<PAGE>
As filed with the Securities and Exchange Commission on November 6, 2000
Registration No. 333-47830
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT No. 1
TO
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------
Diamond Technology Partners Incorporated
(Exact name of registrant as specified in its charter)
Delaware 8742 36-4069408
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction Industrial Identification No.)
of Incorporation or Classification Number)
Organization)
875 North Michigan Avenue, Suite 3000
Chicago, Illinois 60611
(312) 255-5000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Melvyn E. Bergstein
Chairman and Chief Executive Officer
Diamond Technology Partners Incorporated
875 North Michigan Avenue, Suite 3000
Chicago, Illinois 60611
(312) 255-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
Nancy K. Bellis Leland E. Hutchinson
Vice President and General Counsel Terrence R. Brady
Diamond Technology Partners Winston & Strawn
Incorporated 35 West Wacker Drive
875 North Michigan Avenue, Suite 3000 Chicago, Illinois 60601
Chicago, Illinois 60611 (312) 558-5600
(312) 255-5000
---------------
Approximate date of commencement of the proposed sale of the securities to
the public: As soon as practicable after the effective date of this
Registration Statement and the effective time of the acquisition described in
this Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
---------------
The Registrant hereby amends this Registration Statement on such date as may
be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act or until this Registration Statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
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<PAGE>
PROXY STATEMENT/PROSPECTUS
Dear Diamond Stockholder:
You are cordially invited to attend the annual meeting of stockholders of
Diamond Technology Partners Incorporated to be held on Tuesday, November 21,
2000 at The John Hancock Center, 95th Floor, Signature Room, 875 North Michigan
Avenue, Chicago, Illinois at 10:00 a.m., local time. At the meeting you will be
asked to:
1. Approve the issuance of 6,315,377 shares of Class B Common Stock,
$0.001 par value per share, of Diamond in connection with the consummation
of the business combination between Diamond and Cluster Telecom B.V.
2. Adopt amendments to our Restated Certificate of Incorporation to (i)
change our name to "DiamondCluster International, Inc.," (ii) increase the
aggregate authorized shares of our Class A Common Stock to 100,000,000 and
(iii) permit additional classes of persons to hold our Class B Common
Stock.
3. Elect four directors.
4. Adopt the DiamondCluster 2000 Stock Option Plan and approve the
issuance of options thereunder.
5. Approve an amendment to our Amended and Restated 1998 Equity
Incentive Plan.
6. Confirm the appointment of KPMG LLP as independent auditors of
Diamond for the fiscal year ending March 31, 2001.
7. Transact such other business as may properly come before the meeting.
If you were a Diamond stockholder of record on November 2, 2000, you may
vote at the meeting. Whether or not you plan to attend, please take the time to
vote by completing and mailing the enclosed proxy card to us.
This proxy statement/prospectus is also the prospectus of Diamond for Class
B Common Stock that will be issued in the Cluster business combination.
Additional information with respect to the Cluster transaction and the other
items described above are set forth in this proxy statement/prospectus. You
should consider the matters discussed under "Risk Factors" commencing on page
13 of this proxy statement/prospectus before voting. We encourage all
stockholders of Diamond and all other persons who receive this proxy
statement/prospectus to read this entire document carefully.
Sincerely yours,
Melvyn E. Bergstein
Chairman and Chief Executive Officer
Diamond Technology Partners
Incorporated
Diamond's Class A Common Stock is listed on the Nasdaq National Market under
the symbol "DTPI."
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the issuance of the Class B Common Stock
in the Cluster business combination. Neither the Securities and Exchange
Commission nor any state securities commission has passed upon the fairness or
merits of the Cluster business combination nor determined that the information
contained in this proxy statement/prospectus is accurate or adequate. Any
representation to the contrary is a criminal offense.
Proxy statement/prospectus dated November 7, 2000, and first mailed to
stockholders on or about November 7, 2000.
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
875 North Michigan Avenue, Suite 3000
Chicago, Illinois 60611
(312) 255-5000
Notice of Annual Meeting of Stockholders
to be Held on November 21, 2000
To Stockholders of Diamond
Technology Partners Incorporated:
You are cordially invited to attend the annual meeting of stockholders of
Diamond Technology Partners Incorporated to be held on Tuesday, November 21,
2000, at The John Hancock Center, 95th Floor, Signature Room, 875 North
Michigan Avenue, Chicago, Illinois, at 10:00 a.m., local time for the purpose
of:
1. Approving the issuance of 6,315,377 shares of Class B Common Stock,
$0.001 par value per share, of Diamond in connection with the consummation
of the business combination between Diamond and Cluster Telecom B.V.
2. Adopting amendments to our Restated Certificate of Incorporation to
(i) change our name to "DiamondCluster International, Inc.," (ii) increase
the aggregate authorized shares of our Class A Common Stock to 100,000,000
and (iii) permit additional classes of persons to hold our Class B Common
Stock.
3. Electing four directors.
4. Approving the adoption of the DiamondCluster 2000 Stock Option Plan
and issuance of options thereunder.
5. Approving an amendment to our Amended and Restated 1998 Equity
Incentive Plan.
6. Confirming the appointment of KPMG LLP as independent auditors of
Diamond for the fiscal year ending March 31, 2001.
7. Transacting such other business as may properly come before the
meeting.
The board of directors has fixed the close of business on November 2, 2000
as the record date for the determination of stockholders entitled to notice of,
and to vote at, the annual meeting or any adjournment thereof.
We encourage you to attend the annual meeting in person or to vote your
shares by proxy. PLEASE PROMPTLY FILL OUT, SIGN, DATE AND MAIL THE ENCLOSED
FORM OF PROXY IF YOU DO NOT EXPECT TO BE PRESENT AT THE ANNUAL MEETING. A SELF-
ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF
MAILED IN THE UNITED STATES. The proxy is revocable at any time before it is
voted. Returning the proxy will in no way limit your right to vote at the
annual meeting if you later decide to attend and vote in person.
Michael E. Mikolajczyk
Vice Chairman and Secretary
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE BUSINESS COMBINATION....................... 1
WHO CAN HELP ANSWER YOUR QUESTIONS......................................... 3
SUMMARY.................................................................... 4
SUMMARY FINANCIAL DATA..................................................... 8
DIAMOND SUMMARY SELECTED FINANCIAL DATA.................................... 9
CLUSTER SUMMARY FINANCIAL DATA............................................. 10
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA.................... 11
FORWARD-LOOKING STATEMENTS................................................. 12
RISK FACTORS............................................................... 13
THE ANNUAL MEETING......................................................... 20
Time and Place of the Annual Meeting..................................... 20
Purpose of the Annual Meeting............................................ 20
Record Date; Stock Entitled to Vote; Quorum.............................. 20
Required Vote............................................................ 20
Proxies; Voting and Revocation........................................... 21
Solicitation of Proxies.................................................. 21
BUSINESS COMBINATION....................................................... 22
Background of the Business Combination................................... 22
Recommendation of the Diamond Board of Directors......................... 22
Reasons for the Business Combination..................................... 22
Opinion of Financial Advisor to Diamond.................................. 23
Accounting Treatment..................................................... 26
Closing of Business Combination.......................................... 26
Federal Income Tax Considerations........................................ 26
Appraisal Rights......................................................... 26
Federal Securities Laws Consequences..................................... 27
MATERIAL PROVISIONS OF THE PURCHASE AGREEMENT.............................. 28
Structure of Business Combination........................................ 28
Consideration............................................................ 28
Stock Options............................................................ 28
Conditions............................................................... 29
Additional Conditions to the Obligations of Diamond...................... 29
Additional Conditions to the Obligations of Sellers...................... 29
Representations and Warranties........................................... 29
Certain Covenants........................................................ 30
Termination.............................................................. 30
Fees and Expenses........................................................ 30
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS...................... 31
COMPARISON OF STOCKHOLDER RIGHTS........................................... 36
Capitalization........................................................... 36
Voting Rights; Action in Lieu of Meeting................................. 36
Notice................................................................... 36
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Special Meetings....................................................... 36
Number, Election, Vacancy and Removal of Directors..................... 37
Liability of Directors................................................. 37
Dividends.............................................................. 37
Conversion............................................................. 37
Preemptive Rights...................................................... 37
Charter Document Amendments............................................ 38
BUSINESS OF DIAMOND...................................................... 39
MARKET PRICES AND DIVIDENDS FOR DIAMOND CLASS A COMMON STOCK............. 44
SELECTED HISTORICAL FINANCIAL DATA OF DIAMOND............................ 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF DIAMOND................................................ 46
Overview............................................................... 46
Results of Operations.................................................. 47
Selected Quarterly Results of Operations............................... 50
Liquidity and Capital Resources........................................ 50
Quantitative and Qualitative Disclosures About Market Risk............. 51
BUSINESS OF CLUSTER...................................................... 52
Overview............................................................... 52
Market Opportunity..................................................... 52
Cluster's Services..................................................... 53
Representative Client Relationships.................................... 54
Human Resources and Culture............................................ 55
Competition............................................................ 56
ABSENCE OF MARKET FOR AND DIVIDENDS ON CLUSTER CAPITAL STOCK............. 56
CLUSTER SELECTED HISTORICAL FINANCIAL DATA............................... 57
CLUSTER MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 58
Overview............................................................... 58
Results of Operations.................................................. 59
Liquidity and Capital Resources........................................ 61
Quantitative and Qualitative Disclosures About Market Risks............ 61
Exchange Rates......................................................... 62
ELECTION OF DIRECTORS.................................................... 64
Incumbent Directors.................................................... 64
Nominees............................................................... 64
Directors' Meetings and Committees..................................... 67
Report of Audit Committee.............................................. 67
MANAGEMENT OF DIAMOND.................................................... 68
Executive Officers..................................................... 68
Employment Agreements and Certain Other Arrangements................... 68
Executive Compensation................................................. 69
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Stock Options............................................................ 70
Compensation of Directors................................................ 71
Report of the Compensation Committee on Executive Compensation........... 71
Compensation Committee Interlocks and Insider Participation.............. 72
AMENDMENTS TO DIAMOND'S RESTATED CERTIFICATE OF INCORPORATION.............. 73
Name Change.............................................................. 73
Increase in Authorized Class A Common Stock.............................. 73
Change in Permitted Holders of Class B Common Stock...................... 74
ADOPTION OF DIAMONDCLUSTER 2000 STOCK OPTION PLAN.......................... 75
Summary of the 2000 Plan................................................. 75
ADOPTION OF AMENDMENT TO DIAMOND'S 1998 EQUITY INCENTIVE PLAN.............. 78
Summary of the 1998 Plan................................................. 78
PRINCIPAL STOCKHOLDERS..................................................... 81
Diamond.................................................................. 81
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS........................ 83
DESCRIPTION OF DIAMOND CAPITAL STOCK....................................... 84
Common Stock............................................................. 84
Preferred Stock.......................................................... 85
Transfer Agent and Registrar............................................. 85
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.................... 86
PERFORMANCE GRAPH.......................................................... 87
LEGAL MATTERS.............................................................. 88
EXPERTS.................................................................... 88
SUBMISSION OF STOCKHOLDER PROPOSALS........................................ 88
SOLICITATION OF PROXIES.................................................... 88
AVAILABLE INFORMATION...................................................... 88
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.......................... 89
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................. F-1
ANNEX A.................................................................... A-1
ANNEX B.................................................................... B-1
ANNEX C.................................................................... C-1
ANNEX D.................................................................... D-1
ANNEX E.................................................................... E-1
</TABLE>
iii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE BUSINESS COMBINATION
Q: What is the proposed transaction?
A: Diamond Technology Partners Incorporated will enter into a business
combination with Cluster Telecom B.V. As a result, Diamond will own all of the
issued and outstanding capital stock of Cluster, and the Cluster stockholders
will become stockholders of Diamond.
Q: Why are the companies proposing the business combination?
A: Diamond has been exploring opportunities to expand beyond North America in
order to serve fully its increasingly international client base. The business
combination will result in an immediate pan-European and Latin American
presence with offices in Barcelona, Boston, Chicago, Dusseldorf, Lisbon,
London, Madrid, Munich, New York, Paris, San Francisco and Sao Paulo. In
addition, broadband wireless technology continues to expand across all
industries in the form of mobility and m-commerce. Diamond believes that its
expertise in digital strategies using the traditional Internet and Cluster's
expertise in broadband wireless will complement each other and become a
cornerstone of Diamond's intellectual capital and client work. Diamond believes
that this business combination will allow it to offer international
perspectives and solutions to its clients and will create new opportunities for
work in new industries and new locations.
Q: What will each Cluster stockholder receive in the business combination?
A: In consideration for all of the issued and outstanding capital stock of
Cluster, Diamond will deliver US $44,000,000 and 6,315,377 shares of Diamond's
Class B Common Stock to the Cluster stockholders. Of the shares of Diamond
Class B Common Stock to be delivered at closing, 2,315,377 shares will be held
in escrow to be released annually in three equal installments, subject to
certain post-closing adjustments based on the continued employment of the top
executive officers of Cluster with Diamond for the three-year period following
the closing. In addition, Diamond will grant options to purchase approximately
7,510,000 shares of Class B Common Stock to the employees of Cluster in
connection with the transaction.
Q: Who must approve the business combination?
A: In addition to the approvals of Diamond's and Cluster's boards of directors,
which have been obtained, the issuance of the shares of Diamond Class B Common
Stock must be approved by Diamond's stockholders. The affirmative vote of the
holders of at least a majority of the outstanding shares of Diamond common
stock is required for approval of any item submitted to Diamond's stockholders.
In connection with the business combination, Melvyn E. Bergstein, Diamond's
Chief Executive Officer, has executed a voting undertaking letter obligating
him to vote all shares of Diamond common stock held by him, individually or by
proxy, in favor of the matters submitted for stockholder approval at the
meeting. As of September 30, 2000, Mr. Bergstein controlled, individually or by
proxy, 40.6% of Diamond's outstanding common stock.
Q: Does the Diamond board of directors recommend approval of the issuance of
the shares of Diamond Class B Common Stock?
A: Yes. After careful consideration, the Diamond board of directors unanimously
approved the consummation of the business combination and recommends approval
by the Diamond stockholders of the issuance of the shares of Diamond Class B
Common Stock and other stockholder resolutions necessary in connection with the
business combination.
Q: What do I need to do now?
A: We urge you to read carefully this proxy statement/prospectus, including the
annexes, and to consider how the business combination will affect you as a
Diamond stockholder.
Q: How do I vote?
A: You may vote by mailing a signed proxy card in the enclosed return envelope
as soon as possible so that those shares may be represented at the annual
meeting. You may also attend the annual meeting and vote in person or you can
complete and submit a proxy by internet in accordance with the instructions on
your proxy card.
1
<PAGE>
Q: Can I change my vote?
A: Yes. You can change your vote at any time before your proxy is voted at the
annual meeting. If you hold your shares in your own name, you may:
. send a written notice stating that you would like to revoke your proxy;
. complete and submit a new proxy; or
. attend the annual meeting and vote in person.
If you hold your shares in "street name", you should follow the directions
provided by your broker regarding how to change your vote.
Q: Are there any risks associated with the business combination?
A: The business combination does involve risks. For a discussion of risk
factors that should be considered in evaluating the business combination, see
"Risk Factors" on page 13 of this proxy statement/prospectus.
Q: When and where is the Diamond annual meeting?
A: The annual meeting of Diamond stockholders will be held at 10:00 a.m., local
time, on Tuesday November 21, 2000 at The John Hancock Center, 95th Floor,
Signature Room, 875 North Michigan Avenue, Chicago, Illinois.
Q: When do you expect to complete the business combination?
A: We expect to complete the business combination prior to December 31, 2000.
Q: Whom can I contact with questions?
A: If you have any questions about the business combination or if you need
additional copies of this proxy statement/prospectus or the enclosed proxy, you
should contact:
Diamond Technology Partners Incorporated
875 North Michigan Avenue, Suite 3000
Chicago, Illinois 60611
Attention: Vice President and General Counsel
Telephone Number: 312-255-5000
2
<PAGE>
WHO CAN HELP ANSWER YOUR QUESTIONS
Additional business and financial information about Diamond is available
upon written or oral request without charge to Diamond stockholders by first
class mail or other prompt means. If you would like additional copies of this
proxy statement/prospectus or such additional information, you should contact:
Diamond Technology Partners Incorporated
875 North Michigan Avenue, Suite 3000
Chicago, Illinois 60611
Attention: Vice President and General Counsel
Telephone number: (312) 255-5000
If you wish to request additional documents from Diamond, please do so by
November 14, 2000 in order to receive them prior to the annual meeting of
Diamond stockholders.
For additional information concerning how you can obtain additional
information about Diamond, see "Available Information" on page 88.
3
<PAGE>
SUMMARY
This summary highlights selected information from this proxy
statement/prospectus and does not contain all of the information that is
important to you. To understand the Cluster business combination fully and for
a more complete description of the legal terms of the Cluster business
combination, you should read carefully this entire proxy statement/prospectus
and the documents to which we have referred you. See "Available Information" on
page 88. We have included page references parenthetically to direct you to a
more complete description of each topic presented in this Summary.
The Companies (pages 39 and 52)
Diamond Technology Partners Incorporated
875 North Michigan Avenue, Suite 3000
Chicago, Illinois 60611
Telephone: (312) 255-5000
Diamond is an e-business services firm that synthesizes business and industry
insight with technology expertise to create digital strategies for leading
national and multinational corporations. Diamond offers an approach that
results in innovative new business models that enable its clients to leverage
technology and their existing competencies to develop e-business opportunities.
Diamond leads CEOs and senior leadership teams through a diagnostic approach
designed to broaden their understanding of the ways in which technology can be
used to leverage their company's existing assets. After thorough analysis of a
client's existing business model, Diamond creates a digital strategy to help
the client develop and sustain a competitive advantage in the new digital
economy. Once Diamond has conceived a digital strategy, it prototypes, tests
and implements the applications needed to successfully execute the digital
strategy.
Cluster Telecom B.V.
Torre Mapfre
Marina 16-18
Planta 38-39
08005
Barcelona, Spain
Telephone: +34 93 507 9000
Cluster Telecom B.V., a Netherlands company, is a professional services firm
founded in 1993 that specializes in strategies and solutions for the digital
economy. Cluster is based in The Netherlands and its European, North American
and South American headquarters are located in Barcelona, Spain; Boston,
Massachusetts; and Sao Paulo, Brazil, respectively. Cluster also has offices
located in Munich and Dusseldorf, Germany; Lisbon, Portugal; London, England;
Madrid, Spain; and Paris, France.
Cluster develops value-driven strategies with its clients and assists in the
implementation of the strategies to deliver tangible results to its clients and
value to their customers worldwide. Cluster has a high level of expertise in
telecommunications, wireless communications and emerging digital technologies
and their applications and is focused on providing consulting services for
companies in a wide variety of industries, including telecommunications,
financial services, media, entertainment, fast-moving consumer goods, retail,
tourism and travel.
What Stockholders of Cluster Telecom B.V. Will Receive in the Business
Combination (page 28)
As a result of the Cluster business combination, subject to the provisions of
the purchase agreement described in this proxy statement/prospectus, Cluster's
stockholders shall receive such holder's pro rata share of $44,000,000 and an
aggregate of 6,315,377 shares of Diamond's Class B Common Stock. Of the shares
of Diamond Class B Common Stock to be issued at closing, 2,315,377 shares will
be held in escrow to be released annually in three equal installments, subject
to certain post-closing adjustments based on the continued employment of the
top executive officers of Cluster with Diamond for the three-year period
following the closing. In addition, employees of Cluster shall receive options
to purchase approximately 7,510,000 shares of Diamond's Class B Common Stock.
4
<PAGE>
Reasons for the Business Combination (page 22)
Diamond has been exploring opportunities to expand beyond North America in
order to serve fully its increasingly international client base. The business
combination will result in an immediate pan-European and Latin American
presence with offices in Barcelona, Boston, Chicago, Duseldorf, Lisbon, London,
Madrid, Munich, New York, Paris, San Francisco and Sao Paulo. In addition,
broadband wireless technology continues to expand across all industries in the
form of mobility and m-commerce. Diamond believes that its expertise in digital
strategies using the traditional Internet and Cluster's expertise in broadband
wireless will complement each other and become a cornerstone of Diamond's
intellectual capital and client work. Diamond believes that this business
combination will allow it to offer international perspectives and solutions to
its clients and will create new opportunities for work in new industries and
new locations.
The Annual Meeting (page 20)
Diamond's annual meeting of stockholders will be held at The John Hancock
Center, 95th Floor, Room, 875 North Michigan Avenue, Chicago, Illinois, on
November 21, 2000, at 10:00 a.m., local time. At the annual meeting,
stockholders will be asked to approve, among other matters, the issuance of
6,315,377 shares of Class B Common Stock in connection with the Cluster
business combination.
Voting Rights; Votes Required for Approval (page 20)
You are entitled to vote at the annual meeting if you were a Diamond
stockholder of record as of the close of business on the record date of
November 2, 2000. On the record date, there were 22,365,776 shares of Diamond
Class A Common Stock and 3,097,991 shares of Class B Common Stock issued and
outstanding. The shares of Class B Common Stock will be voted by the chief
executive officer of Diamond, Melvyn E. Bergstein, pursuant to an irrevocable
proxy granted to Mr. Bergstein by the holders of the Class B Common Stock. In
connection with the business combination, Mr. Bergstein has entered into a
voting undertaking letter pursuant to which he has agreed to vote all shares of
Diamond common stock held by him, individually or by proxy, in favor of the
business combination.
Diamond's Class A Common Stock is listed on the Nasdaq National Market System
and, as a result, Diamond is subject to the rules and regulations of Nasdaq.
Pursuant to such rules and regulations, the consent of Diamond's stockholders
to the issuance of the shares of Diamond Class B Common Stock in connection
with the business combination is required. The affirmative vote of a majority
of the outstanding shares of Diamond common stock will be required to approve
the issuance of the shares of Diamond Class B Common Stock and the amendments
to Diamond's restated certificate of incorporation. As a result, abstentions
and broker non-votes in connection with the issuance of shares of Diamond Class
B Common Stock and the amendments to Diamond's charter will count as a vote
"AGAINST" such proposals. All other matters presented for approval at the
annual meeting will require the affirmative vote of the holders of a majority
of the voting power of shares of Diamond's common stock present in person or by
proxy and actually voted. As a result, abstentions and broker non-votes in
respect of any of these matters will not be counted "FOR" or "AGAINST" for
purposes of determining whether such proposals have received the requisite
approval by Diamond's stockholders.
Board of Directors' Recommendation (page 22)
The board of directors of Diamond believes that the proposed Cluster business
combination is in the best interests of the Diamond stockholders and
unanimously recommends that the stockholders approve the issuance of the shares
of Diamond Class B Common Stock to be issued in the business combination and
the other matters submitted for approval at the annual meeting.
Appraisal Rights (page 26)
Diamond is organized under Delaware law. Under Delaware law, you will not be
entitled to dissenters' rights or an appraisal of your shares in connection
with the Cluster business combination because, among other things, you will not
exchange or otherwise relinquish any shares of Diamond capital stock in
connection with the Cluster business combination or other matters presented to
the stockholders for approval.
5
<PAGE>
Federal Income Tax Considerations (page 26)
Stockholders of Diamond will not be subject to any tax consequences in
connection with the Cluster business combination. The Cluster stockholders
should consult their own tax advisors for a full understanding of the tax
consequences to them of the business combination.
Comparison of Stockholder Rights (page 36)
When the Cluster business combination is completed, holders of Cluster capital
stock will become stockholders of Diamond. Cluster stockholders will have
different rights as Diamond stockholders from those they currently have as
Cluster stockholders.
Conditions to the Completion of the Cluster Business Combination (page 29)
The Cluster business combination will be completed if a number of conditions
are met or waived, including the following:
. the stockholders of Diamond approve the issuance of the shares of Diamond
Class B Common Stock described in this proxy statement/prospectus;
. all necessary governmental approvals are obtained;
. no law, injunction or order prohibits the business combination;
. the Class A Common Stock issuable upon conversion of the Class B Common
Stock issued in the business combination is accepted for listing on the
Nasdaq National Market; and
. the Form S-4 registration statement of Diamond, of which this proxy
statement/prospectus is a part, becomes effective and is not the subject
of any stop order or proceedings seeking a stop order.
Opinion of Financial Advisor to Diamond (page 23)
Morgan Stanley & Co. Incorporated, Diamond's financial advisor, has rendered a
written opinion dated September 11, 2000 to Diamond's board of directors that,
as of the date of the opinion, the consideration to be paid in the Cluster
business combination was fair, from a financial point of view, to Diamond. The
full text of the written opinion is attached as Annex B to this proxy
statement/prospectus. We encourage you to read the opinion carefully in its
entirety to understand the procedures followed, the assumptions made, matters
considered and limitations on the review undertaken by Morgan Stanley in
providing its opinion. The opinion of Morgan Stanley is directed to Diamond's
board of directors and does not constitute a recommendation to any Diamond
stockholder with respect to the issuance of the shares of Diamond Class B
Common Stock or the business combination.
Ownership of Diamond After Cluster Business Combination
Upon consummation of the Cluster business combination and issuance of the
shares of Diamond Class B Common Stock in connection therewith, the former
Cluster stockholders will hold approximately 20.5% of the issued and
outstanding Diamond capital stock based upon the number of issued and
outstanding shares of Diamond capital stock as of September 30, 2000.
Termination (page 30)
Either Diamond or Cluster may terminate the purchase agreement:
. by mutual agreement;
. in the event a material breach by the other party remains uncured after
five business days written notice;
. in the event it becomes impossible or impracticable to satisfy the
conditions of closing;
. at any time after December 31, 2000 if the failure to close before such
date is not caused by a breach of the terminating party; or
. if any law or regulation makes consummation of the business combination
illegal or if either party is enjoined from closing the transaction.
6
<PAGE>
Senior Management Following the Business Combination (page 30)
Upon the closing of the Cluster business combination, Cluster will be a wholly-
owned subsidiary of Diamond. Javier Rubio, Chairman and Chief Executive Officer
of Cluster, will serve as Diamond's President, Europe and Latin America and
will join Diamond's board of directors. In addition, for a period of five years
following closing, one of Cluster's five senior officers, or one of their
designees, will serve as a member of Diamond's executive committee. An
additional two independent directors to be identified after the closing will
also join Diamond's board of directors. No other change to the boards of
directors or executive officers of Diamond will result from the Cluster
business combination.
Listing of Diamond Class A Common Stock
The Diamond Class A Common Stock issuable upon conversion of the Class B Common
Stock to be issued in the Cluster business combination will be listed on the
Nasdaq National Market under the symbol "DTPI."
Accounting Treatment (page 26)
The business combination will be accounted for under the purchase method of
accounting in accordance with generally accepted accounting principles. This
means that for accounting and financial reporting purposes, the assets and
liabilities of Cluster will be recorded at their fair value, and any excess of
Diamond's purchase price over the fair value will be recorded as intangible
assets, including goodwill.
7
<PAGE>
SUMMARY FINANCIAL DATA
The following tables present:
. summary historical financial data of Diamond;
. summary historical financial data of Cluster; and
. summary unaudited pro forma consolidated financial data of
DiamondCluster which reflect the merger.
8
<PAGE>
DIAMOND SUMMARY SELECTED FINANCIAL DATA
The selected financial data set forth below for the years ended March 31,
1998, 1999 and 2000 are derived from Diamond's consolidated financial
statements which have been audited by KPMG LLP, independent public accountants.
The data presented for the six-month periods ended September 30, 1999 and 2000
are derived from unaudited financial statements and include, in the judgment of
management, all adjustments necessary to present fairly the data for such
period. The historical data is only a summary, and you should read it in
conjunction with the historical financial statements and related notes from the
annual and quarterly reports of Diamond which are included in this prospectus.
(in thousands, except per share data and number of clients)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31, September 30,
------------------------ ----------------
1998 1999 2000 1999 2000
------- ------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues........................ $58,369 $82,389 $136,235 $56,185 $112,036
Income from operations.............. 8,783 13,699 24,603 10,069 19,526
Net income.......................... 6,008 9,836 16,228 6,617 15,574
Basic earnings per share of common
stock.............................. $ 0.34 $ 0.49 $ 0.78 $ 0.33 $ 0.64
Shares used in computing basic
earnings per share of common
stock.............................. 17,634 19,915 20,807 20,359 24,198
Diluted earnings per share of common
stock.............................. $ 0.28 $ 0.42 $ 0.62 $ 0.27 $ 0.52
Shares used in computing diluted
earnings per share of common
stock.............................. 21,258 23,346 25,984 24,457 29,768
EBITA(1)............................ $ 8,783 $13,699 $ 25,068 $10,193 $ 20,230
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, Mar. 31, June. 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
1998 1998 1998 1999 1999 1999 1999 2000 2000 2000
-------- --------- -------- -------- --------- --------- -------- -------- -------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues............ $18,375 $20,136 $21,194 $22,684 $25,718 $30,467 $36,640 $43,410 $52,158 $59,878
Income from operations.. $ 2,932 $ 3,289 $ 3,448 $ 4,030 $ 4,551 $ 5,518 $ 6,638 $ 7,896 $ 9,126 $10,400
Net income.............. $ 2,135 $ 2,383 $ 2,511 $ 2,807 $ 2,999 $ 3,618 $ 4,345 $ 5,266 $ 7,228 $ 8,346
Other Operating Data:
Number of clients
served................. 40 39 45 47 89 70 66 67 67 61
Number of clients
generating revenues
greater than $500
thousand............... 10 15 15 17 13 16 24 25 36 27
Number of clients
generating revenues
greater than $1
million................ 5 5 5 6 5 10 14 18 17 19
Average revenue per
client................. $ 459 $ 516 $ 471 $ 483 $ 289 $ 435 $ 555 $ 648 $ 778 $ 982
Client-serving
professionals.......... 187 229 234 239 296 378 433 452 506 632
Annualized revenue per
professional........... $ 406 $ 387 $ 366 $ 384 $ 368 $ 362 $ 361 $ 392 $ 436 $ 421
</TABLE>
<TABLE>
<CAPTION>
March 31, Sept. 30,
2000 2000
--------- -----------
(unaudited)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................................. $182,945 $209,973
Working capital........................................... 183,967 201,147
Total assets.............................................. 249,410 291,912
Long term debt, including current portion................. 1,000 500
Total stockholders' equity................................ 218,318 247,272
</TABLE>
The significant increase in the number of clients in the quarter ended June
30, 1999 was due to our acquisition of Omnitech Consulting Group, Inc. We
obtained thirty-eight clients in this quarter as a result of that acquisition.
The acquisition also lowered our average revenue per client in this quarter.
--------
(1) EBITA consists of income from operations before amortization of goodwill
and non-cash compensation. Diamond considers EBITA to be an important
indicator of the operational strength and performance of its business.
EBITA, however, should not be considered an alternative to operating or net
income as an indicator of the performance of Diamond, or as an alternative
to cash flows from operating activities as a measure of liquidity, in each
case determined in accordance with generally accepted accounting
principles. In addition, this definition of EBITA may not be comparable to
similarly titled measures reported by other companies.
9
<PAGE>
CLUSTER SUMMARY FINANCIAL DATA
The selected financial data set forth below for the years ended December 31,
1998 and 1999 and at December 31, 1998 and 1999 are derived from Cluster's
consolidated financial statements that have been audited by Arthur Andersen,
independent auditors. The selected financial data set forth below for the year
ended December 31, 1997 and at December 31, 1997 are derived from Cluster's
consolidated financial statements that have been audited by Bouwer & Officier,
independent auditors. The selected combined financial data set forth below for
the nine months ended September 30, 1999 and 2000 and at September 30, 2000 are
derived from Cluster's unaudited consolidated financial statements and include
all adjustments, consisting of only normal recurring adjustments, which Cluster
considers necessary for a fair presentation of its consolidated financial
position and results of operations for such periods. For the convenience of the
reader, translations have been provided from Dutch guilders to U.S. dollars of
the balance sheet and income statement information at and for the most recent
annual and interim periods at the exchange rate in effect on September 29, 2000
of $0.4005 = NLG1.00. The historical data is only a summary, and you should
read it in conjunction with the historical financial statements and related
notes contained in the annual and interim period reports of Cluster which are
included in this prospectus.
(in thousands, except share amounts and per share data)
<TABLE>
<CAPTION>
(in NLG)
------------------------------------------------
Year Ended Nine Months Ended
December 31, September 30,
---------------------------- -------------------
1997 1998 1999 1999 2000
-------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues................. 13,005 53,884 111,013 74,859 164,449
Income from operations....... 639 7,909 29,833 21,107 32,878
Net income................... 457 4,550 16,966 12,389 20,352
Basic earnings per share of
common stock................ 1,062.79 10,581.39 39,364.17 28,811.63 47,111.11
Shares used in computing
basic earnings per share.... 430 430 431 430 432
Diluted earnings per share of
common stock................ 1,062.79 10,581.39 39,364.17 28,811.63 47,111.11
Shares used in computing
diluted earnings per share.. 430 430 431 430 432
</TABLE>
<TABLE>
<CAPTION>
(in $)
--------------------------
Nine Months
Year Ended Ended
December 31, September 30,
1999 2000
------------ -------------
(unaudited)
<S> <C> <C>
Net revenues....................................... $ 44,461 $ 65,862
Income from operations............................. 11,948 13,167
Net income......................................... 6,795 8,150
Basic earnings per share of common stock........... $15,765.66 $18,865.74
Shares used in computing basic earnings per share.. 431 432
Diluted earnings of share of common stock.......... $15,765.66 $18,865.74
Shares used in computing diluted earnings per
share............................................. 431 432
</TABLE>
<TABLE>
<CAPTION>
At December 31, At September 30,
----------------------- -----------------------
1999 1999 2000 2000
----------- ----------- ----------- -----------
(in thousands of Dutch guilders and U.S.
Dollars)
(U.S. GAAP) (U.S. GAAP)
(audited) (audited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents...... NLG 15,980 $ 6,400 NLG 14,583 $ 5,842
Working capital................ 1,199 480 3,507 1,404
Total assets................... 47,258 18,927 93,745 37,550
Shareholders equity............ 7,351 2,944 15,907 6,371
</TABLE>
10
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The summary unaudited pro forma consolidated financial data of the combined
company, DiamondCluster, have been derived from the unaudited pro forma
consolidated financial statements included elsewhere in this proxy
statement/prospectus. Because Cluster and Diamond have different fiscal years,
and the combined company will adopt the fiscal year-end of Diamond, pro forma
operating results are presented for the twelve months ended March 31, 2000 and
the six months ended September 30, 2000.
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Twelve Months
Ended Ended
September 30, March 31,
2000 2000
------------- -------------
<S> <C> <C>
Statement of Operations Data:
Net revenues..................................... $ 156,495 $ 182,112
Goodwill amortization............................ 31,356 61,797
Non-cash compensation............................ 40,485 80,970
Income (loss) from operations.................... (41,489) (105,629)
Net income (loss)................................ (21,862) (63,982)
Basic earnings (loss) per share of common stock.. $ (0.72) $ (2.36)
Shares used in computing basic earnings per share
of common stock................................. 30,514 27,123
Diluted earnings (loss) per share of common
stock........................................... $ (0.72) $ (2.36)
Shares used in computing diluted earnings per
share of common stock........................... 30,514 27,123
EBITA(/1/)....................................... $ 30,352 $ 37,138
<CAPTION>
At
September 30,
2000
-------------
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........................ $ 171,815
Working capital.................................. 138,226
Total assets..................................... 591,980
Long term debt, including current portion........ 500
Total stockholders equity........................ 495,836
</TABLE>
--------
(1) EBITA consists of income from operations before amortization of goodwill
and noncash compensation. Diamond considers EBITA to be an important
indicator of the operational strength and performance of its business.
EBITA, however, should not be considered an alternative to operating or net
income as an indicator of the performance of Diamond, or as an alternative
to cash flows from operating activities as a measure of liquidity, in each
case determined in accordance with generally accepted accounting
principles. In addition, this definition of EBITA may not be comparable to
similarly titled measures reported by other companies.
11
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus/proxy statement contains "forward-looking statements" within
the meaning of Section 17A of the Securities Act of 1933, and Section 21E of
the Securities Exchange Act of 1934. When used in this prospectus/proxy
statement, the words "anticipates," "believes," "expects," "intends" and
similar expressions identify such forward-looking statements. Although Diamond
believes that such statements are based on reasonable assumptions, these
forward-looking statements are subject to numerous factors, risks and
uncertainties that could cause actual outcomes and results to be materially
different from those projected. These factors, risks and uncertainties include,
among others, the following:
. risks in connection with the business combination described in pages 13
through 15 of this proxy statement/prospectus;
. the impact of general economic conditions where Diamond and Cluster do
business, including interest rates;
. general industry conditions, including competition and product prices;
. fluctuations in exchange rates and currency values;
. capital expenditure requirements;
. legislative or regulatory requirements; and
. access to capital markets.
Diamond's and Cluster's actual results, performance or achievement could
differ materially from those expressed in, or implied by, forward-looking
statements. No assurances can be given that any of the events anticipated by
the forward-looking statements will occur or, if any of them do, what impact
they will have on Diamond's and Cluster's results of operations and financial
condition. Diamond's and Cluster's past results, performance or achievements
cannot be relied upon as a guide to future results, performance or
achievements.
12
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before voting. The
risks described are not the only ones we face. Any of the following risks could
have a material adverse effect on our business, financial condition and
operating results. You should also refer to the other information contained in
this proxy statement/prospectus, including our financial statements and the
related notes.
Risks Associated With the Business Combination
We May Be Unable to Quickly and Effectively Integrate Operations Which Could
Materially Adversely Affect Our Combined Business, Financial Condition and
Results of Operations
Following the business combination, in order to maintain and increase
profitability and operating efficiencies, we will need to integrate and
coordinate certain key elements:
. service offerings;
. marketing and business development efforts;
. management and other professional personnel; and
. operational systems of Diamond and Cluster.
We may not accomplish the integration smoothly, expeditiously or
successfully. The difficulties of combining the companies' operations include:
. the necessity of coordinating geographically separated organizations
(Diamond is based in the United States and Cluster is based in Europe);
. integrating organizations whose personnel have diverse business and
cultural backgrounds; and
. combining different corporate cultures.
The process of integrating operations could cause an interruption of, or loss
of momentum in, the activities of the combined company's businesses and the
loss of key personnel. We will need to dedicate management resources which may
distract attention from normal operations. Employee uncertainty and lack of
focus during the integration may also disrupt our businesses. If we fail to
complete quickly and effectively the integration of our operations, there could
be uncertainty in the marketplace or client concern regarding the impact of the
business combination, which could materially adversely affect the combined
businesses, financial conditions and results of operations of Diamond and
Cluster.
Among the factors considered by the Diamond and Cluster boards of directors
in connection with their respective approvals of the business combination were
the opportunities for economies of scale and operating efficiencies that could
result from the business combination. We cannot give any assurance that these
savings will be realized within the time periods contemplated or that they will
be realized at all.
The Business Combination May Affect Our Ability to Hire, Train and Retain
Highly Qualified Professionals Which May Cause Our Business to Suffer
Our success following the closing will depend upon the retention of senior
executives and other key employees from both Diamond and Cluster who are
critical to the continued advancement, development and support of our services,
ongoing sales and marketing efforts. The loss for any reason of any key
executive officer or of any significant group of our client-serving
professionals could negatively affect our business and prospects. As often
occurs with business combinations of technology/services companies, during the
pre-business combination and integration phases competitors may intensify their
efforts to recruit key employees. Employee uncertainty regarding the effects of
the business combination could also cause increased turnover. We may not be
able to retain or hire key management, technical, sales or marketing personnel
before or after the business combination.
13
<PAGE>
We Must Build Recognition and Client Acceptance of Our New Name
Diamond and Cluster have each invested significant efforts in building
recognition and client acceptance of their names. We believe that transferring
market acceptance for the Diamond and Cluster names to the new name of
DiamondCluster International, Inc. will be an important aspect of our efforts
to retain and attract clients.
Promoting and maintaining name recognition will depend largely on the
success of the combined company's marketing efforts and the ability of
DiamondCluster following the closing to provide high quality, reliable and
cost-effective services. These efforts will require significant expenses, which
will affect our results of operations. In addition, although we intend to
centralize our marketing efforts, a significant part of our client services
will continue to be provided through individual consulting offices. Client
dissatisfaction with the performance of a single office could diminish the
value of our brand following the closing.
We Will Incur Significant Expenses Related to the Business Combination and the
Subsequent Integration Whether or Not Completed
The business combination will result in significant costs to Diamond and
Cluster. Excluding costs associated with combining the operations of the two
companies and costs associated with promoting and maintaining the new
DiamondCluster name following the closing, which are difficult to estimate,
direct transaction costs are estimated at approximately $20,325,000. We expect
these costs to consist primarily of fees for investment bankers, attorneys,
accountants, filing fees, financial printing and costs associated with
discontinuing some redundant business activities. These amounts are preliminary
estimates and are subject to change. The aggregate amount of these costs may be
greater than currently anticipated. The substantial majority of these costs
will be incurred whether or not the business combination is completed. Also,
additional unanticipated expenses may be incurred in the integration of our
businesses. Although we expect that the elimination of duplicative expenses as
well as the realization of other efficiencies related to the integration of the
businesses may result in cost savings, we cannot assure you that these benefits
will be achieved in the near term or at all.
If the Business Combination is Not Completed, Our Stock Price Could Decline
The obligations of Diamond and Cluster to complete the business combination
are subject to the satisfaction or waiver of certain conditions. See page 29 of
this proxy statement/prospectus for a discussion of these conditions. These
conditions might not be satisfied or waived and the business combination might
not be completed. Noncompletion of the business combination would likely have a
negative effect on the stock trading price of Diamond.
The Business Combination Will Dilute Your Percentage Ownership
The business combination will dilute the percentage ownership held by
Diamond stockholders when compared to their ownership prior to the business
combination. Based upon the estimated capitalization of Diamond as of September
30, 2000, the Cluster stockholders will hold approximately 20.5% of the
outstanding shares of Diamond common stock after giving effect to the issuance
of such shares. Diamond currently has outstanding a large number of options to
purchase our capital stock, many of which have exercise prices significantly
below the market price of Diamond's Class A Common Stock as of the date of this
proxy statement/prospectus. When the business combination is completed, up to
approximately 7,510,000 options will be granted to purchase shares of Class B
Common Stock in Diamond. As a result, 36% of the authorized Diamond common
stock will be held in options. To the extent these options are exercised, there
will be further dilution.
Currency Exchange Rate Fluctuations Could Adversely Affect Our Results of
Operations
Approximately 93% of Cluster's revenue for the nine months ended September
30, 2000 was derived from operations outside the United States. The results of
operations for Diamond following the closing could be significantly affected by
factors associated with international operations, such as changes in foreign
currency
14
<PAGE>
exchange rates and uncertainties relative to regional economic or political
circumstances, as well as by other risks sometimes associated with
international operations. Since the revenue and expenses of Diamond's foreign
operations will generally be denominated in local currencies, exchange rate
fluctuations between such local currencies and the U.S. dollar subject us to
currency translation risk with respect to the reported results of our foreign
operations. Also, we may be subject to foreign currency translation risks when
transactions are denominated in a currency other than the currency in which we
incur expenses related to such transactions. There can be no assurance that we
will not experience fluctuations in financial results from our operations
outside the United States, and there can be no assurance that we will be able
to reduce contractually or otherwise favorably the currency translation risk
associated with our operations.
We Could Lose Clients as a Result of Uncertainty Regarding the Business
Combination
Uncertainty regarding the business combination and the ability of Diamond
and Cluster to integrate effectively their operations without significant
reduction in quality of service could lead some clients to select other
vendors. The loss of business from significant clients could have a negative
effect on our business following the closing.
