS AS DEFINED THEREIN.

THIS INSTRUMENT IS SUBJECT TO THE SUBORDINATION AGREEMENT DATED AS OF JULY 23,
2002, AS FROM TIME TO TIME IN EFFECT, AMONG THE MAKER, THE PAYEE, AND KNOWLEDGE
UNIVERSE CAPITAL CO. LLC, WHICH, AMONG OTHER THINGS, SUBORDINATES THE
OBLIGATIONS OF THE OBLIGOR HEREUNDER TO THE PRIOR PAYMENT OF CERTAIN OBLIGATIONS
OF THE OBLIGOR TO KNOWLEDGE UNIVERSE CAPITAL CO. LLC AS PROVIDED THEREIN.

EX-10.3

                                                                    EXHIBIT 10.3

                                                                   July 23, 2002


                        GUARANTEE AND SECURITY AGREEMENT

     This Guarantee and Security Agreement (this "Agreement") is entered into as
of July 23, 2002, by and among Nextera Enterprises, Inc. ("Borrower"), whose
address is 4 Cambridge Center, 3rd Floor, Cambridge, Massachusetts 02142, the
subsidiaries of the Company who are signatories hereto (individually, the
"Subsidiary", together, the "Subsidiaries") and Knowledge Universe Inc.
("Lender"), whose address is 844 Moraga Drive, Los Angeles, California 90049.

Recitals

     A.   Borrower has issued to Lender a debenture dated July 23, 2002
evidencing indebtedness in the principal amount of $21,292,550 (the
"Debenture").

     B.   As a condition precedent to the effectiveness of the Debenture, Lender
has required Borrower and its Subsidiaries to execute and deliver this
Agreement.

Agreement

     NOW, THEREFORE, in consideration of the above recitals and the mutual
covenants hereinafter set forth, the parties hereto agree as follows:

I.   Creation of Security Interest. Borrower and its Subsidiaries hereby assign,
pledge, and grant to Lender, a security interest in all of Borrower's and its
Subsidiaries' right, title, and interest in and to the following properties and
assets of Borrower and its Subsidiaries, (collectively, the "Collateral") in
each case whether now owned or hereafter acquired by Borrower and its
Subsidiaries:

All property and assets of Borrower or its Subsidiaries of every nature and kind
whatsoever, including, without limitation, all machinery, equipment and
supplies, appliances, computers and related equipment, tools, tooling,
furniture, furnishings, fixtures, goods, inventory, raw materials, work in
process, finished goods and materials owned by Borrower or its Subsidiaries,
accounts, accounts receivable, general intangibles, names, trademarks, service
marks, intellectual property, chattel paper, documents, instruments (whether
negotiable or non-negotiable), deposit accounts, investment property,
securities, securities entitlements, money, contract rights and rights to
payment of every kind; all of the foregoing, whether now owned or hereafter at
any time acquired by Borrower or its Subsidiaries and wherever located, and all
products, additions, accessions, replacements and substitutions for and of all
such Collateral; and all books and records of Borrower or its Subsidiaries with
respect to all such Collateral; and all proceeds, which includes: (i) whatever
is now or hereafter receivable or received by Borrower or its Subsidiaries upon
the sale, exchange, collection or other disposition of any item of Collateral,
whether voluntary or involuntary, whether such proceeds constitute accounts,
inventory, general intangibles, equipment, intellectual property or other
assets; (ii) any such items which are now or hereafter acquired by Borrower or
its Subsidiaries with any proceeds of Collateral hereunder; and (iii) any
insurance or payments under any indemnity, warranty or guaranty now or hereafter
payable by reason of damage or loss or otherwise with respect to any item of
Collateral or any proceeds thereof, in order to secure the payment and
performance of the Secured Obligations (as defined below) The definition of
Collateral shall not include more than 66% of the outstanding voting stock or
other voting equity in any foreign subsidiary of the Borrower to the extent that
the pledge of voting stock or other voting equity above such amount would result
in a repatriation of foreign earnings under the Internal Revenue Code (including
the "deemed dividend" provisions of section 956 of the Internal Revenue Code).








II.   Secured Obligations. For purposes of this Agreement, "Secured Obligations"
      shall mean the Debenture.

III.  Representation and Warranties. Borrower and its Subsidiaries represent and
      warrant as follows:

      A. Location of Collateral. The Collateral will at all times be located
      within the jurisdiction in which it is located as of the date hereof.

      B. Existence and Power. Borrower and each of its Subsidiaries is a duly
      organized and validly existing corporation or limited liability company,
      as the case may be, in good standing under the laws of the jurisdiction of
      its incorporation or formation, as the case may be, and each has the
      corporate power and authority to own its property and assets and to
      execute and deliver, and perform its obligations under, this Agreement.

      C. Enforceability. This Agreement has been duly authorized, executed and
      delivered by Borrower and its Subsidiaries and constitutes the legal,
      valid and binding obligation of Borrower and its Subsidiaries enforceable
      against Borrower and its Subsidiaries in accordance with its terms.

      D. No Conflict. Except as set forth below, the execution, delivery and
      performance of this Agreement by Borrower and its Subsidiaries and the
      consummation of the transactions contemplated hereby will not (i) conflict
      with or result in a breach of any of the terms and provisions of, or
      constitute a default (or an event which with the giving of notice or the
      lapse of time or both would constitute a default) under, any agreement,
      indenture, mortgage, deed of trust, equipment lease, instrument or other
      document to which Borrower or a Subsidiary is a party; or (ii) conflict
      with any law, order, rule or regulation of any court or any federal or
      state government, regulatory body or administrative agency, or any other
      governmental body having jurisdiction over Borrower or its properties or a
      Subsidiary or its properties, as the case may be. The consent of the
      Lenders under the Credit Agreement dated December 30, 1999, as amended, is
      required for the Company to execute and deliver the Debenture and this
      Agreement.

IV.   Covenants. Borrower and its Subsidiaries covenant and agree as follows:

      A. Change in Address or Corporate Structure. Borrower and its Subsidiaries
      shall not change their names, identities, or corporate structures, move
      all or any portion of the Collateral or relocate their chief executive
      offices without the prior consent of Lender and, at the request of Lender,
      the prior filing of a financing statement with the proper office and in
      the proper form to perfect or continue the perfection of the security
      interests (without loss of priority) created herein which filing shall be
      satisfactory in form, substance and location to Lender prior to such
      filing.

      B. Payment of Taxes and Liens. Borrower and its Subsidiaries shall pay and
      discharge all taxes, assessments and charges or levies against the
      Collateral prior to delinquency thereof.