General Risks Associated With Our Business
Our Revenues Could Be Adversely Affected by the Loss of a Significant Client or
the Failure to Collect a Large Account Receivable
We have in the past derived, and may in the future derive, a significant
portion of our revenues from a relatively limited number of major clients.
During fiscal 2000, Diamond had two clients that individually accounted for 14%
and 6% of Diamond's net revenues. During the first six months of fiscal 2001,
Diamond had two clients which individually accounted for 10% and 7% of our net
revenues. In the six months ended September 30, 2000, Cluster had five clients
that in the aggregate accounted for approximately 62% of its revenues. Four
Cluster clients individually accounted for more than 10% of its 1999 revenues.
From quarter to quarter, revenues from one or more individual clients may
exceed 10% of our revenues for the quarter. If we lose any major clients or any
of our clients cancel or significantly reduce a large project's scope, we would
lose a significant amount of revenue. In addition, if we fail to collect a
large account receivable, we could be subjected to significant financial
exposure.
Variability of Quarterly Operating Results May Result in Reduced Prices for Our
Common Stock
We have experienced, and may in the future continue to experience,
fluctuations in our quarterly operating results. These fluctuations could
reduce the market price of our Common Stock. Factors that may cause our
quarterly operating results to vary include:
. the number of active client projects;
. the requirements of client projects;
. the termination of major client projects;
. the loss of major clients; and
. the timing of new client engagements and personnel cost increases.
The timing of revenues is difficult to forecast because our sales cycle is
relatively long and our services are affected by both the financial condition
and management decisions of our clients and general economic conditions. A high
percentage of our expenses are relatively fixed at the beginning of any period.
Because our general policy is not to adjust our staffing levels based upon what
we view as short-term circumstances, a variation in the timing, initiation or
completion of client assignments, particularly at or near the end of any
quarter, can cause significant variations in operating results from quarter to
quarter and could result in losses for any particular period.
15
<PAGE>
The Absence of Long-Term Contracts With Our Clients Reduces the Predictability
of Our Revenues
Our clients are generally able to reduce or cancel their use of our
professional services without penalty and, in some circumstances, with little
notice. As a result, we believe that the number of clients or the number and
size of our existing projects are not reliable indicators or measures of future
revenue. We have in the past provided, and are likely in the future to provide,
services to clients without long-term agreements. When a client defers,
modifies or cancels a project, there is no assurance that we will be able to
deploy rapidly our professionals to other projects in order to minimize the
underutilization of employees and the resulting adverse impact on operating
results. We may not be able to replace cancelled or reduced contracts with new
business with the result that our revenues may decline.
Our Chief Executive Officer Controls a Significant Portion of the Voting Rights
Which Limits Your Ability to Influence Corporate Matters
Our Chief Executive Officer controls a significant portion of our voting
stock. All of the holders of our Class B Common Stock have granted proxies to
our Chief Executive Officer to vote these shares. After consummation of the
Cluster transaction, our current Chief Executive Officer will control,
individually or by proxy, approximately 68.2% of the voting rights of our
outstanding Common Stock. As a result, he will have the voting power to
significantly influence the election of our board of directors and to affect
all matters requiring stockholder approval. In addition, an agreement among
Diamond and our partners requires that our Chief Executive Officer be selected
from our partners. This significantly limits the number of qualified persons
that may be considered for that office. As a result, we may not be successful
in attracting future persons who are qualified to serve as our Chief Executive
Officer.
Failure to Properly Manage Our Expanding Operations May Adversely Impact Our
Business
Continued rapid growth will place a significant strain on our financial and
other resources and could result in significant operating losses. Since March
31, 1998, the size of our employee base has more than tripled. Further
increases are anticipated in the future, either through organic growth or
through the carefully targeted acquisition of companies that meet our
acquisition criteria. In order to manage the growth of our professional staff,
we will need to continue to improve our operational, financial and other
internal systems. If our management is unable to manage growth effectively and
revenues do not increase sufficiently to cover our increased expenses, our
operations could be adversely affected.
If We Are Unable to Protect Our Intellectual Property Rights or If We Infringe
Upon the Intellectual Property Rights of Others Our Business May Be Harmed
Failure to secure or maintain protection of our intellectual property could
adversely affect our ability to serve our clients and generate revenue. We rely
on a combination of non-disclosure and other contractual agreements and
copyright and trademark laws to protect our proprietary rights. We enter into
confidentiality agreements with our employees, require that our clients enter
into such agreements, and limit access to and distribution of our proprietary
information. However, these efforts may be insufficient to prevent
misappropriation of our proprietary information or detect unauthorized use of
our intellectual property rights.
Ownership of intellectual property developed during our client engagements
is the subject of negotiation and is frequently assigned to the client. We
generally retain the right to use any intellectual property that is developed
during a client engagement that is of general applicability and is not specific
to the client's project. Issues relating to the ownership of and rights to use
intellectual property developed during the course of a client engagement can be
complicated. Clients may demand assignment of ownership or restrictions on our
use of the work product. In addition, disputes may arise that affect our
ability to resell or reuse intellectual property. We may have to pay economic
damages in these disputes which could adversely affect our business.
16
<PAGE>
Failure to Meet Client Expectations Could Result in Losses and Negative
Publicity
A failure or inability by us or one of our subcontractors to meet a client's
expectations could damage our reputation and adversely affect our ability to
attract new business and result in delayed or lost revenues. Our client
engagements involve the creation, implementation and maintenance of business
systems and other applications that can be critical to our clients' businesses.
We may be sued or unable to collect accounts receivable if a client is not
satisfied with our service.
Our client contracts may not protect us from liability for damages in the
event that we are sued. In addition, our general liability insurance coverage
may not continue to be available on reasonable terms or in sufficient amounts.
The successful assertion of any large claim against us or the failure by us to
collect a large account receivable could result in significant financial
exposure to us.
An Inability to Keep Pace with Rapidly Changing Technology May Impair Our
Ability to Remain Competitive
Our failure to develop e-commerce business services that keep pace with
continuing changes in the Internet and other technology, evolving industry
standards, information technology and client preferences will result in
decreased demand for our services. Among our challenges in this area are the
need to:
. continue to develop our strategic and technical experience;
. develop new services that meet changing client needs; and
. use effectively leading technologies.
We may not be able to meet these objectives on a timely or successful basis.
Competition in Our Industry is Intense and Could Harm Our Business
Increased competition in our industry could result in price reductions,
reduced gross margins or loss of market share, any of which could seriously
harm our business. The e-commerce business services market is relatively new,
includes a large number of participants, is subject to rapid technological
changes and is highly competitive. We compete with a number of companies that
have significantly greater financial, technical and marketing resources,
greater name recognition, and greater revenues than ours. We believe that the
principal competitive factors in our industry include:
. diagnostic capabilities;
. effectiveness of strategic business models;
. scope of services;
. service delivery approach;
. technical and industry expertise;
. perceived value; and
. results orientation.
We believe that our ability to compete also depends in part on a number of
competitive factors outside of our control, including the ability of our
competitors to hire, retain and motivate senior consultants, the price at which
others offer comparable services, and the extent of our competitors'
responsiveness to client needs. We may not be able to compete successfully with
our competitors in the future.
In addition, there are relatively low barriers to entry in our industry. We
do not own any patented technology that inhibits competitors from entering that
market or providing services similar to ours. As a result, new and unknown
market entrants could pose a threat to our business.
17
<PAGE>
The Price for Our Common Stock Has Been Volatile and Unpredictable
The price for our Class A Common Stock has been volatile. Our Class A Common
Stock has been listed on the Nasdaq National Market since February 1997. The
closing market price of the Class A Common Stock has experienced variations,
and since January 1, 1999, our high and low sales price has ranged from a high
of $106.00 to a low of $10.67. The market price of our Class A Common Stock may
experience fluctuations in the future for a variety of reasons. These include:
. negative news about other publicly traded companies in our industry;
. general economic or stock market conditions unrelated to our operating
performance;
. quarterly variations in our operating results;
. changes in earnings estimates by analysts;
. announcements of new contracts or service offerings by or our
competitors; and
. other events or factors.
In addition, the stock market in recent years has experienced significant price
and volume fluctuations which have affected the market prices of technology
related companies. These fluctuations may continue to occur and
disproportionately impact our stock price.
The Failure to Integrate or Negotiate Successfully Any Future Acquisitions
Could Harm Our Business and Operating Results
If we acquire businesses in the future and are unable to integrate
successfully these businesses, it could harm our business and operating
results. In order to remain competitive or to expand our business, we may find
it necessary or desirable to acquire other businesses, products or
technologies. We may be unable to identify appropriate acquisition candidates.
If we identify an appropriate acquisition candidate, we may not be able to
negotiate the terms of the acquisition successfully, to finance the acquisition
or to integrate the acquired businesses, products or technologies into our
existing business and operations. Further, completing a potential acquisition
and integrating an acquired business may strain our resources and require
significant management time. In addition, we may be required to amortize
significant amounts of goodwill and other intangible assets in connection with
future acquisitions which would harm our operating results.
We May Need to Raise Additional Capital in the Future Which May Not Be
Available
We may not be able to raise capital in the future to meet our liquidity
needs and finance our operations and future growth. We were not profitable in
the first two quarters of fiscal 1997. While we have been profitable since the
third quarter of fiscal 1997, we may not continue to be profitable in the
future. We believe that existing cash resources, the amounts available under
our revolving line of credit and cash generated from operations will be
sufficient to satisfy our operating cash needs at least through fiscal 2001.
Any future decreases in our operating income, cash flow, or stockholders'
equity may impair our future ability to raise additional funds to finance
operations. As a result, we may not be able to maintain adequate liquidity to
support our operations.
Future Sales of Our Common Stock in the Public Market Could Cause the Price of
Our Stock to Decline
In the future, our stockholders could sell substantial amounts of our common
stock in the public market which could cause our market price to decline. A
substantial number of outstanding shares of common stock and shares of our
common stock issuable upon exercise of outstanding stock options and warrants
will become eligible for future sale in the public market at various times. An
increase in the number of shares of our common stock in the public market could
adversely affect prevailing market prices and could impair our future ability
to raise capital through the sale of our equity securities. Upon consummation
of the Cluster transaction, we will have 31,779,144 shares of outstanding
common stock.
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Our Charter Documents and Delaware Law May Discourage an Acquisition of Diamond
Provisions of our certificate of incorporation, by-laws, and Delaware law
could make it more difficult for a third party to acquire us, even if doing so
would be beneficial to our stockholders. We may issue shares of preferred stock
in the future without stockholder approval and upon such terms as our board of
directors may determine. Our issuance of this preferred stock could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, a majority of our outstanding stock
and potentially prevent the payment of a premium to stockholders in an
acquisition. Our charter and by-laws also provide that special stockholders
meetings may be called only by our Chairman of the board of directors, by our
Secretary at the direction of our board of directors, or by stockholders
holding at least 30% of the voting power of the issued and outstanding shares
of outstanding common stock, with the result that any third-party takeover not
supported by the board of directors could be subject to significant delays and
difficulties. In addition, our board of directors is divided into three
classes, each of which serves for a staggered three-year term, which may make
it more difficult for a third party to gain control of our board of directors.
We Do Not Intend to Pay Dividends
We have never paid any cash dividends on our common stock and do not expect
to declare or pay any cash or other dividends in the foreseeable future.
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THE ANNUAL MEETING
Time and Place of the Annual Meeting
We are sending this proxy statement/prospectus to you as part of the
solicitation of proxies by our board of directors for use at the annual meeting
of Diamond to be held at the John Hancock Center, 95th Floor, Signature Room,
875 North Michigan Avenue, Chicago, Illinois, on Tuesday, November 21, 2000 at
10:00 a.m., local time. We are first mailing this proxy statement/prospectus,
the attached notice of annual meeting of stockholders and the enclosed proxy
card to you on or about November 7, 2000.
Purpose of the Annual Meeting
At the annual meeting, Diamond stockholders will be asked to consider and
approve the following:
. the issuance of up to 6,315,377 shares of Class B Common Stock in
connection with the consummation of the Cluster business combination;
. the amendment of Diamond's Restated Certificate of Incorporation changing
its name to "DiamondCluster International, Inc."
. the amendment of Diamond's Restated Certificate of Incorporation
increasing the aggregate authorized shares of Class A Common Stock to
100,000,000;
. the amendment of Diamond's Restated Certificate of Incorporation to
permit additional classes of persons to hold Diamond's Class B Common
Stock;
. election of Donald R. Caldwell, Alan C. Kay, Michael E. Mickolajczyk and
Javier Rubio as directors;
. the adoption of the DiamondCluster 2000 Stock Option Plan and issuance of
options in connection with the consummation of the Cluster business
combination;
. the amendment of Diamond's Amended and Restated 1998 Equity Incentive
Plan to increase the aggregate shares available for issuance thereunder;
and
. ratification of KPMG LLP as independent auditors of Diamond for fiscal
year ending March 31, 2001.
We know of no other matters to be brought before the annual meeting. If any
matter incident to the conduct of the annual meeting should be brought before
the meeting, the persons named in the proxy card will vote in their discretion.
Record Date; Stock Entitled to Vote; Quorum
Our board of directors has fixed the close of business on November 2, 2000
as the record date for the annual meeting. Only holders of Class A Common Stock
and Class B Common Stock on the record date will be entitled to vote at the
annual meeting and any adjournments or postponements thereof. At the record
date, 22,365,776 shares of Diamond Class A Common Stock and 3,097,991 shares of
Diamond Class B Common Stock were outstanding and entitled to vote.
The presence, in person or by proxy, of a majority of the shares of common
stock is necessary to constitute a quorum at the annual meeting. Abstentions
and broker non-votes will be included in the determination of shares present at
the annual meeting for purposes of determining a quorum. Properly executed
proxies marked "abstain" will be deemed present for purposes of determining
whether a quorum has been achieved. Proxies held by brokers in "street name"
that are not voted on all proposals to come before the meeting shall also be
deemed "present."
Required Vote
All properly executed proxies delivered and not properly revoked will be
voted at the annual meeting as specified in such proxies. If you do not specify
a choice, your shares represented by a signed proxy will be voted "FOR" the
adoption of the matters submitted for approval.
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The affirmative vote of a majority of the outstanding shares of Diamond
common stock is required to approve the issuance of shares of Diamond Class B
Common Stock and the amendments to Diamond's Restated Certificate of
Incorporation. As a result, the failure to submit a proxy card or to vote in
person at the annual meeting, abstentions by a stockholder and broker non-votes
in connection with the issuance of shares of Diamond Class B Common Stock and
the amendments to Diamond's charter will count as a vote "AGAINST" such
proposals. All other matters presented for approval at the annual meeting will
require the affirmative vote of the holders of a majority of the voting power
of shares of Diamond's common stock which has voting power present in person or
by proxy, and which is actually voted. As a result, the failure to submit a
proxy card or to vote in person at the annual meeting, abstentions by a
stockholder and broker non-votes in respect of any of these matters will not be
counted "FOR" or "AGAINST" for purposes of determining whether such proposals
have received the requisite approval by Diamond's stockholders.
The rules and regulations of the Nasdaq National Market System, on which the
Diamond Class A Common Stock is currently listed, requires the approval of a
majority of the stock outstanding as a prerequisite to listing the shares in
certain instances, including transactions where the issuance could increase the
number of outstanding shares of capital stock by 20% or more.
Proxies; Voting and Revocation
Each share of Diamond Class A Common Stock is entitled to one vote and each
share of Diamond Class B Common Stock is entitled to five votes. Votes will be
tabulated at the special meeting by inspectors of election appointed by
Diamond. The shares of Class B Common Stock will be voted by Melvyn E.
Bergstein pursuant to an irrevocable proxy granted to Mr. Bergstein by the
holders of the Class B Common Stock.
You may revoke or change your proxy at any time prior to its being voted by
filing a written instrument of revocation or change with the corporate
secretary of Diamond. You may also revoke your proxy by filing a duly executed
proxy bearing a later date or by appearing at the annual meeting in person,
notifying the corporate secretary and voting by ballot at the annual meeting.
If you attend the meeting, you may vote in person whether or not you have
previously given a proxy, but your presence, without notifying the corporate
secretary of Diamond, at the meeting will not revoke a previously given proxy.
In addition, if you beneficially hold shares of Diamond common stock that are
not registered in your own name, you will need additional documentation from
the record holder of such shares to attend and vote the shares personally at
the meeting.
Solicitation of Proxies
Proxies will be solicited through the mail and directly by officers,
directors and employees of Diamond not specifically employed for such purpose,
without additional compensation. Diamond will reimburse banks, brokerage houses
and other custodians, nominees and fiduciaries for their reasonable expenses in
forwarding these proxy materials to the principals.
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BUSINESS COMBINATION
Background of the Business Combination
Diamond has been exploring opportunities to expand beyond North America in
order to serve fully its increasingly international client base. In early 2000,
Diamond became aware of Cluster as a competing recruiter of business school
graduates. In May 2000, at Diamond's request, Morgan Stanley arranged and
attended a meeting between members of the management teams of Diamond and
Cluster including Diamond's Chief Executive Officer, Melvyn E. Bergstein, and
Cluster's Chief Executive Officer, Javier Rubio. At the meeting, the parties
discussed their strategic objectives and business offerings. Following the
discussion, the parties agreed to consider in greater detail a possible
business combination. Meetings between senior management of Diamond and Cluster
and their financial advisers were held during late May and June 2000. In early
July, Messrs. Bergstein and Rubio agreed to begin detailed negotiations of the
terms of a possible business combination and on July 20, 2000 executed a non-
binding term sheet. Each party then began an intensive due diligence review of
the other. Negotiations of the purchase agreement commenced in August 2000 and
were concluded with the unanimous approval of the business combination by the
boards of directors of Diamond and Cluster on September 10, 2000 and the
execution of the agreement September 11, 2000.
Recommendation of the Diamond Board of Directors
Diamond's board of directors unanimously recommends that the stockholders
approve the issuance of shares of Diamond Class B Common Stock to be issued in
the business combination and the other matters submitted for approval at the
annual meeting. Following extensive discussion, the directors concluded that
the potential benefits outweigh the associated risks and the business
combination is fair to, and in the best interests of, Diamond and its
stockholders.
Reasons for the Business Combination
Expanding Global Presence. One of Diamond's strategic goals is to expand
beyond North America in order to serve fully the needs of increasingly
international clients operating in a global economy. The business combination
with Cluster will significantly accelerate Diamond's strategic plan and result
in an immediate pan-European and Latin American presence with offices in
Barcelona, Boston, Chicago, Duseldorf, Lisbon, London, Madrid, Munich, New
York, Paris, San Francisco and Sao Paulo. Having capabilities in North America,
Europe and Latin America will enable the combined entity to offer international
perspectives and solutions.
Expanding into Broadband Services. While the Internet has been the primary
focus of Diamond's clients and will continue to be a factor, skills in
broadband wireless expertise is quickly becoming an important consideration.
Diamond believes broadband wireless technology will expand across all
industries in the form of mobility and m-commerce. Diamond believes that its
expertise in digital strategies using the traditional Internet and Cluster's
expertise in wireless will complement each other and become a cornerstone of
Diamond's intellectual capital and client work. Because Diamond believes that
renewable and scalable intellectual capital is the key to long-term
sustainability for a consulting firm, the combination with Cluster will augment
Diamond's already strong intellectual capital with a European perspective in a
broadband wireless context. Diamond believes that many of the clients in its
broad based portfolios--from financial services firms to fast-moving consumer
products companies--can benefit from the combined entity's expertise in
broadband wireless technology and mobility. Similarly, Cluster's existing
clients should benefit from Diamond's in-depth vertical industry expertise and
deep technical solutions and delivery capabilities.
Complementary Skills and Similar Culture. Diamond believes that Cluster's
employee skillset will be complementary to Diamond's. Both groups focus on
leveraging disruptive technologies utilizing deep, digital strategy technology
and value management skills. Cluster's skills have been concentrated in the
area of wireless Internet; Diamond's on the traditional Internet.
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Similar to Diamond, Cluster employs a number of highly qualified individuals
with strong industry experience. The average age of Cluster partners is in the
mid-thirties and many partners have been educated at internationally recognized
business schools. Professional backgrounds include strategy professionals from
Diamond competitors and marketing professional from companies such as American
Express, Nestle, Procter & Gamble, L'Oreal and Pepsi. Cluster utilizes a
campus-based recruiting model similar to Diamond's, which Diamond believes is
critical to the long-term success of a professional services firm.
Opinion of Financial Advisor to Diamond
By letter dated July 21, 2000, Diamond engaged Morgan Stanley & Co.
Incorporated as exclusive financial advisor in connection with the business
combination with Cluster. Morgan Stanley was selected based on its
qualifications, expertise and reputation. On September 10, 2000, Morgan Stanley
delivered to Diamond's board of directors an oral opinion that, on and as of
the date of such opinion, and based on assumptions made, matters considered,
and limits of review set forth in the opinion, the consideration to be paid by
Diamond pursuant to the purchase agreement was fair from a financial point of
view to Diamond. This oral opinion was subsequently confirmed in a written
opinion dated September 11, 2000.
The full text of the Morgan Stanley written opinion is attached as Annex B
to this proxy statement/prospectus and incorporated herein by reference. You
are urged to, and should, read the Morgan Stanley opinion carefully and in its
entirety. The Morgan Stanley opinion is directed to Diamond's board of
directors, addresses only the fairness of the consideration paid by Diamond
pursuant to the purchase agreement from a financial point of view to Diamond
and it does not address any other aspect of the purchase agreement or
constitute a recommendation to any Diamond stockholder as to how to vote at the
annual meeting. The following summary of the Morgan Stanley opinion is
qualified in its entirety by reference to the full text of the Morgan Stanley
opinion.
In connection with rendering its opinion, Morgan Stanley:
. reviewed certain publicly available financial statements and other
information of Diamond;
. reviewed certain internal financial statements and other financial and
operating data concerning Cluster and Diamond prepared by the managements
of Cluster and Diamond;
. reviewed certain financial projections of Cluster and Diamond prepared by
the managements of Cluster and Diamond;
. discussed the past and current operations and financial condition and the
prospects of Cluster with senior executives of Cluster;
. discussed with senior executives of Diamond past and current operations
and financial condition and the prospects of Diamond, including
information relating to certain strategic, financial and operational
benefits anticipated as a result of the business combination;
. reviewed the pro forma impact of the business combination on Diamond's
cash earnings per share and other financial ratios;
. reviewed the reported prices and trading activity for Diamond's Class A
Shares;
. compared the financial performance of Cluster and Diamond and the prices
and trading activity of Diamond's Class A Shares with the financial
performance and the prices and trading activity of the common stock of
certain other comparable publicly-traded companies;
. reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
. participated in discussions and negotiations among representatives of
Cluster and Diamond and their financial and legal advisors;
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<PAGE>
. reviewed the purchase agreement and certain related documents; and
. performed such other analyses and considered such other factors as Morgan
Stanley deemed appropriate.
In preparing its opinion, Morgan Stanley assumed and relied upon without
independent verification the accuracy and completeness of the information
reviewed by it for the purposes of its opinion. With respect to the internal
financial projections and other financial and operating data and discussions
relating to strategic, financial, and operational benefits anticipated from the
business combination provided by Cluster and Diamond, Morgan Stanley assumed
that the projections, data and operational benefits analyses have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the prospects and future financial performance of Cluster and
Diamond. Morgan Stanley also relied upon the assessment by the managements of
Cluster and Diamond of their ability to retain key employees. Without
independent verification, Morgan Stanley relied upon the assessment by the
managements of Cluster and Diamond of:
. the strategic, financial and operational benefits anticipated as a result
of the business combination;
. Cluster's and Diamond's technologies, products or services;
. the timing and risks associated with the integration of Cluster with
Diamond; and
. the validity of and risks associated with Cluster's and Diamond's
existing and future technologies, products or services.
Morgan Stanley did not make any independent valuation or appraisal of the
assets or liabilities of Cluster or Diamond, nor was it furnished with any such
appraisals. In addition, Morgan Stanley assumed that the business combination
will be consummated in accordance with the terms of the purchase agreement. Its
opinion is necessarily based on financial, economic, market and other
conditions as in effect on, and the information made available to it as of, the
date of the opinion.
The following is a brief summary of certain analyses performed by Morgan
Stanley in preparation of its opinion. The financial analyses summary includes
information presented in tabular format. In order to understand fully the
financial analyses used by Morgan Stanley, the table must be read together with
the text of the summary. The table alone does not constitute a complete
description of the financial analyses.
Relative Contribution Analysis. Morgan Stanley analyzed the pro forma
contribution of Cluster and Diamond to the combined company assuming completion
of the business combination and based on estimates for both companies prepared
by the management of Diamond. The analysis showed in terms of historical and
projected revenue, net income and operating income (among other things) that
for fiscal years ended 2000 through 2003 Cluster would contribute between 26.7
and 47.9 percent to the combined company and that 35.5 to 39.9 percent of the
estimated number of client serving professionals generating such revenue would
be contributed by Cluster. These percentages were compared to the ratio of the
consideration to the value of the combined company of approximately 29%.
Valuation of Publicly Traded Comparable Companies. Morgan Stanley reviewed
the current valuation of publicly traded European and U.S. companies in the
Internet services sector that share some characteristics with Cluster. Morgan
Stanley reviewed measures of valuation including equity value to projected
calendar year earnings ratios and aggregate value to projected calendar year
revenues ratios using publicly available information in the case of the
comparable companies and Diamond management's forecast for Cluster in the case
of Cluster. Based on its analysis, Morgan Stanley observed the following:
<TABLE>
<CAPTION>
Equity Value/ Aggregate Value/
Earnings Revenue
--------------- ------------------
2000 2001 2000 2001
------ ------ -------- --------
<S> <C> <C> <C> <C>
European Comparables.................. 145x 123x 11.6x 7.3x
U.S. Comparables...................... 140 105 9.4 4.9
Consideration/Comp.................... 48 24 9.4 5.0
</TABLE>
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Selected Precedent Industry Acquisitions Analysis. Using publicly available
information, Morgan Stanley reviewed 35 recent precedent transactions involving
companies in the Internet services sector that shared some characteristics with
the business combination. Morgan Stanley reviewed publicly available financial
information including the aggregate value to the latest 12-month revenue, which
was obtainable for 21 such transactions. Morgan Stanley observed an aggregate
value to latest 12-month revenue multiple range of 1.2 to 39.4 times with a
mean of 11.6 and median of 6.9 times for the precedent transactions. Based on
Diamond management's forecast for Cluster's calendar year ended 2000, the
consideration implies an aggregate value to revenue multiple of 9.4 times.
No transaction utilized as a comparison in the precedent transaction
analysis is identical to Cluster. In evaluating the strategic combination
transactions, Morgan Stanley made judgments and assumptions with regard to
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of Cluster
and Diamond, such as the impact of competition on the businesses of Cluster and
Diamond and the industry generally, industry condition and prospects of
Cluster, Diamond, or both.
Pro Forma Analysis of the Merger. Morgan Stanley reviewed the pro forma
impact of the business combination on Diamond's cash earnings per share for the
fiscal years 2000 through 2003 based on historical and projected earnings for
Cluster and Diamond prepared by the management of Diamond. Morgan Stanley noted
that the Cluster stockholders would receive approximately 6.3 million shares of
Diamond common stock and up to 7.6 million options for shares of Diamond common
stock, representing approximately 28% fully-diluted ownership of the pro forma
entity. Morgan Stanley noted that, based on the earnings projections for
Cluster and Diamond prepared by Diamond management, the business combination
would be accretive to Diamond's cash earnings in fiscal year 2001 and
increasingly accretive in 2002 and 2003. Morgan Stanley further observed that
the transaction would be highly dilutive to Diamond's earnings as calculated by
generally accepted accounting principles, including the amortization of
goodwill and other non-cash transaction-related charges for the fiscal years
ended 2001 through 2003.
In connection with the review of the business combination by Diamond's board
of directors, Morgan Stanley performed a variety of financial and comparative
analyses for purposes of its opinion. The preparation of a fairness opinion is
a complex process and is not necessarily susceptible to partial analysis or
summary description. In arriving at its opinion, Morgan Stanley considered the
results of all its analyses as a whole and did not attribute any particular
weight to any analysis or factor considered by it. Furthermore, selecting any
portion of its analyses, without considering all analyses, would create an
incomplete view of the process underlying the Morgan Stanley opinion. In
addition, Morgan Stanley may have given various analyses and factors more or
less weight than other analyses or factors, and may have deemed various
assumptions more or less probable than other assumptions, so that the ranges of
valuations resulting from any particular analysis described above should not be
taken to be Morgan Stanley's view of the actual value of Cluster or Diamond. In
performing its analyses, Morgan Stanley made numerous assumptions with respect
to industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Cluster and Diamond. Estimates
contained in Morgan Stanley's opinion are not necessarily indicative of future
results or actual values, which may be significantly more or less favorable
than those suggested by such estimates. The analyses performed were prepared
solely as part of Morgan Stanley's analysis of the fairness of the
consideration to be paid by Diamond pursuant to the purchase agreement from a
financial point of view to Diamond and were conducted in connection with the
delivery of the Morgan Stanley opinion to Diamond's board of directors. The
analyses do not purport to be appraisals or to reflect the prices at which
Cluster or Diamond might actually be sold. Morgan Stanley did not recommend the
consideration to be paid by Diamond or that any consideration to be paid by
Diamond constituted the only appropriate consideration for the business
combination.
In addition, Morgan Stanley's opinion and presentation to Diamond's board of
directors was one of the many factors taken into consideration by Diamond's
board of directors in making its determination to recommend approval of the
business combination. Consequently, the Morgan Stanley analyses described above
should not be viewed as determinative of the opinion of Diamond's board of
directors with respect to the
25
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consideration paid in connection with the business combination or whether
Diamond's board of directors would have been willing to agree to a different
consideration. The consideration to be paid by Diamond pursuant to the purchase
agreement was determined through arm's-length negotiations between Cluster and
Diamond and was approved by Diamond's board of directors.
Diamond engaged Morgan Stanley to advise it on strategic alternatives and to
provide the Morgan Stanley opinion because of its experience and expertise.
Morgan Stanley is an internationally recognized investment banking and advisory
firm. Morgan Stanley, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. In the course of its market-
making and other trading activities, Morgan Stanley may, from time to time,
have a long or short position in, and buy and sell, securities of Diamond. In
the past, Morgan Stanley has performed financing services for Diamond and has
received customary fees for the provision of such services.
Upon the consummation of the business combination, Morgan Stanley will
receive a fee for its services of approximately $7 million. If the business
combination is not consummated, Morgan Stanley will receive an advisory fee of
$250,000. In addition, Morgan Stanley will be reimbursed for its expenses,
including outside counsel. Diamond has agreed to indemnify Morgan Stanley and
its affiliates, their directors, officers, agents and employees and each
person, if any, controlling Morgan Stanley, or any of its affiliates against
certain liabilities and expenses, including liabilities under federal
securities laws, in connection with Morgan Stanley's engagement.
Accounting Treatment
The business combination will be accounted for as a purchase for financial
reporting and accounting purposes under generally accepted accounting
principles. Under the purchase method of accounting, the purchase price
(including direct costs of the business combination) paid by Diamond for the
capital stock of Cluster will be allocated to the identifiable assets and
liabilities of Cluster based upon the fair value of Cluster's identifiable
assets and liabilities, as of the effectiveness of the business combination
with the excess of the purchase price over the fair value of net identifiable
assets being allocated to goodwill. After the business combination, the
financial condition and results of operations of Cluster will be included (but
not separately reported) in the consolidated financial condition and results of
operations of Diamond.
Closing of Business Combination
Diamond anticipates that the business combination will close prior to
December 31, 2000. The closing will occur as soon as practicable, but no
earlier than upon satisfaction or waiver of the conditions to the completion of
the business combination described in the purchase agreement.
Federal Income Tax Considerations
There are no federal income tax considerations to Diamond's stockholders
arising as a result of the business combination. Each Cluster stockholder is
urged to consult its own tax advisor in light of its own particular
circumstances as to the tax consequences of the receipt of shares of Diamond
Class B Common Stock, cash and options delivered in the transaction.
Appraisal Rights
Diamond is a Delaware corporation. Under Delaware law, a Diamond stockholder
will not be entitled to dissenter's rights or an appraisal of its shares in
connection with the Cluster business combination because, among other things, a
Diamond stockholder will not exchange or otherwise relinquish any shares of
Diamond capital stock in the transaction or pursuant to the matters submitted
for approval at the annual meeting.
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Federal Securities Laws Consequences
All shares of Diamond Class B Common Stock received by the Cluster
stockholders in the business combination will be freely transferable under U.S.
federal securities laws, except those shares of Diamond Class B Common Stock
received by persons who are deemed to be "affiliates" of Diamond under the
Securities Act of 1933. The shares received by "affiliates" of Diamond may be
resold only in transactions permitted by Rule 145 under the Securities Act of
1933 or as otherwise permitted under the Securities Act of 1933. Persons who
may be affiliates of Diamond for those purposes generally include individuals
or entities that control, are controlled by, or are under common control with,
Diamond and would not include stockholders who are not officers, directors or
principal stockholders of Diamond.
In addition to these restrictions on transfers by affiliates, all but
800,000 shares of Diamond Class B Common Stock issued in connection with the
business combination will be subject to transfer restrictions and/or a risk of
forfeiture which lapse over periods ranging from one to three years. Further,
all Diamond partners, including the Cluster partners following the business
combination, must agree to sell the shares of Diamond Class B Common Stock
issued to them as part of the business combination or as partners following the
business combination only in accordance with the terms of Diamond's Partners'
Operating Agreement.
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MATERIAL PROVISIONS OF THE PURCHASE AGREEMENT
The following is a brief summary of the material provisions of the purchase
agreement, a copy of which is attached as Annex A to this proxy
statement/prospectus and incorporated in this document by reference. This
summary is qualified in its entirety by reference to the full text of the
purchase agreement. You are urged to read the purchase agreement carefully and
in its entirety.
Structure of Business Combination
Cluster is owned by Imison Investments N.V., a company organized under the
laws of the Netherlands Antilles ("Imison"), and Eagle 2000 S.L., a company
organized under the laws of Spain ("Eagle," and together with Imison, the
"Sellers"). Through a series of transactions described in the purchase
agreement, effective as of the closing, Diamond will own, directly or
indirectly, all of the outstanding capital stock of Cluster and Sellers
collectively will hold the $44 million cash consideration and own 6,315,377
shares of Diamond Class B Common Stock subject to escrow arrangements described
below.
Consideration
In consideration for all of the outstanding capital stock of Cluster,
Sellers will receive from Diamond $44 million and 4,000,000 shares of Diamond
Class B Common Stock. In addition, 2,315,377 shares of Diamond Class B Common
Stock will be issued to Sellers and held in escrow to be released annually in
three equal installments subject to certain post-closing reductions based on
the continued employment of the top executive officers of Cluster with Diamond
for the three-year period following the closing.
Shares of Diamond Class B Common Stock having an aggregate market value
equal to 5% of the aggregate value of the Class B Common Stock, cash
consideration and stock options being delivered by Diamond in connection with
the business combination will also be held in escrow as collateral to satisfy
indemnification claims by Diamond.
Stock Options
At the closing, Diamond will:
. grant the executive officers of Cluster options to purchase 500,000
shares of Diamond Class B Common Stock vesting annually in five equal
tranches with an exercise price which is the lower of (i) $60.35 or (ii)
75% of the average closing price of Diamond Class A Common Stock over the
ten-day period prior to closing;
. grant the top five executive officers of Cluster options to purchase an
estimated 1,546,399 shares of Diamond Class B Common Stock (assuming a
$48.24 per share price for Diamond's Class A Common Stock) vesting in two
equal tranches on the fourth and fifth anniversaries of the closing with
an exercise price equal to 25% of the average closing price of Diamond
Class A Common Stock over the ten-day period prior to closing;
. grant the executive officers of Cluster (other than the top five
executive officers referred to above) options to purchase 1,977,799
shares of Diamond Class B Common Stock vesting annually in five equal
tranches with an exercise price equal to 25% of the average closing price
of Diamond Class A Common Stock over the ten-day period prior to closing;
. grant the employees of Cluster (other than the executive officers)
options to purchase 1,500,000 shares of Diamond Class B Common Stock
vesting annually in four equal tranches with an exercise price equal to
the lower of (i) $60.35 or (ii) 75% of the average closing price of
Diamond Class A Common Stock over the ten-day period prior to closing;
and
. grant the employees of Cluster options to purchase an estimated 1,980,517
shares of Diamond Class B Common Stock resulting from the roll-over of
the existing options to purchase capital stock of Cluster vesting in
accordance with the schedule provided in the existing Cluster option plan
at exercise prices determined in accordance with the exchange ratio
described in the purchase agreement or at a price equal to 50% of the
average closing price of Diamond Class A Common Stock over the ten-day
period prior to closing, if lower.
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Conditions
Neither Diamond nor the Sellers will be obligated to consummate the
business combination unless the following conditions are satisfied or waived:
. no law, judgment, regulation or order is in effect for either party
prohibiting the business combination or materially diminishing the
benefits of the business combination to Diamond or the Sellers;
. all consents, approvals or actions of governmental authorities have been
received, expired or terminated; and
. Javier Rubio is elected a member of the Diamond board of directors.
Additional Conditions to the Obligations of Diamond
Diamond is not obligated to close the business combination unless the
following conditions are satisfied:
. the representations and warranties of Sellers and certain Cluster senior
executive officers are true and correct in all material respects on the
closing date;
. holders of a majority of Diamond common stock approve the issuance of the
shares of Diamond Class B Common Stock in connection with the business
combination;
. Diamond has approved the grant to Cluster's employees of the options to
purchase shares of Diamond Class B Common Stock;
. the Sellers have performed in all material respects their agreements,
covenants and obligations required to be performed prior to the closing;
. Diamond has received satisfactory opinions of legal counsel to Cluster in
Belgium, Brazil, France, Germany, Portugal, Spain, The Netherlands,
United Kingdom and the United States; and
. Cluster's employees have released and waived all rights or claims under
any outstanding options issued by Cluster to purchase shares of its
capital stock.
Additional Conditions to the Obligations of Sellers
Sellers are not obligated to close the business combination unless the
following conditions are satisfied:
. the representations and warranties of Diamond are true and correct in all
material respects on the closing date;
. the Registration Statement on Form S-4, of which this proxy
statement/prospectus forms a part, becomes effective under the Securities
Act of 1933 and must not be the subject of any stop order or proceedings
seeking a stop order;
. Diamond has performed in all material respects its agreements, covenants
and obligations required to be performed prior to closing;
. the shares of Diamond Class B Common Stock issued to the Sellers in the
transaction have become eligible for trading on Nasdaq, subject only to
being issued;
. Sellers have received the legal opinion of counsel to Diamond; and
. Diamond has changed its name to include both the Diamond and Cluster
names.
Representations and Warranties
Sellers and certain of Cluster's senior executive officers have given
representations and warranties for the benefit of Diamond that are customary
for transactions similar to this business combination and given with respect
to a privately-held corporation. Diamond has given representations and
warranties for the benefit of Sellers which are customary for a transaction
similar to this business combination and given with respect to a publicly-held
corporation.
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<PAGE>
Certain Covenants
The purchase agreement contains the following significant covenants which
are customary for a transaction similar to the business combination.
Fulfillment of Conditions. Diamond and Sellers will do everything reasonably
necessary to consummate the business combination.
No Solicitation. The Sellers and the executive officers of Cluster have
agreed not to pursue alternative transactions.
Diamond Stockholders Meeting. Diamond has agreed to hold a stockholders'
meeting to obtain the stockholder approvals necessary in connection with the
business combination.
Voting Undertaking Letter. Diamond's Chief Executive Officer has agreed to
vote all shares of Diamond common stock held by him, individually or by proxy,
in favor of the business combination.
Executive Committee. Diamond has agreed that one of Cluster's five executive
officers (or a senior officer of Cluster designated by the five executive
officers) will be appointed to Diamond's executive committee during the five
year period following closing.
Termination
The purchase agreement may be terminated at any time prior to the closing,
whether before or after the Diamond stockholder meeting, only:
. by written agreement of Diamond and Sellers;
. by Diamond or Sellers in the event the other party fails to cure a
material breach of the purchase agreement within five business days
following written notice;
. by Diamond or Sellers in the event the satisfaction of any condition to
the terminating party's obligations under the purchase agreement becomes
impossible or impracticable to satisfy and the failure is not caused by a
breach of the purchase agreement by the terminating party.
. at any time after December 31, 2000 by either Diamond or Sellers if the
closing has not occurred by such date and the failure is not caused by a
breach of the purchase agreement by the terminating party; or
. by either Diamond or Sellers if any law or regulation that makes the
consummation of the business combination illegal or if any party is
enjoined from closing the transaction.
Effect. The purchase agreement provides that termination will not release
any party from liability for any breach of the purchase agreement existing at
the time of termination.
Termination Fee. Diamond may terminate the purchase agreement in the event
Cluster actively pursues an initial public offering of its shares or Cluster or
Sellers actively pursue an acquisition offer by a third party and, in either
case, the effort is not abandoned within ten business days of written notice
from Diamond. In such an event, Cluster will pay Diamond an amount equal to 3%
of the total equity capital of Cluster valued at the initial public offering
price or 3% of the total value offered to be paid to Cluster's stockholders as
liquidated damages. In addition, Diamond shall receive a pre-emptive right (if
permitted by statute) to participate proportionately in any future issuances of
equity by Cluster.
Fees and Expenses
In the event the business combination is consummated, Diamond will pay the
costs and expenses of all parties in the transaction. In the event the business
combination is not consummated, each party to the purchase agreement will pay
its own costs and expenses.
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<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following pro forma consolidated financial statements show Diamond's and
Cluster's unaudited pro forma financial information at and for each of the
periods indicated, after giving effect to the business combination described in
this proxy statement/prospectus, and should be read in conjunction with the
historical consolidated financial statements and the notes thereto of Diamond
and Cluster included elsewhere in this proxy statement/prospectus.
The following consolidated pro forma balance sheet of DiamondCluster as of
September 30, 2000 gives effect to the merger as if it occurred as of that
date. The following consolidated pro forma statement of operations for the year
ended March 31, 2000 and the six months ended September 30, 2000 give effect to
the merger as if it occurred as of April 1, 1999.
The unaudited pro forma consolidated financial statements are presented in
this proxy statement/prospectus for illustrative purposes only and are not
necessarily indicative of the financial position or results of operations that
would have actually been reported had the business combination occurred at the
beginning of the periods presented, nor are they necessarily indicative of the
financial position or results of operations of Diamond and Cluster on a
consolidated basis in the future.
The Merger
The merger will be accounted for as a purchase business combination in
accordance with Accounting Principles Board ("APB") Opinion No. 16, "Business
Combinations". Pro forma adjustments for the merger include:
. the issuance of $44 million cash, 6,315,377 shares of Diamond Class B
Common Stock and options to purchase approximately 3.5 million shares of
Diamond Class B Common Stock in exchange for all of the outstanding
shares of Cluster common stock;
. The issuance of options to purchase approximately 2.0 million shares of
Diamond Class B Common Stock in exchange for all of the outstanding
options to purchase shares of Cluster stock;
. the issuance of options to purchase approximately 2.0 million shares of
Diamond Class B Common Stock to employees of Cluster in conjunction with
their accepting employment with the combined entity;
. the incurring of costs in the transaction, including legal, accounting,
investment banking and registration fees
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<PAGE>
DIAMONDCLUSTER
CONSOLIDATED PRO FORMA BALANCE SHEET
As of September 30, 2000
(assumes that the contemplated business combination was consummated on
September 30, 2000)
(in thousands of $, unaudited)
<TABLE>
<CAPTION>
Diamond Cluster Pro Forma Pro
Actual Actual Adjustments Formas
-------- ------- ----------- --------
ASSETS
------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.......... $209,973 $ 5,842 $(44,000)(a) $171,815
Accounts receivable................ 17,318 25,292 42,610
Prepaid expenses and other......... 18,496 1,449 19,945
-------- ------- -------- --------
Total current assets................. 245,787 32,583 (44,000) 234,370
Computers, equipment, software, net.. 9,433 4,249 13,682
Other assets......................... 21,167 718 21,885
Goodwill, net........................ 15,525 -- 306,518 (b) 322,043
-------- ------- -------- --------
Total assets..................... $291,912 $37,550 $262,518 $591,980
======== ======= ======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable................... $ 5,787 $ 3,691 $ 9,478
Note payable, current portion...... 500 -- 500
Accrued expenses and other
liabilities....................... 38,353 27,488 $ 20,325 (c) 86,166
-------- ------- -------- --------
Total current liabilities............ 44,640 31,179 20,325 96,144
-------- ------- -------- --------
Total liabilities................ 44,640 31,179 20,325 96,144
Stockholders' equity:
Common stock and additional paid-in
capital........................... 208,501 40 549,371 (d) 757,912
Unearned compensation.............. -- -- (300,847)(e) (300,847)
Notes receivable for sale of common
stock............................. (368) -- (368)
Accumulated other comprehensive
income............................ 951 90 (90)(f) 951
Retained earnings.................. 48,253 6,241 (6,241)(f) 48,253
-------- ------- -------- --------
257,337 6,371 242,193 505,901
Less: Class A Common Stock in
treasury.......................... 10,065 -- 10,065
-------- ------- -------- --------
Total stockholders' equity....... 247,272 6,371 242,193 495,836
-------- ------- -------- --------
Total liabilities and
stockholders' equity............ $291,912 $37,550 $262,518 $591,980
======== ======= ======== ========
</TABLE>
--------
(a) Cash consideration paid in business combination.
(b) Goodwill is comprised of the following components:
<TABLE>
<C> <S>
$ 44,000 Cash consideration
20,325 Estimated transaction-related costs
217,312 Fair market value of 4,000,000 Diamond Class B common shares
issued to Cluster shareholders
31,252 Vested portion of employee rollover options
(6,371) Less: Net worth of Cluster at September 30, 2000
--------
$306,518
</TABLE>
(c) Estimated transaction costs to be incurred in the contemplated business
combination.
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<PAGE>
(d) Common stock and APIC is comprised of the following components:
<TABLE>
<C> <S>
$217,312 Fair market value of 4,000,000 Diamond Class B common shares
issued to Cluster shareholders
31,252 Vested portion of employee rollover options recorded as goodwill
300,847 Employee stock and options (see (e) below); recorded as unearned
compensation
(40) Less: Cluster's common stock and APIC
--------
$549,371
</TABLE>
(e) Unearned compensation is comprised of the following components:
. 2,315,000 Diamond Class B common shares issued to five Cluster executive
officers, earned over three years;
. 1,546,000 Diamond options granted to five Cluster executive officers,
earned over five years;
. 1,978,000 Diamond options granted to Cluster executive officers, earned
over five years;
. 500,000 Diamond options granted to Cluster employees, earned over five
years;
. 1,500,000 Diamond options granted to Cluster employees, earned over four
years; and
. unvested portion of employee rollover options, earned over four years.
(f) Elimination of Cluster's accumulated other comprehensive income and
retained earnings at September 30, 2000.
33
<PAGE>
DIAMONDCLUSTER
CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
Year ended March 31, 2000
(in thousands of $, except per share data, unaudited)
<TABLE>
<CAPTION>
Diamond Cluster Pro Forma
Actual Actual(d) Adjustments Pro Forma
-------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues..................... $136,235 $45,877 -- $ 182,112
Project personnel and related
expenses........................ 72,355 24,024 -- 96,379
Other operating expenses......... 38,784 9,811 -- 48,595
Goodwill amortization............ 493 -- 61,304 (a) 61,797
Non-cash compensation............ -- -- 80,970 (b) 80,970
-------- ------- --------- ---------
Income (loss) from operations.... 24,603 12,042 (142,274) (105,629)
Other income/(expense)........... 2,002 (509) -- 1,493
-------- ------- --------- ---------
Income (loss) before taxes....... 26,605 11,533 (142,274) (104,136)
Income taxes..................... 10,377 4,457 (54,988)(c) (40,154)
-------- ------- --------- ---------
Net income (loss)................ $ 16,228 $ 7,076 $ (87,286) $ (63,982)
======== ======= ========= =========
Pro forma basic earnings (loss)
per share....................... $ (2.36)
Pro forma shares used in
computing basic earnings per
share........................... 27,123
Pro forma diluted earnings (loss)
per share....................... $ (2.36)
Pro forma shares used in
computing diluted earnings per
share........................... 27,123
</TABLE>
--------
(a) One year, straight-line amortization of goodwill (five year life):
<TABLE>
<CAPTION>
Goodwill Amortization
-------- ------------
<S> <C>
$306,518 $61,304
</TABLE>
(b) One year of non-cash compensation:
<TABLE>
<CAPTION>
Unearned compensation Amortization
--------------------- ------------
<S> <C>
$300,847 $80,970
</TABLE>
(c) Adjustments to taxes (assume 38.65%):
<TABLE>
<S> <C>
Tax effect on (a).................................................. $(23,694)
Tax effect on (b).................................................. (31,294)
--------
$(54,988)
</TABLE>
(d) Certain amounts have been reclassified to conform to Diamond's presentation
of the statement of operations.
34
<PAGE>
DIAMONDCLUSTER
CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
Six Months Ended September 30, 2000
(in thousands of $, except per share data, unaudited)
<TABLE>
<CAPTION>
Diamond Cluster Pro Forma Pro
Actual Actual(d) Adjustments Forma
-------- --------- ----------- --------
<S> <C> <C> <C> <C>
Net revenues...................... $112,036 $44,459 -- $156,495
Project personnel and related
expenses......................... 59,458 18,637 -- 78,095
Other operating expenses.......... 32,348 15,700 -- 48,048
Goodwill amortization............. 704 -- $ 30,652 (a) 31,356
Non-cash compensation............. -- -- 40,485 (b) 40,485
-------- ------- -------- --------
Income (loss) from operations..... 19,526 10,122 (71,137) (41,489)
Other income/(expense)............ 6,005 (4) -- 6,001
-------- ------- -------- --------
Income (loss) before taxes........ 25,531 10,118 (71,137) (35,488)
Income taxes...................... 9,957 3,911 (27,494)(c) (13,626)
-------- ------- -------- --------
Net income (loss)................. $ 15,574 $ 6,207 $(43,643) $(21,862)
======== ======= ======== ========
Pro forma basic earnings (loss)
per share........................ $ (0.72)
Pro forma shares used in computing
basic earnings per share......... 30,514
Pro forma diluted earnings (loss)
per share........................ $ (0.72)
Pro forma shares used in computing
diluted earnings per share....... 30,514
</TABLE>
--------
(a) Six-month, straight-line amortization of goodwill (five year life):
<TABLE>
<CAPTION>
Goodwill Amortization
---------- ------------
<S> <C>
$306,518 $30,652
</TABLE>
(b) Six-months of non-cash compensation:
<TABLE>
<CAPTION>
Unearned
Compensation Amortization
------------ ------------
<S> <C>
$300,847 $40,485
</TABLE>
(c) Adjustments to taxes (assume 38.65%):
<TABLE>
<S> <C>
Tax effect on (a)................................................. $ (11,847)
Tax effect on (b)................................................. (15,647)
---------
$ (27,494)
</TABLE>
(d) Certain amounts have been reclassified to conform to Diamond's presentation
of the statement of operations.
35
<PAGE>
COMPARISON OF STOCKHOLDER RIGHTS
The rights of Diamond stockholders are governed by the Delaware General
Corporation Law and Diamond's restated certificate of incorporation and bylaws,
while the rights of Cluster shareholders are governed by Dutch law and its
memorandum and articles of association. In connection with the business
combination, Cluster's shareholders and employees will receive shares of
Diamond Class B Common Stock. The following is a summary of certain material
differences between the rights of Diamond stockholders and the rights of
Cluster shareholders as of the date of this proxy statement/prospectus. The
summary is not intended to include all differences, whether or not material,
and Diamond stockholders and Cluster shareholders should read carefully the
relevant provisions of Delaware and Dutch law and the companies' charter
documents. For information on how the documents may be obtained, see "Available
Information."
Capitalization
Diamond. Diamond is authorized to issue up to 40,000,000 shares of Class A
Common Stock, par value $.001 per share, 20,000,000 shares of Class B Common
Stock, par value $.001 per share, and 2,000,000 shares of preferred stock,
$1.00 par value per share.
Cluster. Cluster has authorized share capital of NLG200,000 divided into
2,000 ordinary shares of NLG100 nominal value each.
Voting Rights; Action in Lieu of Meeting
Diamond. Holders of record of Diamond Class A Common Stock are entitled to
one vote per share, and holders of record of Diamond Class B Common Stock are
entitled to five votes per share. Except as otherwise provided by law, the
holders of Diamond common stock vote as a single class on all matters,
including any vote to amend Diamond's restated certificate of incorporation to
change the number of authorized shares of Class A or Class B Common Stock.
Diamond stockholders may act without a meeting by written consent signed by the
holders of shares having at least the minimum number of votes required to
authorize the action at a meeting.
Cluster. Cluster shareholders are entitled to one vote per share. Cluster's
articles of association require the approval of 66 2/3% of votes cast in order
to (i) amend the articles of association, (ii) dissolve the company or (iii)
suspend or dismiss members of the board of managing directors. All other
matters require the approval of a majority of votes cast, except as otherwise
provided by Dutch law. Cluster shareholders may act by unanimous written
consent (provided no registered depositary receipts of shares have been issued
with Cluster's cooperation).
Notice
Diamond. Diamond stockholders are entitled to notice of the date, time and
place (and purpose in the case of special meetings) of stockholder meetings not
less than ten or more than 60 days prior to the meeting. Written notice of
director nominations and stockholder proposals must be delivered to the company
not less than 45 days prior to the meeting (unless less than 60-days' prior
notice of the meeting has been given in which case the nomination or proposal
must be received not less than 15 days following the date of the notice).
Cluster. Dutch law requires notice by mail of the date, time, place, purpose
and agenda of shareholder meetings be given at least 15 days prior to the
general meeting date unless waived by all shareholders. Proposals for the
approval of Cluster's annual audited financial statements or amendments to its
articles of association must be made available at Cluster's offices for
inspection by shareholders prior to the meeting.
Special Meetings
Diamond. Special meetings of Diamond's stockholders may be called by (i) the
chairman, (ii) the secretary at the request of the board of directors, or (iii)
the secretary at the written request of the holders of at least 30% of all
votes entitled to be cast at the meeting.
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<PAGE>
Cluster. General meetings of Cluster's shareholders may be called by (i)
Cluster's board of managing directors, (ii) shareholders who own at least 10%
of the issued share capital or (iii) the President of the District Court with
competent jurisdiction.
Number, Election, Vacancy and Removal of Directors
Diamond. Diamond's board of directors consists of three classes, as nearly
equal in number as possible, one class of which is elected each year to succeed
the directors whose three-year term is expiring. The number of directors is
determined by the board but cannot be less than five or more than 15. Vacancies
and newly created directorships may be filled by a majority of directors in
office for the remainder of the full term of the class in which the vacancy
occurred or the new directorship was created. Directors may only be removed for
cause.
Cluster. Members of Cluster's managing board of directors are appointed for
an indefinite period of time and removed by the general meeting of
shareholders.
Liability of Directors
Diamond. Diamond directors are not liable to Diamond or its stockholders for
monetary damages for breach of fiduciary duty as a director except in the case
of (i) the director's breach of the director's duty of loyalty, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of the law, (iii) the unlawful payment of dividends or
purchase or redemption of stock, or (iv) a transaction from which the director
derived an improper personal benefit.
Cluster. Cluster directors are jointly and severally liable to the company
(but not its shareholders or creditors) for failure to fulfill properly their
duties. Directors may be liable to the trustee in the event of bankruptcy of
the company. Under Dutch law a company may not limit a director's liability.
Dividends
Diamond. Dividends may be declared by Diamond's board of directors at any
regular or special meeting and paid out of surplus (or out of net profits
during any fiscal year in which there no surplus) in cash, property or in
shares of capital stock
Cluster. Under Dutch law dividends may only be declared after the adoption
at the general meeting of annual accounts in which net assets exceed the sum of
issued and paid-up capital and profits held in reserve. In addition, Cluster's
articles of association permit the declaration and payment of interim dividends
by its board of managing directors within three months of the date of interim
accounts if the interim accounts show an excess of net assets over issued and
paid up capital and profits held in reserve.
Conversion
Diamond. Holders of Diamond's Class A Common Stock have no conversion
rights. Diamond's Class B Common Stock automatically converts to Class A Common
Stock in the event the Class B Common Stock is not owned beneficially or of
record by Diamond or an employee of Diamond or one of its majority-owned
subsidiaries. (In connection with the business combination, Diamond
stockholders are being asked to approve a change in the class of permitted
holders of Class B Common Stock to include any corporation or entity controlled
by an employee of Diamond or one of its majority owned subsidiaries.)
Cluster. Cluster ordinary shares have no conversion rights.
Preemptive Rights
Diamond. Diamond stockholders are not entitled to preemptive rights.
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<PAGE>
Cluster. All currently issued Cluster shares are entitled to pro rata
preemptive rights. Preemptive rights may be limited or eliminated for each
further issue of share capital approved at a general meeting.
Charter Document Amendments
Diamond. A proposal approved by a majority of directors and the approval of
a majority of outstanding voting shares is required to amend Diamond's restated
certificate of incorporation. Diamond's bylaws may be amended if approved by a
majority of directors or a majority of outstanding voting shares.
Cluster. Amendment of Cluster's articles of association requires the
approval of 66 2/3% of the votes cast provided the votes cast represent at
least 50% of all issued share capital.
38
<PAGE>
BUSINESS OF DIAMOND
Overview
Diamond is an e-business services firm that synthesizes business and
industry insight with technology expertise to create innovative digital
strategies for leading national and multinational businesses. For a business to
succeed in today's digital economy, we believe it must have a strategy that
goes beyond conventional strategic thinking. The standard of building an e-
business that is "faster, better, and cheaper" than the existing business is
based on improving the past. We offer an approach that results in innovative
new business models that enable our clients to leverage technology and their
existing competencies to develop innovative, new e-business opportunities.
We lead CEOs and senior leadership teams through a diagnostic approach
designed to broaden their understanding of the ways in which the Internet can
be used to leverage their company's existing assets. After thorough analysis of
a client's existing business model, we create a digital strategy to help the
client develop and sustain a competitive advantage in the new digital economy.
Once we have conceived a digital strategy, we prototype, test and scale the
applications needed to successfully execute the digital strategy.
The Diamond Solution
We combine innovative strategic thinking, in-depth vertical industry
expertise, and a thorough understanding of technology and its applications to
deliver end-to-end e-business solutions. Our ability to identify, prototype and
scale innovative e-business solutions for our clients is predicated on four
attributes that we believe distinguish us from our competitors.
Strategic Business Model Focus. Our approach goes well beyond "faster,
better and cheaper" principles as we work with CEOs and senior leadership teams
to establish new business models. We collaborate with our clients to develop e-
business opportunities that leverage the value of their existing physical and
digital assets, intellectual capital and business relationships. We believe we
have the capabilities to develop and deliver new business models, and transform
existing business models, by drawing on our expertise in strategy, creative
design, technology, operations, change management and implementation.
Strategic Industry Insight and Expertise. We currently focus on serving four
vertical industry groupings: financial services, consumer and industrial
products and services, telecommunications and energy, and health care and
insurance. We believe our vertical industry focus enables us to define and
deliver innovative solutions that effectively address the market dynamics and
business opportunities facing our clients. Within each of the vertical
industries we serve, we have internal and outside experts whose intellectual
capital and experience allow us to create an innovative, industry-specific
digital strategy.
Comprehensive Diagnostic Approach. We work with our clients from the
earliest stages of study and assessment to the creation and implementation of a
digital strategy. We use a six-question diagnostic approach to help CEOs and
senior leadership teams consider the business implications of the digital
economy. The first three questions deal with the new industry structure, its
economics and its customer behaviors. The second three questions focus on
implementation and how to make difficult but necessary changes to exploit e-
business opportunities.
Ability to Prototype, Scale and Execute. Once we have defined a new business
model and designed a digital strategy, we identify and develop a portfolio of
options. From this portfolio, we prototype selected options which are quickly
tested in the market. Through this process, we assess how various options
perform in the market and determine which options most effectively implement
the digital strategy before our clients commit resources to a full-scale
implementation. Based on performance, we revise, recast and implement the
optimal solution. We believe this approach delivers high quality solutions
quickly and efficiently.
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<PAGE>
Diamond Services
We work closely with our clients to help them understand, develop, and
manage the complete implementation of a digital strategy. Typically, this
involves analyzing and categorizing their business options, identifying
transforming business concepts, prototyping and launching the chosen concepts,
then market testing and scaling the e-business for ongoing success. Our teams
combine innovative strategic thinking, creative design capabilities,
technological expertise, change management and disciplined program management
to identify and scale innovative solutions quickly with minimized risk.
Our project teams are composed of strategists, technologists, program
managers, operations managers, web site developers and creative designers who
work closely with our clients and analyze, create, and implement a digital
strategy. Teams are often supported by Diamond Network members who are leading
professional and academic thinkers in their fields and who bring additional
insight, experience and intellectual capital to our clients' challenges.
Sales and Marketing
Our principal sales activities are managed by our senior partners. They are
responsible for building relationships with CEOs and senior leadership teams of
existing and potential clients and for formulating and executing our sales and
marketing strategy. Our senior partners call on existing and potential clients,
discuss potential engagements, negotiate the terms of engagements, and direct
the staffing and execution of consulting projects.
We primarily sell our services to CEOs or other senior executives of
national and multinational businesses. We believe that a majority of our fees
are sourced from CEO and senior management's operating budgets as opposed to
information technology budgets. We have divided our senior partners into
vertical industry groups focused on four industry groups: financial services;
consumer and industrial products and services; telecommunications and energy;
and health care and insurance. The sales efforts in each group are led by a
senior partner who is assigned revenue and profit contribution responsibility
for the group. We seek projects within each group from both new prospects and
existing clients. Each vertical industry group maintains a current list of
targeted prospects that are tracked on an ongoing basis by our senior
management. Building on leads generated through our marketing programs, senior
partners pursue formal consulting engagements.
The primary focus of our marketing programs is to generate leads through
building relationships and educating client prospects about Diamond. We have
initiated a number of relationship-marketing programs designed to complement,
encourage and accelerate personal relationships. We build relationships both
directly and on a collaborative basis with Diamond Network members and through
relationships with certain third-party industry executives who we call "client
relationship executives." These executives are typically retired senior
executives with a wide network of contacts in a given industry. As of September
30, 2000, we had 23 client relationship executives in total associated with our
four vertical industry groups.
Complementing the relationship-marketing programs are a variety of other
business development and marketing techniques used to communicate directly with
current and prospective clients, including publications, surveys, e-mail
newsletters, media and analyst relations, speeches and a homepage on the World
Wide Web. Three of our more substantive marketing efforts include publishing
the business magazine, Context; hosting the Diamond Exchange and Insight, two
executive learning forums; and publishing books and other regular newsletters
focusing on digital strategies. Each of these programs is designed to educate
the market on the opportunities of digital strategies, demonstrate our
intellectual capital, and create an ongoing dialogue with client prospects. See
"Intellectual Capital" for a description of these efforts.
Intellectual Capital
Consulting firms are notably knowledge-intensive organizations. In the past,
the existence of accumulated experience within a consulting firm was enough to
attract and retain clients. Today, information is more readily
40
<PAGE>
accessible and the useful life of new knowledge is shortening. In recognition
of this trend, we have developed multiple programs to continuously identify,
develop and disseminate intellectual capital from individuals both within and
outside Diamond.
Context. Context is a business magazine we have published since November of
1997 covering the growing intersection of business and technology. We have
recently increased the frequency of distribution from quarterly to bi-monthly
and have begun newsstand distribution in select locations. Context's
circulation totals 45,000 readers including 40,000 officer-level executives in
the United States. We believe the magazine serves as a useful business
development and marketing tool to communicate directly with our existing and
prospective clients. Context also provides a means to further develop our
employees' points of view as abstracted and generated from client engagement
experiences.
Diamond Exchange. The Diamond Exchange is a series of executive learning
forums that we launched in February 1997. CEOs and other senior executives are
invited to participate in the Diamond Exchange. We provide our paid
subscription members with innovative, leading-edge research to explore and
understand the strategic risks and opportunities of emerging technologies.
Diamond Exchange members meet three times a year to discuss current issues and
research findings, and their business implications. During these meetings, we
provide the members with the opportunity to discuss their issues with Diamond
Network members, our partners and other business leaders.
Insight. Insight is a series of one-and-a-half day management learning
sessions focused on the theory and practice of digital strategy. Launched in
late 1998, the sessions provide senior executives of our existing and
prospective clients with the opportunity to explore the strategic risks and
opportunities of emerging technologies. The forums are sponsored each year by
leading technology firms and is being sponsored by Intel Corporation in
calendar 2000.
Books and Other Publications. In 1998, a senior partner of Diamond and a
member of the Diamond Network co-authored a book, Unleashing the Killer App:
Digital Strategies for Market Dominance. To date, it has sold over 150,000
copies and is published in 8 different languages. It is widely recognized as a
leading publication in the field of digital strategy. Other Diamond employees
are currently authoring books with Diamond's support. In addition, we publish
electronic and physical newsletters to CEOs and senior managers, and our
partners and Diamond Network members are frequent speakers at business and
technology forums.
Knowledge Leaders. We have created a career path for certain of our
professionals who desire to specialize in a particular area, such as technical
architecture, electronic commerce or supply-chain operations. We refer to these
professionals as "knowledge leaders" within our organization. Knowledge leaders
are responsible for identifying new developments within their respective areas
of expertise and capabilities, and applying that knowledge to client projects
and within the organization. We currently have four partner-level knowledge
leaders and anticipate adding more knowledge leaders in the future.
Diamond Network. The Diamond Network is a group currently comprised of 12
recognized business and technology leaders associated with Diamond. Members of
the Diamond Network, whom we refer to as Diamond Fellows, provide us with a set
of skills that augment and enhance the value that we can provide to our
clients. Diamond Fellows provide a source of intellectual capital, introduce us
to prospective clients, author and contribute to industry publications, serve
as faculty to the Diamond Exchange and Insight and participate in client
projects. Diamond Fellows are contractually committed to dedicate a number of
days annually to Diamond to support marketing, sales, and client work. Diamond
Network relationships are generally non-exclusive, two-year contracts. Diamond
Fellows are compensated with a combination of stock options and per diem
payments for services provided to us or our clients on our behalf.
The intellectual capital gathered through these various programs is shared
throughout the Diamond community through inclusion in our quarterly all-hands
meetings, the Diamond Exchange and Insight programs, Context, and our
interactive case-based training and development programs.
41
<PAGE>
Human Resources and Culture
As of September 30, 2000, we had 800 employees. Of these employees, 632 were
client-serving professionals and 168 were management and administrative
personnel comprising intellectual capital development, marketing, human
resources, finance, accounting, legal, internal information systems and
administrative support.
The responsibilities of our partners include client relationship
development, business development, client management, program management,
thought leadership, professional staff development and mentoring. Our partners
typically have ten to twenty years or more of experience.
Culture. We believe our ability to simultaneously provide expertise in
strategy, operations and technology is dependent upon our ability to develop
and sustain a business culture that is common across all disciplines in the
organization. Three primary elements comprise our culture:
. an environment that intellectually challenges our personnel through
continuous training and client work;
. consistency in compensation and career paths across all disciplines and
skill sets within Diamond; and
. participation by all of our employees in our continuing development and
ownership of Diamond.
Recruiting. We believe our success will depend on our ability to continue to
attract, retain and motivate highly skilled employees to support our current
operations and future growth. We attribute our success in hiring these people
to our ability to provide individuals with high impact client opportunities,
multidisciplinary training and career development, attractive long-term career
advancement opportunities, small teams and a collaborative approach to
consulting and competitive compensation.
Although a significant number of our current employees were hired directly
from other firms, a growing number of our associates are being hired annually
from undergraduate and graduate business programs at many of the country's
leading universities. Over time, we expect to hire a majority of our employees
from these programs and, as a result, we expect senior level positions will be
predominantly filled from internal promotions.
Training and Professional Development. Our training and professional
development programs help us to deliver high-quality services to our clients,
as well as to attract and retain highly skilled professionals. We have
developed programs that ensure all individuals have the opportunity to develop
consulting, business and technology skills throughout their careers. These
programs reinforce our culture by exposing all professionals to the various
services we provide while further developing deep skills in each professional's
principal area of expertise.
Compensation. Our compensation programs have been structured to attract and
retain highly skilled professionals by offering competitive base salaries
coupled with annual cash bonus opportunities. We use equity at all levels
within Diamond to provide long-term wealth creation opportunities and to retain
individuals through vesting provisions. We believe that those professional
services firms able to offer equity will be more successful in attracting and
retaining talented individuals to their organizations.
Our partners are eligible to receive an annual bonus comprised of cash
commensurate with their level of responsibility and based on our overall
performance. Our partners buy stock and are granted stock options upon being
elected a partner. We grant additional equity in conjunction with movement
through the partner levels. Stock and options that we issue to partners vest
annually over five years. Individuals below the partner level are awarded
annual cash bonuses based on their performance. Our non-partners are granted
stock options at the time of hire and promotion. These options typically vest
after three years.
42
<PAGE>
Competition
Our primary competitors include Internet professional service providers,
strategic consulting firms, systems integrators, web-consulting firms, online
agencies and firms that provide both consulting and systems integration
services. Many of our competitors are substantially larger than us and have
significantly greater financial, technical and marketing resources, greater
name recognition and greater revenues. We believe that competition may increase
from both the large, traditional strategic consulting firms as these firms
increase their
use of information technology in their services and enter the digital strategy
market and also from the smaller web-consulting firms where the barriers to
entry are not significant. We believe that the principal criteria considered by
prospective clients when selecting a consulting firm to develop and implement
digital strategies include diagnostic capabilities, effectiveness of strategic
business models, scope of services, service delivery approach, technical and
industry expertise, perceived value and a results orientation.
Furthermore, we face the additional challenge of competing for and retaining
the best personnel available in the e-business services market. As other firms
enter the digital strategy market, we believe that our client- serving
professionals and employees may be targeted by other firms to satisfy their own
personnel needs.
Property
Our headquarters and principal administrative, information systems,
financial, accounting, marketing, legal and human resources operations are
located in approximately 132,000 square feet of leased space primarily in
Chicago, Illinois, but also in San Francisco, California, Bridgewater, New
Jersey, Cleveland, Ohio, Boston, Massachusetts and London, England.
We anticipate that we will require additional office space as our business
expands and believe that we will be able to obtain suitable space as needed.
Legal Proceedings
We are not party to any claims or actions that we believe could have a
material effect on our results of operations or financial position.
43
<PAGE>
MARKET PRICES AND DIVIDENDS FOR DIAMOND CLASS A COMMON STOCK
As of November 2, 2000, there were approximately 13,300 holders of record of
Diamond's Class A Common Stock. The following table presents the high and low
sales prices for the Diamond Class A Common Stock as quoted on the Nasdaq
National Market for each quarter during Diamond's 1999 and 2000 fiscal years
and the first and second quarters of Diamond's 2001 fiscal year.
<TABLE>
<CAPTION>
Class A Common
Stock
---------------
High Low
------- -------
<S> <C> <C>
Fiscal Year Ended March 31, 1999
First Quarter................................................ $ 20.17 $ 14.17
Second Quarter............................................... 21.00 10.67
Third Quarter................................................ 14.00 5.00
Fourth Quarter............................................... 20.17 10.67
Fiscal Year Ended March 31, 2000
First Quarter................................................ $ 17.17 $ 12.83
Second Quarter............................................... 33.09 14.29
Third Quarter................................................ 93.63 25.83
Fourth Quarter............................................... 106.00 60.00
Fiscal Year Ended March 31, 2001
First Quarter................................................ $ 88.88 $ 47.25
Second Quarter............................................... 98.94 55.50
Third Quarter (through November 2, 2000)..................... 74.94 38.88
</TABLE>
The last reported sale price of Diamond Class A Common Stock as quoted on
the Nasdaq National Market on September 8, 2000, the last full trading day
immediately prior to the public announcement of the signing of the purchase
agreement, was $72.88 per share. The last reported sale price of Diamond Class
A Common Stock as quoted on the Nasdaq National Market on November 2, 2000, the
last practicable trading day for which information was available prior to the
date of this proxy statement/prospectus, was $48.00 per share.
The market price of shares of Diamond Class A Common Stock fluctuates from
day to day. As a result, you should obtain current market quotations. No
assurance can be given as to what the market price of Diamond's Class A Common
Stock will be if and when the Cluster business combination is consummated.
Diamond has not declared or paid any cash or other dividends on its Class A
Common Stock and has no intention of doing so in the foreseeable future.
44
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF DIAMOND
The following table shows Diamond's selected consolidated financial data as
of and for each of the periods indicated and should be read in conjunction with
the financial statements and the notes thereto included elsewhere in this proxy
statement/prospectus. The consolidated financial data for each of the years in
the five-year period ended March 31, 2000 was derived from Diamond's audited
consolidated financial statements. The consolidated financial data for the six-
month periods ended September 30, 2000 and 1999 was derived from Diamond's
unaudited consolidated financial statements. The unaudited consolidated
financial data reflect, in the opinion of Diamond's management, all normal
recurring adjustments considered necessary by Diamond for a fair presentation
of these results. Diamond's results of operations for the six-month period
ended September 30, 2000 are not necessarily indicative of the results which
may be expected for the full fiscal year 2001.
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31, September 30,
---------------------------------------- ----------------
1996 1997 1998 1999 2000 1999 2000
------- ------- ------- ------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues........... $26,339 $37,557 $58,369 $82,389 $136,235 $56,185 $112,036
Operating expenses:
Project personnel and
related expenses.... 15,312 21,863 31,619 43,275 72,355 30,143 59,458
Professional
development and
recruiting.......... 4,587 6,272 6,155 9,448 13,199 5,137 11,136
Marketing and sales.. 606 1,928 3,210 4,669 7,325 3,132 6,250
Management and
administrative
support............. 4,460 6,348 8,602 11,298 18,260 7,580 14,962
Goodwill
amortization........ -- -- -- -- 493 124 704
------- ------- ------- ------- -------- ------- --------
Total operating
expenses............ 24,965 36,411 49,586 68,690 111,632 46,116 92,510
------- ------- ------- ------- -------- ------- --------
Income from
operations............ 1,374 1,146 8,783 13,699 24,603 10,069 19,526
Interest income, net... 164 172 1,150 2,488 2,002 778 6,005
------- ------- ------- ------- -------- ------- --------
Income before taxes.... 1,538 1,318 9,933 16,187 26,605 10,847 25,531
Income taxes........... 302 685 3,925 6,351 10,377 4,230 9,957
------- ------- ------- ------- -------- ------- --------
Net income............. $ 1,236 $ 633 $ 6,008 $ 9,836 $ 16,228 $ 6,617 $ 15,574
------- ------- ------- ------- -------- ------- --------
Basic earnings per
share of common
stock................. $ 0.11 $ 0.05 $ 0.34 $ 0.49 $ 0.78 $ 0.33 $ 0.64
Shares used in
computing basic
earnings per share of
common stock.......... 11,430 13,716 17,634 19,915 20,807 20,359 24,198
Diluted earnings per
share of common
stock................. $ 0.11 $ 0.04 $ 0.28 $ 0.42 $ 0.62 $ 0.27 $ 0.52
Shares used in
computing diluted
earnings per share of
common stock.......... 11,430 14,856 21,258 23,346 25,984 24,457 29,768
<CAPTION>
March 31, September 30,
---------------------------------------- ----------------
1996 1997 1998 1999 2000 1999 2000
------- ------- ------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents........... $ 4,635 $17,547 $31,437 $47,698 $182,945 $38,107 $209,973
Working capital........ 4,397 15,725 26,236 46,872 183,967 43,348 201,147
Total assets........... 11,615 25,494 40,352 67,086 249,410 71,613 291,912
Long term debt,
including current
portion............... 125 2,000 -- -- 1,000 1,000 500
Total stockholders'
equity................ 6,568 18,300 28,767 53,301 218,318 60,550 247,272
</TABLE>
45
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF DIAMOND
The following information should be read in connection with the information
contained in the consolidated financial statements and related notes included
elsewhere or incorporated by reference in this proxy statement/prospectus.
Overview
We are an e-business services firm that synthesizes business and industry
insight with technology expertise to create innovative digital strategies for
leading national and multinational businesses. Once conceived, we believe such
strategies must be implemented rapidly in order to maximize competitive
benefits. We have experienced substantial revenue growth since our inception,
generating net revenues of $136.2 million from 143 clients during the most
recent fiscal year ended March 31, 2000. We employed 632 client-serving
professionals as of September 30, 2000.
Our revenues are comprised of professional fees for services rendered to our
clients which are billed either monthly or semi-monthly in accordance with the
terms of the client engagement. Prior to the commencement of a client
engagement, we and our client agree on fees for services based upon the scope
of the project, our staffing requirements and the level of client involvement.
We recognize revenue as services are performed in accordance with the terms of
the client engagement. Out-of-pocket expenses are reimbursed by our clients and
offset against expenses incurred and are not included in recognized revenues.
Provisions are made for estimated uncollectible amounts based on our
experience. Although from time to time we have been required to make revisions
to our clients' estimated deliverables, to date none of such revisions has had
a material adverse effect on our operating or financial results.
The largest portion of our costs consist primarily of employee-related
expenses for our client-serving professionals and other direct costs such as
third-party vendor costs and unbilled travel costs associated with the delivery
of services to our clients. The remainder of our costs are comprised of the
expenses associated with the development of our business and the support of our
client-serving professionals such as professional development and recruiting,
marketing and sales, and management and administrative support. Professional
development and recruiting expenses consist primarily of recruiting and
training content development and delivery costs. Marketing and sales expenses
consist primarily of the costs associated with our development and maintenance
of our marketing materials and programs. Management and administrative support
expenses consist primarily of the costs associated with operations, finance,
information systems, facilities and other administrative support for project
personnel.
We regularly review our fees for services, professional compensation and
overhead costs to ensure that our services and compensation are competitive
within the industry. In addition, we monitor the progress of client projects
with client senior management. We manage activities of our professionals by
closely monitoring engagement schedules and staffing requirements for new
engagements. Because most of our client engagements are, and may be in the
future, terminable by our clients without penalty, an unanticipated termination
of a client project could require us to maintain underutilized employees. While
professional staff must be adjusted to reflect active engagements, we must
maintain a sufficient number of senior professionals to oversee existing client
engagements and participate in our sales efforts to secure new client
assignments.
46
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, selected
statement of operations data as a percentage of net revenues:
<TABLE>
<CAPTION>
Six Months
Year Ended March Ended
31, September 30,
------------------- --------------
1998 1999 2000 1999 2000
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues................ 100.0% 100.0% 100.0% 100% 100%
----- ----- ----- ------ ------
Operating expenses:
Project personnel and
related expenses......... 54.2 52.5 53.1 53.7 53.1
Professional development
and recruiting........... 10.6 11.5 9.7 9.1 9.9
Marketing and sales....... 5.5 5.7 5.4 5.6 5.6
Management and
administrative support... 14.7 13.7 13.4 13.5 13.4
Goodwill amortization..... 0.0 0.0 0.3 0.2 0.6
----- ----- ----- ------ ------
Total operating
expenses............... 85.0 83.4 81.9 82.1 82.6
----- ----- ----- ------ ------
Income from operations...... 15.0 16.6 18.1 17.9 17.4
Interest income, net........ 2.0 3.0 1.4 1.4 5.4
----- ----- ----- ------ ------
Income before taxes......... 17.0 19.6 19.5 19.3 22.8
Income taxes................ 6.7 7.7 7.6 7.5 8.9
----- ----- ----- ------ ------
Net income.................. 10.3% 11.9% 11.9% 11.8% 13.9%
===== ===== ===== ====== ======
</TABLE>
Six Months Ended September 30, 2000 Compared to Six Months Ended September 30,
1999
Our net income of $15.6 million during the six months ended September 30,
2000 improved from $6.6 million during the same period in the prior year as a
result of increased revenues, partially offset by an increase in the cost of
our client-serving professionals and an increase in expenses required to
support our growth during the period.
Our net revenues increased 99% to $112.0 million during the six months ended
September 30, 2000 as compared to the same period in the prior year. The
increase in our net revenues reflects an increase in the volume of services
delivered to new clients, continued services to our existing client base,
continued growth of our Diamond Marketspace Solutions practice, as well as
three acquisitions. We served 70 clients during the six months ended September
30, 2000 as compared to 89 clients during the same period in the prior year.
This decrease in clients was due to our acquisition of Omnitech Consulting
Group in April of 1999, from which we inherited 38 new clients, most of which
were not clients during the six months ended September 30, 2000.
Project personnel and related expenses increased $29.3 million to $59.5
million during the six months ended September 30, 2000 as compared to the same
period in the prior year. In aggregate, project personnel and related expenses
increased 97% from the same period in the prior year due to increases in both
the number and compensation of our client-serving professionals to respond to
growth. We increased our client-serving professional staff from 378 at
September 30, 1999 to 632 at September 30, 2000. As a percentage of net
revenues, project personnel and related expenses decreased from 53.7% to 53.1%
during the six months ended September 30, 2000, as compared to the same period
in the prior year.
Professional development and recruiting expenses increased $6.0 million to
$11.1 million during the six months ended September 30, 2000 as compared to the
same period in the prior year. This increase reflects our recruiting and
training of a greater number of client-serving professionals and an associated
increase in recruiting and training resources. As a percentage of net revenues,
these expenses increased to 9.9% as compared to 9.1% during the same period in
the prior year.
47
<PAGE>
Marketing and sales expenses increased from $3.1 million to $6.3 million
during the six months ended September 30, 2000 as compared to the same period
in the prior year as a result of increased spending in:
. The publication of our magazine, Context, which transitioned from a
quarterly publication to a bi-monthly publication and is now being
marketed at selected newsstands across the United States and distributed
to senior executives in Europe;
. The conduct and sponsorship of several Diamond Exchange, Insight, and
other seminars for prospective clients; and
. The hiring of additional marketing staff to further develop our corporate
branding and marketing initiatives.
As a percentage of net revenues, these expenses remained consistent at 5.6%.
Management and administrative support expenses increased from $7.6 million
to $15.0 million, or 97%, during the six months ended September 30, 2000 as
compared to the same period in the prior year as a result of the additional
facilities, including the opening of the San Francisco office in the third
fiscal quarter of FY 2000 and London office in the fourth fiscal quarter of FY
2000, equipment and personnel necessary to support our growth and increased
consulting capacity. As a percentage of net revenues, these expenses decreased
from 13.5% to 13.4% as a result of our improved operating leverage resulting
from our net revenue growth.
Goodwill amortization increased $580 thousand from $120 thousand to $700
thousand during the six months ended September 30, 2000 as compared to the
same period in the prior year primarily as a result of the acquisitions of
Leverage and Momentus which were completed in October 1999 and May 2000,
respectively. As a percentage of net revenues, these expenses increased from
0.2% to 0.6%.
Other income increased $5.2 million from $800 thousand to $6.0 million
during the six months ended September 30, 2000 as compared to the same period
in the prior year, primarily as a result of an increase in cash balances from
$38.1 million as of September 30, 1999 to $210.0 million as of September 30,
2000. As a percentage of net revenues, other income increased from 1.4% to
5.4%.
Fiscal 2000 Compared to Fiscal 1999
We had net income of $16.2 million during fiscal 2000 which improved from
net income of $9.8 million during fiscal 1999 as a result of increased
revenues combined with an improvement in the utilization of client-serving
professionals, partially offset by an increase in expenses required to support
our growth during the period.
Our net revenues increased 65.4% to $136.2 million during fiscal 2000 as
compared to fiscal 1999. The increase in our net revenues reflects an increase
in the volume of services delivered to new clients, continued services to our
existing client base, as well as two acquisitions. For fiscal 2000, $59.2
million of revenue was derived from services delivered to new clients and
$77.0 million related to the completion of projects or the undertaking of
additional projects from our client base of the previous fiscal year. We
served 143 clients during fiscal 2000 as compared to 85 clients served during
fiscal 1999.
Project personnel and related expenses increased $29.1 million, or 67.2%,
to $72.4 million during fiscal 2000 as compared to fiscal 1999. This increase
resulted from increases in both the number and compensation of our client-
serving professionals to respond to growth. We increased our client-serving
professional staff from 239 at March 31, 1999 to 452 at March 31, 2000. As a
percentage of net revenues, project personnel and related expenses increased
from 52.5% to 53.1% during fiscal 2000.
Professional development and recruiting expenses increased $3.8 million
during fiscal 2000 as compared to fiscal 1999. This increase reflects our
recruiting and training of a higher number of client-serving professionals and
an associated increase in recruiting and training resources. As a percentage
of net revenues,
48
<PAGE>
these expenses decreased to 9.7% from 11.5% during the same period in the prior
year as a result of our improved operating leverage resulting from our net
revenue growth.
Marketing and sales expenses increased $2.7 million to $7.3 million during
fiscal 2000 as compared to fiscal 1999 as a result of increased spending for:
. the publication of our magazine, Context, which transitioned from a
quarterly publication to a bi-monthly publication and is now being
marketed at selected newsstands across the United States;
. the conduct of several Diamond Exchange and Insight seminars for
prospective clients; and
. the hiring of a chief marketing officer and supporting staff to lead our
corporate branding and marketing initiatives.
As a percentage of net revenues, these expenses decreased from 5.7% to 5.4%
as a result of our improved operating leverage resulting from our net revenue
growth.
Management and administrative support expenses increased from $11.3 million
to $18.3 million, or 61.6%, during fiscal 2000 as compared to fiscal 1999 as a
result of the additional facilities, equipment and personnel necessary to
support our growth and increased consulting capacity. As a percentage of net
revenues, management and administrative support expenses decreased from 13.7%
to 13.4%.
Fiscal 1999 Compared to Fiscal 1998
Our net income of $9.8 million during fiscal 1999 improved from net income
of $6.0 million during fiscal 1998 as a result of increased revenues combined
with an improvement in the utilization of client-serving professionals,
partially offset by an increase in expenses required to support our growth
during the period.
Our net revenues increased 41.2% to $82.4 million during fiscal 1999 as
compared to fiscal 1998. The increase in our net revenues reflects an increase
in the volume of services delivered to new clients, as well as the leveraging
of our existing client base. For fiscal 1999, $16.9 million of revenue was
derived from services delivered to new clients and $65.5 million related to the
completion of projects or the undertaking of additional projects from our
client base of the previous fiscal year. We served 85 clients during fiscal
1999 as compared to 65 clients served during fiscal 1998.
Project personnel and related expenses increased $11.7 million, or 36.9%, to
$43.3 million during fiscal 1999 as compared to fiscal 1998. This increase
resulted from an increase in the number of client-serving professionals to
respond to growth. We increased our client-serving professional staff from 175
at March 31, 1998 to 239 at March 31, 1999. As a percentage of net revenues,
project personnel and related expenses decreased from 54.2% to 52.5% during
fiscal 1999 reflecting the improvement in utilization of client-serving
professionals.
Professional development and recruiting expenses increased $3.3 million
during fiscal 1999 as compared to fiscal 1998. This increase reflects our
recruiting and training of a higher number of client-serving professionals
during fiscal 1999. As a percentage of net revenues, professional development
and recruiting expenses increased from 10.6% to 11.5% during fiscal 1999.