      C. Insurance. Borrower and its Subsidiaries, at their own expense, shall
      have and maintain insurance at all times with respect to all Collateral
      against such risks and liabilities, with such carrier and in such amounts
      as Lender may require. Such insurance shall be payable to Lender and to
      Borrower or its Subsidiaries as their interests may appear, shall include
      a mortgagee's loss payable endorsement, and shall not be subject to
      cancellation or reduction in coverage without thirty (30) days' prior
      written notice to Lender. Borrower and its Subsidiaries shall supply
      evidence of such insurance to Lender upon request.

      D. No Transfer. Except for sales of inventory in the ordinary course of
      Borrower's or a Subsidiaries business, as the case may be, Borrower and
      its Subsidiaries shall not sell, assign (by operation of law or
      otherwise), exchange or otherwise voluntarily or involuntarily transfer or
      dispose of all or any portion of the Collateral or encumber, or
      hypothecate, or create or permit to exist any lien, security interest,
      charge or encumbrance or adverse claim upon or other interest in all or
      any portion of the Collateral without the prior written consent of Lender.

      E. Reports. Borrower and its Subsidiaries shall promptly deliver to Lender
      all financial statements, reports and information concerning Borrower, its
      Subsidiaries and/or the Collateral as may be requested by Lender from time
      to time.

V.    Guarantee.









      A. Guarantee of Secured Obligations. Borrower and each Subsidiary
      unconditionally guarantee that the Secured Obligations will be performed
      and paid in full in cash when due and payable, whether at the stated or
      accelerated maturity thereof or otherwise, this guarantee being a
      guarantee of payment and not of collectability and being absolute and in
      no way conditional or contingent. In the event any part of the Secured
      Obligations shall not have been so paid in full when due and payable,
      Borrower and each Subsidiary will, immediately upon notice by the Lender
      or, without notice, immediately upon the occurrence of a default due to
      bankruptcy, pay or cause to be paid to the Lender the amount of such
      Secured Obligations which are then due and payable and unpaid. The
      obligations of Borrower and each Subsidiary hereunder shall not be
      affected by the invalidity, unenforceability or irrecoverability of any
      other guarantor thereof. For purposes hereof, the Secured Obligations
      shall be due and payable when and as the same shall be due and payable
      under the terms of the Debenture notwithstanding the fact that the
      collection or enforcement thereof may be stayed or enjoined under the
      Bankruptcy Code or other applicable law. If, notwithstanding any other
      provision of this Agreement, including the obligations incurred by it
      under this Agreement and the rights granted to it by Section 5.10,
      enforcement of the obligations of Borrower and each Subsidiary under this
      Agreement for the full amount of the Secured Obligations to which Borrower
      and each Subsidiary is liable would constitute an unlawful transfer under
      any applicable fraudulent conveyance or fraudulent transfer law or any
      comparable law, then the obligations of Borrower and each Subsidiary
      hereunder shall be reduced to the highest amount for which such
      obligations may then be enforced without resulting in an unlawful transfer
      under any such law.

      B. Continuing Obligation. Borrower and each Subsidiary acknowledges that
      the Lender has entered into the Debenture in reliance on this Section 5
      being a continuing irrevocable agreement, and Borrower and each
      Subsidiary agrees that its guarantee may not be revoked in whole or in
      part. The obligations of the Borrowers and each Subsidiary hereunder shall
      terminate when the Secured Obligations have been indefeasibly paid in full
      in cash and discharged; provided, however, that:

                              (1) if a claim is made upon the Lender at any time
      for repayment or recovery of any amounts or any property received by the
      Lender from any source on account of any of the Secured Obligations and
      the Lender repays or returns any amounts or property so received
      (including interest thereon to the extent required to be paid by the
      Lender) or

                              (2) if the Lender becomes liable for any part of
      such claim by reason of (i) any judgment or order of any court or
      administrative authority having competent jurisdiction, or (ii) any
      settlement or compromise of any such claim (provided that, except after
      the occurrence and during the continuance of an Event of Default, the
      Borrower shall have consented to such settlement or compromise, such
      consent not to be unreasonably withheld),

then the Borrower and each Subsidiary shall remain liable under this Agreement
for the amounts so repaid or property so returned or the amounts for which the
Lender becomes liable (such amounts being deemed part of the Secured
Obligations) to the same extent as if such amounts or property had never been
received by the Lender, notwithstanding any termination hereof or the
cancellation of any instrument or agreement evidencing any of the Secured
Obligations. Not later than five days after receipt of notice from the Lender,
the Borrower and each Subsidiary shall pay to the Lender an amount equal to the
amount of such repayment or return for which the Lender has so become liable.
Payments hereunder by the Borrower and each Subsidiary may be required by the
Lender on any number of occasions.

      C. Waivers with Respect to Secured Obligations. Except to the extent
      expressly required by the Debenture, Borrower and each Subsidiary waives,
      to the fullest extent permitted by the provisions of applicable law, all
      of the following (including all defenses, counterclaims and other rights
      of any nature based upon any of the following):

                             (1) presentment, demand for payment and protest of
      nonpayment of any of the Secured Obligations, and notice of protest,
      dishonor or nonperformance;

                             (2) notice of acceptance of this guarantee and
      notice that credit has been extended in reliance on Borrower's and each
      Subsidiary's guarantee of the Secured Obligations;

                             (3) notice of any Event of Default or of any
      inability to enforce performance of the obligations of the Borrower or its
      Subsidiaries under the Debenture;








                             (4) demand for performance or observance of, and
      any enforcement of any provision of the Debenture or any pursuit or
      exhaustion of rights or remedies with respect to the Debenture or against
      the Borrower or its Subsidiaries in respect of the Debenture or any
      requirement of diligence or promptness on the part of the Lender in
      connection with any of the foregoing;

                             (5) any act or omission on the part of the Lender
      which may impair or prejudice the rights of Borrower and its Subsidiaries,
      including rights to obtain subrogation, exoneration, contribution,
      indemnification or any other reimbursement from Borrower or its
      Subsidiaries, or otherwise operate as a deemed release or discharge;

                             (6) failure or delay to perfect or continue the
      perfection of any security interest in Secured Obligations or any other
      action which harms or impairs the value of, or any failure to preserve or
      protect the value of, the Secured Obligations;

                             (7) any statute of limitations or any statute or
      rule of law which provides that the obligation of a surety must be neither
      larger in amount nor in other respects more burdensome than the obligation
      of the principal;

                             (8) any "single action" or "anti-deficiency" law
      which would otherwise prevent the Lender from bringing any action,
      including any claim for a deficiency, against Borrower or its Subsidiaries
      before or after the Lender's commencement or completion of any foreclosure
      action, whether judicially, by exercise of power of sale or otherwise, or
      any other law which would otherwise require any election of remedies by
      the Lender; and

                             (9) all demands and notices of every kind with
      respect to the foregoing.