Marketing and sales expenses increased $1.5 million to $4.7 million during
fiscal 1999 as compared to fiscal 1998 as a result of our investment in our
marketing and branding programs. Our marketing activities in fiscal 1999 were
focused on the continued development of our magazine, Context, the promotion of
intellectual capital through the Diamond Exchange and the conduct of three
Insight seminars for prospective clients. As a percentage of net revenues,
marketing and sales expenses increased from 5.5% to 5.7%.
Management and administrative support expenses increased from $8.6 million
to $11.3 million, or 31.3%, during fiscal 1999 as compared to fiscal 1998. This
increase resulted from the cost of additional facilities, equipment and
personnel necessary to support our growth and increased consulting capacity. As
a percentage of net revenues, management and administrative support expenses
decreased from 14.7% to 13.7% as a result of our improved operating leverage
resulting from our net revenue growth.
49
<PAGE>
Selected Quarterly Results of Operations
Set forth below are selected statements of operations and other operating
data for each of our full quarters covering the last two fiscal years and the
six months ended September 30, 2000. In our opinion, this data has been
prepared on the same basis as the audited financial statements and includes all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the information for the period presented when read in
conjunction with the consolidated financial statements and related notes
contained elsewhere herein. Results of operations for any previous fiscal
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30 Sept. 30
1998 1998 1998 1999 1999 1999 1999 2000 2000 2000
-------- --------- -------- -------- -------- --------- -------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues........... $18,375 $20,136 $21,194 $22,684 $25,718 $30,467 $36,640 $43,410 $52,158 $59,878
Income (loss) from
operations............ $ 2,932 $ 3,289 $ 3,448 $ 4,030 $ 4,551 $ 5,518 $ 6,638 $ 7,896 $ 9,126 $10,400
Net income (loss)...... $ 2,135 $ 2,383 $ 2,511 $ 2,807 $ 2,999 $ 3,618 $ 4,345 $ 5,266 $ 7,228 $ 8,346
Other Operating Data:
Number of clients
served(1)............. 40 39 45 47 89 70 66 67 67 61
Number of clients
generating Revenues
greater than $500
thousand.............. 10 15 15 17 13 16 24 25 36 27
Number of clients
generating Revenues
greater than $1
million............... 5 5 5 6 5 10 14 18 17 19
Average revenue per
client(1)............. $ 459 $ 516 $ 471 $ 483 $ 289 $ 435 $ 555 $ 648 $ 778 $ 982
</TABLE>
--------
(1) The significant increase in the number of clients in the quarter ended
June 30, 1999 was due to our acquisition of OmniTech Consulting Group,
Inc. We obtained thirty-eight clients in this quarter as a result of that
acquisition. The acquisition also lowered our average revenue per client
in this quarter.
We have experienced quarterly fluctuations in our operating results
partially due to our rapid growth since inception, together with the impact of
our considerable investments in recruiting, training and marketing during the
periods.
Liquidity and Capital Resources
In March 2000, we completed a public offering and sold 1,500,000 shares of
Class A Common Stock at a price of $80.13 per share. We realized approximately
$114.0 million in connection with the sale, net of payment of the underwriters'
commissions and other expenses of the offering. In the offering, an additional
1,775,000 shares were sold by selling stockholders.
We maintain a revolving line of credit pursuant to the terms of an unsecured
credit agreement from a commercial bank under which we may borrow up to $10.0
million at an annual interest rate based on the prime rate or based on the
LIBOR plus 1.75%, at our discretion. This line of credit has been reduced to
account for letters of credit outstanding. As of September 30, 2000, we had
approximately $9.9 million available under this line of credit.
Our billings for the quarter ended September 30, 2000 totaled $71.7 million.
These amounts include billings to clients for out-of-pocket expenses that are
reimbursed by clients which are not included in recognized revenues. Our gross
accounts receivable balance of $18.9 million at September 30, 2000 represents
24 days of billings for the quarter.
In October 1998 our Board of Directors authorized the repurchase, from time
to time, of up to one million shares of our Class A Common Stock. These
repurchases were authorized to be made in the open market or in
50
<PAGE>
privately negotiated transactions. At September 30, 2000, the number of shares
purchased under this authorization was 769,950 shares at an aggregate cost of
$10.1 million. We intend to fund future repurchases through our cash balances.
We believe that our current cash balances, existing lines of credit and cash
flow from existing and future operations, will be sufficient to fund our
operating requirements at least through fiscal 2001. Should our business expand
more rapidly than expected, we believe that additional bank credit would be
available to fund any additional operating and capital requirements. In
addition, we could consider seeking additional public or private debt or equity
financing to fund future growth opportunities.
Quantitative and Qualitative Disclosures About Market Risk
We do not invest excess funds in derivative financial instruments or other
market rate sensitive instruments.
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BUSINESS OF CLUSTER
Overview
Cluster is a professional services firm with operations in Europe, Latin
America and North America specializing in strategies and solutions for the
digital economy. Cluster has a high level of expertise in telecommunications,
wireless communications and emerging digital technologies and their
applications. Cluster primarily serves clients in the telecommunications
industry and has recently focused on expanding into other industries including
financial services, media, entertainment, fast-moving consumer goods, retail,
tourism and travel. In calendar year 2000 to date, Cluster carried out projects
for over 50 clients in over 20 countries and expects to have revenues of over
$90 million during calendar year 2000.
Cluster was founded in 1993 and has been built on the following three
strategic principles:
. Specialization. Cluster believes that specialization is necessary, not a
choice, to keep pace with the rapidly developing dynamics of the digital
economy, and consequently, it specializes in wireless communications and
the Internet.
. Strategy. Cluster provides innovative strategies designed to deliver
significant value in today's highly competitive marketplaces.
. Implementation. After developing a strategy for its client, Cluster
assists that client in implementing successful initiatives with a hands-
on, high-involvement approach to deliver tangible results for its client
and value to its customers worldwide. Implementation often includes
assuming key management roles and managing systems integrators and other
subcontractors.
By emphasizing the importance of implementation, Cluster's business model
yields greater accountability to its clients for the actual results of its
strategies. Cluster believes that its ability to deliver value to its clients
accounts for its growth and is demonstrated by its success in developing long-
term and ongoing relationships with its clients.
At September 30, 2000, Cluster employed a total of 487 people, including 376
consulting professionals. Cluster offers its services worldwide through nine
offices. Cluster is based in The Netherlands and its European, North American
and South American headquarters are located in Barcelona, Spain; Boston,
Massachusetts; and Sao Paulo, Brazil, respectively. Cluster also has offices
located in Munich and Dusseldorf, Germany; Lisbon, Portugal; London, England;
Madrid, Spain; and Paris, France.
Market Opportunity
Throughout the 1990s the communications industry worldwide and particularly
in Europe was highly dynamic and underwent extensive and rapid change. This
change has resulted from multiple factors, including privatization,
deregulation and intensified competition, the explosive growth of the Internet
and broadband services and the growth of wireless communications. In this
environment, even companies in the telecommunications sector have found it
difficult to keep up with the evolving opportunities and risks in the market,
creating Cluster's market opportunity to provide a professional services firm
specialized in the Internet and wireless communications, the two most
revolutionary communications platforms to achieve widespread market acceptance
during the 1990s.
The principal development in communications is the emergence of wireless
communications and the opportunities offered by the technological improvements.
Industry sources estimate that Western Europe had 193 million wireless
customers at June 30, 2000 with $60 billion of wireless service revenues in
1999. Western Europe had wireless penetration rates of 40% at year-end 1999,
50% at June 30, 2000 and is projected to have 83% by 2004. Other parts of the
world are undergoing similar growth though, with the exception of Japan, at
generally lower levels of penetration. The implementation of the next
generation of wireless technology, referred to as third-generation technology,
promises broadband wireless communications and offers the opportunity to
deliver to wireless customers a broad array of new products and services
created for a mobile medium. Advising companies regarding these changes is
another of Cluster's market opportunities.
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The other main development on the Internet space is broadband Internet
access and e-commerce as principal market opportunities. Through broadband
Internet access, which permits faster transmission speeds, media will converge
on the Internet as it becomes the source for video, music, newspapers and other
communication and entertainment. Industry sources expect e-commerce to continue
to grow as established retailers seek to take their brands and products across
borders and into regions they have not reached with physical stores, while pure
play e-tailers seek to leap-frog established retailers through innovative
Internet strategies. These developments and trends present companies with the
opportunity to access potential customers around the world with their products
and services and with the risk of failing to adapt to a changed market
environment. Helping companies to take advantage of these opportunities and
avoid these risks is part of Cluster's market opportunity.
Cluster also believes that it has the opportunity to offer to clients in
North and South America the benefits of its expertise in wireless
communications developed in Europe, a market that is generally recognized as
more advanced than the Americas in wireless communications.
Cluster's Services
Cluster's telecommunications and wireless communications consulting
experience includes working closely with third generation network operators,
WAP portals, m-commerce ventures, new mobile content providers, broadband
network operators and telecom equipment manufacturers to develop pan-European
and global strategies, balance global and local content, reposition portals,
adopt one-to-one marketing methods and cope with the Internet's impact.
Cluster's Internet strategies and solutions are targeted at both new and
established companies. Cluster's innovative Internet services include creating
pure Internet players, protecting existing market positions, designing and
implementing web experiences, analyzing how e-tailing affects customer
behavior, and assessing the impact of e-procurement and virtual intermediaries.
Cluster believes that each customer relationship enriches its intellectual
capital and enhances the services it is able to deliver.
Cluster provides professional services in two key areas:
. digital strategy; and
. digital solutions.
Digital Strategy. Like Diamond, Cluster works with CEOs and senior
leadership teams to develop business plans and customer-driven strategies to
help businesses expand in the new digital economy. Cluster focuses on unlocking
the potential for companies in the digital economy particularly in mobile
communications. Cluster and its clients agree on deliverables to be prepared by
Cluster for the client in light of the client's specific situation, needs and
objectives. These might include market studies, strategies for the use of
mobile technology, strategic objectives and positioning and others.
Digital Solutions. With digital solutions, Cluster goes beyond the
conceptual and takes an active role in implementing mobile and digital
strategies for its clients. Employees of Cluster take on temporary top-level
management positions within the business organizations to facilitate client
transitions into the digital economy. Cluster's team is integrated into the
client's management ensuring the achievement of objectives during the early and
critical phases of a project. As Cluster helps its clients build out their
business, they will manage systems integrators and other subcontractors.
Cluster helps its clients manage all aspects of their customer relationships
through online communication.
Project Teams. Like Diamond, Cluster provides its services in teams of
consultants with multiple and complementary skills: analysts, consultants,
managers and industry specialists. Each project team is led by a partner and
can vary in size from three to 20. The team normally operates from the client's
site or a nearby location and typically consists of a partner, a senior
consultant who acts as the project manager, and various consultants and
analysts. Each team also has the support of the Cluster Knowledge Center, which
collects, processes and re-packages information from a wide range of internal
and external sources specifically for Cluster's needs. Cluster believes that
such teamwork fosters creativity, improves work product quality and creates
effective relationships among its employees.
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Vertical Industries. Cluster specializes in providing its services to
certain vertical industry groups the largest and most important of which is
telecommunications. Other emerging industry groups include financial services,
media, entertainment, fast-moving consumer goods, retail, tourism and travel.
The common factor among its clients is the desire to become leaders in the
digital economy.
Representative Client Relationships
Cluster focuses its marketing and sales activity on Fortune 1000
enterprises. Cluster, like Diamond, markets its services primarily to CEOs and
other senior executives of its current and potential clients and invests
significant time cultivating and fostering relationships with these decision-
makers in an effort to understand fully clients' businesses and their
consulting needs. The functionality of many of Cluster's solutions is
applicable across a variety of industries, including financial services, media,
entertainment, fast-moving consumer goods, retailing, tourism, and travel.
A representative list of Cluster's clients includes:
<TABLE>
<CAPTION>
Telecommunications Financial
Companies Institutions Other
--------- ------------ -----
<S> <C> <C>
Airtel American Express AltaVista
Bell Canada Bradesco Clix
Bouygues Telecom HSBC Scandinavia Online
British Telecom Norwich Union
Ericsson
Optimus
Orange
Telefonica
Telesp Celular
Sprint PCS
Vodafone-Airtouch
</TABLE>
Cluster has derived a significant portion of its revenue from a limited
number of large clients. In calendar year 1999, Cluster's five largest clients
accounted for approximately 56% of its revenue, with four clients each
accounting for more than 10% of such revenue. In calendar year 1998, Cluster's
five largest clients accounted for approximately 79% of its revenue, with five
clients each accounting for more than 10% of such revenue.
Historically, Cluster has been able to develop long-term relationships by
expanding relationships with past clients into new projects. All of the five
largest clients in calendar year 1998 remained among the ten largest for
calendar year 1999 and all have remained clients in 2000 to date. The revenues
coming from these five specific clients increased by 42% in calendar year 1999
compared with 1998 and by 32% in the first half of 2000, compared with the
first half of calendar year 1999. At the same time, Cluster has been able to
increase the number of clients and diversify the clients and client
assignments, with 40 projects and 15 clients in calendar year 1998, 67 projects
and 27 clients in calendar year 1999 and 99 projects and 59 clients during the
first nine months of calendar year 2000.
The following are representative examples of Cluster's client engagements:
Scandinavia. Cluster assisted Scandinavia Online, a leader in the fixed
Internet portal market, in the development of a wireless access strategy.
Cluster assessed the impact of future developments in wireless Internet, and
helped the client identify acquisition and joint venture partners that would
enable a new product portfolio.
United Kingdom. Cluster assisted American Express to identify and implement
a viable wireless commerce, or m-commerce, strategy. Cluster identified the
most significant business opportunities for the client and which international
markets were the highest priorities. Cluster then combined this strategic
insight with the client's existing fixed Internet strategy. In a follow-up
project, Cluster also helped the client negotiate an agreement with a joint
venture partner to launch a new and innovative e-payments business.
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United States. Cluster assisted Sprint PCS, a major U.S. telecom operator
with national coverage and almost 20 million subscribers seeking to drive U.S.
wireless penetration from its current 38% toward European current penetration
levels of 45-50% over a period of one to two years. Cluster assisted in
identifying the demographic segments to be targeted and the best marketing and
commercial strategies. Cluster explored different strategic scenarios for the
U.S. market and helped determine how products would perform and the best way to
optimize product development and marketing.
Spain. Cluster is currently working for Xfera, the first third generation
wireless operator in Europe, taking on managerial positions to help launch the
company. Cluster is directly involved in defining the Xfera's business and
market entry strategy, building and rolling out its customer care system,
hiring and training key executive positions and developing and implementing
portals that will make broadband wireless Internet fully competitive.
Brazil. With the entry of new mobile players in Brazil, one of the incumbent
telephone companies was dramatically losing its market share. Cluster
consultants helped turn the company around by filling temporary executive
positions, defining a new strategy and implementing a second start-up of the
marketing department. Using the rules of the newly deregulated market to the
client's advantage, Cluster brought the company's mobile market share from 30%
up to 60% in the Brazilian region where it operates.
Human Resources and Culture
As of September 30, 2000, Cluster had 26 partners. Cluster's partners
provide direction and leadership and are responsible for the management and
development of the firm on a global and local basis. They are also responsible
for client development and management, project management, staff development
and mentoring. Cluster's partners typically have from 8 to 15 years of
dedicated experience, combined with an entrepreneurial attitude and long-term
view of the business.
Recruiting. Like Diamond, Cluster recognizes that its success depends upon
its ability to attract and retain talented professionals. Cluster believes that
its business model, which provides specialization in the new economy,
interesting multinational projects, greater operational experience, fast career
progression, competitive rewards and an attractive corporate culture enhances
its ability to attract top professionals directly from other strategy
consulting firms and from top graduate and undergraduate business and
engineering institutions in Europe, the United States and Latin America. By
developing these individuals over time, Cluster aims to fill future senior
positions from within the firm.
Culture. Cluster believes that its culture is an important factor in
successfully hiring and retaining professionals. Cluster's employees are young
and energetic and come from a multitude of professional backgrounds and over 45
nationalities which Cluster believes fosters an exciting and diverse work
environment. Cluster's campus-based recruiting program and promote-from-within
focus further strengthens its culture.
Professional Development. Cluster believes that providing its professionals
with a wide variety of challenging projects and the opportunity to demonstrate
ability and achieve professional advancement are keys to their retention.
Cluster's training program builds skills in three critical areas: conceptual
knowledge of the digital economy, consulting skills and implementation
capabilities with vertical industry expertise. Cluster's training program
includes diverse training programs ranging from seminars led by industry
experts to intensive off-site courses. Professional development is a
consequence of Cluster's evaluation and feedback process that assesses
individual project performance and firm development contribution.
Compensation and Benefits. Cluster offers competitive compensation and
benefits packages that include a competitive base salary, individual and
company-based performance bonus, stock options and locally competitive
benefits. Similar to Diamond, Cluster believes that by offering long-term
wealth creation opportunities at all levels within the organization, it will
have a competitive advantage for attracting and retaining talented individuals.
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Competition
Cluster believes that its primary competitors currently are McKinsey & Co.,
Booz Allen & Hamilton, BCG, Bain & Co., Andersen Consulting, Arthur D. Little
(c-quential), Gemini Consulting, A.T. Kearney, MarchFirst and smaller
professional wireless telecommunications and Internet services and consulting
firms.
ABSENCE OF MARKET FOR AND DIVIDENDS ON CLUSTER CAPITAL STOCK
No active trading market exists with respect to any of the shares of any
class of capital stock of Cluster. Such shares are not listed on any exchange
and are not traded in the over-the-counter market. To date, no dividends
corresponding to fiscal year 2000 have been declared or paid by Cluster on its
outstanding shares of capital stock.
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CLUSTER SELECTED HISTORICAL FINANCIAL DATA
The selected financial data set forth below for the years ended December 31,
1998 and 1999 and at December 31, 1998 and 1999 are derived from Cluster's
consolidated financial statements that have been audited by Arthur Andersen,
independent auditors. The selected financial data set forth below for the year
ended December 31, 1997 and at December 31, 1997 are derived from Cluster's
consolidated financial statements that have been audited by Bouwer & Officier,
independent auditors. The selected consolidated financial data set forth below
for the nine months ended September 30, 1999 and 2000 and at September 30, 1999
and 2000 are derived from Cluster's unaudited consolidated financial statements
and include all adjustments, consisting of only normal recurring adjustments,
which Cluster considers necessary for a fair presentation of its combined
financial position and results of operations for such periods. Operating
results for the nine months ended September 30, 2000 are not necessarily
indicative of the results that may be expected for the entire year ending
December 31, 2000. For the convenience of the reader, translations have been
provided from Dutch guilders to U.S. dollars of the balance sheet and income
statement information at and for the most recent annual and interim periods at
the exchange rate in effect on September 29, 2000 of $0.4005 = NLG1.00. The
data set forth below should be read in conjunction with and is qualified by
reference to "Cluster Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and related
notes thereto of Cluster included herein.
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended September 30,
------------------------------------------------ ----------------------------------
1997 1998 1999 1999 1999 2000 2000
---------- ----------- ------------ --------- ----------- ----------- --------
(in thousands of Dutch guilders (NLG) and U.S. dollars)
(Dutch (U.S. (U.S.
GAAP) (U.S. GAAP) GAAP) GAAP)
(audited) (audited) (audited) (audited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues............... NLG 13,005 NLG 53,884 NLG 111,013 $ 44,461 NLG 74,859 NLG164,449 $ 65,862
Direct salaries and
costs................. (10,340) (29,710) (47,030) (18,836) (31,611) (79,841) (31,977)
---------- ----------- ------------ --------- ----------- ---------- --------
Gross profit......... 2,665 24,174 63,983 25,625 43,248 84,608 33,885
Royalty expense........ -- (5,609) (11,773) (4,715) (8,458) -- --
General and
administrative
expenses.............. (2,026) (10,656) (22,377) (8,962) (13,683) (51,730) (20,718)
---------- ----------- ------------ --------- ----------- ---------- --------
Total operating
expenses............ (2,026) (16,265) (34,150) (13,677) (22,141) (51,730) (20,718)
---------- ----------- ------------ --------- ----------- ---------- --------
Operating income..... 639 7,909 29,833 11,948 21,107 32,878 13,167
Financial
income/(expense)...... 56 16 (2,179) (873) (909) 302 121
---------- ----------- ------------ --------- ----------- ---------- --------
Income before tax...... 695 7,925 27,654 11,075 20,198 33,180 13,288
Provision for income
taxes................. (279) (3,375) (10,688) (4,280) (7,809) (12,828) (5,138)
Extraordinary income... 56 -- -- -- -- -- --
Extraordinary
expenses.............. (15) -- -- -- -- -- --
Total extraordinary
items............... 41 -- -- -- -- -- --
---------- ----------- ------------ --------- ----------- ---------- --------
Net Income............. NLG 457 NLG 4,550 NLG 16,966 $ 6,795 NLG 12,389 $ 20,352 $ 8,150
========== =========== ============ ========= =========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
At December 31, At September 30,
------------------------------------------- -----------------------------
1997 1998 1999 1999 1999 2000 2000
--------- ---------- ---------- --------- ---------- ---------- -------
(in thousands of Dutch guilders (NLG) and U.S. dollars)
(Dutch (U.S. (U.S. (U.S.
GAAP) GAAP) GAAP) GAAP)
(audited) (audited) (audited) (audited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents........... NLG 274 NLG 7,786 NLG 15,980 $ 6,400 NLG 19,895 NLG 14,583 $ 5,842
Working capital........ (106) (5,626) 1,199 480 4,911 3,507 1,404
Total assets........... 3,268 21,079 47,258 18,927 41,491 93,745 37,550
Shareholders' equity... 1,057 (3,494) 7,351 2,944 8,976 15,907 6,371
</TABLE>
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CLUSTER MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with Cluster's
consolidated financial statements included elsewhere in this proxy
statement/prospectus. Because Cluster's financial reporting currency is the
Dutch guilder, this discussion regarding Cluster's financial condition and
results of operations is presented in Dutch guilder. The Dutch guilder is a
currency inside of the euro zone and, consequently, is fixed to the euro at
NLG2.20371= (Euro)1.00. At September 29, 2000, the exchange rate for the Dutch
guilder was $0.4005=NLG1.00 according to the European Central Bank.
Cluster's financial statements for 1998 and 1999 were prepared on the basis
of accounting practices generally accepted in the U.S. and its financial
statements for 1997 were prepared on the basis of accounting practices
generally accepted in The Netherlands. Consequently, the financial condition
and results of operations for 1998 and 1999 are not fully comparable with 1997.
Overview
Cluster, based in Europe with operations in Latin America and North America,
is a professional services firm specializing in strategies and solutions for
the digital economy. Cluster has a high level of expertise in
telecommunications, wireless communications and emerging digital technologies
and their applications and is focused on providing consulting services for
companies in a wide variety of industries, including telecommunications,
financial services, media, entertainment, fast-moving consumer goods, retail,
tourism and travel. Cluster was founded in 1993.
Cluster's results of operations have been characterized by rapid growth and
steady expansion. In 1998 and 1999, Cluster has experienced growth in net
revenues of 314% and 106%, respectively, compared to the previous year.
Similarly, net income increased from NLG0.5 million in 1997 to NLG4.6 million
in 1998 to NLG17.0 million in 1999. These trends continued in the nine months
ended September 30, 2000 as net revenues increased 120% and net income
increased 64%, compared to the corresponding period of 1999. This growth has
been internally generated and through the addition of new professionals.
Cluster's revenues include professional fees for consulting services
rendered to clients, plus fixed additional amounts in some projects billed to
cover project expenses. These fees are generally billed at the end of each
month for the services rendered in that month. Fees are agreed with clients
prior to the commencement of an engagement on either a per project fixed fee
basis (based on an estimate of staff needs) or based upon actual resources and
time spent on the client project.
Cluster's primary revenue growth drivers include: (i) the size and number of
new client engagements; (ii) the growth of existing clients relationships;
(iii) increases in Cluster's billing rate; and (iv) growth in the number and
rate of utilization of billable employees.
Expenses
Cluster's principal expense categories are direct salaries and costs,
royalty expense, and general and administrative expenses.
Direct salaries and costs. These expenses consist principally of salaries
and employee benefits associated with billable professionals and travel and
other expenses associated with the delivery of services. These costs represent
the largest portion of Cluster's expenses.
General and administrative expenses. These expenses include management
expenses, professional development and recruiting expenses, marketing and sales
and administrative support expenses. Management expenses include the costs
directly related to administrative personnel in each office as well as
corporate
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administrative personnel. Professional development and recruiting expenses
include the costs related to the personnel directly involved in these
activities. Marketing and sales expenses principally include the cost of
personnel associated with marketing and sales and their travel and promotional
expenses. Administrative support expenses primarily consist of the costs
associated with facilities management, finance, information systems, and the
maintenance of Cluster's knowledge center, including the costs associated with
the personnel related to these functions.
Royalty expenses. Until the end of 1999, Cluster recognized and paid royalty
expenses related to the use of the "Cluster" trademark for projects and sales
efforts in countries other than Spain. This practice was discontinued in 2000,
as Cluster's principal shareholder, who holds the rights to the "Cluster"
brand, has agreed to contribute to Cluster the brand and all rights associated
with it, including right of use for 2000.
Results of Operations
Nine Months Ended September 30, 2000 and 1999
Revenues. Revenues increased 119.7% to NLG164.4 million for the nine months
ended September 30, 2000 from NLG74.9 million for the corresponding period for
1999. This increase was primarily attributable to an increase in the number of
client engagements, the size of the engagements, and an increase in the number
of billable employees. A reserve of NLG10.2 million, which had the effect of
reducing reported revenue by that amount, was recorded in the nine months ended
September 30, 2000 in order to cover uncollectible amounts. During 1999 no
reserves were recorded.
Direct salaries and costs. Direct salaries and costs increased 152.6% to
NLG79.8 million for the nine months ended September 30, 2000 from NLG31.6
million for the corresponding period for 1999. This increase was primarily
attributable to an increase to 376 billable employees at September 30, 2000
from 164 billable employees for the corresponding period for 1999. As a
percentage of revenues, direct salaries and costs increased to 48.6% for the
nine months ended September 30, 2000 from 42.2% for the corresponding period
for September 30, 1999. This increase is primarily attributable to the
reduction in revenues due to the recording of revenue reserves in fiscal year
2000 as well as, expected average bonus percentages for all employees for 2000,
which has been accrued.
Royalty expense. Royalties have been discontinued for the year 2000, as all
rights to the "Cluster" trademark related to the years 2000 and following will
be transferred to Cluster. Royalty expense was NLG8.5 million and as a
percentage of revenues was 11.3% for the nine months ended September 30, 1999.
General and administrative expenses. General and administrative expenses
increased 278.1% to NLG51.7 million for the nine months ended September 30,
2000, from NLG13.7 million for the corresponding period for 1999. This increase
was primarily attributable to (i) the full operation of all six subsidiaries
other than the Spanish subsidiary during the full first nine months of 2000, as
compared with only partial operation of the London office (opened in May 1999),
Boston office (opened in March 1999), Sao Paulo office (opened in April 1999),
Dusseldorf office (opened in July 1999), and no operations in the Paris office
(opened in October 1999), and the Lisbon office (opened in March 2000) during
the first nine months of 1999, (ii) the increase of support staff in regional
headquarters and in the other offices from 47 in September 1999 to 114 in
September 2000, (iii) the increased efforts in recruiting and training of
professionals directly related to the growth in the number of billable
employees and (iv) the increased branding and marketing efforts performed
during the nine months ended September 30, 2000 as compared with the
corresponding period for 1999. In addition, Cluster incurred additional
expenses as it reorganized its corporate structure in preparation for a
possible initial public offering. As a percentage of revenues, general and
administrative expenses increased to 31.5% for nine months ended September 30,
2000 from 18.3% for the corresponding period for 1999.
Operating income. Operating income increased 55.8% to NLG32.9 million for
the nine months ended September 30, 2000, from NLG21.1 million for the
corresponding period for 1999. This increase was primarily attributable to the
increase in revenues, partially offset by the increase in expenses. As a
percentage of
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revenues, operating income decreased to 20.0% for the nine months ended
September 30, 2000 from 28.2% for the corresponding period for 1999. This
decrease was primarily attributable to the increased costs related to full
operational international offices.
Taxation. Income tax expense increased 64.3% to NLG12.8 million for the nine
months ended September 30, 2000, from NLG7.8 million for the corresponding
period for 1999. This increase was primarily attributable to the increase in
income before taxes. As a percentage of income before tax, Cluster's estimated
income tax expense for September 30, 2000 maintained the 38.7% level of the
first nine months of 1999.
Years Ended December 31, 1999 and 1998
Revenues. Revenues increased 106.0% to NLG111.0 million for 1999 from
NLG53.9 million for 1998. This increase was primarily attributable to an
increase in both the number of client engagements, the size of the client
engagements, and an increase in billable employees.
Direct salaries and costs. Direct salaries and costs increased 58.3% to
NLG47.0 million for 1999 from NLG29.7 million for 1998. This increase was
primarily attributable to an increase to 187 billable employees at year-end
1999 from 93 employees at year-end 1998. As a percentage of revenues, direct
salaries and costs decreased to 42.4% for 1999 from 55.1% for 1998. This
decrease was primarily attributable to an increased utilization of billable
employees, together with higher average billing rates.
Royalty expense. Royalty expense for use of the "Cluster" trademark
increased 109.9% to NLG11.8 million for 1999 from NLG5.6 million for 1998. This
increase was primarily attributable to the aggregate increase in revenues. As a
percentage of revenues, royalty expense increased to 10.6% for 1999 from 10.4%
for 1998.
General and administrative expenses. General and administrative expenses
increased 110.0% to NLG22.4 million for 1999 from NLG10.7 million for 1998.
This increase was primarily attributable to an increase in overall non-billable
support staff and the opening and staffing of new offices in Brazil, the U.S.,
and the United Kingdom, which run through the majority of the year and offices
in Germany and France towards the end of 1999. As a percentage of revenues,
general and administrative expenses increased to 20.2% for 1999 from 19.8% for
1998.
Operating income. Operating income increased 277.2% to NLG29.8 million for
1999 from NLG7.9 million for 1998. This increase was primarily attributable to
the increase in revenues and gross margin and the contained growth of general
and administrative expenses. As a percentage of revenues, operating income
increased to 26.9% for 1999 from 14.7% for 1998. This increase was primarily
attributable to the improvements in gross margin.
Taxation. Income tax expense increased 216.7% to NLG10.7 million for 1999
from NLG3.4 million for 1998. As a percentage of income before tax, Cluster's
estimated income tax expense decreased to 38.6% for 1999 from 42.6% for 1998.
This decrease was primarily attributable to the relative weight of non-
deductible expenses included in the accounts (NLG1.6 million in each of both
years).
Years Ended December 31, 1998 and 1997
Our results of operations for 1998 and 1999 are not entirely comparable due
to a change from reporting in Dutch GAAP in 1997 to reporting in U.S. generally
acceptable accounting principles for 1998 and subsequent periods.
Revenues. Revenues increased 314.3% to NLG53.9 million for 1998 from NLG13.0
million for 1997. This increase was primarily attributable to the increase in
the size and scope of client assignments.
Direct salaries and costs. Direct salaries and costs increased 187.3% to
NLG29.7 million for 1998 from NLG10.3 million for 1997. This increase was
primarily attributable to an increase to 93 billable employees at
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year-end 1998 from 54 billable employees at year-end 1997. As a percentage of
revenues, direct salaries and costs decreased to 55.1% for 1998 from 79.5% for
1997. This decrease was primarily attributable to better utilization of
billable resources and an increase in billing rates.
Royalty expense. During 1997 no royalty expense for the "Cluster" trademark
was recorded as the royalty agreement was entered into in 1998 with the
incorporation of the first subsidiary in the UK and the beginning of the
international expansion of Cluster. In 1998 royalty expense accounted for
NLG5.6 million and 10.4% of revenues.
General and administrative expenses. General and administrative expenses
increased 426.0% to NLG10.7 million for 1998 from NLG2.0 million for 1997. This
increase was primarily attributable to an increase in the number of support
staff from 13 to 26 and the increased efforts in recruiting and training of
consultants. As a percentage of revenues, general and administrative expenses
increased to 19.8% for 1998 from 15.6% for 1997.
Operating income. Operating income increased more than eleven-fold to NLG7.9
million for 1998 from NLG0.7 million for 1997. This increase was primarily
attributable to an increase of the gross margin, partially offset by the
increase in expenses. As a percentage of revenues, operating income increased
to 14.7% for 1998 from 4.9% for 1997.
Taxation. Income tax expense increased more than eleven-fold to NLG3.4
million for 1998 from NLG0.3 million for 1997. This increase was primarily
attributable to an increase of taxable income. As a percentage of income before
tax, Cluster's estimated income tax expense increased to 42.6% for 1998 from
40.1% for 1997.
Liquidity and Capital Resources
From inception, Cluster has funded its operations and capital resource
requirements primarily through cash provided by operations. At December 31,
1999, Cluster's cash balance was NLG16.0 million and its working capital was
NLG1.2 million.
Cluster generated NLG18.9 million in cash from operations for the year ended
December 31, 1999. This was primarily due to net income. Cluster's operating
activities generated cash of NLG16.6 million for the year ended December 31,
1998. This was principally due to net income and increases in accounts payable.
Capital expenditures were NLG4.6 million in 1999 and NLG1.3 million in 1998.
These expenditures were primarily for office equipment and other fixed assets
to support Cluster's expansion.
Cluster paid dividends totaling NLG6.2 million in 1999 and NLG7.5 million in
1998. It has no plans to pay dividends related to the results of 2000. However,
dividends totaling NLG11.9 million related to the results of operations for
1999, are still due to the shareholders of Cluster.
Cluster believes that its current cash balances together with cash generated
from operations will be sufficient to finance Cluster's operating requirements
for at least the next 12 months. There can be no assurance, however, that
Cluster's actual needs will not exceed expectations or that Cluster will be
able to fund its operations in the absence of other sources.
Quantitative and Qualitative Disclosures About Market Risks
Cluster's primary market risks relate to changes in foreign currency
exchange rates. Cluster does not have any debt and does not hold any derivate
instruments.
Since about 80% of the sales and purchases of Cluster and its subsidiaries
in the first nine months of 2000 were denominated in euro or currencies linked
to the euro, Cluster's results of operations have historically not been subject
to significant foreign currency risk. In currencies outside the euro-zone, such
as the British pound, Brazilian reai and U.S. dollar, Cluster seeks to balance
the sales volume with the volume of purchases in each currency so that internal
hedging is obtained.
61
<PAGE>
After excluding these operations, overall sales exposure to fluctuations in
the value of the euro does not exceed 1.5% of sales. All of this 1.5% is
denominated in "hard" currencies, such as the U.S. dollar, Swiss franc and
Canadian dollar with a negligible amount (2.0%) in Brazilian reais. In Brazil,
Cluster's fees are tied to the U.S. dollar so as to hedge any devaluation risk
relating to Brazilian reais. On the contrary, about 7% of expenses (5% of
sales) are denominated in British Pound and currently not hedged through sales.
Cluster historically has not entered into foreign currency contracts in
order to hedge their foreign exchange risk due to management's belief that the
costs of such hedges outweigh the benefits they might provide.
Exchange Rates
On January 1, 1999, the euro was introduced as a new currency in 11 European
Union member states: Austria, Belgium, Finland, France, Germany, Ireland,
Italy, Luxembourg, The Netherlands, Portugal and Spain. The currencies of the
participating member states are non-decimal subdivisions of the euro until
January 1, 2002 and for up to six months thereafter. The exchange rate at which
the Dutch guilder has been irrevocably fixed against the euro is NLG2.20371 to
(Euro)1.00. Beginning January 1, 2002, the participating member states will
issue new euro-denominated bills and coins for use in cash transactions. By
July 1, 2002, the participating member states will withdraw the bills and coins
denominated in their respective currencies from circulation, and they will no
longer be legal exchange for any transactions.
The following table sets forth, for the periods indicated, information
concerning the noon buying rate for Dutch guilders in New York City for cable
transfers as certified for customs purposes by the Federal Reserve Bank of New
York. From the introduction of the euro on January 1, 1999, the table sets
forth, for the period and dates indicated, information in Dutch guilders
derived by translating the resulting euro amount the Dutch guilders into euro
at the fixed exchange rate of NLG2.20371 to (Euro)1.00 and then translating
into U.S. dollars at the noon buying rate for the euro in New York City for
cable transfers, as certified for customs purposes by the Federal Reserve Bank
of New York. Amounts are expressed in Dutch guilders per $1.00, and average
figures reflect the average of the noon buying rates on the last day of each
month during the relevant period.
<TABLE>
<CAPTION>
Rate at
Year ended December 31, Period End Average High Low
----------------------- ---------- ------- ------ ------
<S> <C> <C> <C> <C>
1995..................................... 1.6035 1.6051 1.7494 1.5192
1996..................................... 1.7271 1.6824 1.7560 0.6875
1997..................................... 2.0278 1.9524 2.1177 1.7300
1998..................................... 1.8770 1.9837 2.0890 1.8142
1999..................................... 2.1884 2.0686 2.2002 1.8657
2000 (through November 2)................ 2.5642 2.3655 2.6647 2.1323
</TABLE>
62
<PAGE>
The following table sets forth, for the period and dates indicated,
information concerning the noon buying rate for the euro. Amounts are expressed
in U.S. dollars per (Euro)1.00, and average figures reflect the average of the
noon buying rates on the last day of each month during the relevant period.
<TABLE>
<CAPTION>
Rate at
Quarter ended Period End Average High Low
------------- ---------- ------- ------ ------
<S> <C> <C> <C> <C>
March 31, 1999........................... 1.0808 1.1058 1.1812 1.0716
June 30, 1999............................ 1.0310 1.0732 1.1610 1.0296
September 30, 1999....................... 1.0643 1.0639 1.0793 1.0139
December 31, 1999........................ 1.0070 1.0370 1.0887 1.0016
March 31, 2000........................... 0.9574 0.9866 1.0335 0.9524
June 30, 2000............................ 0.9545 0.9338 0.9648 0.8891
September 30, 2000....................... 0.8837 0.9042 0.9548 0.8462
</TABLE>
The noon buying rate for the euro on November 2, 2000 was $0.8594
= (Euro)1.00.
Monetary policy within the 11 founding members of the euro zone is set by
the European Central Bank. The European Central Bank has announced an objective
of containing inflation and will adjust interest rates in line with this policy
without taking account of other economic variables such as the rate of
unemployment. It has further declared that it will not set an exchange rate
target for the new currency.
Following the consummation of the proposed combination, DiamondCluster's
financial condition and results of operations will be affected by fluctuations
between the U.S. dollar, the combined firm's reporting currently, and the euro,
in which most of Cluster's revenues are denominated.
63
<PAGE>
ELECTION OF DIRECTORS
The board of directors of Diamond consists of three classes as nearly equal
in number as possible. One of the three classes, comprising approximately one-
third of the directors, is elected each year to succeed the directors whose
terms are expiring. The number of directors of Diamond, as determined by the
board of directors under Diamond's restated certificate of incorporation and
by-laws, was recently increased from eleven to twelve. Accordingly, there is
one vacancy to be filled on the board of directors. The nominees for director
are Michael E. Mickolajczyk, Alan C. Kay, Donald R. Caldwell and Javier Rubio.
Following the closing of the business combination, Diamond intends to increase
its board of directors with two additional members who are yet to be
identified.
Incumbent Directors
The incumbent directors of Diamond are as follows:
<TABLE>
<CAPTION>
Name Age Positions
---- --- ---------
<C> <C> <S>
Melvyn E. Bergstein (1)....... 58 Chairman of the Board of Directors,
Chief Executive Officer
Edward R. Anderson (4)(5)..... 53 Director
Donald R. Caldwell (2)(3)(5).. 54 Director
Mark L. Gordon (1)(3)......... 49 Director
Adam J. Gutstein (4).......... 37 President and Director
Alan C. Kay (2)............... 60 Director
John D. Loewenberg (1)(3)..... 60 Director
Michael E. Mikolajczyk (2).... 49 Vice Chairman, Secretary and Director
Christopher J. Moffitt (4).... 46 Director
John J. Sviokla (1)........... 43 Vice Chairman and Director
Arnold R. Weber (4)(5)........ 71 Director
--------
(1) Term expires as of the 2001 Annual Meeting of Stockholders
(2) Term expires as of the 2000 Annual Meeting of Stockholders
(3) Member of the Audit Committee
(4) Term expires as of the 2002 Annual Meeting of Stockholders
(5) Member of the Compensation Committee
Nominees
The nominee who is not an incumbent director is:
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Javier Rubio (1).............. 40 President, Europe and Latin America (2)
</TABLE>
--------
(1) Mr. Rubio has an interest in the approval of the issuance of the Diamond
Class B shares and the adoption of the Diamond 2000 Stock Option Plan as he
will beneficially own 2,236,596 shares of Class B Common Stock and
approximately 711,400 options for Class B Common Stock after giving effect
to the business combination.
(2) Mr. Rubio is currently the Chairman of the Board of Directors and Chief
Executive Officer of Cluster. He will not become President, Europe and
Latin America of Diamond until the consummation of the business
combination.
64
<PAGE>
Shares represented by proxies in the enclosed form will be voted for the
election of the nominees identified below to serve as directors for the term
specified herein or until their successors are elected, unless contrary
instructions are received. Messrs. Mikolajczyk, Caldwell and Kay and Rubio
will, if elected, serve as Class I directors and commence their three-year term
immediately after the 2000 Annual Meeting of Stockholders. Each nominee, other
than Javier Rubio, presently serves as director of Diamond. If an unexpected
occurrence should make it necessary, in the judgment of the proxy holders, to
substitute some other person for any of the nominees, such shares will be voted
for such other person as the proxy holders may select.
Donald R. Caldwell Donald R. Caldwell has been a member of Diamond's board
of directors since June 1994 and has been the chief executive officer of Cross
Atlantic Technology Fund, L.P. since March 1999. From February 1996 to March
1999, Mr. Caldwell was president and chief operating officer and a director of
Safeguard Scientifics, Inc. From April 1991 to December 1993, Mr. Caldwell was
the president of Valley Forge Capital Group, Ltd. Prior to that time, Mr.
Caldwell held various executive and management positions with a predecessor
company of Cambridge Technology Partners (Massachusetts), Inc. and Arthur Young
& Co., a predecessor to Ernst & Young, LLP. Mr. Caldwell currently serves on
the board of directors of First Consulting Group, in addition to numerous
privately held companies and other civic organizations.
Alan C. Kay Alan C. Kay has been a member of Diamond's board of directors
since June 1996 and is currently vice president of research and development for
Walt Disney Imagineering, Inc. and is a Disney fellow. From 1984 to 1996, Dr.
Kay was an Apple fellow at Apple Computer, Inc. Prior to that time, Dr. Kay
held scientific positions at Atari Corporation and Xerox Palo Alto Research
Center. He was a research associate and lecturer in computer science at
Stanford University from 1969-1971.
Michael E. Mikolajczyk Michael E. Mikolajczyk co-founded Diamond and joined
us in April 1994, serving as a member of Diamond's board of directors since
then. From April 1994 until July 1998, Mr. Mikolajczyk also served as Diamond's
Senior Vice President, Chief Financial and Administrative Officer. From July
1998 until April 2000, Mr. Mikolajczk served as President. In July 1999, he
became Secretary and since April 1, 2000 he has also been Vice Chairman. Prior
to joining Diamond, he served as senior vice president of finance and
administration and chief financial officer for Technology Solutions Company.
Prior to that time, Mr. Mikolajczyk held several senior financial and corporate
development positions at MCI Telecommunications Corporation.
Javier Rubio Javier Rubio will be our President, Europe and Latin America.