Borrower and each Subsidiary represents that each has obtained the advice
of counsel as to the extent to which suretyship and other defenses may be
available to it with respect to its obligations hereunder in the absence of
the waivers contained in this Section 5.3.

            No delay or omission on the part of the Lender in exercising any
      right under Debenture or under any other guarantee of the Secured
      Obligations shall operate as a waiver or relinquishment of such right. No
      action which the Lender or the Borrower and its Subsidiaries may take or
      refrain from taking with respect to the Secured Obligations shall affect
      the provisions of this Agreement or the obligations of Borrower and its
      Subsidiaries hereunder. None of the Lender's rights shall at any time in
      any way be prejudiced or impaired by any act or failure to act on the part
      of Borrower or its Subsidiaries, or by any noncompliance by Borrower or
      its Subsidiaries under the Debenture, regardless of any knowledge thereof
      which the Lender may have or otherwise be charged with.

      D. Lender's Power to Waive, etc. Borrower and each Subsidiary grants to
      the Lender full power in its discretion, without notice to or consent of
      Borrower and each Subsidiary, such notice and consent being expressly
      waived to the fullest extent permitted by applicable law, and without in
      any way affecting the liability of Borrower and its Subsidiaries under its
      guarantee hereunder:

                             (1) To waive compliance with, and any Event of
      Default under, and to consent to any amendment to or modification or
      termination of any provision of, or to give any waiver in respect of, the
      Secured Obligations or any guarantee thereof (as from time to time in
      effect);

                             (2) To grant any extensions of the Secured
      Obligations (for any duration), and any other indulgence with respect
      thereto, and to effect any total or partial release (by operation of law
      or otherwise), discharge, compromise or settlement with respect to the
      obligations of Borrower and its Subsidiaries in respect of the Secured
      Obligations, whether or not rights against Borrower and its Subsidiaries
      under this Agreement are reserved in connection therewith;

                             (3) To take security in any form for the Secured
      Obligations, and to consent to the addition to or the substitution,
      exchange, release or other disposition of, or to deal in any other manner
      with, any part of any property or asset contained in the Collateral
      whether or not the property, if any, received upon the exercise of such
      power shall be of a character or value the same as or different from the
      character or value of any property disposed of, and to obtain, modify or
      release any present or







      future guarantees of the Secured Obligations and to proceed against any of
      the Collateral or such guarantees in any order;

                             (4) To collect or liquidate or realize upon any of
      the Secured Obligations or the Collateral in any manner or to refrain from
      collecting or liquidating or realizing upon any of the Secured Obligations
      or the Collateral; and

                             (5) To extend credit under the Debenture or
      otherwise in such amount as the Lender may determine, including increasing
      the amount of credit and the interest rate and fees with respect thereto,
      even though the condition of the Borrower and its Subsidiaries (financial
      or otherwise, on an individual or consolidated basis) may have
      deteriorated since the date hereof.

      E. Certain Representations by Borrower and each Subsidiary. Borrower and
      each Subsidiary represents that:


                             (1) it is in its best interest and in pursuit of
      the purposes for which it was organized as an integral part of the
      business conducted and proposed to be conducted by Borrower and each
      Subsidiary, and reasonably necessary and convenient in connection with the
      conduct of the business conducted and proposed to be conducted by them, to
      induce the Lender to enter into the Debenture and by making the Guarantee
      contemplated by this Section 5;

                             (2) the amount of cash available under the
      Debenture will directly or indirectly inure to its benefit;

                             (3) after giving effect to the foregoing
      considerations, the assets and liabilities of Borrower and each Subsidiary
      and rights of contribution among Borrower and each Subsidiary, including
      the rights provided in Section 5.10:

                                 (i)   it will not be rendered insolvent as a
            result of entering into this Agreement;

                                 (ii)  after giving effect to the transactions
            contemplated by this Agreement, it will have assets having a fair
            saleable value in excess of the amount required to pay its probable
            liability on its existing debts as such debts become absolute and
            matured;

                                 (iii) it has, and will have, access to adequate
            capital for the conduct of its business; and

                                 (iv)  it has the ability to pay its debts from
            time to time incurred in connection therewith as such debts mature;

                             (4) it has been advised by the Lender that the
      Lender is unwilling to enter into the Debenture unless the Guarantee
      contemplated by this Section 5 is given by it; and

                             (5) except as otherwise permitted pursuant to the
      Debenture, in the case of each Subsidiary, all of its equity or ownership
      interests are owned, directly or indirectly, by the Borrower.

      F. Subrogation. Borrower and each Subsidiary agrees that, until the
      Secured Obligations are paid in full, they will not exercise any right of
      reimbursement, subrogation, contribution, offset or other claims against
      the Borrower or the other Subsidiaries, as the case may be, arising by
      contract or operation of law in connection with any payment made or
      required to be made by Borrower or each Subsidiary under this Agreement.
      After the payment in full of the Secured Obligations, Borrower and each
      Subsidiary shall be entitled to exercise against the Borrower and the
      other Subsidiaries, as the case may be, all such rights of reimbursement,
      subrogation, contribution and offset, and all such other claims, to the
      fullest extent permitted by law.








      G. Subordination. Borrower and each Subsidiary covenants and agrees that
      all indebtedness, claims and liabilities then or thereafter owing by the
      Borrower and each Subsidiary whether arising hereunder or otherwise are
      subordinated to the prior payment in full of the Secured Obligations and
      are so subordinated as a claim against Borrower and each Subsidiary or any
      of their assets, whether such claim be in the ordinary course of business
      or in the event of voluntary or involuntary liquidation, dissolution,
      insolvency or bankruptcy, so that no payment with respect to any such
      indebtedness, claim or liability will be made or received while any Event
      of Default exists; provided, however, that the foregoing provisions shall
      not limit the right of Borrower or each Subsidiary to receive payments in
      respect of such indebtedness, claims or liabilities so long as no Event of
      Default exists.










      H. Future Subsidiaries; Further Assurances. The Borrower will from time to
      time cause (a) any present wholly owned subsidiary that is not a
      Subsidiary within 30 days after notice from the Lender or (b) any future
      wholly owned subsidiary within 30 days after any such person becomes a
      wholly owned subsidiary, to join this Agreement pursuant to a joinder
      agreement in form and substance satisfactory to the Lender; provided,
      however, that in the event such a wholly owned subsidiary is prohibited by
      any valid law, statute, rule or regulation from guaranteeing the Secured
      Obligations, or if such a guarantee by any foreign subsidiary would result
      in a repatriation of foreign earnings under the Internal Revenue Code
      (including the "deemed dividend" provisions of section 956 of the Internal
      Revenue Code), (i) such guarantee will be limited to the extent necessary
      to comply with such prohibition or to prevent such repatriation of foreign
      earnings or (ii) if such limitation on the guaranteed amount is not
      sufficient to avoid such prohibition or repatriation, the Borrower and its
      other Subsidiaries will pledge the stock of such wholly owned subsidiary
      (or as much of such stock as may be pledged without resulting in such a
      repatriation) to the Lender to secure the Secured Obligations pursuant to
      a pledge agreement in form and substance satisfactory to the Lender.
      Borrower and each Subsidiary will, promptly upon the request of the Lender
      from time to time, execute, acknowledge and deliver, and file and record,
      all such instruments, and take all such action, as the Lender deems
      necessary or advisable to carry out the intent and purpose of this Section
      5.

      I. Contribution Among Guarantors. Borrower and each Subsidiary agree that,
      as among themselves in their capacity as guarantors of the Secured
      Obligations, the ultimate responsibility for repayment of the Secured
      Obligations, in the event that the Borrower fails to pay when due its
      Secured Obligations, shall be equitably apportioned among the Borrower and
      each Subsidiary (a) in the proportion that each, in its capacity as a
      guarantor, has benefited from the extensions of credit to the Borrower by
      the Lender under the Debenture, or (b) if such equitable apportionment
      cannot reasonably be determined or agreed upon among Borrower and each
      Subsidiary, in proportion to their respective net worths determined on or
      about the date hereof (or such later date as such party becomes party
      hereto). In the event that Borrower or a Subsidiary, in its capacity as a
      guarantor, pays an amount with respect to the Secured Obligations in
      excess of its proportionate share as set forth in this Section 5.10,
      Borrower or each other Subsidiary, as the case may be, shall, to the
      extent consistent with the Debenture, make a contribution payment to such
      party in an amount such that the aggregate amount paid by Borrower and
      each Subsidiary reflects its proportionate share of the Secured
      Obligations. In the event of any default by any Borrower or Subsidiary
      under this Section 5.10, Borrower and each other Subsidiary, as the case
      may be, will bear, to the extent consistent with the Debenture, its
      proportionate share of the defaulting party's obligation under this
      Section 5.10. This Section 5.10 is intended to set forth only the rights
      and obligations of the Borrower and each Subsidiary among themselves and
      shall not in any way affect the obligations of Borrower and each
      Subsidiary to the Lender under the Debenture or this Agreement (which
      obligations shall at all times constitute the joint and several
      obligations of Borrower and each Subsidiary).

VI.   Right to Enter. Lender shall have, at all times, with or without notice,
the right to enter into and upon any premises where any of the Collateral or
records with respect thereto are located for the purpose of inspecting the same,
performing an audit, making copies of records, observing the use of any part of
the Collateral, protecting Lender's security interest in the Collateral, or
otherwise determining whether Borrower and its Subsidiaries are in compliance
with the terms of this Agreement.

VII.  Further Assurances. Borrower and its Subsidiaries shall execute and file
any financing or continuation statement, or amendments thereto, and such other
instruments or notices as may be necessary or desirable, which Lender may
reasonably request in order to perfect and preserve the perfection and the
priority of the security interests granted or purported to be granted under this
Agreement. Borrower and its Subsidiaries agree that, at Lender's option, this
Agreement, or a photocopy hereof, may be filed by Lender as a financing
statement, and that Borrower's and its Subsidiaries execution hereof shall
constitute the execution by Borrower and its Subsidiaries of a financing
statement. Borrower and its Subsidiaries hereby irrevocably make, constitutes,
and appoints Lender (and any of Lender's officers, employees, or agents
designated by Lender) as Borrower's and its Subsidiaries' true and lawful
attorney, with power to: (a) sign the name of Borrower and its Subsidiaries on
any and all documents to be executed, recorded, or filed in order to perfect or
continue perfected Lender's security interest in the Collateral including,
without limitation, any UCC financing statements; (b) endorse Borrower's and its
Subsidiaries' names on any checks, notices, acceptances, money orders, drafts,
or other item of payment or security that may come into Lender's possession; (c)
at any time after a default has occurred make, settle, and adjust all claims
under Borrower's or its Subsidiaries' policies of insurance in respect of the
Collateral and make all determinations and decisions with respect to such
policies of insurance. The appointment of Lender as Borrower's and its
Subsidiaries' attorney, and each and every one of Lender's rights and powers,
being coupled with an interest, is irrevocable until all of the Secured
Obligations have been fully repaid and performed.








VIII. Defaults. Borrower and its Subsidiaries shall be in default under this
Agreement upon the happening of any one or more of the following events:

      A. Payments. Except as prohibited or restricted by the Subordination
      Agreement dated July 23, 2002, with respect to the Debenture, Borrower or
      a Subsidiary shall fail to make any payment;

      B. Representations and Warranties. Any representation or warranty made by
      Borrower or a Subsidiary in this Agreement or the Debenture or which is
      contained in any certificate, document, financial or other written
      statement furnished at any time pursuant hereto or thereto shall prove to
      have been untrue, incorrect or misleading in any material respect when
      made;

      C. Other Covenants. Borrower or a Subsidiary shall fail duly to observe or
      perform any covenant or agreement contained in any agreement to which
      Borrower or a Subsidiary, as the case may be, and Lender are parties;

      D. Collateral. Borrower or a Subsidiary shall fail to pay and discharge
      any judgment or levy of any attachment, execution or other process against
      any all or any portion of the Collateral and such judgment shall not be
      satisfied, or such levy or other process shall not be removed within
      twenty (20) calendar days after the entry or levy thereof, or at least
      five (5) calendar days prior to the time of any proposed sale under any
      such judgment levy; or

      E. Insolvency. Borrower or a Subsidiary commences or proposes to commence
      any bankruptcy, reorganization or insolvency proceeding, or other
      proceeding under any federal, state or other law for the relief of
      debtors; Borrower or a Subsidiary fails to obtain the dismissal, within
      thirty (30) days after the commencement thereof, of any bankruptcy,
      reorganization or insolvency proceeding, or other proceeding under any law
      for the relief of debtors, instituted by one or more third parties, fails
      actively to oppose any such proceeding, or, in any such proceeding,
      defaults or files an answer admitting the material allegations upon which
      the proceeding was based or alleges its willingness to have an order for
      relief entered or its desire to seek liquidation, reorganization or
      adjustment of its debts; or any receiver, trustee or custodian is
      appointed to take possession of all or any substantial portion of the
      assets of Borrower or a Subsidiary, as the case may be, or any committee
      of Borrower's or a Subsidiary, as the case may be, creditors, or any class
      thereof, is formed for the purpose of monitoring or investigating the
      financial affairs of Borrower or a Subsidiary, as the case may be, or
      enforcing such creditors' rights.