Mr. Rubio founded Cluster in 1993 and has served as its Chairman of the Board
of the Directors and Chief Executive Officer since that time. Prior to founding
Cluster, Mr. Rubio held several senior positions with other consulting firms,
including seven years in various positions with the MAC Group (Gemini
Consulting) and the Monitor Company. Mr. Rubio is a top advisor for CEOs and a
respected voice in the telecom industry across Europe. Mr. Rubio's expertise in
telecom ranges from mobile, satellite and fixed network to CATV. He has worked
on multiple assignments for a variety of Fortune 500 companies, such as AT&T,
Vodafone-AirTouch, Ericsson and British Telecom, assisting them with strategic
decision making. He speaks Spanish, English, French, Portuguese and Italian.
Mr. Rubio holds a Master of Business Administration from the University of
Chicago and a Telecommunications Engineering degree from Barcelona Polytechnic
University.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF DONALD
R. CALDWELL, ALAN C. KAY, MICHAEL E. MIKOLAJCZYK AND JAVIER RUBIO.
The following directors' terms continue beyond the 2000 Annual Meeting of
Stockholders:
Melvyn E. Bergstein Melvyn E. Bergstein co-founded Diamond in January 1994
and served as Diamond's Chairman and Chief Executive Officer and President
until July 1, 1998, when Mr. Bergstein vacated the office of President in favor
of Mr. Mikolajczyk. Mr. Bergstein has been a member of Diamond's board of
directors since January 1994. Prior to co-founding Diamond, Mr. Bergstein held
several senior executive
65
<PAGE>
positions with Technology Solutions Company from 1991 to 1993. Prior to that
time, Mr. Bergstein held several senior positions with other consulting firms,
including twenty-one years in various positions with the Arthur Andersen &
Co.'s consulting division, now Andersen Consulting. Mr. Bergstein also serves
as a member of the board of directors of New Era of Networks, Inc., an
enterprise application integration software company.
Edward R. Anderson Edward R. Anderson has been a member of Diamond's board
of directors since June 1994. In July 1999, Mr. Anderson became the chairman
and chief executive officer of E-Certify Corp. From January 1994 to July 1999
he was president, chief operating officer and director of CompuCom Systems,
Inc. He joined CompuCom as chief operating officer in August 1993. From 1988 to
1993, Mr. Anderson served as president and chief operating officer of
ComputerLand USA. Prior to that time, Mr. Anderson held executive and
management positions with The Computer Factory, W.R. Grace & Company, and the
American Express Company.
Mark L. Gordon Mark L. Gordon has been a member of Diamond's board of
directors since August 1999. Mr. Gordon is an attorney with the law firm Gordon
& Glickson LLC and has been a partner of that firm since August 1979, currently
serving as its managing partner. Mr. Gordon founded Gordon & Glickson's
technology practice and advises a wide range of emerging technology companies,
including Diamond, on business and legal matters. Mr. Gordon also serves as a
member of the board of directors of New Era of Networks, Inc., an enterprise
application integration software company.
Adam J. Gutstein Adam J. Gutstein co-founded Diamond in January 1994 and has
served as a partner and Vice President since inception and as a member of
Diamond's board of directors since August 1999. From July 1998 until April
2000, Mr. Gutstein served as Chief Operating Officer. Since April 1, 2000, Mr.
Gutstein has served as President. Prior to joining Diamond, Mr. Gutstein was a
vice president at Technology Solutions Company and a manager with Andersen
Consulting.
John D. Loewenberg John D. Loewenberg has been a member of Diamond's board
of directors since October 1996. Mr. Loewenberg is currently managing partner
and a consultant with JDL Enterprises, a consulting firm. Previously Mr.
Loewenberg was an executive vice president and chief operating officer of
Connecticut Mutual, a life insurance company, from May 1995 through 1996. Prior
to joining Connecticut Mutual, Mr. Loewenberg held several senior management
positions with Aetna Life and Casualty and its affiliates. Mr. Loewenberg is a
director of CompuCom Systems, Inc., Sanchez Computer Associates, Inc., and
DocuCorp International, Inc.
Christopher J. Moffitt Christopher J. Moffitt co-founded Diamond in January
1994 and served as Diamond's senior vice president and secretary until July 1,
1999. He has been a member of Diamond's board of directors since January 1994.
From 1988 to 1993, he served as senior vice president of Technology Solutions
Company. Prior to that time, Mr. Moffitt held several consulting positions and
senior technology positions with Arthur Young & Co. a predecessor to Ernst &
Young, LLP, Neiman Marcus and Electronic Data Systems.
John J. Sviokla John J. Sviokla joined us in September 1998 as a partner and
Vice President and became a member of Diamond's board of directors in August
1999. Since April 1, 2000, Dr. Sviokla has been Vice Chairman. Prior to joining
Diamond, Dr. Sviokla was a professor at the Harvard Business School from
October 1986 to August 1998. His pioneering work on Marketspace established
Harvard's first course on electronic commerce. He co-authored the seminal
articles Managing in the Marketspace and Exploiting the Virtual Value Chain,
both appearing in the Harvard Business Review. Dr. Sviokla has authored over 90
articles, cases, and edited books, and has been a consultant to large and small
companies around the world. He has been a guest professor at many universities
including, Kellogg, MIT, The London Business School, the Melbourne Business
School and the Hong Kong Institute of Science and Technology. His current
research and consulting focuses on how to help large companies unlock value in
the new economy.
66
<PAGE>
Arnold R. Weber Mr. Weber has been a member of our board of directors since
November 1999. Mr. Weber has been President Emeritus of Northwestern University
since July 1998 and was its 14th president from 1984 to 1994. From 1995 to
1999, he served as president of the Civic Committee of the Commercial Club of
Chicago, a leading business and civic organization in Chicago. Mr. Weber has
been a member of the faculty at the Graduate School of Business at the
University of Chicago, Stanford University and the Massachusetts Institute of
Technology. Mr. Weber is a trustee of the Museum of Science and Industry, the
Committee for Economic Development, the Aspen Institute and the University of
Notre Dame. He has received honorary degrees from various universities,
including Notre Dame, the University of Colorado, Loyola University of Chicago,
Northwestern University and the University of Illinois. Mr. Weber is a director
of Aon Corporation, John Deere & Company, PepsiCo Inc. and the Tribune Company.
Directors' Meetings and Committees
The board of directors has an Audit Committee which has authority to review
and recommend to the board of directors internal accounting and financial
controls for Diamond and accounting principles and auditing practices and
procedures to be employed in the preparation and review of financial
statements. The Audit Committee was established on February 18, 1997 and met
two times during the fiscal year ended March 31, 2000.
The board of directors also has a Compensation Committee which has authority
to review and recommend to the Chief Executive Officer and the board of
directors policies, practices and procedures relating to the compensation of
managerial employees and the establishment and administration of employee
benefit plans, except for stock option plans. The Compensation Committee was
established on February 18, 1997 and met informally during fiscal 2000. All
decisions regarding managerial employee compensation were reviewed with and
made by the board of directors as a whole. Effective as of May, 2000, the
Compensation Committee consists solely of independent directors. The board of
directors has no Nominating Committee.
The board of directors held four meetings in fiscal 2000 and acted by
unanimous written consent five times. All of the directors attended at least 75
percent of the total meetings held by the board of directors and by the
committees on which they served during fiscal 2000 other than Dr. Sviokla who
attended two of the three meetings held following his election to the board of
directors.
Report of Audit Committee
The Audit Committee of Diamond's board of directors has adopted the Audit
Committee Charter, which is attached to this proxy statement/prospectus as
Annex C. The Audit Committee has furnished the following report:
Report of Audit Committee
In connection with the March 31, 2000 consolidated financial statements, the
audit committee: (1) reviewed and discussed the audited financial statements
with management; (2) discussed with KPMG LLP, the Company's independent public
accountants, the matters required by Statement on Auditing Standards No. 61;
and (3) received and discussed with the KPMG LLP the matters required by
Independence Standards Board Statement No. 1. Based upon these reviews and
discussions, the audit committee recommended to the Board of Directors that the
audited financial statements be included in the Annual Report on Form 10-K
filed with the Securities and Exchange Commission.
Submitted by: Donald R. Caldwell, Chair
Mark L. Gordon
John D. Loewenberg
67
<PAGE>
MANAGEMENT OF DIAMOND
Executive Officers
Our executive officers are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Melvyn E. Bergstein.................. 58 Chairman of the Board of
Directors and Chief Executive
Officer
Adam J. Gutstein..................... 37 President and Director
Javier Rubio(1)...................... 40 President, Europe and Latin
America and Director
Michael J. Connolly(2)............... 39 Chief Operating Officer
Michael E. Mikolajczyk............... 49 Vice Chairman, Secretary and
Director
John J. Sviokla...................... 43 Vice Chairman and Director
Karl E. Bupp......................... 38 Chief Financial Officer and
Treasurer
</TABLE>
--------
(1) Mr. Rubio will become Director and President, Europe and Latin America
upon closing of the contemplated business combination.
(2) Mr. Connolly will become President, North American Operations upon closing
of the contemplated business combination.
See "Election of Directors" on page 64 for complete biographies of our
current directors and nominees.
Michael J. Connolly joined us in May 1995 as a partner and Vice President.
Since July 1999, Mr. Connolly has been managing our Diamond Marketspace
Solutions group. Diamond Marketspace Solutions helps build and operate fully
functioning e-business ventures for Diamond's clients. Effective April 1,
2000, Mr. Connolly assumed the title of chief operating officer. Prior to
joining Diamond, Mr. Connolly was an associate partner with Andersen
Consulting.
Karl E. Bupp co-founded Diamond and joined us in April 1994 as Vice
President of Financial Planning responsible for our internal planning,
analysis and treasury functions. Since July 1998, Mr. Bupp has served as our
Chief Financial Officer and Treasurer. Prior to joining us, Mr. Bupp was the
corporate controller, and director of planning and treasury services for
Technology Solutions Company. From 1985 to 1993, he held various financial
management and analyst positions with MCI Telecommunications Corporation.
Employment Agreements and Certain Other Arrangements
Messrs. Bergstein, Mikolajczyk, Sviokla, Connolly, Gutstein and Bupp have
employment agreements with Diamond that provide for annual salaries and
bonuses that are determined in accordance with the Second Amended and Restated
Partners Operating Agreement dated April 1, 1996. These employment agreements
are terminable at any time by either party and contain non-competition
provisions, which last for 18 months following cessation of employment with
Diamond. In addition, the employment agreements prohibit employees from
disclosing any of Diamond's confidential information and require them to
disclose to Diamond, and to grant ownership to Diamond all ideas, inventions
and business plans developed during the course of employment to the extent
they relate to the business of Diamond, result from work performed for Diamond
or result from use of any of Diamond's property.
68
<PAGE>
Executive Compensation
The following table sets forth certain information concerning compensation
paid or accrued in fiscal years 2000, 1999 and 1998 with respect to Diamond's
Chief Executive Officer and the four other executive officers who were most
highly compensated in fiscal 2000 (collectively, the "Named Officers"):
Summary Compensation Table(1)
<TABLE>
<CAPTION>
Long Term
Compensation
Awards/
Other Securities All Other
Name and Principal Fiscal Annual Underlying Compensation
Position Year Salary Bonus Compensation Options (2)
------------------ ------ -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Melvyn E. Bergstein..... 2000 $525,000 $252,000 -- 30,600 $4,902
Chairman & CEO 1999 500,000 225,000 $2,297 -- 8,550
1998 506,250 300,000 -- 71,406 8,550
Michael E. Mikolajczyk.. 2000 425,000 204,000 1,659 28,800 1,710
Vice Chairman & 1999 400,000 180,000 -- -- 3,306
Secretary 1998 400,000 240,000 -- 55,444 3,306
John J. Sviokla......... 2000 375,500 180,000 -- 45,400 1,140
Vice Chairman 1999 204,219 136,100 -- 114,001 646
Adam J. Gutstein........ 2000 400,000 192,000 -- 42,900 1,026
President 1999 350,000 157,500 -- -- 1,254
1998 350,000 210,000 -- 47,215 1,026
Karl E. Bupp............ 2000 275,000 132,000 1,659 18,601 1,026
Chief Financial Officer 1999 250,000 112,500 -- 35,642 941
and Treasurer 1998 225,000 90,000 -- -- 1,254
</TABLE>
--------
(1) The compensation described in this table does not include (i) medical,
group life insurance or other benefits received by the Named Officers which
are available generally to all salaried employees of Diamond or (ii)
certain perquisites and other personal benefits, securities, or property
received by the Named Officers which do not in the aggregate exceed the
lesser of $50,000 or 10% of the Named Officer's salary during the fiscal
year.
(2) Represents the excess of the group life insurance premium paid in the
respective fiscal year.
69
<PAGE>
Stock Options
The following table provides information on stock options granted by Diamond
in fiscal 2000 to the Named Officers. All Diamond option grants depicted below
were made pursuant to the Diamond's 1998 Equity Incentive Plan.
Options Granted to Named Officers During Fiscal 2000
<TABLE>
<CAPTION>
Percent of
Total
Number of Options Realizable Value at Assumed
Shares Granted to Stock Price Appreciation
Underlying Employees Exercise for Option Terms (1)
Options in Fiscal Price Expiration ----------------------------
Name Granted Year Per Share Date 5% 10%
---- ---------- ---------- --------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Melvyn E. Bergstein..... 30,600 1% $13.53 4/01/06 $ 168,547 $ 392,786
Michael E. Mikolajczyk.. 28,800 1% $13.53 4/01/06 158,632 369,681
John J. Sviokla......... 25,000 1% $52.25 11/12/06 112,365 261,857
20,400 0% $13.53 4/01/06
Adam J. Gutstein........ 42,900 1% $13.53 4/01/06 236,296 550,671
Karl E. Bupp............ 18,601 0% $13.53 4/01/06 102,456 238,765
</TABLE>
--------
(1) The amounts shown are calculated assuming that the market value of the
common stock issuable upon exercise of the option is equal to the exercise
price per share as of the date of grant. The dollar amounts under these
columns assume a compounded annual market price increase for the underlying
shares of common stock from the date of grant to the end of the option term
of 5% and 10%, respectively. This format is prescribed by the Commission
and is not intended to forecast future appreciation of shares of the common
stock. The actual value, if any, the Named Officer will realize will depend
on the excess of the market price for shares of the common stock on the
date the option is exercised over the exercise price. Accordingly, there is
no assurance that the above value realized by a Named Officer will be at or
near the value estimated above.
The following table sets forth information concerning options exercised by
the Named Officers during fiscal 2000 and the number and the hypothetical value
of certain unexercised options of Diamond held by the Named Officers as of
March 31, 2000. This table is presented solely for purposes of complying with
the rules of the Commission and does not necessarily reflect the amounts the
Named Officers will actually receive upon any sale of the shares acquired upon
exercise of the options.
Options Exercised by Named Officers During Fiscal 2000
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In the Money Options
Shares Options at March 31, 2000 as of March 31, 2000
Acquired ----------------------------- -----------------------
on Value Un- Un-
Name Exercise Realized Exercisable Exercisable Exercisable Exercisable
---- -------- ---------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Melvyn E. Bergstein..... -- -- 391 101,615 $ 20,117 $5,251,654
Michael E. Mikolajczyk.. -- -- 12,671 102,510 816,400 5,541,754
John J. Sviokla......... 40,230 $2,401,581 -- 143,678 -- 6,991,543
Adam J. Gutstein........ 12,622 531,449 -- 108,678 -- 5,839,536
Karl E. Bupp............ 941 59,819 -- 53,302 -- 2,984,002
</TABLE>
70
<PAGE>
Compensation of Directors
Directors receive no cash compensation for their services as directors,
except for reimbursement of expenses incurred in connection with attending
meetings of the board of directors and its committees. Directors are granted
options to purchase Class A Common Stock of Diamond at the discretion of the
board of directors. The exercise price of each option is equal to the fair
market value of the shares on the date of grant. The options vest over periods
of three to five years and have terms ranging from five years to seven years.
The following table provides information on stock options granted to directors
in fiscal 2000.
Options Granted to Directors During Fiscal 2000
<TABLE>
<CAPTION>
Potential Realizable
Value at
Percent of Assumed Annual Rates
Number of Total of Stock Price
Shares Options Appreciation For
Underlying Granted to Exercise Option Terms (1)
Options Directors in Price Per Expiration --------------------
Name Granted Fiscal Year Share Date 5% 10%
---- ---------- ------------ --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Edward R. Anderson...... 12,600 0% $17.70 8/01/03 $ 90,792 $ 211,583
Donald R. Caldwell...... 30,000 1% $17.70 8/01/04 216,170 503,796
Mark L. Gordon.......... 15,000 0% $17.70 8/01/02 108,085 251,884
John D. Loewenberg...... 5,100 0% $17.70 8/01/02 36,749 85,641
Arnold R. Weber......... 22,500 0% $27.97 10/07/03 256,198 597,051
</TABLE>
--------
(1) The amounts shown are calculated assuming that the market value of the
common stock issuable upon exercise of the option is equal to the exercise
price per share as of the date of grant. The dollar amounts under these
columns assume a compounded annual market price increase for the underlying
shares of common stock from the date of grant to the end of the option term
of 5% and 10%, respectively. This format is prescribed by the Commission
and is not intended to forecast future appreciation of shares of the common
stock. The actual value, if any, a director will realize will depend on the
excess of the market price for shares of the common stock on the date the
option is exercised over the exercise price. Accordingly, there is no
assurance that the value realized by a director will be at or near the
value estimated above.
Report of the Compensation Committee on Executive Compensation
The Compensation Committee of Diamond's board of directors (the
"Compensation Committee") was established on February 18, 1997 and did not have
any formal meetings to consider executive officer compensation for the fiscal
year ended March 31, 2000. The functions of the Compensation Committee were
carried out by the full board of directors. The board of directors has
furnished the following report on executive compensation:
Report on Executive Compensation
The compensation of the Named Officers and all other officers who have been
promoted as a "partner" of Diamond was determined in accordance with the
Partners' Operating Agreement and the Partners' Compensation Program. Under
these agreements, officers' compensation is approved by Diamond's Management
and Management Compensation Committees, each a non-board committee composed of
partners and established under the Partners' Operating Agreement and by the
board of directors. The purpose and design of this structure is to provide a
combination of base salary, bonus and equity to Diamond's partners that will
link individual rewards to Diamond's success, motivate teamwork, encourage the
partners to maintain equity interests in Diamond and reward individual
performance.
Base salaries are established on the basis of the partners' experience and
contributions to Diamond. Bonuses are based on Diamond's achievement of certain
financial targets established in its annual business plan. The Partners'
Compensation Program provides that the bonus will be paid in cash. The Named
Officers,
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as partners, share in a bonus pool funded pursuant to a formula that first
provides for a return on revenue and for bonuses to non-partner employees.
Target bonuses for all partners, as a percentage of base salary, are
established prior to the fiscal year in which they take effect.
CEO Compensation
Mr. Bergstein's salary for the year ended March 31, 2000 was $525,000, plus
a bonus of $252,000 as compared to $500,000, plus a $225,000 bonus, for the
prior fiscal year. Mr. Bergstein's compensation was based on his leadership of
Diamond; Diamond's dramatic growth since being founded in early 1994; his
contributions to recruiting key employees, directors and advisory board
members; and his contribution to the revenues of Diamond by attracting
significant clients and by actively participating in serving Diamond's clients.
As with all other partners, Mr. Bergstein's compensation as Chief Executive
Officer is subject to the approval of the Management Committee, the Management
Compensation Committee, the partners and the board of directors. The board of
directors believes his compensation to be reasonable.
Policy on Qualifying Compensation
Section 162(m) of the Code, provides that publicly held companies may not
deduct in any taxable year compensation in excess of one million dollars paid
to any of the individuals named in the Summary Compensation Table that is not
"performance-based" as defined in Section 162(m). In order for incentive
compensation to qualify as "performance-based" compensation under Section
162(m), Diamond's discretion to grant awards must be strictly limited. The
board of directors believes that the benefit to Diamond of retaining the
ability to exercise discretion under Diamond's incentive compensation plans
outweighs the limited risk of loss of tax deductions under Section 162(m).
Therefore, Diamond does not currently intend to seek to qualify its incentive
compensation plans under Section 162(m).
By the Board of Directors:
Melvyn E. Bergstein
Edward R. Anderson
Donald R. Caldwell
Mark L. Gordon
Adam J. Gutstein
Alan C. Kay
John D. Loewenberg
Michael E. Mikolajczyk
Christopher J. Moffitt
John J. Sviokla
Arnold R. Weber
Compensation Committee Interlocks and Insider Participation
The Compensation Committee currently consists of Mr. Anderson, Mr. Caldwell
and Mr. Weber. None of the Named Officers of Diamond has served on the board of
directors or on the compensation committee of any other entity whose officers
served either on the board of directors or on the Compensation Committee of
Diamond. The Compensation Committee, however, was established on February 18,
1997 and did not have any formal meetings to consider executive officer
compensation for the fiscal year ended March 31, 2000. For fiscal 2000,
recommendations concerning the aggregate compensation of all of Diamond's
Partners (including its Named Officers) were made to the board of directors by
Diamond's Chief Executive Officer and Diamond's Management Committee, and
decisions regarding such compensation were made by the full board of directors.
Under the terms of the Partners' Operating Agreement, allocations among
Diamond's Partners (including its executive officers) are made by the
Management Committee upon approval of the aggregate amount of such compensation
by the board of directors and the approval of the actual allocations by at
least seventy percent of Diamond's Partners.
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AMENDMENTS TO DIAMOND'S RESTATED CERTIFICATE OF INCORPORATION
The Diamond board of directors has determined that in connection with the
Cluster business combination it is necessary and in the best interests of
Diamond's stockholders to amend Diamond's current restated certificate of
incorporation to effect the following:
. to change Diamond's name to "DiamondCluster International, Inc.";
. to increase the aggregate authorized shares of Class A Common Stock to
100,000,000 and
. to permit additional classes of persons to hold our Class B Common Stock.
Name Change
Both Diamond and Cluster have invested significant efforts in building name
recognition and client acceptance of their names. As a condition to the
consummation of the business combination, the name of the combined entity must
contain both Diamond's and Cluster's name. In accordance with this requirement
and in order to capitalize on the name recognition of both Diamond and Cluster,
Diamond's board of directors has proposed that Diamond change its name to
"DiamondCluster International, Inc."
The Diamond board of directors has approved the amendment. The Board
believes that this name change will transfer market acceptance of Cluster to
Diamond and be important to the retention and attraction of clients. In order
to amend Diamond's restated certificate of incorporation, holders of a majority
of shares of the Class A Common Stock and the Class B Common Stock, voting
together as a single class, must approve the amendment. This amendment will
become effective upon filing of an amendment to Diamond's restated certificate
of incorporation with the Secretary of State of Delaware.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF THE NAME
CHANGE OF DIAMOND TO "DIAMONDCLUSTER INTERNATIONAL, INC."
Increase in Authorized Class A Common Stock
As of September 30, 2000, the total number of authorized shares of Class A
Common Stock of Diamond is 40,000,000 of which 21,661,627 shares are issued.
However, Class B Common Stock may be converted to Class A Common Stock which
could result an increase in the number of outstanding shares of Class A Common
Stock that may exceed the number of shares authorized.
As of September 30, 2000 there were 2,897,566 shares of Class B Common Stock
issued and 9,956,215 options outstanding to purchase Class A and Class B Common
Stock. Upon the consummation of the business combination, Diamond will issue an
additional 6,315,377 shares of Class B Common Stock and approximately 7,510,000
Class B options to Cluster stockholders and employees. There may not be enough
authorized shares of Class A Common Stock available if all outstanding shares
of Class B Common Stock and Class B options are converted to shares of Class A
Common Stock. An increase in the authorized Class A Common Stock to 100,000,000
will accommodate the possibility that all Class B Common Stock and outstanding
Class B options could be converted to Class A Common Stock.
In addition, even if the currently authorized shares of Class A Common Stock
are sufficient to accommodate the conversion of all outstanding shares of Class
B Common Stock and Class B options, an increase in the authorized Class A
Common Stock to 100,000,000 is still necessary to permit Diamond to issue stock
in connection with future acquisitions and to issue options pursuant to
Diamond's existing and newly created stock option plans.
The Diamond board of directors has approved the amendment. In order to amend
Diamond's restated certificate of incorporation, holders of a majority of
shares of the Class A Common Stock and the Class B Common Stock, voting
together as a single class, must approve the amendment. This amendment will
become effective upon filing of an amendment to Diamond's restated certificate
of incorporation with the Secretary of State of Delaware.
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THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF THE
INCREASE IN AUTHORIZED CLASS A COMMON STOCK OF DIAMOND.
Change in Permitted Holders of Class B Common Stock
As described in "Material Provisions of the Purchase Agreement" on page 28
of this proxy statement/prospectus, stockholders of Cluster will receive
6,315,377 shares of Diamond Class B Common Stock in connection with the
business combination. However, the Cluster stockholders, which are corporate
entities, may not hold shares of Diamond Class B Common Stock, which currently
may only be held by Diamond employees.
Diamond's restated certificate of incorporation currently states that in the
event that Diamond's Class B Common Stock is not owned beneficially or of
record by a permitted holder, or if a beneficial or record owner of a share of
Class B Common Stock ceases to be a permitted holder, then such share of Class
B Common Stock automatically converts to one fully paid and non-assessable
share of Class A Common Stock. A "permitted holder" of Class B Common Stock is
Diamond or a person who is an employee of Diamond or any of Diamond's majority-
owned subsidiaries.
In addition, the definitions, of permitted holders constrains the Diamond
Partners from engaging in normal estate planning activities while maintaining
their ownership of Class B Common Stock.
In order to issue Diamond Class B Common Shares to the Cluster stockholders
in connection with the business combination and to permit a broader array of
alternatives in the ownership of Class B Common Stock, it is necessary to amend
Diamond's restated certificate of incorporation to revise the definition of
permitted holders to include:
(i) any corporation, company, limited liability company, partnership or
limited partnership controlled by an employee or group of employees of
Diamond or of any of Diamond's majority-owned subsidiaries or
(ii) any trust for the primary benefit of an employee of Diamond or any
of its majority-owned subsidiaries, or for the primary benefit of the
employee's spouse, lineal ancestors, or lineal descendants.
The term "control" shall mean the possession, direct or indirect, of the power
to direct or cause the direction of the management and policies of the entity
through ownership of voting securities, by contract, or otherwise. Beneficial
ownership of shares of Class B Common Stock shall be determined as set forth in
Rule 13d-3 under the Securities Exchange Act of 1934, as amended.
The Diamond board of directors has approved the amendment. In order to amend
Diamond's restated certificate of incorporation, holders of a majority of
shares of the Class A Common Stock and the Class B Common Stock, voting
together as a single class, must approve the amendment. This amendment will
become effective upon filing of an amendment to Diamond's restated certificate
of incorporation with the Secretary of State of Delaware.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF THE
CHANGE IN PERMITTED HOLDERS OF CLASS B COMMON STOCK.
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<PAGE>
ADOPTION OF THE DIAMONDCLUSTER 2000 STOCK OPTION PLAN
Our board of directors has determined that it is in the interest of Diamond
to adopt a stock option plan that permits the grant of options to employees of
Diamond and Cluster specifically in connection with the business combination.
See "Material Provisions of the Purchase Agreement".
In connection with the consummation of the Cluster business combination,
Diamond will issue options to Cluster's employees to purchase up to
approximately 5,510,000 shares of Class B Common Stock of Diamond. In addition,
options to purchase approximately 2,000,000 shares of Class B Common Stock will
be issued to Cluster employees in connection with a roll-over of existing
Cluster options. The Diamond board of directors has decided to grant up to
500,000 options to existing employees of Diamond in connection with the
business combination. All of these options would be granted pursuant to the
DiamondCluster International, Inc. 2000 Stock Option Plan (the "2000 Plan"),
which has been approved by the board of directors and is being submitted to the
stockholders of Diamond for approval.
Assuming a quorum is present, the affirmative vote of the holders of a
majority of Diamond's common stock present, whether in person or represented by
proxy, and voting will be required to approve the adoption of the 2000 Plan.
The 2000 Plan will become effective on the date it is approved by the
stockholders.
Summary of the 2000 Plan
The following summary of the 2000 Plan is qualified in its entirety by
reference to the full text of the 2000 Plan, which is attached to this proxy
statement/prospectus as Annex D.
The primary purpose of the 2000 Plan is to promote the long-term success of
Diamond and its stockholders by strengthening Diamond's ability to attract and
retain highly competent executives and other selected employees and to provide
a means to encourage stock ownership and proprietary interest in Diamond.
The persons eligible to receive options under the 2000 Plan are the
employees of Cluster identified in the purchase agreement and all Diamond
employees at the time of the closing of the business combination.
Under the 2000 Plan, participants may receive stock options, stock
appreciation rights ("SARs") or stock awards, when and as approved by the
management committee. Awards may be granted singly, in combination, in tandem
or in combination or in tandem with, in replacement of, as alternatives to or
as the payment form for grants or rights under any other compensation plan or
individual contract or agreement of Diamond, including the plan of any acquired
entity.
Stock Options. A stock option represents a right to purchase a specified
number of shares of the Class B Common Stock during a specified period as
determined by the management committee. The purchase price per share for each
option shall be as specified by the management committee and may be less than
the fair market value on the date of the grant, unless the grant is in the form
of an incentive stock option ("ISO"). A stock option may be in the form of a
nonqualified stock option or an ISO. The price at which shares may be purchased
under a stock option shall be paid in full by the holder of the stock option at
the time of exercise in cash or pursuant to such other method permitted by the
management committee, including tendering shares of Class B Common Stock,
third-party exercise transactions or any combination of such methods.
SARs. An SAR generally represents a right to receive a payment, in cash
and/or shares, equal to the excess of the fair market value of a specified
number of shares of Class B Common Stock on the date the SAR is exercised over
the fair market value on the date the SAR was granted, as set forth in the
applicable award agreement. "Fair market value," for all purposes of the 2000
Plan, shall mean the average of the closing price of a share of Class A Common
Stock on the Nasdaq National Market for the ten trading days immediately
preceding the date of the grant.
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Stock Awards. A stock award is a grant made or denominated in shares of
Class B Common Stock or units equivalent to shares of Class B Common Stock. All
or part of any stock award may be subject to conditions and restrictions
established by the management committee and set forth in the applicable award
agreement, which may include, but is not limited to, continuous service with
Diamond or the achievement of performance goals.
The management committee may provide that any awards under the 2000 Plan
earn dividends or dividend equivalents. Such dividends or dividend equivalents
may be paid currently or may be credited to a participant's account. Any
crediting of dividends or dividend equivalents may be subject to such
restrictions and conditions as the management committee may establish,
including reinvestment in additional shares or share equivalents.
The aggregate number of shares of Class B Common Stock which may be
transferred to participants under the 2000 Plan is 8,500,000. The aggregate
number of shares that may be granted as ISOs shall be 8,500,000. Unless
otherwise determined by the Committee, the aggregate number of shares that may
be covered by awards granted to any single individual shall be 150,000.
Shares subject to awards under the 2000 Plan which expire, terminate or are
canceled prior to exercise, or in the case of stock awards, do not vest, shall
thereafter be available for the granting of other awards under the 2000 Plan.
In the event of any stock dividend, stock split, combination or exchange of
shares, merger, consolidation, spin-off, recapitalization or other distribution
(other than normal cash dividends) of Company assets to stockholders or any
other change affecting the shares of Class B Common Stock or share price, the
management committee may, but is not required to, adjust (i) the aggregate
number of shares of Class B Common Stock issuable under the 2000 Plan, (ii)
each outstanding award made under the 2000 Plan and (iii) the exercise price
per share for any outstanding stock options, SARs or similar awards under the
2000 Plan.
Payment of awards may be in the form of cash, shares of Class B Common
Stock, other awards or combinations thereof as the management committee shall
determine at the time of the grant, and with such restrictions as it may
impose. The management committee may also require or permit participants to
elect to defer the issuance of shares or the settlement of awards in cash under
such rules and procedures as it may establish under the 2000 Plan. It also may
provide that deferred settlements include the payment or crediting of interest
on the deferral amounts, or the payment or crediting of dividend equivalents
where amounts are denominated in share equivalents.
Awards granted under the 2000 Plan shall not be transferable or assignable
other than: (i) by will or the laws of descent and distribution, (ii) by gift
or other transfer of an award to any trust or estate in which the original
award recipient or such recipient's spouse or other immediate relative has a
substantial beneficial interest, or to a spouse or other immediate relative,
provided that any such transfer is permitted by Rule 16b-3 of the Exchange Act
as in effect when the transfer occurs and the board of directors does not
rescind this provision prior to such transfer, or (iii) pursuant to a domestic
relations order (as defined by the Internal Revenue Code of 1986, as amended
(the "Code")).
The 2000 Plan may be amended by the management committee as it deems
necessary or appropriate to better achieve the purposes of the 2000 Plan,
except that no such amendment shall be made without the approval of Diamond's
stockholders if such amendment would increase the maximum number of shares (as
adjusted pursuant to 2000 Plan provisions) issuable under the 2000 Plan. The
board of directors may suspend the 2000 Plan or terminate the 2000 Plan at any
time; provided, that no such action shall adversely affect any outstanding
benefit.
Federal Income Tax Consequences. In general, under the Code as presently in
effect, a participant will not be deemed to receive any income for federal
income tax purposes at the time an option or SAR is granted or a restricted
stock award is made, nor will Diamond be entitled to a tax deduction at that
time. However, when
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any part of an option or SAR is exercised, when restrictions on restricted
stock lapse, or when an unrestricted stock award is made, the U.S. federal
income tax consequences may be summarized as follows:
1. In the case of an exercise of a nonqualified option, the participant
will recognize ordinary income in an amount equal to the difference between
the option price and the fair market value on the exercise date.
2. In the case of an exercise of an SAR, the participant will recognize
ordinary income on the exercise date in an amount equal to any cash and
unrestricted Class B Common Stock received, at fair market value on the
exercise date.
3. In the case of an exercise of an option or SAR payable in restricted
stock, or in the case of an award of restricted stock, the immediate
federal income tax effect for the recipient will depend on the nature of
the restrictions. Generally, the value of the Class B Common Stock will not
be taxable to the recipient as ordinary income until the year in which his
or her interest in the Class B Common Stock is freely transferable or is no
longer subject to a substantial risk of forfeiture. However, the recipient
may elect to recognize income when the Class B Common Stock is received,
rather than when his or her interest in the Class B Common Stock is freely
transferable or is no longer subject to a substantial risk of forfeiture.
If the recipient makes this election, the amount taxed to the recipient as
ordinary income is determined as of the date of receipt of the restricted
stock.
4. In the case of an ISO there is no tax liability at the time of
exercise. However, the excess of the fair market value of the stock on the
exercise date over the option price is included in the participant's income
for purposes of the alternative minimum tax. If no disposition of the ISO
stock is made before the later of one year from the date of exercise or two
years from the date the ISO is granted, the participant will realize a
long-term capital gain or loss upon a sale of the stock equal to the
difference between the option price and the sale price. If the stock is not
held for the required period, ordinary income tax treatment will generally
apply to the amount of any gain at sale or exercise, whichever is less, and
the balance of any gain or loss will be treated as capital gain or loss
(long-term or short-term, depending on whether the shares have been held
for more than one year).
5. Upon the exercise of a nonqualified option or SAR, the award of stock
or the recognition of income on restricted stock, Diamond will generally be
allowed an income tax deduction equal to the ordinary income recognized by
the employee. Diamond does not receive an income tax deduction as a result
of the exercise of an ISO, provided that the ISO stock is held for the
required period described above. When a cash payment is made pursuant to
the award, the recipient will recognize the amount of the cash payment as
ordinary income, and Diamond will generally be entitled to a deduction in
the same amount.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF THE
DIAMOND 2000 STOCK OPTION PLAN
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ADOPTION OF AMENDMENT TO DIAMOND'S 1998 EQUITY INCENTIVE PLAN
The proposed amendment to Diamond's 1998 Equity Incentive Plan would
increase the number of shares of Class B Common Stock subject to the plan from
6,800,000 to 13,000,000 shares.
Diamond's board of directors has determined that in order to give Diamond
the ongoing flexibility to attract and retain the management and employee
talent necessary for our continued success, selected directors, partners and
officers and employees should be granted equity-based incentive compensation
awards.
In February, 1998 Diamond's board of directors unanimously approved the 1998
Equity Incentive Plan (the "1998 Plan") pursuant to which our management
committee may grant incentive awards in the form of stock options, stock
appreciation rights and stock. As amended, the 1998 Plan authorizes 13,000,000
shares of Class B Common Stock to be issuable or transferable pursuant to
awards.
In September, 2000, Diamond's board of directors unanimously approved,
subject to stockholder approval, the proposed increase in shares of Class B
Common Stock subject to the 1998 Plan.
Assuming a quorum is present, the affirmative vote of the holders of a
majority of Diamond's common stock present, whether in person or represented by
proxy, and voting will be required to approve the proposed amendment to the
1998 Plan. The amendment will become effective on the date it is approved by
the stockholders.
Summary of the 1998 Plan
The following summary of the 1998 Plan is qualified in its entirety by
reference to the full text of the 1998 Plan as amended, which is attached to
this proxy statement/prospectus as Annex E.
The primary purpose of the 1998 Plan is to promote the long-term success of
Diamond and its stockholders by strengthening Diamond's ability to attract and
retain highly competent executives and other selected employees and to provide
a means to encourage stock ownership and proprietary interest in Diamond.
Any employee of (i) Diamond, (ii) any entity that is directly or indirectly
controlled by Diamond or (iii) any entity in which Diamond has a significant
equity interest is eligible to receive one or more awards under the 1998 Plan.
Non-employee directors and bona fide third party consultants of Diamond are
considered "employees" eligible to receive awards, but only for purposes of
nonqualified stock options. As of September 30, 2000, Diamond had 800
employees.
Under the 1998 Plan, participants may receive SAR's or stock awards when and
as approved by the management committee. Awards may be granted singly, in
combination, in tandem or in combination or in tandem with, in replacement of,
as alternatives to or as the payment form for grants or rights under any other
compensation plan or individual contract or agreement of Diamond, including the
plan of any acquired entity.
Stock Options. A stock option represents a right to purchase a specified
number of shares of the Class B Common Stock during a specified period as
determined by the management committee. The purchase price per share for each
stock option shall be not less than 100% of fair market value of Class A Common
Stock on the date of the grant, subject to certain exceptions. A stock option
may be in the form of an incentive stock option ("ISO") which complies with
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") or a
nonqualified stock option. The price at which shares may be purchased under a
stock option shall be paid in full by the holder of the stock option at the
time of exercise in cash or pursuant to such other method permitted by the
management committee, including tendering shares of Class B Common Stock,
third-party exercise transactions or any combination of such methods.
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SARs. An SAR generally represents a right to receive a payment, in cash
and/or shares, equal to the excess of the fair market value of a specified
number of shares of Class B Common Stock on the date the SAR is exercised over
the fair market value on the date the SAR was granted, as set forth in the
applicable award agreement. "Fair market value," for all purposes of the 1998
Plan, shall mean the average of the closing price of a share of Class A Common
Stock on the Nasdaq National Market for the ten trading days immediately
preceding the date of the grant.
Stock Awards. A stock award is a grant made or denominated in shares of
Class B Common Stock or units equivalent to shares of Class B Common Stock. All
or part of any stock award may be subject to conditions and restrictions
established by the management committee and set forth in the applicable award
agreement, which may include, but is not limited to, continuous service with
Diamond or the achievement of performance goals.
The management committee may provide that any awards under the 1998 Plan
earn dividends or dividend equivalents. Such dividends or dividend equivalents
may be paid currently or may be credited to a participant's account. Any
crediting of dividends or dividend equivalents may be subject to such
restrictions and conditions as the management committee may establish,
including reinvestment in additional shares or share equivalents.
The aggregate number of shares of Class B Common Stock which may be
transferred to participants under the 1998 Plan, as proposed to be amended, is
13,000,000, plus any shares represented by awards made pursuant to or taken
into account under the 1994 Stock Option Plan that have been forfeited,
expired, canceled or settled without issuance of shares.
The aggregate number of shares of Class B Common Stock that may be covered
by awards granted to any single individual under the 1998 Plan shall not exceed
150,000 shares per fiscal year of Diamond. The aggregate number of shares of
Class B Common Stock that may be granted in the form of ISOs shall be 6,800,000
shares (13,000,000 shares if the proposed amendment is adopted). Shares subject
to awards under the 1998 Plan which expire, terminate or are canceled prior to
exercise, or in the case of stock awards, do not vest, shall thereafter be
available for the granting of other awards under the 1998 Plan.
In the event of any stock dividend, stock split, combination or exchange of
shares, merger, consolidation, spin-off, recapitalization or other distribution
(other than normal cash dividends) of Company assets to stockholders or any
other change affecting the shares of Class B Common Stock or share price, the
management committee may, but is not required to, adjust (i) the aggregate
number of shares of Class B Common Stock issuable under the 1998 Plan, (ii)
each outstanding award made under the 1998 Plan and (iii) the exercise price
per share for any outstanding stock options, SARs or similar awards under the
1998 Plan.
Payment of awards may be in the form of cash, shares of Class B Common
Stock, other awards or combinations thereof as the management committee shall
determine at the time of the grant, and with such restrictions as it may
impose. The management committee may also require or permit participants to
elect to defer the issuance of shares or the settlement of awards in cash under
such rules and procedures as it may establish under the 1998 Plan. It also may
provide that deferred settlements include the payment or crediting of interest
on the deferral amounts, or the payment or crediting of dividend equivalents
where amounts are denominated in share equivalents.
Awards granted under the 1998 Plan shall not be transferable or assignable
other than: (i) by will or the laws of descent and distribution, (ii) by gift
or other transfer of an award to any trust or estate in which the original
award recipient or such recipient's spouse or other immediate relative has a
substantial beneficial interest, or to a spouse or other immediate relative,
provided that any such transfer is permitted by Rule 16b-3 of the Exchange Act
as in effect when the transfer occurs and the board of directors does not
rescind this provision prior to such transfer, or (iii) pursuant to a domestic
relations order (as defined by the Code).
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The 1998 Plan may be amended by the management committee as it deems
necessary or appropriate to better achieve the purposes of the 1998 Plan,
except that no such amendment shall be made without the approval of Diamond's
stockholders if such amendment would increase the maximum number of shares (as
adjusted pursuant to 1998 Plan provisions) issuable under the 1998 Plan. The
board of directors may suspend the 1998 Plan or terminate the 1998 Plan at any
time; provided, that no such action shall adversely affect any outstanding
benefit.
Federal Income Tax Consequences. In general, under the Code as presently in
effect, a participant will not be deemed to receive any income for federal
income tax purposes at the time an option or SAR is granted or a restricted
stock award is made, nor will Diamond be entitled to a tax deduction at that
time. However, when any part of an option or SAR is exercised, when
restrictions on restricted stock lapse, or when an unrestricted stock award is
made, the federal income tax consequences may be summarized as follows:
1. In the case of an exercise of a nonqualified option, the participant
will recognize ordinary income in an amount equal to the difference between
the option price and the fair market value on the exercise date.
2. In the case of an exercise of an SAR, the participant will recognize
ordinary income on the exercise date in an amount equal to any cash and
unrestricted Class B Common Stock received, at fair market value on the
exercise date.
3. In the case of an exercise of an option or SAR payable in restricted
stock, or in the case of an award of restricted stock, the immediate
federal income tax effect for the recipient will depend on the nature of
the restrictions. Generally, the value of the Class B Common Stock will not
be taxable to the recipient as ordinary income until the year in which his
or her interest in the Class B Common Stock is freely transferable or is no
longer subject to a substantial risk of forfeiture. However, the recipient
may elect to recognize income when the Class B Common Stock is received,
rather than when his or her interest in the Class B Common Stock is freely
transferable or is no longer subject to a substantial risk of forfeiture.
If the recipient makes this election, the amount taxed to the recipient as
ordinary income is determined as of the date of receipt of the restricted
stock.