Upon such default, Lender may declare all Secured Obligations to be immediately
due and payable. Lender shall have the remedies of a secured party under the
California Uniform Commercial Code and may require Borrower and its Subsidiaries
to assemble the Collateral and turn it over to Lender at a place designated by
Lender. Borrower and its Subsidiaries hereby expressly waive and release all
rights to have any of the Collateral marshalled upon the exercise of any
remedies under this Agreement.








IX.    Costs and Expenses. Borrower and its Subsidiaries agree to pay on demand
all costs and expenses, including legal fees, incurred or paid by Lender in
preparing, executing or amending this Agreement, and in exercising its rights
and remedies or protecting its interests hereunder.

X.     Right of Set Off. In addition to and not in limitation of any other right
or remedy hereunder, Lender shall have, at any time, the right to set off any
indebtedness or obligation of Borrower or its Subsidiaries against any
indebtedness or obligation of Lender to Borrower or its Subsidiaries, without
notice to or demand upon Borrower or its Subsidiaries, any guarantor of any such
indebtedness or obligation or any other person, whether or not such Obligation
or indebtedness is liquidated, contingent or mature at the time of such offset
and however such indebtedness or obligations were created or incurred.

XI.    Notices. All notices, requests and other communications required or
permitted to be made hereunder shall, except as otherwise provided, be in
writing and may be delivered personally or sent by telegram, telecopy, telex,
overnight courier or certified mail, postage prepaid, to the parties addressed
as set forth in the first paragraph hereof. Such notices, requests and other
communications sent shall be effective upon receipt, unless sent by (i)
overnight courier, in which case they shall be effective exactly one (1)
business day after deposit with such overnight courier, or (ii) mail, in which
case they shall be effective exactly three (3) business days after deposit in
the United States mail. Either party may change its address or other information
by giving notice thereof to the other party hereto in conformity with this
section.

XII.   Termination of Security Agreement. This Security Agreement and the
security interest hereunder shall terminate upon the full and final payment in
cash and performance of all the Secured Obligations. Notwithstanding anything to
the contrary herein, this Security Agreement (including all representations,
warranties and covenants contained herein) shall continue to be effective or be
reinstated, as the case may be, if at any time any amount received by Lender in
respect of the Secured Obligations is rescinded or must otherwise be restored or
returned by Lender upon or in connection with the insolvency, bankruptcy,
dissolution, liquidation or reorganization of Borrower or a Subsidiary or
otherwise, all as though such payment had not been made.

XIII.  Headings. The various headings in this Agreement are inserted for
convenience only and shall not affect the meaning or interpretation of this
Agreement or any provision hereof.

XIV.   Amendments. This Agreement or any provision hereof may be changed,
waived, or terminated only by a statement in writing signed by the party against
which such change, waiver or termination is sought to be enforced, and then any
such waiver or consent shall be effective only in the specific instance and for
the specific purpose for which given.

XV.    Entire Agreement. This Agreement and the Debenture are intended by the
parties as a final expression of their agreement and is intended as a complete
and exclusive statement of the terms and conditions thereof. Acceptance of or
acquiescence in a course of performance rendered under this Agreement shall not
be relevant to determine the meaning of this Agreement even though the accepting
or acquiescing party had knowledge of the nature of the performance and
opportunity for objection.

XVI.   Severability. If any provision or obligation of this Agreement should be
found to be invalid, illegal or unenforceable in any jurisdiction, the validity,
legality and enforceability of the remaining provisions and obligations or any
other agreement executed in connection herewith, or of such provision or
obligation in any other jurisdiction, shall not in any way be affected or
impaired thereby and shall nonetheless remain in full force and effect to the
maximum extent permitted by law.

XVII.  Successors and Assigns. All rights of Lender hereunder shall inure to the
benefit of its successor and assigns. Borrower and its Subsidiaries shall not
assign any of their interest under this Agreement without the prior written
consent of Lender. Any purported assignment inconsistent with this provision
shall, at the option of Lender, be null and void.

XVIII. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, without giving effect to
the principles thereof relating to conflicts of law.

XIX.   Delay; Waiver. No delay in enforcing or failing to enforce any right
under this Agreement by Lender shall constitute a waiver by Lender of such
right. No waiver by Lender of any default hereunder shall be effective unless in
writing, nor shall any waiver operate as a waiver of any other default or of the
same default on a future occasion.








XX.    Time of Essence. Time is of the essence of each provision of this
Agreement of which time is an element.

XXI.   Survival of Representations and Warranties. All representations,
warranties and covenants of Borrower and its Subsidiaries contained herein shall
survive the execution and delivery of this Agreement, and shall terminate only
upon the full payment and performance by Borrower of the Secured Obligations.










XXII.  Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original, but all of which shall together constitute one and the same agreement.

               IN WITNESS WHEREOF, the parties hereto have caused this Security
Agreement to be duly executed and delivered by their respective officers as of
the date first above written.

                                        NEXTERA ENTERPRISES, INC.




                                        By:    /s/ Michael P. Muldowney
                                               ---------------------------------
                                        Name:   Michael P. Muldowney
                                               ---------------------------------
                                        Title: Chief Financial Officer
                                               ---------------------------------


                                        CE ACQUISITION CORP.
                                        ERG ACQUISITION CORP.
                                        LEXECON INC.
                                        NETNEXT, INC.
                                        NEXTERA BUSINESS PERFORMANCE
                                          SOLUTIONS GROUP, INC.
                                        NEXTERA INTERACTIVE, INC.
                                        SCANADA, INC.
                                        NEXTERA & COMPANY, LLC
                                        NEXTERA INTERNATIONAL, LLC

                                        By:    /s/ Michael P. Muldowney
                                               ---------------------------------
                                               As an authorized officer of each
                                               of the foregoing corporations and
                                               limited liability companies


                                        KNOWLEDGE UNIVERSE INC.,
                                        a Delaware corporation




                                        By:     /s/ Stanley E. Maron
                                                -------------------------------
                                        Name:   Stanley E. Maron
                                                --------------------------------
                                        Title:  Secretary
                                                --------------------------------

EX-10.4

                                                                    EXHIBIT 10.4

                           NEXTERA ENTERPRISES, INC.