4. In the case of an ISO there is no tax liability at the time of
exercise. However, the excess of the fair market value on the exercise date
over the option price is included in the participant's income for purposes
of the alternative minimum tax. If no disposition of the ISO stock is made
before the later of one year from the date of exercise or two years from
the date the ISO is granted, the participant will realize a long-term
capital gain or loss upon a sale of the stock equal to the difference
between the option price and the sale price. If the stock is not held for
the required period, ordinary income tax treatment will generally apply to
the amount of any gain at sale or exercise, whichever is less, and the
balance of any gain or loss will be treated as capital gain or loss (long-
term or short-term, depending on whether the shares have been held for more
than one year).
5. Upon the exercise of a nonqualified option or SAR, the award of stock
or the recognition of income on restricted stock, Diamond will generally be
allowed an income tax deduction equal to the ordinary income recognized by
the employee. Diamond does not receive an income tax deduction as a result
of the exercise of an ISO, provided that the ISO stock is held for the
required period as described above. When a cash payment is made pursuant to
the award, the recipient will recognize the amount of the cash payment as
ordinary income, and Diamond will generally be entitled to a deduction in
the same amount.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF THE
AMENDMENT TO DIAMOND'S 1998 EQUITY INCENTIVE PLAN.
80
<PAGE>
PRINCIPAL STOCKHOLDERS
Diamond
The following table sets forth certain information as of August 31, 2000
regarding the beneficial ownership of Diamond's common stock for:
. each person who is known to Diamond to be the beneficial owner of more
than five percent of the Class A Common Stock;
. each person who is known to Diamond to be the beneficial owner of more
than five percent of the Class B Common Stock;
. Diamond's directors and nominees;
. the Named Officers; and
. all executive officers and directors as a group.
Beneficial ownership of Class A Common Stock and Class B Common Stock has
been determined for this purpose in accordance with Rules 13d-3 and 13d-5 of
the Securities Exchange Act of 1934, as amended. Accordingly, the amounts in
the table do not purport to represent beneficial ownership for any purpose
other than compliance with Securities and Exchange Commission reporting
requirements. Further, beneficial ownership as determined in this manner does
not necessarily bear on the economic incidence of ownership of Class A Common
Stock or Class B Common Stock.
Amount and Nature of Beneficial Ownership
<TABLE>
<CAPTION>
Number of Percent of
Name and Address Class(1) Shares Class(2)
---------------- -------- --------- ----------
<S> <C> <C> <C>
Melvyn E. Bergstein, individually(3,4)............ Class A 187,932 **
Class B 487,720 17.0
Melvyn E. Bergstein, as proxyholder(5)............ Class A -- --
Class B 2,375,271 83.4
Navallier & Associates Inc.(6).................... Class A 1,644,918 7.6
One East Liberty
Reno, NV 89501
Putnam Investment Management, Inc.(6)............. Class A 1,229,850 5.7
One Post Office Square
Boston, MA 02110
Pilgrim Baxter & Associates, Ltd.(6).............. Class A 1,136,050 5.3
825 Duportail Road
Wayne, PA 19087
Karl E. Bupp(3,5,7)............................... Class A 12,947 **
Class B 97,559 3.4
Michael J. Connolly(3,5,8)........................ Class A -- --
Class B 18,900 **
Adam J. Gutstein(3,5,9)........................... Class A 16,140 **
Class B 152,208 5.0
Michael E. Mikolajczyk(3,5,10).................... Class A 5,682 **
Class B 460,367 16.0
Javier Rubio(5,11)................................ Class A -- --
Class B -- --
John J. Sviokla(3,5,12)........................... Class A -- --
Class B 26,750 **
Edward R. Anderson(13)............................ Class A 17,960 **
Class B -- --
Donald R. Caldwell(13)............................ Class A 67,275 **
Class B -- --
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
Number of Percent of
Name and Address Class(1) Shares Class(2)
---------------- -------- --------- ----------
<S> <C> <C> <C>
Mark L. Gordon(13).............................. Class A 19,500 **
Class B -- --
Alan Kay(14).................................... Class A 92,002 **
Class B -- --
John D. Loewenberg(15).......................... Class A 28,350 **
Class B -- --
Christopher J. Moffitt.......................... Class A 187,105 **
Class B -- --
Arnold R. Weber(13)............................. Class A 7,500 **
Class B -- --
All executive officers and directors as a group
(13 persons)(5,16)............................. Class A 642,393 2.9
Class B 2,945,131 100.0
</TABLE>
--------
** Less than 1% of the class outstanding
(1) In the event that any share of Class B Common is transferred to any party
other than a "Permitted Holder" (an employee of the Company or the
Company) or if a beneficial or record holder of a share of Class B Common
Stock ceases to be a Permitted Holder, the share is automatically and
immediately converted into a share of Class A Common. Shares of Class A
Common Stock may not be converted into shares of Class B Common Stock.
(2) Solely for the purpose of determining beneficial ownership herein, the
number of shares of common stock deemed outstanding as of August 31, 2000
(i) assumes 21,637,038 shares of Class A Common Stock and 2,849,143 shares
of Class B Common Stock were outstanding as of such date, and (ii)
includes additional shares of common stock issuable pursuant to options or
warrants held by such owner which may be exercised within 60 days after
August 31, 2000 ("presently exercisable options"), as set forth below.
(3) The address of each of Messrs. Bergstein, Mikolajczyk, Gutstein, Sviokla,
Bupp and Connolly is 875 North Michigan Avenue, Suite 3000, Chicago,
Illinois 60611.
(4) Excludes 149,970 shares of Class A Common Stock held in trust for certain
members of the Bergstein family. Includes 13,848 shares of Class B Common
Stock issuable pursuant to presently exercisable options.
(5) All holders of Class B Common Stock, including Messrs. Mikolajczyk,
Gutstein, Sviokla, Bupp and Connolly, have granted to Mr. Bergstein, as
the current Chief Executive Officer, the right to vote such shares
pursuant to the terms of irrevocable proxies. See "Voting and Stock
Restriction Agreement." As of August 31, 2000 includes 2,375,271 shares of
Class B Common Stock subject to such proxies.
(6) As of June 30, 2000 based upon 13-F filings.
(7) Includes 1,409 shares of Class B Common Stock issuable pursuant to
presently exercisable options.
(8) Includes 8,041 shares of Class B Common Stock issuable pursuant to
presently exercisable options.
(9) Includes 14,093 shares of Class B Common Stock issuable pursuant to
presently exercisable options.
(10) Includes 36,497 shares of Class B Common Stock issuable pursuant to
presently exercisable options.
(11) Excludes 2,236,596 shares of Class B Common Stock to be issued in
conjunction with the Diamond and Cluster business combination.
(12) Includes 22,100 shares of Class B Common Stock issuable pursuant to
presently exercisable options.
(13) Includes 7,500 shares of Class A Common Stock issuable pursuant to
presently exercisable options.
(14) Consists of 92,002 shares of Class A Common Stock issuable pursuant to
presently exercisable options.
(15) Consists of 28,350 shares of Class A Common Stock issuable pursuant to
presently exercisable options.
(16) Includes in the aggregate 150,352 shares of Class A Common Stock and
95,988 shares of Class B Common Stock issuable pursuant to presently
exercisable options held by all directors and executive officers.
82
<PAGE>
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The board of directors of Diamond recommends a vote for ratification of the
appointment of KPMG LLP as the independent auditors of Diamond to audit the
books and accounts for Diamond for the current fiscal year. It is intended that
the shares represented by proxies in the enclosed form will be voted for
ratification of KPMG LLP as the independent auditors, unless contrary
instructions are received. It is expected that representatives of KPMG LLP will
attend the annual meeting, with the opportunity to make a statement if they so
desire, and will be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR RATIFICATION OF THE
APPOINTMENT OF KPMG LLP AS INDEPENDENT AUDITORS OF DIAMOND FOR THE FISCAL YEAR
ENDING MARCH 31, 2001
83
<PAGE>
DESCRIPTION OF DIAMOND CAPITAL STOCK
Our authorized capital stock consists of 40,000,000 shares of Class A Common
Stock, par value $.001 per share, 20,000,000 shares of Class B Common Stock,
par value $.001 per share, and 2,000,000 shares of preferred stock, par value
$1.00 per share.
Common Stock
As of November 2, 2000, there were 25,463,767 shares of common stock
outstanding and held of record by approximately 14,000 stockholders. After
giving effect to the issuance of shares of Diamond Class B Common Stock in
conjunction with the business combination, there will be 30,874,570 shares of
our common stock outstanding.
Our common stock is divided into two classes, Class A and Class B. Class A
Common Stock is entitled to one vote per share and Class B Common Stock is
entitled to five votes per share on all matters submitted to a vote of holders
of common stock. Class B Common Stock may be owned beneficially or of record
only by permitted holders. Permitted holders of Class B Common Stock are
Diamond and persons who are employees of Diamond or any of our majority-owned
subsidiaries. A person shall cease to be a permitted holder on the date on
which he or she ceases to be an employee of Diamond or any of our majority-
owned subsidiaries. In connection with the business combination, the Diamond
stockholders have been asked to approve an amendment to Diamond's restated
certificate of incorporation which would permit corporations and other entities
controlled by Diamond employees to constitute a permitted holder. See
"Amendments to Diamond's Restated Certificate of Incorporation" on page 73 of
this proxy statement/prospectus. The holders of common stock do not have
cumulative voting rights. The election of directors is determined by a
plurality of votes cast and, except as otherwise required by law or our
certificate of incorporation, all other matters are determined by a majority of
the votes cast. Accordingly, the holders of the Class B Common Stock may
significantly influence the election of all directors standing for election.
All of the holders of our Class B Common Stock have granted proxies to our
Chief Executive Officer to vote their shares. After giving effect to the
issuance of the Series B Common Stock in connection with the business
combination, our current Chief Executive Officer will control approximately
68.2% of the voting rights of our outstanding common stock. See "Risk Factors--
Certain Individuals Control a Significant Portion of the Voting Rights Which
Limits Your Ability to Influence Corporate Matters." In the event that any
share of Class B Common Stock is transferred to any party other than a
permitted holder or if a beneficial or record holder of a share of Class B
Common Stock ceases to be a permitted holder, the share automatically and
immediately shall be converted into a share of Class A Common Stock. Shares of
Class A Common Stock may not be converted into shares of Class B Common Stock.
As of November 2, 2000, there were 22,365,776 shares of Class A Common Stock
and 3,097,991 shares of Class B Common Stock issued and outstanding. Upon
completion of the Cluster business combination, there will be 22,365,776 shares
of Class A Common Stock and 9,413,368 shares of Class B Common Stock
outstanding.
The holders of our common stock are entitled to receive ratably such
dividends, if any, as may be declared by our board of directors out of funds
legally available therefore, subject to any preferential dividend rights of
outstanding preferred stock. Upon the liquidation, dissolution or winding up of
Diamond, the holders of our common stock are entitled to receive ratably our
net assets available after the payment of all debts and other liabilities.
Holders of the common stock have no preemptive, subscription, redemption or
conversion rights other than as described herein. The outstanding shares of
common stock are, and the shares offered by us and the selling stockholders in
this offering will be, when issued and paid for, fully paid and nonassessable.
The rights, preferences and privileges of holders of our common stock are
subject to, and may be adversely affected by, the rights of the holders of
shares of any series of our preferred stock which we may designate and issue in
the future. See "--Preferred Stock."
84
<PAGE>
Preferred Stock
We, by resolution of our board of directors and without any further vote or
action by the stockholders, have the authority, subject to certain limitations
prescribed by law, to issue from time to time up to an aggregate of 2,000,000
shares of our preferred stock in one or more classes or series and to determine
the designation and the number of shares of any class or series as well as the
voting rights, preferences, limitations and special rights, if any, of the
shares of any such class or series, including the dividend rights, dividend
rates, conversion rights and terms, voting rights, redemption rights and terms,
and liquidation preferences. The issuance of our preferred stock may have the
effect of delaying, deferring or preventing a change of control of Diamond. As
of the date of this prospectus, there are no shares of preferred stock
outstanding, and we have no plans to issue any shares of our preferred stock.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C., Overpeck Centre, 85 Challenger Road, Ridgefield
Park, New Jersey 07660, telephone number (800) 526-0801.
85
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires Diamond's officers and directors,
and persons who own more than ten percent of a registered class of Diamond's
equity securities, to file reports of ownership and changes in ownership of
such securities with the Securities and Exchange Commission and Nasdaq.
Officers, directors and greater than ten percent beneficial owners are required
by applicable regulations to furnish Diamond with copies of all Section 16(a)
forms they file. During fiscal year 2000, the Form 3 reports filed on behalf of
Mssrs. Gordon and Weber and one Form 4 report filed on behalf of each of Mssrs.
Anderson, Bergstein, Bupp, Gordon, Gutstein, Kay, Lowenberg, Mikolajczyk,
Moffitt and Sviokla were filed late.
86
<PAGE>
PERFORMANCE GRAPH
The following graph compares Diamond's total annual stock price performance
of Class A Common Stock against the total stock price performance of the Nasdaq
Market Index and the Russell 2000 Index for the periods indicated. Diamond does
not believe that there is a representative published industry or line-of-
business index or a representative industry peer group of public companies
against which to measure Diamond's stock price performance. Therefore, under
Securities and Exchange Commission regulations, Diamond has selected the
Russell 2000 Index, an index of companies with similar market capitalization to
Diamond, to use as a representative peer group. The graph presents the year-end
value of a $100 investment on February 25, 1997 in Diamond's Class A Common
Stock at the $5.50 initial offering price and in each of the Nasdaq Market
Index and the Russell 2000 Index and assumes the reinvestment of dividends, if
any.
<TABLE>
<CAPTION>
Cumulative Total Return
-----------------------------------
2/25/97 3/97 3/98 3/99 3/00
------- ----- ------ ------ -------
<S> <C> <C> <C> <C> <C>
Diamond Technology Partners Incorporated... 100.00 72.73 330.30 279.55 1195.45
Nasdaq Stock Market (U.S.)................. 100.00 90.73 137.57 185.85 345.43
Russell 2000............................... 100.00 96.43 138.04 107.63 121.90
</TABLE>
87
<PAGE>
LEGAL MATTERS
The validity of the shares of Diamond Class B Common Stock will be passed
upon for Diamond by Winston & Strawn, Chicago, Illinois.
EXPERTS
The consolidated financial statements of Diamond as of March 31, 1999 and
2000 and for each of the years in the three-year period ended March 31, 2000
have been included herein in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere in the proxy
statement/prospectus, and upon the authority of them as experts in accounting
and auditing.
The consolidated financial statements of Cluster as of December 31, 1998 and
1999, and for the years then ended in this proxy statement/prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of them as
experts in accounting and auditing.
The consolidated financial statements of Cluster for the year ended December
31, 1997 has been included herein and in the proxy statement/prospectus in
reliance upon the report of Bouwer & Officier, independent certified public
accountants, appearing elsewhere in the proxy statement/prospectus and upon the
authority of them as experts in accounting and auditing.
SUBMISSION OF STOCKHOLDER PROPOSALS
To be eligible for inclusion in Diamond's proxy statement and form of proxy
relating to Diamond's next annual meeting stockholder proposals must be
received at Diamond's executive offices on or before June 4, 2001 unless the
2001 annual meeting of stockholders is to be held earlier than September 1,
2001 in which case proposals must be received a reasonable period of time in
advance of Diamond's solicitation of proxies for that meeting. Proposals should
be submitted by certified mail, return receipt requested, addressed to Diamond,
875 North Michigan Avenue, Suite 3000, Chicago, Illinois 60611 Attention:
Secretary.
SOLICITATION OF PROXIES
Diamond will bear the costs of soliciting proxies from its stockholders. In
addition to the use of the mails, proxies may be solicited by the directors,
officers and employees of Diamond by personal interview, electronic mail or
telephone. Directors, officers and employees will not be additionally
compensated for such solicitation, but may be reimbursed for their out-of-
pocket expenses. Arrangements will also be made with brokerage houses and other
custodians, nominees and fiduciaries for the forwarding of solicitation
material to the beneficial owners of Class A Common Stock held of record by
such persons, and Diamond will reimburse brokerage houses, custodians, nominees
and fiduciaries for their reasonable out-of-pocket expenses.
AVAILABLE INFORMATION
Diamond files reports with the Securities and Exchange Commission and has
filed with the Securities and Exchange Commission a registration statement on
Form S-4 with respect to the Diamond Class B Common Stock to be issued in
connection with the Cluster business combination. This proxy
statement/prospectus constitutes the prospectus of Diamond that is filed as
part of the registration statement. Other parts of the registration statement
are omitted from this proxy statement/prospectus in accordance with the rules
and regulations of the Securities and Exchange Commission. Copies of the
registration statement, including exhibits, as well as any other materials
Diamond files with the Securities and Exchange Commission may be inspected,
without charge, at the Public Reference Room at the offices of the Securities
and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The
public may obtain information on the operation of the Public Reference Room by
calling the Securities and Exchange Commission at 1-800-SEC-0330. In addition,
Diamond is an electronic filer. Therefore Diamond's filings with the Securities
and Exchange Commission are available at the Securities and Exchange
Commission's website at http://www.sec.gov.
88
<PAGE>
Diamond is required to file periodic reports, proxy statements and other
information with the Commission. These periodic reports, proxy statements and
other information will be available for inspection and copying at the
Commission's public reference room and the web site of the Commission referred
to above.
You should rely only on the information contained or incorporated by
reference in this proxy statement/prospectus to vote on the proposals presented
at the special meeting. Diamond and Cluster have not authorized anyone to
provide you with information that is different from what is contained in this
proxy statement/prospectus. This proxy statement/prospectus is dated November
7, 2000. You should not assume that the information contained in this proxy
statement/prospectus is accurate as of any date other than that date, and
neither the mailing of this proxy statement/prospectus to you nor the issuance
of the shares of Diamond Class B Common Stock in the Cluster transaction shall
create any implication to the contrary.
This proxy statement/prospectus is being furnished to Diamond stockholders
in connection with the solicitation of proxies by the Diamond board of
directors for use at Diamond's annual meeting. Each copy of this proxy
statement/prospectus mailed to Diamond stockholders is accompanied by a form of
proxy for use at Diamond's annual meeting. This proxy statement/prospectus also
serves as a prospectus for holders of Cluster share capital in connection with
the shares of Diamond Class B Common Stock to be issued in connection with the
Cluster business combination.
Diamond has supplied all information contained or incorporated by reference
in this proxy statement/ prospectus relating to Diamond, and Cluster has
supplied all such information relating to Cluster.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents or information filed by us (File No. 000-22125) with
the Commission are incorporated in this proxy statement/prospectus by reference
and made a part hereof:
. All documents filed by us with the Commission pursuant to Section 13(a),
13(c), 14 or 14(d) of the Exchange Act after the date of this proxy
statement/prospectus and prior to the annual meeting.
Any statement contained in a document or a portion of which is incorporated
by reference herein shall be deemed to be modified or superseded for purposes
of this proxy statement/prospectus to the extent that a statement contained
herein or in any other subsequently filed document which also is or is deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this proxy
statement/prospectus.
89
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
Consolidated Balance Sheets as of March 31 and September 30, 2000....... F-2
Consolidated Statements of Net Income and Comprehensive Income for the
Six Months Ended September 30, 1999 and 2000........................... F-3
Consolidated Statements of Cash Flows for the Six Months Ended September
30, 1999 and 2000...................................................... F-4
Notes to Consolidated Financial Statements.............................. F-5
Consolidated Financial Statements:
Independent Auditors' Report............................................ F-6
Consolidated Balance Sheets as of March 31, 1999 and 2000............... F-7
Consolidated Statements of Net Income and Comprehensive Income for the
Years Ended March 31, 1998, 1999 and 2000.............................. F-8
Consolidated Statements of Stockholders' Equity for the Years Ended
March 31, 1998, 1999 and 2000.......................................... F-9
Consolidated Statements of Cash Flows for the Years Ended March 31,
1998, 1999 and 2000.................................................... F-10
Notes to Consolidated Financial Statements.............................. F-11
CLUSTER TELECOM B.V. AND SUBSIDIARIES
Consolidated Balance Sheets as of December 31, 1999 and September 30,
2000..................................................................... F-20
Consolidated Statements of Net Income for the Nine Months Ended September
30, 1999 and 2000........................................................ F-21
Consolidated Statement of Cash Flow for the Nine Months Ended September
30, 1999 and 2000........................................................ F-22
Notes to the Consolidated Financial Statements............................ F-23
Consolidated Financial Statements for the Year Ended December 31, 1999:
Auditors' Report........................................................ F-24
Consolidated Balance Sheet.............................................. F-25
Consolidated Statement of Operations.................................... F-26
Consolidated Statement of Shareholders' Equity.......................... F-27
Consolidated Statement of Cash Flow..................................... F-28
Notes to Consolidated Financial Statements.............................. F-29
Consolidated Financial Statements for the Year Ended December 31, 1998:
Auditors' Report........................................................ F-37
Consolidated Balance Sheet.............................................. F-38
Consolidated Statement of Operations.................................... F-39
Consolidated Statement of Shareholders' Equity.......................... F-40
Consolidated Statement of Cash Flow..................................... F-41
Notes to Consolidated Financial Statements.............................. F-42
Balance sheet as at December 31, 1997..................................... F-49
Profit and loss account for the year ended December 31, 1997.............. F-49
Consolidated balance sheet as at December 31, 1997........................ F-50
Consolidated profit and loss account for the year ended December 31,
1997..................................................................... F-50
Notes to the Annual Accounts.............................................. F-51
Notes to the Consolidated Annual Accounts................................. F-52
Supplementary Information................................................. F-54
</TABLE>
F-1
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
March September 30,
31, 2000 2000
-------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $182,945 $209,973
Accounts receivable, net of allowance of $1,279 and
$1,756 as of March 31, 2000 and June 30, 2000,
respectively........................................ 10,596 17,318
Income taxes receivable.............................. 13,874 8,908
Prepaid expenses and deferred income taxes........... 7,144 9,588
-------- --------
Total current assets............................... 214,559 245,787
Computers, equipment and training software, net........ 8,214 9,433
Other assets........................................... 15,981 21,167
Goodwill, net.......................................... 10,656 15,525
-------- --------
Total assets..................................... $249,410 $291,912
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 3,759 $ 5,787
Note payable, current portion........................ 500 500
Other accrued liabilities............................ 26,333 38,353
-------- --------
Total current liabilities.......................... 30,592 44,640
Note payable, less current portion..................... 500 --
-------- --------
Total liabilities................................ 31,092 44,640
Stockholders' equity:
Preferred Stock, $1.00 par value, 2,000 shares
authorized, no shares issued........................ -- --
Class A common stock, $.001 par value, 40,000 shares
authorized, 21,958 issued as of March 31, 2000 and
22,194 issued as of June 30, 2000................... 22 22
Class B common stock, $.001 par value, 20,000 shares
authorized, 2,701 issued as of March 31, 2000 and
2,999 issued as of June 30, 2000.................... 3 3
Additional paid-in capital........................... 195,372 208,476
Notes receivable from sale of common stock........... (232) (368)
Accumulated other comprehensive income............... 539 951
Retained earnings.................................... 32,679 48,253
-------- --------
228,383 257,337
Less Class A Common Stock in treasury, at cost, 770
shares held........................................... 10,065 10,065
-------- --------
Total stockholders' equity......................... 218,318 247,272
-------- --------
Total liabilities and stockholders' equity....... $249,410 $291,912
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-2
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
CONSOLIDATED STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Six
Months Ended
September 30,
----------------
1999 2000
------- --------
<S> <C> <C>
Net revenue.................................................. $56,185 $112,036
------- --------
Operating expenses:
Project personnel and related expenses..................... 30,143 59,458
Professional development and recruiting.................... 5,137 11,136
Marketing and sales........................................ 3,132 6,250
Management and administrative support...................... 7,580 14,962
Goodwill amortization...................................... 124 704
------- --------
Total operating expenses................................. 46,116 92,510
------- --------
Income from operations....................................... 10,069 19,526
Other income, net............................................ 778 6,005
------- --------
Income before taxes.......................................... 10,847 25,531
Income taxes................................................. 4,230 9,957
------- --------
Net income................................................... 6,617 15,574
Unrealized gain from securities, net of income tax expense of
$302........................................................ -- 412
------- --------
Comprehensive income......................................... $ 6,617 $ 15,986
======= ========
Basic net income per share of common stock................... $ 0.33 $ 0.64
Diluted net income per share of common stock................. $ 0.27 $ 0.52
Shares used in computing basic net income per share of common
stock....................................................... 20,359 24,198
Shares used in computing diluted net income
per share of common stock................................... 24,457 29,768
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Six
Months Ended
September 30,
-----------------
1999 2000
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 6,617 $ 15,574
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 1,072 3,311
Deferred income taxes................................... -- 303
Tax benefits from employee stock plans.................... 1,145 5,066
Changes in assets and liabilities, net of effects of
acquisition:
Accounts receivable..................................... (90) (6,412)
Prepaid expenses and other.............................. (776) 2,240
Accounts payable........................................ 1,108 1,784
Other assets and liabilities............................ (10,079) 9,629
------- --------
Net cash provided by (used in) operating activities......... (1,003) 31,495
------- --------
Cash flows from investing activities:
Capital expenditures, net................................. (3,283) (3,791)
Payments for purchase of companies........................ (3,214) (3,241)
Other assets.............................................. -- (2,354)
------- --------
Net cash used in investing activities....................... (6,497) (9,386)
------- --------
Cash flows from financing activities:
Repayment of note payable................................. -- (500)
Stock issuance costs...................................... -- (4)
Common stock issued....................................... 2,690 5,484
Purchase of treasury stock................................ (4,781) --
------- --------
Net cash provided by (used in) financing activities......... (2,091) 4,980
------- --------
Effect of exchange rate changes on cash..................... -- (61)
------- --------
Net increase (decrease) in cash and cash equivalents........ (9,591) 27,028
Cash and cash equivalents at beginning of period............ 47,698 182,945
------- --------
Cash and cash equivalents at end of period.................. $38,107 $209,973
======= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................. $ 13 $ 13
Cash paid during the period for income taxes.............. 2,606 24
Supplemental disclosure of noncash investing and financing
Activities:
Issuance of common stock for notes........................ $ 264 $ 483
Issuance of acquisition note payable...................... 1,000 --
Issuance of common stock in acquisitions.................. 1,842 2,422
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. Basis of Reporting
The accompanying consolidated financial statements of Diamond Technology
Partners Incorporated (the "Company") include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation. Certain prior period amounts
have been reclassified to conform with current period presentation. In the
opinion of management, the consolidated financial statements reflect all normal
and recurring adjustments that are necessary for a fair presentation of the
Company's financial position, results of operations, and cash flows as of the
dates and for the periods presented. The consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Consequently, these statements do not include
all the disclosures normally required by generally accepted accounting
principles for annual financial statements nor those normally made in the
Company's Annual Report on Form 10-K. Accordingly, reference should be made to
the Company's Annual Report on Form 10-K for additional disclosures, including
a summary of the Company's accounting policies, which have not changed. The
consolidated results of operations for the quarter ended September 30, 2000,
are not necessarily indicative of results for the full year.
B. Business Combinations
In May 2000, the Company acquired Momentus Group Limited ("Momentus"), a
London-based e-business consulting company. Under the terms of the acquisition
agreement, the Company paid approximately $2.9 million in cash and delivered
44,252 shares of the Company's Class A Common Stock. Additionally, Momentus may
be paid a maximum of 69,265 shares of the Company's Class A Common Stock over
the next two years upon the achievement of certain performance measures.
In October 1999, the Company acquired Leverage Information Systems, Inc.,
("Leverage"), a San Francisco based systems architecture and development
company specializing in the building of complex web sites and intranets. Under
the terms of the acquisition, the Company paid $1.0 million in cash and issued
97,500 shares of the Company's Class A Common Stock.
In April 1999, the Company acquired OmniTech Consulting Group, Inc.
("OmniTech"), a Chicago-based change management firm specializing in web-based
and other multimedia corporate learning. Under the terms of the acquisition
agreement, the Company paid $4.0 million in cash, and issued a $1.0 million
note and 115,641 shares of the Company's Class A Common Stock. Additionally,
OmniTech may be paid a maximum of $2 million over the two years following the
closing date upon achievement of certain performance measures.
The acquisitions are being accounted for under the purchase method of
accounting and, accordingly, the operating results of OmniTech, Leverage, and
Momentus have been included in the Company's consolidated financial statements
since the date of acquisition. The excess of net assets acquired ("Goodwill")
recorded for OmniTech, Leverage, and Momentus approximated $16.7 million, and
is being amortized on a straight-line basis ranging from 7 to 25 years.
F-5
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Diamond Technology Partners Incorporated:
We have audited the accompanying consolidated balance sheets of Diamond
Technology Partners Incorporated and subsidiaries as of March 31, 1999 and
2000, and the related consolidated statements of net income and comprehensive
income, stockholders' equity and cash flows for each of the years in the three-
year period ended March 31, 2000. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Diamond
Technology Partners Incorporated and subsidiaries as of March 31, 1999 and
2000, and the results of their operations and their cash flows for each of the
years in the three-year period ended March 31, 2000, in conformity with
generally accepted accounting principles.
KPMG LLP
Chicago, Illinois
April 18, 2000
F-6
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and 2000
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
ASSETS 1999 2000
------ ------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $47,698 $182,945
Accounts receivable, net of allowance of $419 and $1,279
as of March 31, 1999 and 2000, respectively.............. 10,434 10,596
Income taxes receivable................................... 986 13,874
Prepaid expenses and deferred taxes....................... 1,539 7,144
------- --------
Total current assets.................................... 60,657 214,559
Computers, equipment and software, net...................... 3,419 8,214
Other assets................................................ 3,010 15,981
Goodwill, net............................................... -- 10,656
------- --------
Total assets............................................ $67,086 $249,410
======= ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable.......................................... $ 1,468 $ 3,759
Note payable, current portion............................. -- 500
Accrued compensation...................................... 8,835 14,219
Deferred revenue.......................................... 709 3,629
Other accrued liabilities................................. 2,773 8,485
------- --------
Total current liabilities............................... 13,785 30,592
Note payable, less current portion.......................... -- 500
------- --------
Total liabilities....................................... 13,785 31,092
Stockholders' equity:
Preferred Stock, $1.00 par value, 2,000 shares authorized,
no shares issued......................................... -- --
Class A Common Stock, $.001 par value, 40,000 shares
authorized, 15,007 issued in 1999 and 21,958 issued in
2000..................................................... 15 22
Class B Common Stock, $.001 par value, 20,000 shares
authorized, 5,474 issued in 1999 and 2,701 issued in
2000..................................................... 5 3
Additional paid-in capital................................ 42,146 195,372
Notes receivable from sale of common stock................ (32) (232)
Unrealized gain on investments............................ -- 539
Retained earnings......................................... 16,451 32,679
------- --------
58,585 228,383
Less Class A Common Stock in treasury, at cost, 456 shares
in 1999 and 770 shares in 2000........................... 5,284 10,065
------- --------
Total stockholders' equity.............................. 53,301 218,318
------- --------
Total liabilities and stockholders' equity.............. $67,086 $249,410
======= ========
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
CONSOLIDATED STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME
Fiscal years ended March 31, 1998, 1999 and 2000
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1999 2000
------- ------- --------
<S> <C> <C> <C>
Net revenues...................................... $58,369 $82,389 $136,235
------- ------- --------
Operating expenses:
Project personnel and related expenses.......... 31,619 43,275 72,355
Professional development and recruiting......... 6,155 9,448 13,199
Marketing and sales............................. 3,210 4,669 7,325
Management and administrative support........... 8,602 11,298 18,753
------- ------- --------
Total operating expenses...................... 49,586 68,690 111,632
------- ------- --------
Income from operations............................ 8,783 13,699 24,603
Interest income................................... 1,201 2,534 2,099
Interest expense.................................. (51) (46) (97)
------- ------- --------
Income before taxes............................... 9,933 16,187 26,605
Income taxes...................................... 3,925 6,351 10,377
------- ------- --------
Net income........................................ 6,008 9,836 16,228
Unrealized gain from securities, net of income tax
expense of $344.................................. -- -- 539
------- ------- --------
Comprehensive Income.............................. $ 6,008 $ 9,836 $ 16,767
======= ======= ========
Basic net income per share of common stock........ $ 0.34 $ 0.49 0.78
Shares used in computing basic net income per
share of common stock............................ 17,634 19,915 20,807
Diluted net income per share of common stock...... $ 0.28 $ 0.42 $ 0.62
Shares used in computing diluted net income per
share of common stock............................ 21,258 23,346 25,984
</TABLE>
See accompanying notes to consolidated financial statements
F-8
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Fiscal years ended March 31, 1998, 1999 and 2000
(In thousands)
<TABLE>
<CAPTION>
Notes
Class Class Receivable Unrealized
A B Class A Additional from Sale of Gain Total
Common Common Stock Paid-In Common Retained Treasury On Stockholders'
Stock Stock Subscribed Capital Stock Earnings Stock Investments Equity
------ ------ ---------- ---------- ------------ -------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31,
1997................... $ 8 $ 7 $ 8,476 $ 9,324 $(122) $ 607 $ -- $-- $ 18,300
Issuance of stock....... 3 -- (8,476) 11,554 (443) -- -- -- 2,638
Exercise of stock
options................ -- -- -- 1,192 -- -- -- -- 1,192
Income tax benefit
related to stock option
exercises.............. -- -- -- 480 -- -- -- -- 480
Purchase of stock....... -- -- -- (93) -- -- -- -- (93)
Repayment of notes...... -- -- -- -- 242 -- -- -- 242
Net income.............. -- -- -- -- -- 6,008 -- -- 6,008
---- ---- ------- -------- ----- ------- -------- ---- --------
Balance at March 31,
1998................... 11 7 -- 22,457 (323) 6,615 -- -- 28,767
Issuance of stock....... 1 -- -- 15,998 (60) -- -- -- 15,939
Exercise of warrants.... -- -- -- 1,326 -- -- -- -- 1,326
Exercise of stock
options................ -- 1 -- 1,460 -- -- -- -- 1,461
Income tax benefit
related to stock option
exercises.............. -- -- -- 1,331 -- -- -- -- 1,331
Purchase of stock....... -- -- -- (426) -- -- (5,284) -- (5,710)
Conversion to Class A... 3 (3) -- -- -- -- -- -- --
Repayment of notes...... -- -- -- -- 351 -- -- -- 351
Net income.............. -- -- -- -- -- 9,836 -- -- 9,836
---- ---- ------- -------- ----- ------- -------- ---- --------
Balance at March 31,
1999................... 15 5 -- 42,146 (32) 16,451 (5,284) -- 53,301
Issuance of stock....... 2 -- -- 118,741 (668) -- -- -- 118,075
Exercise of warrants.... -- -- -- 243 -- -- -- -- 243
Exercise of stock
options................ 1 2 -- 8,638 -- -- -- -- 8,641
Income tax benefit
related to stock option
exercises.............. -- -- -- 23,730 -- -- -- -- 23,730
Purchase of stock....... -- -- -- (174) -- -- (4,781) -- (4,955)
Conversion to Class A... 4 (4) -- -- -- -- -- -- --
Repayment of notes...... -- -- -- -- 468 -- -- -- 468
Employee stock purchase
plan................... -- -- -- 2,048 -- -- -- -- 2,048
Unrealized gain......... -- -- -- -- -- -- -- 539 539
Net income.............. -- -- -- -- -- 16,228 -- -- 16,228
---- ---- ------- -------- ----- ------- -------- ---- --------
Balance at March 31,
2000................... $ 22 $ 3 -- $195,372 $(232) $32,679 $(10,065) $539 $218,318
==== ==== ======= ======== ===== ======= ======== ==== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-9
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years ended March 31, 1998, 1999 and 2000
(In thousands)
<TABLE>
<CAPTION>
1998 1999 2000
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 6,008 $ 9,836 $ 16,228
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 871 998 4,026
Tax benefits from employee stock plans......... 480 1,331 23,730
Deferred income taxes.......................... (461) 38 (4,341)
Changes in assets and liabilities:
Accounts receivable.......................... (567) (5,371) 1,844
Prepaid expenses and other................... 15 (1,242) (14,417)
Accounts payable............................. 125 (266) 1,963
Deferred compensation........................ -- -- --
Accrued compensation......................... 6,535 2,300 3,896
Deferred revenue............................. 419 (420) 2,920
Income taxes payable......................... (82) -- --
Other assets and liabilities................. 655 (1,314) (557)
------- ------- --------
Net cash provided by operating activities.. 13,998 5,890 35,292
------- ------- --------
Cash flows used in investing activities:
Capital expenditures, net........................ (475) (2,773) (7,871)
Payments for purchase of companies............... -- -- (5,328)
Other assets..................................... (648) (223) (7,190)
------- ------- --------
Cash flows used in investing activities.... (1,123) (2,996) (20,389)
------- ------- --------
Cash flows from financing activities:
Repayment of notes payable....................... (2,000) -- --
Stock issuance costs............................. (649) (1,523) (582)
Common stock issued.............................. 3,757 20,933 125,881
Purchase of treasury stock....................... -- (5,284) (4,781)
Repurchase of common stock....................... (93) (426) (174)
------- ------- --------
Net cash provided by financing activities.. 1,015 13,367 120,344
------- ------- --------
Net increase in cash and cash equivalents.......... 13,890 16,261 135,247
Cash and cash equivalents at beginning of year..... 17,547 31,437 47,698
------- ------- --------
Cash and cash equivalents at end of year........... $31,437 $47,698 $182,945
======= ======= ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest........... $ 51 $ 24 $ 25
Cash paid during the year for income taxes....... 4,558 5,875 5,821
Supplemental disclosure for noncash investing and
financing activities:
Issuance of common stock for notes............... $ 443 $ 60 $ 668
Issuance of acquisition note payable............. -- -- 1,000
Incentive compensation applied to Payment for
common stock.................................... 1,041 -- --
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements
F-10
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Description of Business
Diamond Technology Partners Incorporated (the "Company" or "Diamond") is an
e-business services firm that synthesizes business and industry insight with
technology expertise to create innovative digital strategies for leading
national and multinational businesses. The Company serves clients primarily in
four key markets: financial services, consumer and industrial products and
services, telecommunications and energy, and health care and insurance.
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All intercompany accounts and
balances have been eliminated in consolidation. Certain prior period amounts
have been reclassified to conform with current period presentation.
Revenue Recognition
The Company recognizes revenues on contracts as work is performed, net of
provisions for estimated uncollectible amounts. Actual uncollectible amounts
are charged against this reserve when they become known. Out-of-pocket expenses
are reimbursed by clients and are offset against expenses incurred.
Computers, Equipment and Software
Computers, equipment and software are stated at cost less accumulated
depreciation. Depreciation is based on the estimated useful lives of the assets
and is computed using the straight-line method. Costs capitalized for
internally developed software include external consulting fees and employee
salaries. Depreciation and amortization expense was $720,000, $998,000 and
$4,026,000 for the years ended March 31, 1998, 1999 and 2000, respectively.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with original maturities of
three months or less and are stated at cost, which approximates fair value.
Cash equivalents consist of money market funds and demand deposits.
Accounting for Investment Interests
Occasionally, the Company may obtain non-controlling equity ownership
interests as compensation for services performed. Equity securities are
accounted for under the cost method of accounting unless these securities have
readily determinable fair values based on quoted market prices. Securities for
which the fair market value is determinable are recorded under SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The Company
classified the securities as available-for-sale securities. Unrealized gains
and losses on these investments are reported under "Unrealized gain on
investment" as a separate component of stockholders' equity, net of any related
tax effect.
Other Comprehensive Income
Other comprehensive income represents unrealized gains on available-for-sale
investments and securities, net of the related tax effect.
F-11
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist principally of cash investments and
accounts receivable. The Company places its cash investments with high quality
financial institutions. Trade receivables potentially subject the Company to
credit risk. The Company extends credit to its customers based upon an
evaluation of the customer's financial condition and credit history and
generally does not require collateral. The Company has historically incurred
minimal credit losses. No customers individually accounted for more than 10% of
revenues as of and for the year ended March 31, 1998. The Company had two
customers which collectively accounted for 25% of revenues as of and for the
year ended March 31, 1999, and one customer who accounted for 14% of revenues
as of and for the year ended March 31, 2000.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires the use of the liability method of accounting for income taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be reversed or settled.
Net Income Per Share
Basic net income per share is computed using the weighted average number of
common shares outstanding. Diluted net income per share is computed using the
weighted average number of common shares outstanding and the assumed exercise
of stock options and warrants (using the treasury stock method). Following is a
reconciliation of the shares (in thousands) used in computing basic and diluted
net income per share for the fiscal years ended March 31, 1998, 1999 and 2000:
<TABLE>
<CAPTION>
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
Shares used in computing basic net income per
share............................................. 17,634 19,915 20,807
Dilutive effect of stock options and warrants...... 3,624 3,431 5,177
------ ------ ------
Shares used in computing diluted net income per
share............................................. 21,258 23,346 25,984
------ ------ ------
Antidilutive securities not included in dilutive
net income per share calculation.................. 66 24 103
====== ====== ======
</TABLE>
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities, and revenues and expenses
during the period reported. Actual results could differ from those estimates.
Financial Instruments
The fair value of the Company's financial instruments approximates their
carrying value.
F-12
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) Computers, Equipment and Software
Computers, equipment and software at March 31, 1999, and 2000 are summarized
as follows (amounts in thousands):
<TABLE>
<CAPTION>
1999 2000
------- -------
<S> <C> <C>
Computers and equipment................................. $ 4,272 $11,210
Software................................................ 2,252 3,383
------- -------
6,524 14,593
Less accumulated depreciation and amortization.......... (3,105) (6,379)
------- -------
$ 3,419 $ 8,214
======= =======
</TABLE>
(4) Other Assets
Other assets at March 31, 1999 and 2000 are summarized as follows (amounts
in thousands):
<TABLE>
<CAPTION>
1999 2000
------ -------
<S> <C> <C>
Investment in public companies............................ $ 353 $ 2,265
Investment in non-public companies........................ -- 9,773
Other assets.............................................. 2,657 3,943
------ -------
Total................................................. $3,010 $15,981
====== =======
</TABLE>
(5) Commitments
The Company leases office space and equipment under various operating
leases. As of March 31, 2000, the minimum future lease payments under operating
leases with noncancelable terms in excess of one year are as follows (amounts
in thousands):
<TABLE>
<CAPTION>
Year ending March 31,
---------------------
<S> <C>
2001.............................. $2,770
2002.............................. 1,587
2003.............................. 825
2004.............................. 332
2005.............................. 332
Thereafter........................ 442
------
$6,288
======
</TABLE>
Rent expense under operating leases amounted to $1,611,000, $1,660,000 and
$2,428,000 for the years ended March 31, 1998, 1999, and 2000, respectively.
The Company is party to standby letters of credit in support of the minimum
future lease payments under leases for permanent office space and office
furniture amounting to $184,000 as of March 31, 2000, declining annually during
the lease terms.
(6) Notes Payable and Line of Credit
The Company has an available line of credit of $10,000,000 with a commercial
bank, which has been reduced by letters of credit outstanding as of March 31,
2000 in the amount of $184,000. At March 31, 2000, all remaining amounts under
this line of credit were available to the Company at the bank's prime rate or
LIBOR plus 1.75%, at the Company's discretion.
F-13
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Notes payable consists of amounts due to former shareholders of Omnitech
Consulting Group, Inc. The note payable is due in two installments, $500,000,
on April 23, 2000 and $500,000 on April 23, 2001. The note carries a 5%
interest rate.
(7) Stockholders' Equity
Stock Split, Stock Recapitalization and Public Offerings
The Company's Board of Directors approved a three-for-two stock split of the
Company's Class A and Class B Common Stock, effective November 1, 1999.
Shareholders of record at the close of business on October 25, 1999 received an
additional share for every two shares of the Company's Class A or Class B
Common Stock held. The consolidated balance sheets, statements of operations,
statements of stockholders' equity and notes to consolidated financial
statements have been restated to reflect this split. Class A is entitled to one
vote per share and Class B Common Stock is entitled to five votes per share on
all matters submitted to the vote of holders of common stock. Class B Common
Stock may only be owned beneficially or of record by employees of the Company
or by the Company.