                             SUBORDINATION AGREEMENT


        This Agreement, dated as of July 23, 2002, is among Nextera Enterprises,
Inc., a Delaware corporation (the "Company"), Knowledge Universe Inc., a
Delaware corporation ("Knowledge Universe"), and Knowledge Universe Capital Co.
LLC, a Delaware limited liability company ("KU Cap Co"). The parties agree as
follows:

        1.      Definitions. Certain capitalized terms are used in this
Agreement as specifically defined in this Section 1 as follows:

        "Exchange Debenture" means the debenture in the original principal
amount of $21,292,550 dated July 23, 2002, executed by the Company in favor of
Knowledge Universe.

        "Junior Creditor" means Knowledge Universe and each other Person
becoming a party to this Agreement (or to a subordination agreement in
substantially the form of this Agreement) pursuant to Section 9.1.

        "KU Cap Co Debentures" means that certain debenture owed to KU Cap Co by
the Company, dated January 5, 1998, evidencing indebtedness in the original
principal amount of $24,970,000 (with a current balance of approximately
$12,809,094) and that certain debenture owed to KU Cap Co by the Company, dated
December 15, 2000, evidencing indebtedness in the original principal amount of
$10,000,000 (with a current balance of approximately $11,601,200).

        "Reorganization" means any voluntary or involuntary dissolution,
winding-up, liquidation, reorganization by judicial proceedings, bankruptcy,
insolvency, receivership, or other statutory or common law proceedings,
including any proceeding under the federal Bankruptcy Code or any similar law of
any other jurisdiction, involving the Company or any guarantor of the Senior
Indebtedness or any of their present or future domestic subsidiaries or any of
their respective properties or the readjustment of the respective liabilities of
the Company or any such other Person or any assignment for the benefit of
creditors or any marshaling of the assets or liabilities of the Company or any
such other Person.

        "Senior Indebtedness" means:

               (i) The obligation to pay the KU Cap Co Debentures;

               (ii)  Obligations to pay interest owing under the KU Cap Co
               Debentures, whether such obligations arise before or after the
               institution of any Reorganization and whether or not such
               obligations are allowed claims in such Reorganization; and

               (iii) All renewals, extensions, and refinancings of the items
               described in clauses (i) and (ii) above.

        "Subordinated Indebtedness" means:

               (a)   The principal of and interest on the Exchange Debenture and
               all other indebtedness of the Company and its subsidiaries to the
               Junior Creditor; and

               (b)   All other obligations of the Company and its subsidiaries
               to the Junior Creditor with respect to the items in clause (a),
               whether now existing or hereafter arising, including intercompany
               advances and any claim against the Company and its subsidiaries
               in respect of rescission, indemnification, expenses, damages, or
               otherwise.

        2.     Subordination Covenants. Each of the Company and the Junior
Creditor covenants that, so long as any part of the Senior Indebtedness is
outstanding, each of them will comply with the following provisions:

        3.     Subordination. To the extent and in the manner provided in this
Agreement, the payment of any Subordinated Indebtedness is and shall be
expressly subordinated and junior in right of payment to the prior payment in
full of all Senior Indebtedness, and the Subordinated Indebtedness is
subordinated as a claim against the Company, any of its subsidiaries, any
guarantor of the Senior Indebtedness or any of their






respective assets to the prior payment in full of the Senior Indebtedness, in
each case whether such claim is (a) in the ordinary course of business or (b) in
the event of any Reorganization.

        4.     Restricted Payments. Without the written consent of KU Cap Co,
the Company and its subsidiaries will not make, and the Junior Creditor will not
accept or receive, any payment of any Subordinated Indebtedness, whether in
cash, securities, or other property or by way of conversion, exchange or set-off
or otherwise, and no such payment shall become due.

        5.     Reorganization. In the event of any Reorganization, all Senior
Indebtedness shall first be paid in full before any payment is made on account
of any Subordinated Indebtedness. In any proceedings seeking to effect a
Reorganization any payment or distribution of any kind or character, whether in
cash, property, or securities, which may be payable or deliverable in respect of
any such Subordinated Indebtedness shall be paid or delivered directly to KU Cap
Co for application to payment of the Senior Indebtedness, unless and until all
Senior Indebtedness shall have been paid in full.

        6.     Specific Powers in Reorganization. In any proceedings with
respect to any Reorganization, the Junior Creditor irrevocably authorizes KU
Cap Co:

        7.     To prove and enforce any claims on the Subordinated Indebtedness
owed by the Company and its subsidiaries to the Junior Creditor;

        8.     To vote claims comprising any such Subordinated Indebtedness and
to accept or reject on behalf of the Junior Creditor any plan proposed in
connection with any such Reorganization;

        9.     To accept and execute receipts for any payment or distribution
made with respect to any such Subordinated Indebtedness and to apply such
payment or distribution to the payment of the Senior Indebtedness; and

        10.    To take any action and to execute any instruments necessary to
effectuate the foregoing.

        11.    Payments Held in Trust. If, notwithstanding the foregoing, any
payment or distribution of the assets of the Company or any of its present or
future subsidiaries of any kind or character (other than payments permitted by
Section 2.2) shall be received, by way of set-off or otherwise, by the Junior
Creditor before all Senior Indebtedness is paid in full, such payment or
distribution and the amount of any such set-off shall be held in trust by the
Junior Creditor and promptly paid over to KU Cap Co (who shall have the right to
convert any such assets into cash) for application to the payment of Senior
Indebtedness until all such Senior Indebtedness shall have been paid in full,
after giving effect to any concurrent payment or distribution to the holders of
Senior Indebtedness.

        12.    Restrictions on Acceleration. Notwithstanding any contrary
provision of any Subordinated Indebtedness or of any agreement or instrument
relating thereto, (a) no Subordinated Indebtedness (other than payments
permitted by Section 2.2) shall become or be declared to be due and payable
prior to the date on which the Senior Indebtedness becomes or is declared to be
due and payable and (b) if any Senior Indebtedness shall have become or been
declared to be due and payable prior to its stated maturity, the Subordinated
Indebtedness shall become immediately due and payable.