On March 31, 1997, the Company completed its initial public offering ("IPO")
and sold 2,632,500 of its common shares at the price of $3.67 per share. The
Company realized $8,476,000 in connection with the sale, net of the payment of
the underwriters commissions and other expenses of the offering. Of the net
proceeds, $2,000,000 were used to repay a loan from Safeguard Scientifics, Inc.
In the offering, an additional 2,400,000 shares were sold by selling
stockholders. On April 8, 1997, the underwriters', pursuant to their exercise
of the over-allotment option, purchased an additional 480,000 shares of the
Company's common stock at $3.67 per share. The Company's proceeds from these
additional shares, net of expenses, were $1,595,000.
In April 1998, the Company completed an offering and sold 982,188 shares of
Class A Common Stock at a price of $17.83 per share. The Company realized
approximately $15.9 million in connection with the sale, net of payment of the
underwriters' commissions and other expenses of the offering. In the offering,
an additional 3,517,812 shares were sold by selling stockholders.
In September 1998, the Company's Board of Directors authorized the
repurchase, from time to time, of up to one million shares of the Company's
Class A Common Stock. These repurchases were authorized to be made in the open
market or in privately negotiated transactions. At March 31, 2000, the number
of shares purchased under this authorization was 769,950 at an aggregate cost
of $10,065,044. The Company funded the repurchases through its cash balances.
In March 2000, the Company completed an offering and sold 1,500,000 shares
of Class A Common Stock at a price of $80.13 per share. The Company realized
approximately $114.0 million in connection with the sale, net of payment of the
underwriters' commissions and other expenses of the offering. In the offering,
an additional 1,775,000 shares were sold by selling stockholders.
In April 1999, the Company's Board of Directors adopted and the Company's
shareholders subsequently approved the 1999 Employee Stock Purchase Plan. The
1999 Employee Stock Purchase Plan is designed to qualify for certain income tax
benefits for employees under the section 423 of the Internal Revenue Code and
contains 900,000 shares of Class B Common Stock. The plan allows qualifying
employees to purchase Class B Common Stock at the end of each fiscal quarter,
commencing the period ended September 30, 1999, at 85% of the lesser of the
fair market value of the Class A Common Stock on the individual's enrollment
date and the last day of the fiscal quarter. The amount each employee can
purchase is limited to the lesser of (i) 15% of pay or (ii) $6,250 of stock
value in any fiscal quarter.
Stock Options
Under the Company's 1998 Equity Incentive Plan (collectively, the "Stock
Option Plan" or "Plan"), the Company may grant qualified incentive stock
options to officers and employees of the Company. The Stock
F-14
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Option Plan provides that, subsequent to the IPO, options will be granted at
the average of the closing price of a share of Class A Common Stock on the
Nasdaq Stock Market System for the ten trading days immediately preceding the
date of grant. Options have been granted to officers which vest incrementally,
with varying percentages on the first through fifth anniversaries of the date
of grant, respectively, and expire on the seventh anniversary of the date of
grant. Options have been granted to employees which fully vest upon the third
anniversary of the date of grant and expire on the fifth anniversary of the
date of grant. Options were also granted to employees at various times which
vest over periods ranging from 18 months to 3 years from the date of grant and
which expire on the fifth anniversary of the date of grant. The Company's Board
of Directors has also granted non-qualified stock options to certain persons
who were not employees on the date of grant and certain non-employee members of
the Board of Directors. These non-qualified stock options vest over periods
ranging from immediate to five years.
The following table summarizes the transactions, both incentive and
nonqualified, pursuant to the Plans (amounts in thousands, except price per
share amounts).
<TABLE>
<CAPTION>
Weighted-
Shares Average
Under Exercise Price
Option Range of Prices Per Share
------ --------------- --------------
<S> <C> <C> <C>
Balances, March 31, 1997......... 4,752 $ 0.81 to 3.67 $ 1.77
Granted........................ 2,444 4.27 to 15.07 12.97
Exercised...................... (822) 0.81 to 3.67 1.45
Canceled....................... (215) 0.81 to 12.83 2.01
------ --------------- ------
Balances, March 31, 1998......... 6,159 0.81 to 15.07 6.25
Granted........................ 3,530 6.73 to 19.87 9.16
Exercised...................... (972) 0.81 to 8.93 1.52
Canceled....................... (2,555) 1.21 to 19.87 12.74
------ --------------- ------
Balances, March 31, 1999......... 6,162 0.81 to 18.27 6.20
Granted........................ 4,991 13.53 to 92.55 22.44
Exercised...................... (1,904) 0.81 to 20.87 4.57
Canceled....................... (879) 0.81 to 28.17 10.15
------ --------------- ------
Balances, March 31, 2000......... 8,370 $ 0.81 to 92.55 $15.83
====== =============== ======
</TABLE>
At March 31, 1998, 1999 and 2000, 931,500, 772,500, and 625,800 options were
exercisable, respectively, under the Plans.
The following table summarizes information about stock options under the
Plans at March 31, 2000 (share amounts in thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------------------
Weighted-
Range of Options Weighted-Average Weighted- Options Average
Exercise Outstanding Remaining Average Exercisable Exercise
Prices at 3/31/00 Contractual Life Exercise Price at 3/31/00 Price
-------- ----------- ---------------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.81
to
3.63 925 2.81 $ 1.91 470 $ 2.07
3.67
to
7.75 2,177 4.29 7.64 73 7.06
8.10
to
13.53 2,399 5.22 12.88 73 10.74
13.73
to
22.00 1,403 4.83 15.64 7 14.30
24.43
to
92.55 1,466 5.52 41.79 2 31.00
------ ----- ---- ------ --- ------
$ 0.81
to
92.55 8,370 4.70 $15.83 626 $ 3.90
====== ===== ==== ====== === ======
</TABLE>
F-15
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company applies Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock Based Compensation," and Emerging Issues Task Force
(EITF) Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services" for stock issued to individuals or groups other than employees. The
Company applies Accounting Principles Board (APB) Opinion 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for stock
issued to employees as defined by APB No.25. Accordingly, no compensation
expense has been recognized on options granted to employees and directors. Had
compensation expense on these options been determined based on the fair value
at the grant date for awards under these plans consistent with the methodology
prescribed under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the Company's net income and diluted
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1998 1999 2000
------ ------ -------
<S> <C> <C> <C>
Net income
As reported...................................... $6,008 $9,836 $16,228
Pro forma........................................ 5,663 7,737 5,055
Diluted net income per share
As reported...................................... $ 0.28 $ 0.42 $ 0.62
Pro forma........................................ 0.26 0.33 0.19
</TABLE>
The weighted-average fair value of the options granted under the Stock
Option Plans in 1998, 1999 and 2000, calculated using the Black-Scholes pricing
model, was $4.48, $2.68, and $10.42, respectively. The following assumptions
were used in the Black-Scholes pricing model for options granted in 1998, 1999
and 2000: dividend yield of 0.0 percent for each year, estimated volatility of
35% for 1998 and 1999 and 60% in 2000, risk-free interest rates ranging from
4.4% to 6.3%, and an expected life of 1 to 6 years.
(8) Income Taxes
The provision for income taxes for fiscal years ended March 31, 1998, 1999
and 2000 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1998 1999 2000
------ ------ -------
<S> <C> <C> <C>
Current:
Federal......................................... $3,781 $5,654 $10,070
State........................................... 605 659 1,729
------ ------ -------
4,386 6,313 11,799
Deferred.......................................... (461) 38 (1,422)
------ ------ -------
$3,925 $6,351 $10,377
====== ====== =======
</TABLE>
The total tax provision differs from the amount computed by applying the
federal income tax rate of 34 percent for 1998 and 35 percent for 1999 and 2000
to income before income taxes for the following reasons (in thousands):
<TABLE>
<CAPTION>
1998 1999 2000
------- ------ -------
<S> <C> <C> <C>
Federal income taxes at statutory rate............ $ 3,377 $5,665 $ 9,311
Effect of permanent differences................... 194 254 333
State income taxes, net of federal benefit........ 354 432 733
------- ------ -------
$33,925 $6,351 $10,377
======= ====== =======
</TABLE>
F-16
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of the temporary differences that give rise to the deferred
tax assets and liabilities at March 31, 1999 and 2000 are presented below (in
thousands):
<TABLE>
<CAPTION>
1999 2000
------ ------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward.......................... $ -- $2,920
Reserves and allowances.................................. 521 1,976
Accrued bonuses.......................................... 318 564
Accrued recruiting....................................... 247 78
------ ------
Total gross deferred tax assets........................ 1,086 5,538
Deferred tax liabilities:
Accelerated depreciation................................. 157 70
Capitalized assets....................................... 18 --
Unrealized gain on investments........................... -- 344
Goodwill--Omnitech....................................... -- 59
Other.................................................... 176 333
------ ------
Total deferred tax liabilities......................... 351 806
------ ------
Net deferred income taxes.................................. $ 735 $4,732
====== ======
</TABLE>
As of March 31, 2000, the Company has available for income tax purposes
approximately $6.1 million in federal net operating loss carryforwards which
may be used to offset future taxable income. These loss carryforwards will
expire in fiscal year 2020. In addition, the Company has state net operating
loss carryforwards of approximately $15.5 million which may be used to offset
future taxable income. The expiration of these loss carryforwards ranges
between five and twenty years.
Management believes it is more likely than not that the deferred tax assets
will be realized in the future.
(9) Benefit Plans
401(k) Plan
The Company has a noncontributory defined contribution plan covering
substantially all of its employees. This plan is qualified under Section
401(k) of the Internal Revenue Code of 1986. The Company may elect to make
contributions to this plan but to date has not done so.
(10) Business Combinations
In October 1999, the Company acquired Leverage Information Systems, Inc.,
("Leverage"), a San Francisco based systems architecture and development
company specializing in the building of complex web sites and intranets. Under
the terms of the acquisition, the Company paid $1.0 million in cash and issued
97,500 shares of the Company's Class A Common Stock.
In April 1999, the Company acquired OmniTech Consulting Group, Inc.
("Omnitech"), a Chicago-based change management firm specializing in web-based
and other multimedia corporate learning. Under the terms of the acquisition
agreement, the Company paid $4.0 million in cash, and issued a $1.0 million
note and 173,461 shares of the Company' Class A Common Stock. Additionally,
OmniTech may be paid a maximum of $2 million over the two years following the
closing date upon achievement of certain performance measures.
The acquisitions are being accounted for under the purchase method of
accounting and, accordingly, the operating results of OmniTech and Leverage
have been included in the Company's consolidated financial statements since
the date of acquisition. The excess of net assets acquired ("Goodwill")
recorded for OmniTech and Leverage approximated $11.1 million, and are being
amortized on a straight-line basis over 25 years and 7 years, respectively.
F-17
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following summarized pro forma financial information for year ended
March 31, 1999 and 2000 assume the OmniTech and Leverage acquisitions occurred
as of April 1 of each year:
<TABLE>
<CAPTION>
1999 2000
------- --------
(in thousands,
except per share
data)
<S> <C> <C>
Net revenue.............................................. $93,255 $137,549
Net income............................................... 10,124 15,690
Net income per share:
Basic.................................................. $ 0.50 $ 0.75
Diluted................................................ $ 0.43 $ 0.60
</TABLE>
These amounts are based upon certain assumptions and estimates, and do not
necessarily represent results that would have occurred if the acquisition had
taken place on the basis assumed above, nor are they indicative of the results
of future combined operations.
(11) Subsequent event (Unaudited)
On May 10, 2000, the Company acquired Momentus Group Limited ("Momentus"), a
London-based e-business consulting company. Under the terms of the acquisition
agreement, the Company paid approximately $2.9 million in cash and delivered
44,252 shares of the Company's Class A Common Stock. Additionally, Momentus may
be paid a maximum of 69,265 shares of the Company's Class A Common Stock over
the next two years upon the achievement of certain performance measures. The
acquisition will be accounted for under the purchase method of accounting.
(12) Quarterly Financial Information (Unaudited)
The following table presents the unaudited quarterly financial information
for fiscal 1999 and 2000 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------
Sept.
June 30 30 Dec. 31 Mar. 31
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year Ended March 31, 1999
Net revenues........................... $18,375 $20,136 $21,194 $22,684
Income from operations................. 2,932 3,289 3,448 4,030
Income before taxes.................... 3,529 3,938 4,117 4,603
Net income............................. 2,135 2,383 2,511 2,807
Basic earnings per share............... 0.11 0.12 0.13 0.14
Diluted earnings per share............. $ 0.09 $ 0.10 $ 0.11 $ 0.12
Year Ended March 31, 2000
Net revenues........................... $25,718 $30,467 $36,640 $43,410
Income from operations................. 4,551 5,518 6,638 7,896
Income before taxes.................... 4,916 5,931 7,124 8,634
Net income............................. 2,999 3,618 4,345 5,266
Basic earnings per share............... 0.15 0.18 0.21 0.24
Diluted earnings per share............. $ 0.13 $ 0.14 $ 0.16 $ 0.19
</TABLE>
F-18
<PAGE>
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following summarized unaudited pro forma financial information for the
three months ended June 30, 1999 and 2000 assume the OmniTech, Leverage, and
Momentus acquisitions occurred as of April 1 of each year:
<TABLE>
<CAPTION>
Three Months
Ended June 30,
---------------
1999 2000
------- -------
(in millions,
except
per share data)
<S> <C> <C>
Net Revenue............................................... $26,803 $52,379
Net income................................................ 2,428 7,150
Earnings per share:
Basic................................................... 0.12 0.30
Diluted................................................. 0.10 0.24
</TABLE>
These amounts are based upon certain assumptions and estimates, and do not
necessarily represent results that would have occurred if the acquisition had
taken place on the basis assumed above, nor are they indicative of the results
of future combined operations.
F-19
<PAGE>
CLUSTER TELECOM B.V. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In NLG thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------ -------------
(NLG) (NLG)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... 15,980 14,583
Accounts receivable--trade........................ 22,141 63,143
Due from parent company........................... 190 0
Other receivables................................. 2,723 3,619
Prepaid expenses.................................. 72 0
------ ------
Total current assets.......................... 41,106 81,345
Intangible assets................................... 432 1,144
Tangible fixed assets............................... 5,286 10,608
Financial assets.................................... 434 648
------ ------
Total fixed assets............................ 6,152 12,400
------ ------
Total assets.................................. 47,258 93,745
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
Trade........................................... 9,206 9,216
Due to parent company........................... 9,031 14,445
Taxes and social security contributions............. 11,204 14,732
Other debts......................................... 5,100 7,832
Accrued liabilities................................. 5,366 31,613
------ ------
Total current liabilities..................... 39,907 77,838
Stockholders' equity:
Common stock...................................... 43 43
Additional paid-in capital........................ 56 56
Legal reserve..................................... 6 (106)
Retained earnings................................. 7,166 15,691
Cumulative foreign currency translation
adjustments...................................... 80 223
------ ------
Total group equity............................ 7,351 15,907
------ ------
Total shareholders' equity and liabilities.... 47,258 93,745
====== ======
</TABLE>
See accompanying notes to consolidated financial statements
F-20
<PAGE>
CLUSTER TELECOM B.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET INCOME
(In NLG thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
--------------------
1999 2000
--------- ---------
<S> <C> <C>
Net revenue............................................... 74,859 164,449
Direct salaries and costs................................. (31,611) (79,841)
--------- ---------
Gross profit............................................ 43,248 84,608
Royalty expense........................................... (8,458) --
General and administrative expenses....................... (13,683) (51,730)
--------- ---------
Total operating expenses................................ (22,141) (51,730)
Operating income........................................ 21,107 32,878
--------- ---------
Financial income (expense)................................ (909) 302
Income before tax......................................... 20,198 33,180
--------- ---------
Provision for income taxes................................ (7,809) (12,828)
--------- ---------
Net income................................................ 12,389 20,352
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
F-21
<PAGE>
CLUSTER TELECOM B.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In NLG thousands)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-------------------
1999 2000
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................ 12,389 20,352
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation........................................ 353 780
Provision for contingencies......................... 1,221 859
Changes in assets and liabilities:
Accounts receivable--trade........................ (6,414) (41,002)
Other receivables................................. 42 (824)
Accounts payable--trade........................... (7,198) 10
Accounts payable--due from Parent Company......... 0 190
Accounts payable--due to Parent Company........... (4,735) 5,414
Taxes and social security contributions........... 2,041 3,529
Other debts....................................... (576) 2,732
Accrued liabilities............................... 17,190 25,388
--------- ----------
Net cash provided by (used in) operating
activities..................................... 14,313 17,428
--------- ----------
Cash flows from investing activities:
Fixed asset additions................................. (2,287) (7,061)
--------- ----------
Net cash used in investing activities........... (2,287) (7,061)
--------- ----------
Cash flows from financing activities:
Dividends paid........................................ 0 (11,907)
--------- ----------
Net cash provided by (used in) financing
activities..................................... 0 (11,907)
--------- ----------
Effect of exchange rate changes on cash................. 83 143
--------- ----------
Net increase (decrease) in cash and cash equivalents.... 12,109 (1,397)
Cash and cash equivalents at beginning of period........ 7,786 15,980
--------- ----------
Cash and cash equivalents at end of period.............. 19,895 14,583
========= ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-22
<PAGE>
CLUSTER TELECOM B.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. Basis of Reporting
The accompanying consolidated financial statements of Cluster (the
"Company") include the accounts of the Company. All significant intercompany
transactions and balances have been eliminated in consolidation. Certain prior
period amounts have been reclassified to conform with current period
presentation. In the opinion of management, the consolidated financial
statements reflect all normal and recurring adjustments that are necessary for
a fair presentation of the Company's financial position, results of operations,
and cash flows as of the dates and for the periods presented. The consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information. Consequently, these
statements do not include all the disclosures normally required by generally
accepted accounting principles for annual financial statements. The
consolidated results of operations for the nine months ended September 30,
2000, are not necessarily indicative of results for the full year.
F-23
<PAGE>
AUDITORS' REPORT
To the Board of Directors and Shareholders of
Cluster Telecom BV and Subsidiaries
We have audited the accompanying consolidated balance sheet of Cluster
Telecom B.V. and subsidiaries as of December 31, 1999 and the related
consolidated statements of operations, shareholders' equity and cash flow for
the year ended December 31, 1999. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cluster
Telecom B.V. and subsidiaries as of December 31, 1999 and the results of their
operations and their cash flows for the year ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
Arthur Andersen
Amsterdam, The Netherlands,
June 8, 2000
F-24
<PAGE>
CLUSTER TELECOM B.V. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands of Dutch guilders, except per share data)
<TABLE>
<CAPTION>
December 31,
ASSETS 1999
------ ------------
<S> <C>
Current Assets:
Cash and cash equivalents....................................... 15,980
Accounts receivable--
Trade......................................................... 22,141
Due from parent company....................................... 190
Other receivables............................................... 2,723
Prepaid expenses................................................ 72
------
25,126
------
Total current assets........................................ 41,106
Non Current Assets:
Intangible assets............................................... 432
Tangible fixed assets........................................... 5,286
Financial assets--
Deposits...................................................... 371
Long term loans to employees.................................. 63
------
Total fixed assets.......................................... 6,152
------
Total Assets...................................................... 47,258
======
<CAPTION>
SHAREHOLDERS' EQUITY AND LIABILITIES
------------------------------------
<S> <C>
Current Liabilities:
Accounts payable
Trade......................................................... 9,206
Due to parent company......................................... 9,031
Taxes and social security contributions......................... 11,204
Other debts..................................................... 5,100
Accrued liabilities............................................. 5,366
------
Total current liabilities................................... 39,907
Shareholders' Equity:
Common stock--NLG 100 par value; 2,000 shares authorized, 432
shares issued and outstanding.................................. 43
Additional paid-in capital...................................... 56
Legal reserve................................................... 6
Retained earnings............................................... 7,166
Cumulative foreign currency translation......................... 80
------
Total shareholders' equity.................................. 7,351
------
Total shareholders' equity and liabilities.................. 47,258
======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-25
<PAGE>
CLUSTER TELECOM B.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands of Dutch guilders)
<TABLE>
<CAPTION>
For the Year
Ended
December 31,
1999
------------
<S> <C>
Revenues........................................................... 111,013
Direct salaries and costs.......................................... (47,030)
-------
Gross profit..................................................... 63,983
Royalty expense.................................................... (11,773)
General and administrative expenses................................ (22,377)
-------
Total operating expenses......................................... (34,150)
Operating income................................................. 29,833
Financial income/(expense)......................................... (2,179)
Income before tax.................................................. 27,654
Provision for income taxes......................................... (10,688)
-------
Net income......................................................... 16,966
=======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-26
<PAGE>
CLUSTER TELECOM B.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands of Dutch guilders, except share data)
<TABLE>
<CAPTION>
Cumulative Retained
Common Stock Additional Foreign Earnings Total
------------- Paid-in Legal Currency (Accumulated Shareholders' Comprehensive
Shares Amount Capital Reserve Translation deficit) Equity Income
------ ------ ---------- ------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1998................... 430 43 56 6 (32) (3,567) (3,494)
Issuance of common
stock.................. 2 -- -- -- -- -- --
Cash dividends.......... -- -- -- -- -- (6,233) (6,233)
Foreign Currency
Translation
Adjustments............ -- -- -- -- 112 -- 112 112
Net income.............. -- -- -- -- -- 16,966 16,966 16,966
BALANCE, December 31,
1999................... 432 43 56 6 80 7,166 7,351 17,078
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-27
<PAGE>
CLUSTER TELECOM B.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands of Dutch guilders)
<TABLE>
<CAPTION>
For the Year
Ended
December 31,
1999
------------
<S> <C>
Cash flow from operating activities
Net income...................................................... 16,966
Adjustment to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................. 594
Provision for contingencies................................... 1,629
Changes in operating assets and liabilities:
Accounts receivable--Trade.................................. (11,928)
Accounts receivable--Due from parent Company................ (190)
Other receivables........................................... (1,775)
Prepaid expenses............................................ (72)
Account payables--Trade..................................... (313)
Account payables--Due to parent Company..................... 3,262
Taxes and social security contributions..................... 6,872
Other debts................................................. 3,601
Accrued liabilities......................................... 283
-------
Net cash provided from operating activities............... 18,929
-------
Cash flow from investing activities
Fixed asset additions........................................... (4,614)
-------
Net cash used in investing activities..................... (4,614)
-------
Cash flow from financing activities:
Dividends paid.................................................. (6,233)
-------
Net cash used in financing activities..................... (6,233)
Impact of exchange rate fluctuation on cash....................... 112
-------
Net increase in cash and cash equivalents......................... 8,194
-------
Cash and cash equivalents at beginning of year.................... 7,786
Cash and cash equivalents at the end of the year.................. 15,980
Supplemental Disclosures:
Income taxes paid............................................... 4,385
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-28
<PAGE>
CLUSTER TELECOM B.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. General
Cluster Telecom B.V. and subsidiaries ("Cluster" or the "Company") was
incorporated in The Netherlands on March 23, 1972 and is a limited liability
company with its corporate headquarters located in The Hague, The Netherlands.
The Company's principal activity is providing consulting services in the
area of telecommunications.
The shareholders of the Company are:
. Imison N.V., located in The Netherlands Antilles (75% shareholder).
. Eagle 2000, S.L., located in Barcelona, Spain (25% shareholder).
Other subsidiaries owned by the shareholders, excluding those owned by the
Company, are referred to as affiliated companies.
2. Principles of Consolidation
All of the subsidiaries have been fully consolidated with Cluster Telecom
B.V. as it holds the majority of the votes in the subsidiaries' representative
and decision-making bodies. Uniform accounting principles and valuation
criteria were used in the preparation of the consolidated financial statements.
All significant intercompany balances and transactions have been eliminated
in consolidation. The consolidated financial statements include the financial
statements of the Company and the following subsidiaries:
<TABLE>
<CAPTION>
Percentage
Name Legal Seat Ownership
---- ---------- ----------
<S> <C> <C>
Cluster Consulting, S.L..................... Barcelona-Spain 100%
Cluster Consulting, Ltd..................... London-UK 100%
SARL Cluster Consulting..................... Paris-France 100%
Cluster Consulting Corp..................... Boston-US 100%
Cluster Consulting Do Brasil Ltda........... Sao Paolo-Brazil 99%
Cluster Consulting GmbH..................... Dusseldorf-Germany 100%
</TABLE>
In 1999, the following new companies were formed, with Cluster Telecom B.V.
subscribing to their capital stock:
. SARL Cluster Consulting (Paris-France)
. Cluster Consulting Corp. (Boston-US)
. Cluster Consulting Do Brasil Ltda. (Sao Paulo-Brazil)
. Cluster Consulting GmbH (Dusseldorf-Germany)
Assets and liabilities of foreign subsidiaries not denominated in Dutch
guilders are, for consolidation purposes, translated into Dutch guilders at the
applicable exchange rates in effect on the balance sheet date, and
shareholders' equity is translated at historical exchange rates. Income and
expense are translated at the average applicable rates of exchange for the
year. The resulting exchange differences from the translation have been
recorded in shareholders' equity as "foreign currency translation adjustments."
F-29
<PAGE>
3. Accounting Principles
(a) General
Assets and liabilities denominated in foreign currencies have been
translated into Dutch guilders at the rates of exchange prevailing at year end.
Transactions in foreign currencies are translated at the rates of exchange
prevailing on the date of the transaction. The exchange results are recorded
under financial income/expense in the statement of income. Foreign exchange
results arising as a result from payment or recording as a receivable of
dividends and royalties from the subsidiaries are for the accounts of the
Company's shareholders.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the consolidated financial
statements. Actual results could differ from those estimates.
(b) Intangible assets
Costs with respect to the acquisition of licenses, patents, trademarks,
concessions and the rights of intellectual ownership have been amortized on a
straight-line basis over 4 years.
The Company periodically evaluates the recoverability of the carrying amount
of its long-lived assets in accordance with SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of.
Whenever events or changes in circumstances indicate that the carrying amounts
of those assets may not be recoverable, the Company will compare undiscounted
net cash flows estimated to be generated by those assets to the carrying amount
of those assets. When these undiscounted cash flows are less than the carrying
amounts of the assets, the Company will record impairment losses to write the
asset down to fair value, measured by the discounted estimated net future cash
flows expected to be generated from the assets. During the years ended December
31, 1999, 1998 and 1997, management believes that no such impairments exist.
(c) Non-current assets
Tangible fixed assets are stated at the acquisition cost, less accumulated
depreciation. The depreciation is calculated on the basis of acquisition cost
less residual value over the estimated useful life of the related asset on a
straight-line basis. The estimated useful lives are:
<TABLE>
<S> <C>
Furniture, leasehold Improvements and equipment.................. 10 years
Other non current assets......................................... 4 years
</TABLE>
Expenditures for expansion, modernization or improvement are capitalized,
provided that they increase productivity, capacity or efficiency, or extend the
useful lives of the related assets.
The values of non-current assets are reviewed if facts and circumstances
suggest that they may be impaired as discussed in Note 3b. There were no
reevaluations of such assets recorded during 1999.
(d) Financial assets
Financial assets comprise deposits given to landlords and utility companies,
stated at cost, and long-term loans made to employees.
(e) Accounts receivable and payable
Accounts receivable are stated at historical value, less an allowance for
uncollectible accounts.
Accounts receivable and payables relating to transactions, whether or not
they arise in the normal course of business, are recorded at historical value
and are classified as long-term or short-term according to when they fall due.
F-30
<PAGE>
(f) Recognition of income
Revenues are recognized for time and materials contracts and fixed-fee
contracts on the percentage-of-completion method of accounting, based on the
ratio of costs incurred to total estimated costs. Unbilled revenues represent
labor costs incurred, and estimated earnings, production and other client-
reimbursable costs. Advanced billings represent billings of production and
other client-reimbursable out-of-pocket costs in excess of revenues recognized.
Amounts billed to clients in excess of revenues recognized to date are
classified as deferred revenues. Unbilled charges and/or advanced billings were
not material as of December 31, 1999. Cost of sales is recorded in the same
period that sales are recognized. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
identified.
(g) Cash and cash equivalents
The Company considers instruments purchased with an original maturity of
three months or less to be cash equivalents.
(h) Business concentration
The customers of the Company that accounted for 10% or more of revenues in
1999, and the related accounts receivable, as of the end of the period
presented are as follows:
<TABLE>
<CAPTION>
(in thousands of Dutch guilders)
---------------------------------
Accounts receivable
as of December 31,
Customer 1999 Revenues 1999
-------- ------------- -------------------
<S> <C> <C>
Ericsson Group.......................... 16,009 2,113
Sonae Group............................. 12,272 1,968
Orange Group............................ 11,946 979
Airtel Group............................ 11,631 668
</TABLE>
(i) Comprehensive Income
The components of comprehensive income are as follows:
<TABLE>
<CAPTION>
For the year ended
December 31,
1999
------------------
<S> <C>
Net Income............................................. 16,966
Foreign currency translation adjustment................ 112
------
Comprehensive Income................................... 17,078
</TABLE>
4. Related party transactions
(a) Royalty expense
Cluster Telecom B.V. has set up a licensing agreement with its majority
shareholder Imison N.V. that enables it to use the trademark of the Company.
Under this agreement, the Company must pay royalties of between 94% and 98% of
the total royalties received by Cluster Telecom B.V. from its subsidiaries.
The amount charged against revenues for royalty expense during 1999 was
NLG11,773.
(b) Provision of services
Several of the consultants providing services to the Company are related to
the stockholders of Cluster Telecom B.V. The amount paid to these consultants
(either as natural persons or through companies they have created) in respect
of services provided in 1999 amounted to NLG4.2 million. The Company believes
the rates being charged for these services are comparable to amounts that would
be paid to third parties.
F-31
<PAGE>
5. Tangible Fixed Assets
The breakdown of the Tangible Fixed Assets in the accompanying consolidated
balance sheet as of December 31, 1999 is as follows:
<TABLE>
<CAPTION>
(in thousands of Dutch guilders)
-------------------------------------
Other
Tangible
Fixed Leasehold
Furniture Assets Improvements Total
--------- -------- ------------ -----
<S> <C> <C> <C> <C>
Historical Cost..................... 1,453 2,810 2,105 6,368
Accumulated Depreciation............ 285 630 167 1,082
----- ----- ----- -----
Balance December 31................. 1,168 2,180 1,938 5,286
===== ===== ===== =====
</TABLE>
6. Financial Assets
The breakdown of the Financial Fixed Assets in the accompanying consolidated
balance sheet as of December 31, 1999 is as follows:
<TABLE>
<CAPTION>
in thousands of
Dutch guilders
---------------
<S> <C>
Deposits.................................................. 371
Long term loans to employees.............................. 63
---
Total................................................... 434
===
</TABLE>
7. Accounts Receivable
Accounts receivable, as presented under current assets, mature within one
year, and comprise the following:
<TABLE>
<CAPTION>
in thousands of
Dutch guilders
---------------
<S> <C>
Trade accounts receivable................................. 22,141
Due from parent company................................... 190
Other receivables......................................... 2,795
------
25,126
======
</TABLE>
Accounts receivable at December 31, 1999 were substantially denominated in
foreign currencies. The foreign currencies include the French franc, Brazilian
real, Spanish peseta, U.S. dollar, the euro and others. The breakdown is
summarized as follows:
<TABLE>
<CAPTION>
(in thousands of Dutch guilders)
--------------------------------
Euro
French Brazilian Spanish US and
Franc Real Peseta Dollar Other
------ --------- ------- ------ -----
<S> <C> <C> <C> <C> <C>
1,705 33 4,868 2,255 14,545
</TABLE>
8. Cash and cash equivalents
Cash equivalents at December 31, 1999 include short-term time deposits
amounting to NLG285,000. The amounts stated in the accompanying financial
statements for cash and cash equivalents approximate fair value due to their
short term maturity.
F-32
<PAGE>
9. Liabilities
Liabilities that are due to be paid within one year, including the short-
term portion of long-term liabilities, if any, are presented under short-term
liabilities.
The amount payable to Imison N.V. is related primarily to a license
agreement between the Company and Imison N.V. to use the Company's trademark.
The amount charged against revenue for this royalty expense during 1999 was
NLG11,773.
Accounts payable as of December 31, 1999 were substantially denominated in
foreign currencies. The foreign currencies include British pound, Deutsche
mark, the French franc, Brazilian real, Spanish peseta, U.S. dollar, the euro
and others. The breakdown is summarized as follows:
<TABLE>
<CAPTION>
(in thousands of Dutch guilders)
--------------------------------
Euro
British Deutsche French Real Spanish and
Pound Mark Franc (Brazil) Peseta US Dollar other
------- -------- ------ -------- ------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
2,464 279 436 5,709 10,414 139 2,953
</TABLE>
10. Contingent Liabilities
(a) Tax contingencies
The caption "Accrued liabilities" in the accompanying consolidated financial
statements include a provision amounting to NLG4.9 million for covering certain
contingencies, to the extent that the Company's net worth is not altered, if
certain contingencies materialize. These contingencies basically stem from the
Company's remunerations systems for non-salaried consultants. The amount
charged against profit and loss for the year was NLG1.6 million. The Company
has a bank guaranteed from Credit Suisse, which would cover this amount in the
event the above-mentioned contingencies materialize.
In addition to the contingencies mentioned in the preceding paragraph, as a
result of varying interpretations that can be made of current legislation
applicable to certain Company practices, other contingencies might arise which
cannot be objectively quantified, for which no provision has been made in the
accompanying consolidated financial statements and for which no guarantee has
been given to the Company. These contingencies basically stem from the
Company's remuneration systems for non-salaried consultants and directors, as
the tax and labor authorities might challenge the nature of their relationship
with the Company. Should a reclassification of this relationship occur, the tax
and labor authorities might require the Company to pay applicable withholding
taxes and social security contributions. In addition, the tax authorities might
conclude that VAT paid by the Company on these consultants' invoices is not
deductible. Although these contingencies are hard to quantify, the amount that
could be claimed by the authorities, including eventual penalties, could be
between NLG10.5 million and NLG13.2 million. As advised by legal counsel,
Company management believes these contingencies are unlikely to materialize and
that the Company's position defendable.
(b) Operating lease commitments
The Company and its subsidiaries were committed under operating leases,
expiring in various years, principally for the lease of office space. Certain
leases were subject to rent reviews and require payment of expenses under
escalation clauses. Rent expense was NLG2.1 million for the year ended December
31, 1999. The Company has no further obligations regarding such leases as of
December 31, 1999.
11. Income Taxes
The corporate tax is based on the fiscal result, taking into account that
certain income and expenses as reported in the profit and loss account are
exempted from taxation (permanent).
F-33
<PAGE>
Income before income taxes and the provision for taxes are summarized as
follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
1999
------------
<S> <C>
Income (loss) before income taxes:
United States (Boston Subsidiary).......................... (1,531)
International.............................................. 29,185
-------
27,654
Provision for taxes on income:
Current--
United States............................................ --
International............................................ (10,688)
-------
(10,688)
Deferred--
United States............................................ --
International............................................ --
-------
16,966
=======
</TABLE>
The only subsidiary that has deferred taxes is Cluster Consulting, S.L.
(Spain), due to an accelerated amortization performed in 1995 pursuant to
Spanish law. The deferred tax included in "Taxes and social security
contributions" in the accompanying balance sheet as of December 31, 1999
amounted to NLG118,000.
The Company's effective tax rate during 1999 was 38.65% as a result of the
income generated by the subsidiaries in Spain (both, statutory and effective
tax rate of 35%), the United Kingdom (effective tax rate of 30.25%) and Germany
(effective tax rate 47%).
12. Financial Income and Expense
The breakdown of 1999 financial income and expense items is summarized as
follows:
<TABLE>
<S> <C>
Interest Income................................................... 376
Other............................................................. (362)
Currency exchange loss, net....................................... (2,193)
------
(2,179)
======
</TABLE>
13. Shareholders' equity
The breakdown of shareholders equity is shown in the notes to the Company's
annual accounts.
(a) Common stock
The authorized share capital of the Company amounts to NLG200,000,
consisting of 2,000 shares with a par value of NLG100. At December 31, 1999, a
total of 432 shares were issued and fully paid, and additional paid-in capital
amounted to NLG56,000.
F-34
<PAGE>
(b) Legal reserve
Due to local legislation in Spain, a legal reserve has been provided for
with respect to the Company's participation in Cluster Consulting, S.L.
(Barcelona).
Under the Spanish Corporations Law, as amended, 10% of income for each year
must be transferred to the legal reserve until the balance of this reserve
reaches at least 20% of capital stock.
The legal reserve can be used to increase capital, provided that the
remaining reserve balance does not fall below 10% of the increased capital
stock amount. Except as mentioned above, until the legal reserve exceeds 20% of
capital stock, it can only be used to offset losses, provided that sufficient
other reserves are not available to offset such losses.
14. Segment reporting
The Company operates only in one segment, providing consulting services.
Even though the Company has different legal entities operating in various
countries, its operation and management is performed on a global basis.
A summary of the Company's revenues and long-lived assets for the year ended
December 31, 1999 is summarized as follows:
<TABLE>
<CAPTION>
(in thousands of Dutch guilders)
--------------------------------
Cluster Cluster
Cluster Consulting, Cluster Consulting Cluster Cluster
Consulting, Ltd. Consulting, Corp. Consulting Consulting,
S.L. (United SARL (United GmbH Ltda.
(Spain) Kingdom) (France) States) (Germany) (Brazil)
----------- ----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ 67,176 35,929 914 2,048 3,160 1,786
Long-lived Assets....... 2,881 989 39 501 9 867
</TABLE>
These revenues are primarily earned from the telecommunications consulting
services provided by the Company to clients located in the following geographic
areas:
<TABLE>
<CAPTION>
(in thousands of Dutch guilders)
---------------------------------------------------------------
Central
and
Northern Far Latin Middle North Southern
Africa Europe East America East America Europe Total
------ -------- ---- ------- ------ ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
8,506 44,766 1,285 12,630 340 1,438 42,049 111,013
</TABLE>
15. Personnel Expenses
Labor cost are summarized as follows:
<TABLE>
<CAPTION>
(in
thousands
of Dutch
guilders)
---------
<S> <C>
Salaries and wages.............................................. 9,279
Other social security contributions............................. 1,751
------
11,030
======
</TABLE>
16. Directors and supervisory directors
The remuneration of statutory directors of the Company amounts to
NLG792,000. There are no remuneration or post-retirement obligations for
retired statutory directors. There are no pension plans for the statutory
directors. The Company has no supervisory directors.
F-35
<PAGE>
17. Appropriation of Net Income
Subject to the provision under Dutch law that no dividends can be declared
until all losses have been recovered, decision regarding the distribution of
profits are made at the Annual General Meeting of Shareholders, in accordance
with Article 16 of the Company's Articles of Incorporation.
The Management is planning to distribute dividends amounting to NLG11.9
million, in addition to the interim dividends paid amounting to NLG6.2 million.
18. Subsequent Events
In 2000, the Company entered into negotiations regarding a potential sale of
a portion of its shares. As of the date of this report, no final decision had
been made relating to this potential sale.
On April 19, 2000 the Board of Directors approved a stock option plan under
which 4 million options were issued to employees, professionals with a service
agreement with the Company or officers or directors appointed by the Company or
any of its subsidiaries and affiliates. The stock options entitle the
recipients the option to acquire shares in the and/or stock appreciation rights
entitling the grantee to shares or cash compensation measured by appreciation
in the value of the shares in the Company between the exercise price and the
fair market value of the ordinary shares in the company on the date of
exercise. The options were issued at Euro 16 and vest quarterly between January
2, 2001 and January 2, 2004.
F-36
<PAGE>
AUDITORS' REPORT
To the Board of Directors and Shareholders of
Cluster Telecom B.V. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Cluster
Telecom B.V. and subsidiaries as of December 31, 1998 and the related
consolidated statements of operations, shareholders' equity and cash flow for
the year ended December 31, 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cluster
Telecom B.V. and subsidiaries as of December 31, 1998 and the results of their
operations and their cash flows for the year ended December 31, 1998 in
conformity with accounting principles generally accepted in the United States.
Arthur Andersen
Amsterdam, The Netherlands,
June 8, 2000
F-37
<PAGE>
CLUSTER TELECOM B.V. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands of Dutch guilders, except share data)
<TABLE>
<CAPTION>
ASSETS December 31, 1998
------ -----------------
<S> <C>
Current Assets:
Cash and cash equivalents.................................. 7,786
Accounts receivable--Trade................................. 10,213
Other receivables.......................................... 948
------
11,161
------
Total current assets..................................... 18,947
Non Current Assets:
Intangible assets.......................................... 3
Tangible fixed assets...................................... 1,890
Financial assets (deposits)................................ 239
------
Total fixed assets....................................... 2,132
------
Total Assets................................................. 21,079
======
<CAPTION>
SHAREHOLDERS' EQUITY AND LIABILITIES December 31, 1998
------------------------------------ -----------------
<S> <C>
Current Liabilities:
Accounts payable
Trade.................................................... 9,519
Due to parent company.................................... 5,769
Taxes and social security contributions.................... 4,332
Other debts................................................ 1,499
Accrued liabilities........................................ 3,454
------
Total current liabilities................................ 24,573
Shareholders' Equity:
Common stock--NLG 100 par value; 2,000 shares authorized,
430 shares issued and outstanding......................... 43
Additional paid-in capital................................. 56
Legal reserve.............................................. 6
Retained earnings.......................................... (3,567)
Cumulative foreign currency translation.................... (32)
------
Total shareholders' equity............................... (3,494)
------
Total shareholders' equity and liabilities................... 21,079
======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-38
<PAGE>
CLUSTER TELECOM B.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands of Dutch guilders)
<TABLE>
<CAPTION>
For the year
ended
December 31,
1998
------------
<S> <C>
Revenues........................................................... 53,884
Direct salaries and costs.......................................... (29,710)
-------
Gross profit..................................................... 24,174
Royalty expense.................................................... (5,609)
General and administrative expenses................................ (10,656)
-------
Total operating expenses......................................... (16,265)
Operating income................................................. 7,909
Financial income/(expense)......................................... 16
Income before tax.................................................. 7,925
Provision for income taxes......................................... (3,375)
-------
Net income......................................................... 4,550
=======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-39
<PAGE>
CLUSTER TELECOM B.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands of Dutch guilders, except share data)
<TABLE>
<CAPTION>
Cumulative Retained
Common Stock Additional Foreign Earnings Total
------------- Paid-in Legal Currency (Accumulate Shareholders' Comprehensive
Shares Amount Capital Reserve Translation deficit) Equity Income
------ ------ ---------- ------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1997................... 430 43 56 6 -- 963 1,068
Cash dividends.......... -- -- -- -- -- (7,466) (7,466) --
Foreign Currency
Translation
Adjustments............ -- -- -- -- (32) -- (32) (32)
Adjustment for
consolidation
purposes--provision for
contingencies.......... -- -- -- -- -- (1,614) (1,614)
Net income.............. -- -- -- -- -- 4,550 4,550 4,550
BALANCE, December 31,
1998................... 430 43 56 6 (32) (3,567) (3,494) 4,518
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-40
<PAGE>
CLUSTER TELECOM B.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
(in thousands of Dutch guilders)
<TABLE>
<CAPTION>
For the year ended
December 31, 1998
------------------
<S> <C>
Cash flow from operating activities:
Net income................................................ 4,550
Adjustment to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization........................... 276
Provision for contingencies............................. 1,680
Changes in operating assets and liabilities:
Accounts receivable--Trade............................ (10,213)
Other receivables..................................... (948)
Accounts payable--Trade............................... 9,519
Accounts payable--Due from parent Company............. 5,762
Taxes and social security contributions............... 4,332
Other debts........................................... 1,438
Accrued liabilities................................... 160
-------
Net cash provided by operating activities........... 16,556
-------
Cash flow from investing activities:
Fixed asset additions..................................... (1,274)
-------
Net cash used in investing activities............... (1,274)
-------
Cash flow from financing activities:
Dividends paid............................................ (7,466)
-------
Net cash used in financing activities............... (7,466)
-------
Impact of exchange rate fluctuation on cash................. (32)
-------
Net increase in cash and cash equivalents................... 7,784
-------
Cash and cash equivalents at beginning of year.............. 2
Cash and cash equivalents at the end of the year............ 7,786
Supplemental Disclosures:
Income taxes paid........................................... 290
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-41
<PAGE>
CLUSTER TELECOM B.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
1. General
Cluster Telecom B.V. and subsidiaries ("Cluster" or the "Company"), was
incorporated in the Netherlands on March 23, 1972 and is a limited liability
company with its corporate headquarter located in The Hague, The Netherlands.