        13.    Effect of Provisions; Subrogation.

        14.    Effect of Provisions; Relative Rights. The provisions hereof as
to subordination are solely for the purpose of defining the relative rights of
the holders of Senior Indebtedness on one hand and the Junior Creditor on the
other hand, and such provisions shall not impair as between the Company and the
Junior Creditor the obligation of the Company, which is unconditional and
absolute, to pay to the Junior Creditor the principal of any Subordinated
Indebtedness owed by the Company to the Junior Creditor and interest thereon,
and all other amounts in respect thereof, nor shall any such provisions prevent
the Junior Creditor from exercising all remedies otherwise permitted by
applicable law or under the terms of such Subordinated Indebtedness upon the
occurrence and during the continuance of a default thereunder, except to the
extent prohibited by this Agreement.







            15. Subrogation. When all Senior Indebtedness then outstanding has
      been paid in full, the Junior Creditor shall be subrogated to the rights
      of the holders of Senior Indebtedness to receive payments or distributions
      of assets of the Company or any of its subsidiaries that would be deemed
      payable on the Senior Indebtedness until the Subordinated Indebtedness
      shall be paid in full. For the purposes of such subrogation, no payments
      or distributions to the holders of Senior Indebtedness of any cash,
      property, or securities to which the Junior Creditor would be entitled
      except for the provisions of this Agreement, and no payment over pursuant
      to the provisions of this Agreement to the holders of Senior Indebtedness
      by the Junior Creditor, shall, as between the Company or any of its
      subsidiaries and their creditors other than the holders of Senior
      Indebtedness, on one hand, and the Junior Creditor, on the other hand, be
      deemed to be a payment by the Company or any of its subsidiaries to or on
      account of Senior Indebtedness.

      16. Legend, etc. Each of the Company and the Junior Creditor covenants to
cause each instrument or certificate representing or evidencing any of the
Subordinated Indebtedness to have affixed upon it a legend substantially as
follows:

               "This instrument is subject to the Subordination Agreement dated
               as of July 23, 2002, as from time to time in effect, among the
               maker, the payee, and Knowledge Universe Capital Co. LLC, which,
               among other things, subordinates the obligations of the obligor
               hereunder to the prior payment of certain obligations of the
               obligor to the holders of Senior Indebtedness as defined
               therein."

The Company shall cause any financial statement describing or listing or
otherwise reflecting the existence of any Indebtedness included in the
Subordinated Indebtedness to indicate clearly the subordinated character
thereof.

      17. Further Assurances. Each of the Company and the Junior Creditor
covenants to execute and deliver to KU Cap Co such further instruments and to
take such further action as KU Cap Co may at any time or times reasonably
request in order to carry out the provisions and intent of this Agreement.

      18. Representations and Warranties. In order to induce KU Cap Co to enter
into this Agreement, the Company represents and warrants that:

            19. Organization and Business. The Company is a duly organized and
      validly existing entity, in good standing under the laws of the
      jurisdiction of its organization, with all power and authority necessary
      (a) to enter into and perform this Agreement and (b) to own its properties
      and carry on the business now conducted or proposed to be conducted by it.
      Certified copies of the Charter and By-laws of the Company have been
      previously delivered to KU Cap Co and are correct and complete.

            20. Authorization and Enforceability. The Company has taken all
      corporate action required to execute, deliver and perform this Agreement.
      This Agreement constitutes the legal, valid, and binding obligation of the
      Company, enforceable against the Company in accordance with its terms.

            21. No Legal Obstacle to Agreements. Neither the execution and
      delivery of this Agreement, nor the consummation of any transaction
      referred to in or contemplated by this Agreement, nor the fulfillment of
      the terms hereof or thereof or of any other agreement, instrument, deed,
      or lease referred to in this Agreement, has constituted or resulted, or
      will constitute or result, in:

                22. Any breach or termination of the provisions of any
            agreement, instrument, deed or lease to which the Company is a party
            or by which it is bound, or of the Charter or By-laws of the
            Company; or

                23. The violation of any law, statute, judgment, decree, or
            governmental order, rule, or regulation applicable to the Company.

      No approval, authorization, or other action by, or declaration to or
      filing with, any governmental or administrative authority or any other
      Person is required to be obtained or made by the Company in connection
      with the execution, delivery, and performance of this Agreement or the
      transactions contemplated hereby.

            24. Litigation. No litigation, at law or in equity, or any
      proceeding before any court, board, or other governmental or
      administrative agency or any arbitrator is pending or, to the knowledge of
      the






      Company, threatened which may involve any material risk of any final
      judgment, order, or liability which, after giving effect to any applicable
      insurance, has resulted, or creates a material risk of resulting, in any
      material adverse change in the Company's business, assets, financial
      condition, income, or prospects or which seeks to enjoin the consummation,
      or which questions the validity, of any of the transactions contemplated
      by this Agreement. No judgment, decree, or order of any court, board, or
      other governmental or administrative agency or any arbitrator has been
      issued against or binds the Company which has resulted, or creates a
      material risk of resulting, in any material adverse change in the
      Company's business, assets, financial condition, income, or prospects.

      25.   Information Regarding the Company. The Junior Creditor expressly
acknowledges and agrees that it has made such investigation as it deems
desirable of the risks undertaken by it in entering into this Agreement and is
fully satisfied that it understands all such risks. The Junior Creditor waives
any obligation which may now or hereafter exist on the part of KU Cap Co or any
holder of any Senior Indebtedness to inform the Junior Creditor of the risks
being undertaken by entering into this Agreement or of any changes in such risks
and the Junior Creditor undertakes to keep itself informed of such risks and any
changes therein. The Junior Creditor expressly waives (except to the extent
prohibited by applicable law which cannot be waived) any duty which may now or
hereafter exist on the part of KU Cap Co or any holder of any Senior
Indebtedness to disclose to the Junior Creditor any matter related to the
business, operations, character, collateral, credit, condition (financial or
otherwise), income, or prospects of the Company or its affiliates, properties,
or management, whether now or hereafter known by any KU Cap Co. The Junior
Creditor represents, warrants, and agrees that it assumes sole responsibility
for obtaining from the Company and its affiliates all information concerning and
other information as to the Company and its subsidiaries and their respective
affiliates, properties, or management or anything relating to any of the above
as it deems necessary or desirable.

      26.   Continuing Agreement; Lender Powers; etc.

            27. Continuing Agreement, etc. This Agreement shall be a continuing
      agreement, shall be irrevocable by the Junior Creditor, and shall remain
      in full force and effect until the payment in full of the Senior
      Indebtedness.

            28. No Impairment by Company, KU Cap Co, etc. No right of KU Cap Co
      or any present or future holder of any Senior Indebtedness shall at any
      time be prejudiced or impaired by any conduct on the part of the Company,
      including any noncompliance by the Company with the terms of this
      Agreement, or by any conduct, in good faith, by KU Cap Co or any such
      holder, regardless of any knowledge thereof which KU Cap Co or any such
      holder may have or otherwise be charged with.

            29. Specific Performance. KU Cap Co is authorized to demand specific
      performance of this Agreement at any time when the Company or the Junior
      Creditor shall have failed to comply with any provision hereof applicable
      to it, and each of them irrevocably waives any defense based on the
      adequacy of a remedy at law which might be asserted as a bar to the remedy
      of specific performance hereof in any action brought therefor by KU Cap
      Co.

      30.   Transfers; Successors and Assigns.

            31. Transfers. The Junior Creditor will not sell, assign, transfer,
      or otherwise dispose of any Subordinated Indebtedness except to another
      Person which shall have entered into this Agreement or another agreement
      with KU Cap Co, in a form satisfactory to KU Cap Co, providing for
      subordination of such Subordinated Indebtedness to the prior payment of
      the Senior Indebtedness on the terms provided in this Agreement.

            32. Successors and Assigns. The provisions of this Agreement shall
      inure to the benefit of KU Cap Co and its successors and assigns and shall
      be binding upon each of the Company and the Junior Creditor and their
      respective successors and assigns. The Company and the Junior Creditor may
      not assign their rights or obligations under this Agreement except to the
      extent provided in Section 9.1.

      33.   Notices. Any notice or other communication in connection with this
Agreement shall be deemed to be given if given in writing (including facsimile)
addressed as provided below (or to the addressee at such other address as the
addressee shall have specified by notice actually received by the addressor),
and if either (a) actually delivered in fully legible form to such address
(evidenced in the case of a facsimile by receipt of a confirmation thereof) or
(b) in the case of a letter, five business days shall have elapsed after the
same shall have been deposited in the United States mails, with first-class
postage prepaid and registered or certified.





      If to the Company, to it at 4 Cambridge Center, 3rd Floor, Cambridge,
Massachusetts 02142, to the attention of its chief financial officer.

      If to Knowledge Universe, to it at 844 Moraga Drive, Los Angeles,
California 90049, to the attention of Stanley Maron.

      If to Knowledge Universe Capital Co. LLC, to it at 844 Moraga Drive, Los
Angeles, California 90049, to the attention of Ralph Finerman.

      34.   Venue; Service of Process. Each of the Company, the Junior Creditor,
and KU Cap Co:

            35. Irrevocably submits to the nonexclusive jurisdiction of the
      state courts of The Commonwealth of Massachusetts and to the nonexclusive
      jurisdiction of the United States District Court for the District of
      Massachusetts for the purpose of any suit, action or other proceeding
      arising out of or based upon this Agreement or the subject matter hereof
      or thereof;

            36. Waives to the extent not prohibited by applicable law, and
      agrees not to assert, by way of motion, as a defense or otherwise, in any
      such proceeding brought in any of the above-named courts, any claim that
      it is not subject personally to the jurisdiction of such court, that its
      property is exempt or immune from attachment or execution, that such
      proceeding is brought in an inconvenient forum, that the venue of any such
      proceeding is improper, or that this Agreement, or the subject matter
      hereof or thereof, may not be enforced in or by such court; and

            37. Consents to service of process in any such proceeding in any
      manner permitted by Chapter 223A of the General Laws of The Commonwealth
      of Massachusetts and agrees that service of process by registered or
      certified mail, return receipt requested, at its address specified in or
      pursuant to Section 10 is reasonably calculated to give actual notice.

      38. WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW
WHICH CANNOT BE WAIVED, EACH OF KU CAP CO, THE COMPANY, AND THE JUNIOR CREDITOR
WAIVES, AND COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT,
OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE,
CLAIM, DEMAND, OR ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT, OR THE
SUBJECT MATTER HEREOF OR IN ANY WAY CONNECTED WITH THE DEALINGS OF KU CAP CO,
THE COMPANY, OR THE JUNIOR CREDITOR IN CONNECTION WITH ANY OF THE ABOVE, IN EACH
CASE WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER IN CONTRACT OR TORT
OR OTHERWISE. Each of the Company and the Junior Creditor acknowledges that it
has been informed by KU Cap Co that the provisions of this Section 12 constitute
a material inducement upon which KU Cap Co has relied, is relying, and will rely
in entering into this Agreement, and that it has reviewed the provisions of this
Section 12 with its counsel. KU Cap Co, the Company, or the Junior Creditor may
file an original counterpart or a copy of this Section 12 with any court as
written evidence of the consent of KU Cap Co, the Company, and the Junior
Creditor to the waiver of the right to trial by jury.

      39. General. All covenants, agreements, representations, and warranties
made in this Agreement shall be deemed to have been relied on by KU Cap Co,
notwithstanding any investigation made by KU Cap Co on its behalf, and shall
survive the execution and delivery to KU Cap Co. The invalidity or
unenforceability of any provision hereof shall not affect the validity or
enforceability of any other provision hereof, and any invalid or unenforceable
provision shall be modified so as to be enforced to the maximum extent of its
validity or enforceability. The headings in this Agreement are for convenience
of reference only and shall not limit, alter, or otherwise affect the meaning
hereof. This Agreement constitutes the entire understanding of the parties with
respect to the subject matter hereof and thereof and supersede all prior and
current understandings and agreements, whether written or oral. This Agreement
may be executed in any number of counterparts, which together shall constitute
one instrument.







This Agreement shall be governed by and construed in accordance with the laws
(other than the conflict of laws rules) of The Commonwealth of Massachusetts.

        Each of the undersigned has caused this Agreement to be executed and
delivered by its duly authorized officer as of the date first written above.

                                        NEXTERA ENTERPRISES, INC.

                                        By:    /s/ Michael P. Muldowney
                                               ---------------------------------
                                        Title: Chief Financial Officer

                                        KNOWLEDGE UNIVERSE CAPITAL CO. LLC

                                        By:    /s/ Stanley E. Maron
                                               ---------------------------------
                                        Title: Secretary

                                        KNOWLEDGE UNIVERSE INC.

                                        By:    /s/ Stanley E. Maron
                                               ---------------------------------
                                        Title: Secretary