The Company's principal activity is providing consulting services in the
area of telecommunications.
The shareholders of the Company are:
. Imison N.V., located in The Netherlands Antilles (100% shareholder).
Other subsidiaries owned by the shareholders, excluding those owned by the
Company, are referred to as affiliated companies.
2. Principles of Consolidation
All of the subsidiaries have been fully consolidated with Cluster Telecom
B.V. as it holds the majority of the votes in the subsidiaries representative
and decision-making bodies. Uniform accounting principles and valuation
criteria were used in the preparation of the consolidated financial statements.
All significant intercompany balances and transactions have been eliminated
in consolidation. The consolidated financial statements include the financial
statements of the Company and the following subsidiaries:
<TABLE>
<CAPTION>
Percentage
Name Legal Seat Ownership
---- --------------- ----------
<S> <C> <C>
Cluster Consulting, S.L........................ Barcelona-Spain 100%
Cluster Consulting, Ltd........................ London-UK 100%
</TABLE>
In 1998, Cluster Consulting, Ltd. (London-UK), a new company, was formed
with Cluster Telecom B.V. subscribing to its capital stock.
Assets and liabilities of foreign subsidiaries not denominated in Dutch
guilders are for consolidation purposes translated into Dutch guilders at the
applicable exchange rates in effect on the applicable balance sheet date, and
shareholders' equity is translated at historical exchange rates. Income and
expense are translated at the average applicable rates of exchange for the
year. The resulting exchange differences from the translation have been
recorded in shareholders' equity as "foreign currency translation adjustments".
3. Accounting Principles
(a) General
Assets and liabilities denominated in foreign currencies have been
translated into Dutch guilders at the rates of exchange prevailing at year-end.
Transactions in foreign currencies are translated at the applicable rates of
exchange prevailing on the date of the transaction. The exchange results are
recorded under financial income/expense in the statement of income. Foreign
exchange results arising as a result from payment or recording as a receivable
of dividends and royalties from the subsidiaries are for the accounts of the
Company's shareholder.
These consolidated financial statements have been prepared in accordance
with US GAAP. Considering that this is the first consolidation under these
circumstances (US GAAP), the consolidated financial statements refer only to
1998. Therefore, there are no comparative figures relating 1997 consolidated
financial statements.
F-42
<PAGE>
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the consolidated financial
statements. Actual results could differ from those estimates.
(b) Intangible assets
Costs with respect to the acquisition of licenses, patents, trademarks,
concessions and the rights of intellectual ownership have been amortized on a
straight-line basis over 4 years.
The Company periodically evaluates the recoverability of the carrying amount
of its long-lived assets in accordance with SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of.
Whenever events or changes in circumstances indicate that the carrying amounts
of those assets may not be recoverable, the Company will compare undiscounted
net cash flows estimated to be generated by those assets to the carrying amount
of those assets. When these undiscounted cash flows are less than the carrying
amounts of the assets, the Company will record impairment losses to write the
asset down to fair value, measured by the discounted estimated net future cash
flows expected to be generated from the assets. During the years ended December
31, 1998 and 1997, management believes that no such impairments exist.
(c) Non current assets
Tangible fixed assets are stated at the acquisition cost, less accumulated
depreciation. The depreciation is calculated on the basis of acquisition cost
less residual value over the estimated useful life of the related asset on a
straight-line basis. The estimated useful lives are:
<TABLE>
<S> <C>
Machinery and equipment............. 10 years
Other non current assets............ 4 years
</TABLE>
Expenditures for expansion, modernization or improvement are capitalized,
provided that they increase productivity, capacity or efficiency or extend the
useful lives of the related assets.
The values of non-current assets are reviewed if facts and circumstances
suggest that they may be impaired as discussed in Note 3b. There were no
reevaluations of such assets recorded during 1998.
(d) Financial assets
Financial fixed assets comprise deposits given to landlords and utility
companies, stated at cost.
(e) Accounts receivable and payable
Accounts receivable are stated at historical value, less an allowance for
uncollectible accounts.
Accounts receivable and payables relating to transactions, whether or not
they arise in the normal course of business, are recorded at historical value
and are classified as long-term or short-term according to when they fall due.
(f) Recognition of income
Revenues are recognized for time and materials contracts and fixed-fee
contracts on the percentage-of-completion method of accounting, based on the
ratio of costs incurred to total estimated costs. Unbilled revenues represent
labor costs incurred and estimated earnings, production and other client-
reimbursable costs. Advanced billings represent billings of production and
other client-reimbursable out-of-pocket costs in excess of revenues recognized.
Amounts billed to clients in excess of revenues recognized to date are
classified as deferred revenues. Unbilled charges and/or advanced billings were
not material as of December 31, 1998. Cost of sales is recorded in the same
period that sales are recognized. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
identified.
(g) Cash and cash equivalents
The Company considers instruments purchased with an original maturity of
three months or less to be cash equivalents.
F-43
<PAGE>
(h) Business concentration
The customers of the Company that accounted for 10% or more of revenues in
1998 and the related accounts receivable, as of the end of the period presented
are as follows:
<TABLE>
<CAPTION>
(in thousands of Dutch guilders)
------------------------------------
Accounts receivable as
Customer 1998 Revenues of December 31, 1998
-------- ------------- ----------------------
<S> <C> <C>
Sonae Group.......................... 15,457 755
Airtel Group......................... 7,620 1,105
Ben Group............................ 6,815 3,028
Ericsson Group....................... 6,382 2,022
Orange Group......................... 5,379 849
</TABLE>
(i) Comprehensive Income
The components of comprehensive income are as follows:
<TABLE>
<CAPTION>
For the year ended
December 31, 1998
------------------
<S> <C>
Net Income............................................. 4,550
Foreign currency translation adjustment................ (32)
-----
Comprehensive Income................................... 4,518
=====
</TABLE>
4. Related party transactions
(a) Royalty expense
Cluster Telecom B.V. has set up a licensing agreement with its shareholder
Imison N.V. that enables it to use the trademark of the Company. Under this
agreement, the Company must pay royalties of between 94% and 98% of the total
royalties received by Cluster Telecom B.V. from its subsidiaries.
The amount charged against revenues for royalty expense during 1998 was NLG
5,609 thousands.
(b) Provision of services
Several of the consultants providing services to the Company are related to
the stockholder of Cluster Telecom B.V. The amount paid to these consultants
(either as natural persons or through companies they have created) in respect
of services provided in 1998 amounted to NLG 638 thousands. The Company
believes the rates being charged for these services are comparable to amounts
that would be paid to third parties.
5. Tangible Fixed Assets
The breakdown of the Tangible Fixed Assets in the accompanying consolidated
balance sheet as of December 31, 1998 is as follows:
<TABLE>
<CAPTION>
(in
thousands of
Dutch
guilders)
------------
<S> <C>
Machinery and equipment...................................... 1,573
Other tangible fixed assets.................................. 822
Accumulated Depreciation..................................... (505)
-----
Balance December 31...................................... 1,890
=====
</TABLE>
F-44
<PAGE>
6. Financial Assets
The breakdown of the Financial Fixed Assets caption in the accompanying
consolidated balance sheet as of December 31, 1998 is as follows:
<TABLE>
<CAPTION>
(in thousands
of Dutch
guilders)
-------------
<S> <C>
Deposits.................................................... 239
---
Total................................................... 239
===
</TABLE>
7. Accounts Receivable
Accounts receivable, as presented under current assets, mature within one
year, and comprise the following:
<TABLE>
<CAPTION>
(in thousands
of Dutch
guilders)
-------------
<S> <C>
Trade accounts receivable................................... 10,213
Other receivables........................................... 948
------
11,161
======
</TABLE>
Accounts receivable at December 31, 1998 were substantially denominated in
foreign currencies. The foreign currencies include the Austrian schilling,
Belgian franc, British pound, Deutsche mark, French franc, Portuguese escudo,
Spanish peseta and Swiss franc. The breakdown is summarized as follows:
<TABLE>
<CAPTION>
(in thousands of Dutch guilders)
--------------------------------------------------------------------
Austrian Belgian British Deutsche French Portuguese Spanish Swiss
Schilling Franc Pound Mark Franc Escudo Peseta Franc
--------- ------- ------- -------- ------ ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
1,443 969 41 908 86 1,095 2,744 859
</TABLE>
8. Liabilities
Liabilities that are due to be paid within one year, including the short-
term portion of long-term liabilities, if any, are presented under short-term
liabilities.
The breakdown of current liabilities is summarized as follows:
<TABLE>
<CAPTION>
(in thousands
of Dutch
guilders)
-------------
<S> <C>
Trade-accounts payable...................................... 9,519
Payable to parent company................................... 5,769
Other payables.............................................. 5,991
------
21,279
======
</TABLE>
The amount payable to Imison N.V. is related primarily to a license
agreement between the Company and Imison N.V., to use the Company's trademark.
The amount charged against revenue for this royalty expense during 1998 was
NLG 5,609 thousands.
Accounts payable as of December 31, 1998 were substantially denominated in
foreign currencies. The foreign currencies include British pound, Deutsche
mark, Spanish peseta and the Swiss franc. The breakdown is summarized as
follows:
<TABLE>
<CAPTION>
(in thousands of Dutch guilders)
-------------------------------------------------------------------------------------------------
British Deutsche Spanish Swiss
Pound Mark Peseta Franc
------- -------- ------- -----
<S> <C> <C> <C>
367 5 14,209 344
</TABLE>
F-45
<PAGE>
9. Contingent Liabilities
(a) Tax contingencies
The caption "Accrued liabilities" in the accompanying consolidated financial
statements include a provision amounting to NLG 3.29 million for covering
certain contingencies, to the extent that the Company's net worth is not
altered, if certain contingencies materialize. These contingencies basically
stem from the Company's remuneration systems for non-salaried consultants. This
provision has been recorded against profit and loss for the year (NLG 1.68
million) and against retained earnings (NLG 1.61 million), based on the year
when those contingencies were generated. The Company has a bank guarantee from
Credit Suisse, which would cover this amount in the event the above-mentioned
contingencies materialize.
In addition to the contingencies mentioned in the preceding paragraph, as a
result of varying interpretations that can be made of current legislation
applicable to certain Company practices, other contingencies might arise which
cannot be objectively quantified, for which no provision has been made in the
accompanying consolidated financial statements and for which no guarantee has
been given to the Company. These contingencies basically stem from the
Company's remuneration systems for non-salaried consultants and directors, as
the tax and labor authorities might challenge the nature of their relationship
with the Company. Should a reclassification of this relationship occur, the tax
and labor authorities might require the Company to pay applicable withholding
taxes and social security contributions. In addition, the tax authorities might
conclude that VAT paid by the Company on these consultants' invoices is not
deductible. Although these contingencies are hard to quantify, the amount that
could be claimed by the authorities, including eventual penalties, could be
between NLG 5.87 million and NLG 7.29 million. As advised by legal counsel,
Company management believes these contingencies are unlikely to materialize and
that the Company's position is defendable.
(b) Operating lease commitments
The Company and its subsidiaries were committed under operating leases,
expiring in various years, principally for the lease of office space. Certain
leases were subject to rent reviews and require payment of expenses under
escalation clauses. Rent expense was NLG 547 thousands for the year ended
December 31, 1998. The Company has no further obligations regarding such leases
as of December 31, 1998.
10. Income Taxes
The corporate tax is based on the fiscal result, taking into account that
certain income and expenses as reported in the profit and loss account are
exempted from taxation (permanent).
Income before income taxes and the provision for taxes are summarized as
follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
1998
------------
<S> <C>
Income (loss) before income taxes:
International............................................ 7,925
------
7,925
Provision for taxes on income:
Current--
International............................................ (3,375)
------
(3,375)
Deferred--
International............................................ --
------
4,550
======
</TABLE>
F-46
<PAGE>
The only subsidiary that has deferred taxes is Cluster Consulting, S.L.
(Spain), due to an accelerated amortization performed in 1995 pursuant to
Spanish law. The deferred tax, included in "Taxes and social security
contributions" in the accompanying balance sheet as of December 31, 1998
amounted to NLG 190,000.
The Company's effective tax rate during 1998 was 42.5%, as a result of the
income generated by the Dutch parent company (effective tax rate of 62%) and
the subsidiaries in Spain (both, statutory and effective tax rate of 35%) and
the United Kingdom (effective tax rate of 31%).
11. Financial Income and Expense
The breakdown of 1998 financial income and expense items is summarized as
follows:
<TABLE>
<S> <C>
Interest Income..................... 84
Currency exchange loss, net......... (68)
---
16
===
</TABLE>
12. Shareholders' equity
The breakdown of shareholders equity is shown in the notes to the Company's
annual accounts.
(a) Common stock
The authorized share capital of the Company amounts to NLG 200,000
consisting of 2,000 shares with a par value of NLG 100.
At December 31, 1998 a total of 430 shares were issued and fully paid, and
additional paid-in capital amounted to NLG 55,772.
(b) Legal reserve
Due to local legislation in Spain, a legal reserve has been provided for
with respect to the Company's participation in Cluster Consulting, S.L.
(Barcelona).
Under the Spanish Corporations Law, as amended, 10% of income for each year
must be transferred to the legal reserve until the balance of this reserve
reaches at least 20% of capital stock.
The legal reserve can be used to increase capital provided that the
remaining reserve balance does not fall below 10% of the increased capital
stock amount. Except as mentioned above, until the legal reserve exceeds 20% of
capital stock, it can only be used to offset losses, provided that sufficient
other reserves are not available to offset such losses.
13. Segment reporting
The Company operates only in one segment, providing consultant services.
Even though the Company has different legal entities operating in various
countries, its operation management are performed on a global basis.
A summary of the Company's revenues and long-lived assets for the year ended
December 31,1998 is summarized as follows:
<TABLE>
<CAPTION>
(in thousands of Dutch guilders)
-------------------------------------------------
Cluster Consulting, S.L. Cluster Consulting, Ltd.
(Spain) (United Kingdom)
------------------------ ------------------------
<S> <C> <C>
Revenues................ 38,498 15,386
Long-lived Assets....... 1,890 --
</TABLE>
F-47
<PAGE>
These revenues are primarily earned from the telecommunications consulting
services provided by the Company to clients located in the following geographic
areas:
<TABLE>
<CAPTION>
(in thousands of Dutch guilders)
-------------------------------------------------------------------------
Central and
Northern North Southern
Africa Europe America Europe Total
------ ----------- ------- -------- -----
<S> <C> <C> <C> <C> <C>
352 25,364 216 27,952 53,884
</TABLE>
14. Personnel Expenses
Labor costs are summarized as follows:
<TABLE>
<CAPTION>
(in thousands of Dutch guilders)
--------------------------------
<S> <C>
Salaries and wages...................... 2,662
Other social security contributions..... 422
-----
3,084
=====
</TABLE>
15. Directors and supervisory directors
The remuneration of statutory directors of the Company amounts to NLG
924,000.
There are no remuneration or post-retirement obligations for retired
statutory directors.
There are no pension plans for the statutory directors.
The Company has no supervisory directors.
16. Appropriation of Net Income
Subject to the provision under Dutch law that no dividends can be declared
until all losses have been recovered, decisions regarding the distribution of
profits are made at the Annual General Meeting of Shareholders, in accordance
with Article 16 of the Company's Articles of Incorporation.
On March 9, 2000 the Annual General Meeting of shareholders resolved to
declare the interim dividend distribution for fiscal year 1997 and 1998
amounting to NLG 887 thousands (gross) and NLG 7,466 thousands (gross)
respectively, as final dividend for these years.
17. Subsequent Events
In 2000, the Company entered into negotiations regarding a potential sale of
a portion of their shares. As of the date of this report, no final decision had
been made relating to this potential sale.
On April 19, 2000 the Board of Directors approved a stock option plan under
which 4 million options were issued to employees, professionals with a service
agreement with the Company or officers or directors appointed by the Company or
any of its subsidiaries and affiliates. The stock options entitle the
recipients the option to acquire shares in the and/or stock appreciation rights
entitling the grantee to shares or cash compensation measured by appreciation
in the value of the shares in the Company between the exercise price and the
fair market value of the ordinary shares in the Company on the date of
exercise. The options were issued at Euro 16 and vest quarterly between January
2, 2001 and January 2, 2004.
F-48
<PAGE>
1. Balance sheet as at December 31, 1997 (after proposed appropriation of
results)
<TABLE>
<CAPTION>
Notes 1997
----- ---------
NLG
<S> <C> <C>
Fixed assets
Financial fixed assets................................... 5.4 1,122,968
Current assets
Receivables.............................................. (6,091)
Cash and banks........................................... 1,492
---------
(4,599)
Current Liabilities 5.5 61,526
Net current assets....................................... (66,125)
---------
Total assets less current liabilities................ 1,056,843
=========
Shareholder's equity 5.6
Issued and paid-up capital............................... 43,000
Share premium............................................ 55,772
Legal reserve............................................ 6,093
Retained earnings........................................ 951,978
---------
1,056,843
=========
</TABLE>
2. Profit and loss account for the year ended December 31, 1997
<TABLE>
<CAPTION>
Notes 1997
----- --------
NLG
<S> <C> <C>
Net sales................................................. --
Cost of sales............................................. --
--------
Gross profit.............................................. --
General and administrative expenses....................... 5.7 32,194
--------
Total costs........................................... (32,194)
Net profit from sales..................................... --
Financial result.......................................... 4,166
--------
Operating profit before taxation.......................... (28,029)
Taxation on result from operations........................ 5.8 --
Share in result of subsidiaries........................... 485,163
--------
Net profit............................................ 457,135
========
</TABLE>
F-49
<PAGE>
3. Consolidated balance sheet as at December 31, 1997
(after proposed appropriation of results)
<TABLE>
<CAPTION>
Notes 1997
----- ----------
NLG
<S> <C> <C>
Fixed assets
Tangible fixed assets .................................. 1,092,517
Intangible fixed assets................................. 1,724
Financial fixed assets ................................. 68,412
----------
1,162,653
Current assets
Debtors................................................. 1,837,771
Receivable from group company........................... (6,091)
Cash and banks.......................................... 273,523
----------
2,105,203
Current liabilities..................................... (2,211,013)
----------
(105,810)
Net current assets..................................
----------
Total assets less current liabilities............... 1,056,843
==========
Shareholder's equity
Issued and paid-up capital.............................. 6.4
Share premium........................................... 43,000
Legal reserve........................................... 55,772
Retained earnings....................................... 6,093
951,978
----------
1,056,843
==========
</TABLE>
4. Consolidated profit and loss account for the year ended December 31, 1997
<TABLE>
<CAPTION>
Notes 1997
----- ----------
NLG
<S> <C> <C>
Net sales................................................ 13,005,043
Cost of sales............................................ 10,340,127
--- ----------
Gross profit............................................. 2,664,916
General and administrative expenses...................... 2,025,827
--- ----------
Net profit from sales.................................... 639,089
Financial result......................................... 56,605
--- ----------
Operating profit before taxation......................... 695,694
Taxation on result from operations....................... 279,194
--- ----------
Result from operation after taxation..................... 416,500
---
Extraordinary income..................................... 55,942
Extraordinary expenses................................... 15,307
--- ----------
40,635
---
--- ----------
Net result after taxation............................ 457,135
=== ==========
</TABLE>
F-50
<PAGE>
5. Notes to the Annual Accounts
5.1 Group affiliation and principal activities
The Company, incorporated on March 23, 1972, is a limited company with its
statutory seat in The Hague, The Netherlands. The former name of the company
was Beleggingsmaatschappij Lokus B.V.
The principal activity of the company is the holding of group companies.
5.2 Basis of presentation
The accompanying Annual Accounts have been prepared in accordance with
principles of accounting generally accepted in The Netherlands and are in
compliance with the provisions of The Netherlands' Civil Code, Book 2, Title 9.
5.3 Summary of principal accounting policies
For the summary of the principal accounting policies we refer to the Notes
to the Consolidated Annual Accounts.
5.4 Financial fixed assets
Financial fixed assets comprise 100% investments in subsidiary. Movements in
the equity values of the subsidiaries are as follows:
<TABLE>
<CAPTION>
Cluster
Consulting
SL
Barcelona
----------
NLG
<S> <C>
December 31, 1996.............................................. 637,805
Attributable result............................................ 485,163
---------
1,122,986
=========
</TABLE>
5.5 Current liabilities
The breakdown of current liabilities can be shown as follows:
<TABLE>
<CAPTION>
31/12/1997
----------
NLG
<S> <C>
Payable to parent company...................................... --
Other payables................................................. 61,526
------
61,526
======
</TABLE>
5.6 Shareholder's equity
The authorized share capital of the Company amounts to f 200,000 dividend
into 2,000 shares of f 100 each.
At balance sheet date a total of 430 shares were issued and fully paid, upon
which a share premium was paid amounting to f 55,772.
Movements in reserves can be shown as follows:
<TABLE>
<CAPTION>
1997
-------
NLG
<S> <C>
Retained earnings at December 31, 1996............................ 494,843
Result for the year............................................... 457,135
-------
Retained earnings at December 31, 1997............................ 951,978
=======
</TABLE>
F-51
<PAGE>
Due to local legislation in Spain a legal service has been provided for
with respect to the Company's participation in Cluster Consulting S.L.,
Barcelona.
5.7 General and administrative expenses
<TABLE>
<S> <C>
Management fees.................................................... 18,027
Accounting and audit fees.......................................... 2,938
Professional fees.................................................. 11,019
General expenses................................................... 210
------
32,194
======
</TABLE>
5.8 Provision for Corporate Tax
The corporate tax is based on the fiscal result, taking into account that
certain income and expenses as reported in the profit and loss account are
exempted from taxation.
5.9 Directors and employees
The company has no employees other than its directors.
The company has one director during the year. No loans or advances have
been granted to or received from the director.
The Company had no supervisory directors.
6. Notes to the Consolidated Annual Accounts
6.1 Principal activities
The principal activity of the group is providing consultancy services in
the area of telecommunication.
6.2 Summary of principal accounting policies
a. Basis of consolidation
The consolidated Annual Accounts reflect the figures of Cluster Telecom
B.V., The Hague and its subsidiary. The consolidated figures are determined in
accordance with the accounting policies as described in these notes.
b. Assets and liabilities
Assets and liabilities are stated at nominal value except where a different
basis of valuation has been indicated.
c. Foreign currencies
Assets and liabilities expressed in foreign currencies have been translated
to Dutch guilders at the exchange rates ruling at the balance sheet date.
Foreign currency transactions have been converted at exchange rates
approximating those ruling at the time of the transactions. The resulting
exchange differences have been recognized currently in the profit and loss
account. Foreign exchange results arising as a result from payment or
recording as a receivable of dividends and royalties from group companies are
for the account of the company's parent company.
d. Tangible fixed assets
Tangible fixed assets are valued at cost.
F-52
<PAGE>
Depreciation is calculated on a straight-line basis over the expected
useful economic lives of related assets.
The principal rates of depreciation applied are the following:
Machinery and equipment 10-25%.
Maintenance expenditure is capitalized only if it lengthens the useful
life of the relating assets.
e. Financial fixed assets
Financial fixed assets comprise subsidiaries and warrants. The subsidiaries
are valued at the share of the net equity of the respective companies. The
accounting policies of the subsidiaries are in accordance with those as
described in these notes. The warrants are recorded at their nominal values.
6.3 Tangible fixed assets
Movements in tangible fixed assets can be summarized as follows:
<TABLE>
<CAPTION>
Machinery &
equipment
-----------
NLG
<S> <C>
Cost
December 31, 1996................................................... 939,495
Additions less disposals............................................ 398,647
---------
December 31, 1997................................................... 1,338,142
=========
Accumulated depreciation
December 31, 1997 Charge for the year............................... 91,600
December 31, 1997................................................... 154,025
---------
245,625
=========
Net book value
December 31, 1997................................................... 1,092,517
=========
</TABLE>
6.4 Shareholder's equity
The breakdown of the shareholder's equity is shown in the notes to the
Company's Annual account.
6.5 Personnel Expenses and Staff Numbers
The breakdown of personnel expenses can be summarized as follows:
<TABLE>
<CAPTION>
1997
---------
<S> <C>
Wages/salaries.................................................. 1,624,000
Social security charges......................................... 247,802
---------
1,871,802
=========
</TABLE>
During the year ended December 31, 1997, the average number of staff
employed by the Group was 32.
6.6 Directors and supervisory directors
The Group has 4 directors who received a remuneration of (Pounds) 585,948.
The Group has no supervisory directors.
F-53
<PAGE>
7. Supplementary Information
7.1 Proposed Appropriation of Results
Subject to the provision under Dutch law that no dividends can be declared
until all losses have been recovered, profits are at the disposal of the Annual
General Meeting of Shareholders, in accordance with article 1.6 of the Company
Articles of Incorporation.
The management proposed to declare the interim dividends distributed final
and to add the net result for the year to retained earnings. This proposal for
the net result has been reflected in the accompanying annual accounts
7.2 Post Balance Sheet Events
No matters of circumstances of importance have arisen since the end of the
financial year which have significantly affect or may significantly affect the
operations of the Company, the results of those operations or the affairs of
the Company.
7.3 Auditor's Report
The auditor's report is set forth on the following page.
7.4 Auditors' Report
Introduction
We have audited the financial statements of Cluster Telecom B.V., The Hague,
formerly named Beleggingsmaatschappij Lokus B.V., for the year 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
Scope
We conducted our audit in accordance with auditing standards generally
accepted in The Netherlands. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the financial statements. We believe that our audit provides a reasonable basis
for our opinion.
Opinion
In our opinion, the financial statements give a true and fair view of the
financial position of the Company as at December 31, 1997 and of the result for
the year then ended in accordance with accounting principles generally accepted
in The Netherlands and comply with the financial reporting requirements
included in Part 9 of Book 2 of The Netherlands Civil Code.
The Hague, October 11, 2000
Bouwer & Officier Accountants
-------------------------------
C. M. Oosterling RA
F-54
<PAGE>
ANNEX A
EXECUTION COPY
(1) DIAMOND TECHNOLOGY PARTNERS INCORPORATED
as the "Purchaser"
(2) IMISON INVESTMENTS N.V.
(3) EAGLE 2000 S.L.
as the "Sellers"
AND
(4) THE PERSONS NAMED IN SCHEDULE 1, HERETO
as the "Cluster Partners"
WITH RESPECT TO ALL OUTSTANDING CAPITAL STOCK OF CLUSTER TELECOM B.V.
----------------
STOCK PURCHASE AGREEMENT
----------------
Dated 11 September 2000
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
Page
Clause ----
<S> <C>
1.Sale Of Shares And Closing............................................. 3
2.Representations And Warranties Of The Sellers And The Cluster
Partners................................................................ 8
3.Representations And Warranties Of The Purchaser........................ 20
4.Covenants Of The Sellers And The Cluster Partners...................... 25
5.Covenants Of The Purchaser............................................. 31
6.Conditions To Obligations Of The Purchaser............................. 35
7.Conditions To Obligations Of The Sellers............................... 37
8.Covenants Relating To The Closing Arrangements......................... 39
9.Employee Matters....................................................... 41
10.Survival Of Representations, Warranties, Covenants And Agreements..... 41
11.Indemnification....................................................... 41
12.Termination........................................................... 47
13.Definitions........................................................... 48
14.Miscellaneous......................................................... 55
Schedule 1 The Cluster Partners......................................... *
Schedule 2 Calculations Relating To The Consideration................... *
(A)The Proportions Of Consideration...................................... *
(B)The Proportions Of Diamond Share Options/Relevant Proportions......... *
Schedule 3 Liquidated Damages For Certain Breaches Of Clause 9.1........ *
Schedule 4 Calculation Of Number Of Key Five Diamond Share Options...... *
Schedule 5 Form Of The Cluster Partners' Certificate.................... *
Schedule 6 Form Of Secretary's Certificate To Be Delivered By Each
Seller.................................................................. *
Schedule 7 Diamond Form Of Officer's Certificate........................ *
Schedule 8 Diamond Form Of Secretary's Certificate...................... *
Schedule 9 Escrow Agreement............................................. 64
Schedule 10 Deferred Shares Escrow Agreement............................. *
Schedule 11 Opinions To Be Provided By Counsel To The Sellers............ *
Schedule 12 Opinion Of Counsel To Purchasers............................. *
Schedule 13 Employee Agreements.......................................... *
Schedule 14 The Seller's Disclosure Schedule............................. *
Schedule 15 Required Filings And Notices................................. *
Schedule 16 The Purchaser's Disclosure Schedule.......................... *
Schedule 17 Diamond (Partners) Equity Sales Program...................... *
Schedule 18 Cluster Employees............................................ *
Schedule 19 Piggyback Registration Rights Agreement...................... 71
Schedule 20 Cluster Stock Options........................................ *
</TABLE>
--------
*Omitted.
A-2
<PAGE>
This STOCK PURCHASE AGREEMENT, dated as of September 11, 2000, is made and
entered into by and among DIAMOND TECHNOLOGY PARTNERS, INCORPORATED, a
corporation incorporated under the laws of the State of Delaware (the
"Purchaser"), IMISON INVESTMENTS N.V., a company incorporated under the laws of
the Netherlands Antilles, EAGLE 2000 S.L., a company incorporated under the
laws of Kingdom of Spain (together the "Sellers") and THOSE PERSONS WHOSE NAMES
AND ADDRESSES ARE SET OUT IN SCHEDULE ONE (together the "Cluster Partners").
Capitalized terms not otherwise defined herein have the meanings set forth in
Clause 13.1.
WHEREAS, the Cluster Partners own, directly or indirectly, in the aggregate,
all the issued and outstanding shares of capital stock of each of the Sellers;
WHEREAS, the Sellers own an aggregate of four hundred and thirty-two (432)
shares of common stock, par value one hundred Dutch Guilders (NLG 100) per
share of Cluster Telecom B.V., a company incorporated with limited liability
under the laws of the Netherlands (registered in the Chamber of Commerce of
Amsterdam with number 24255121), whose registered office is at Strawinskylaan
1725, 107XX, Amsterdam (Postbus 7241, 1007JE, Amsterdam) (the "Company"),
constituting all the issued and outstanding shares of capital stock of the
Company (such shares being referred to herein as the "Shares");
WHEREAS, the Sellers shall incorporate a company in Belgium of which the
Purchaser shall own fifty percent (50%) of the common stock and the Sellers
shall together own fifty percent (50%) of the common stock ("Belgium Co")
immediately prior to Closing. On or prior to Closing, the Sellers shall
contribute the Shares and the Purchaser shall contribute the Cash Consideration
and the Closing Consideration Shares as defined in Clause 1.2 to Belgium Co. At
Closing, the Purchaser and the Sellers shall effect a demerger of Belgium Co
with the immediate result that (i) the Purchaser owns all of the common stock
of a company which owns all of the Shares; and (ii) the Sellers own all of the
common stock of a company which owns all of the Cash Consideration and (except
as provided in Clauses 1.3 and 1.4) the Closing Consideration Shares); and
WHEREAS, the Sellers desire to sell, and the Cluster Partners desire the
Sellers to sell, and the Purchaser desires to purchase, the Shares on the terms
and subject to the conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. SALE OF SHARES AND CLOSING
1.1 Purchase and Sale
Upon the terms and subject to the conditions set forth in this Agreement:
(a) the Sellers agree to sell (and the Cluster Partners shall cause each
Seller to sell) to the Purchaser; and
(b) the Purchaser agrees to purchase from the Sellers,
all of the rights, title and interest of the Sellers in and to the Shares at
the Closing.
1.2 Consideration
Upon the terms and subject to the conditions set forth in this Agreement, as
consideration for the purchase of the Shares, the Purchaser shall:
(a) pay to the Sellers cash in the amount of forty-four million US
dollars ($44,000,000) (the "Cash Consideration"); and
(b) pay in the manner set forth below an aggregate of six million, three
hundred and fifteen thousand, three hundred and seventy-seven (6,315,377)
Diamond Shares (the "Consideration Shares",
A-3
<PAGE>
and together with the Cash Consideration and the Options to be issued
pursuant to Clause 1.3(h), the "Consideration"), which Consideration Shares
shall be payable as follows:
(i) the Purchaser shall issue and deliver to Belgium Co, four
million (4,000,000) Consideration Shares less the number of Escrow
Consideration Shares which, upon issuance in accordance with the terms
of this Agreement, shall be fully paid and non-assessable, free and
clear of any Liens of any nature whatsoever (except for such Liens
resulting solely from the transfer restrictions set forth in Clause 1.3
and Clause 1.4) (the "Closing Consideration Shares");
(ii) the Purchaser shall issue to Belgium Co and deliver to the
Escrow Agent such number of Consideration Shares as have, in the
aggregate, a Market Price equal to five percent (5%) of the
Consideration Value which, upon issuance in accordance with the terms
of this Agreement, shall be fully paid and non-assessable, free and
clear of any Liens of any nature whatsoever (except for such Liens
resulting solely from the transfer restrictions and security interest
set forth in Clause 1.3 and Clause 1.4) and which shall be held by the
Escrow Agent in escrow in accordance with the Escrow Agreement (the
"Escrow Consideration Shares"); and
(iii) the Purchaser shall issue to Belgium Co, and deliver to the
Escrow Agent two million, three hundred and fifteen thousand, three
hundred and seventy-seven (2,315,377) Consideration Shares, which, upon
issuance in accordance with the terms of this Agreement, shall be fully
paid and non-assessable, free and clear of any Liens of any nature
whatsoever (except for such Liens resulting solely from the transfer
restrictions and security interests set forth in Clause 1.3 and Clause
1.4), all of which shall be held by the Escrow Agent in escrow in
accordance with the Deferred Consideration Escrow Agreement (the
"Deferred Consideration Shares").
1.3 Closing; Escrow
The Closing will take place at the offices of the Purchaser at 875 North
Michigan Avenue, Suite 3000, Chicago, Illinois 60611 or at such other place as
the Purchaser and the Sellers mutually agree, at 10:00 A.M. local time, on the
Closing Date. To effect the transfer and delivery of the Shares and
Consideration described in Clause 1.1 and Clause 1.2 and subject to the terms
and conditions set forth herein, the following shall occur:
(a) Purchaser Contribution: at or immediately prior to the Closing
Belgium Co shall issue to the Purchaser shares of its common stock and, in
payment for such shares of common stock, the Purchaser shall:
(i) pay the Cash Consideration by wire transfer of immediately
available funds to such US dollar account maintained by Belgium Co as
it may direct by written notice delivered to the Purchaser at least two
(2) Business Days before the Closing Date; and
(ii) assign, transfer and deliver to Belgium Co certificates
representing good and valid title in and to the Closing Consideration
Shares, free and clear of all Liens (other than Liens created by this
Agreement), by delivering to Belgium Co certificates representing
Closing Consideration Shares in genuine unaltered form, duly endorsed
in blank, with requisite stock transfer tax stamps, if any, attached,
in accordance with applicable Laws;
(b) Seller Contribution: at or immediately prior to Closing Belgium Co
shall issue to the Sellers (in the proportions to be determined by the
Sellers and notified to the Purchaser prior to the Closing based on then
current valuation and consistent with their shareholding in the Company)
shares of its common stock and, in payment for such shares of common stock,
the Seller shall (and the Cluster Partners shall cause the Sellers to)
assign and transfer to Belgium Co good and valid title in and to the
Shares, free and clear of all Liens, by execution of a notarial deed of
transfer of the Shares in accordance with applicable Laws and with stock
transfer tax stamps, if any, attached;
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Provided that, following the actions set out in Clauses 1.3 (a) and (b), the
Purchaser shall hold fifty percent (50%) of the shares of Belgium Co and the
Sellers shall hold fifty percent (50%) of the shares of Belgium Co.
(c) Immediately following the issue and allotment of the shares of
Belgium Co and payment therefore set out in Clause 1.3(a) and (b), the
Purchasers and the Sellers shall cause Belgium Co to demerge in accordance
with Belgian Law (all necessary filings, registrations, consents and
approvals required having been made or given prior to Closing) resulting in
two companies, each incorporated under the Laws of Belgium the first of
which ("Purchaser Co") shall be wholly-owned by the Purchaser and shall
hold good and valid title in and to the Shares, free and clear of all
Liens, and the second of which ("Sellers' Co") shall be wholly-owned by the
Sellers and shall hold the Cash Consideration and shall hold good and valid
title in and to the Closing Consideration Shares, free and clear of all
Liens except as provided in Clauses 1.3 and 1.4;
(d) the Purchaser shall deliver to the Escrow Agent to be held in
accordance with the Deferred Shares Escrow Agreement certificates
representing good and valid title in and to the Deferred Consideration
Shares, free and clear of all Liens (other than Liens created by this
Agreement) in genuine unaltered form, duly endorsed in blank, with
requisite stock transfer tax stamps, if any, attached, in accordance with
applicable Laws;
(e) the Purchaser shall deliver to the Escrow Agent to be held in
accordance with the Escrow Agreement certificates representing good and
valid title in and to the Escrow Consideration Shares, free and clear of
all Liens (other than Liens created by this Agreement), in genuine
unaltered form, duly endorsed in blank, with requisite stock transfer tax
stamps, if any, attached, in accordance with applicable Laws;
(f) the Sellers shall (and the Cluster Partners shall cause the Sellers
to) deliver to the Purchaser the opinions, certificates, Contracts,
documents and instruments to be delivered under Clause 6 and the Books and
Records to be delivered under Clause 4.9; and
(g) the Purchaser shall deliver to the Sellers the opinions,
certificates, Contracts, documents and instruments to be delivered under
Clause 7;
(h) the Purchaser shall also:
(i) grant the Cluster Partners, in accordance with the parameters
described in, and subject to the terms of, Clause 1.3(h)(i) of the
Disclosure Schedule, five hundred thousand (500,000) Diamond Share
Options; provided that such Diamond Share Options (A) shall vest in
five equal tranches, one tranche vesting on each of the first, second,
third, fourth and fifth anniversary of the Closing and (B) shall have
an exercise price which is the lower of $60.35 or seventy-five percent
(75%) of the Market Price (the "Partners Diamond Share Options");
(ii) grant the Key Five Partners, in the proportions set out in
Schedule 2(B), such number of Diamond Share Options as results from the
calculation set out in Schedule 4; provided that such Diamond Share
Options shall (A) vest in two equal tranches, one tranche vesting on
each of the fourth and fifth anniversaries of Closing, and (B) have an
exercise price which is twenty-five percent (25%) of the Market Price
(the "Key Five Diamond Share Options");
(iii) grant the Cluster Partners (other than the Key Five Partners)
one million, nine hundred and seventy-seven thousand, seven hundred and
ninety-nine (1,977,799) Diamond Share Options; provided that such
Diamond Share Options shall (A) vest in five equal tranches, one
tranche vesting on each of the first, second, third, fourth and fifth
anniversaries of Closing; and (B) have an exercise price which is
twenty-five percent (25%) of the Market Price (the "Non-Key Five
Diamond Share Options");
(iv) grant the Cluster Employees, in accordance with the parameters
described in, and subject to the terms of, Clause 1.3(h)(i) of the
Disclosure Schedule, one million and five hundred
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thousand (1,500,000) Diamond Share Options; provided however that such
Diamond Share Options shall (A) have an exercise price which is the
lower of $60.35 and seventy-five percent (75%) of the Market Price, and
(B) vest in four equal tranches, one tranche vesting on each of the
first, second, third and fourth anniversaries of the Closing; (the
"Cluster Employees Diamond Share Options"); and
(v) grant to the Cluster Partners and the Cluster Employees, in
proportion to their holdings of Cluster Share Options on the Valuation
Date, such number of Diamond Share Options equal to the number of
Cluster Share Options multiplied by the Exchange Ratio; provided that
such Diamond Share Options shall have an exercise price which is the
lower of the exercise price that would result from applying the
Exchange Ratio to the exercise price of the Cluster Share Options as
set out in Clause 1.3(h)(v) of the Disclosure Schedule or fifty percent
(50%) of the Market Price provided that the vesting schedule of such
new stock options shall be the same as that in the current Cluster
Option plan in effect as at the date hereof (the "Replacement Cluster
Diamond Share Options").
1.4 Transfer Restrictions and Escrow Arrangements for the Consideration Shares
(a) Subject to Clauses 1.4(b) and (c), no Seller (which, for the purpose of
this Clause 1.4 only shall include Sellers' Co) shall directly or indirectly
without the written consent of a duly authorized officer of the Purchaser,
offer for sale, tender, transfer, pledge or encumber (other than involuntary
pledges or encumbrances), assign or otherwise dispose of (other than pursuant
to an involuntary pledge or encumbrance) or enter into any contract, option or
other arrangement or understanding with respect to or contract to offer for
sale, transfer, tender, pledge, encumbrance, assign or otherwise dispose of
(each a "Transfer") the Closing Consideration Shares; provided that such
restrictions upon Transfer shall not apply at any time to 800,000 Closing
Consideration Shares, which shall be freely transferable from the Closing Date
and shall expire as to a further 800,000 Closing Consideration Shares on each
Lock-up Termination Date such that as of the second anniversary of the Closing
no such contractual Transfer restrictions shall continue; and provided,
further, that such contractual Transfer restriction shall immediately terminate
if the Purchaser shall be the object of a public tender offer; and provided
further that in the event that the Sellers desire to exercise their piggyback
registration rights (the "Registration Rights") in accordance with the
Piggyback Registration Rights Agreement, in addition to any Closing
Consideration Shares for which the sales restrictions have lapsed, the Closing
Consideration Shares to be released on the immediately succeeding Lock-Up
Termination Date shall also be eligible for sale through the Piggyback
Registration Rights Agreement.
(b) Any Cluster Partner who is an "affiliate" of the Purchaser for the
purposes of Rule 144 of the U.S. Securities Act of 1933 as amended (the
"Securities Act"), shall not be permitted to Transfer any Consideration Shares
for the one-year period from the date of this Agreement; provided, however,
that any such Cluster Partner shall be permitted to Transfer any Consideration
Shares regarding which Registration Rights are exercised without regard to such
one-year restriction.
(c) Without limiting the provisions of Clauses 1.4(a) and (b), any and all
Consideration Shares and Diamond Shares received upon exercise of Diamond Share
Options which those Cluster Partners who become partners of the Purchaser hold
and wish to Transfer shall only be transferred in accordance with the Diamond
Partner Equity Sales Program and in accordance with Article 4 of the Second
Amended and Restated Voting and Stock Restriction Agreement dated as of August
4, 1997 (the "Voting and Stock Restriction Agreement"); provided, however, that
the Cluster Partners shall be permitted to Transfer, without regard to the
requirements of the Diamond Partner Equity Sales Program, any Consideration
Shares regarding which Registration Rights are exercised.
(d) The Sellers agree and acknowledge that the Deferred Consideration Shares
shall be deposited in accordance with the Deferred Consideration Escrow
Agreement to secure the performance by the Sellers of their obligations under
Clause 9.1 of this Agreement and shall be released by the Escrow Agent to the
Sellers in accordance with the Deferred Consideration Escrow Agreement.
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(e) The Sellers agree and acknowledge that the Escrow Consideration Shares
shall be deposited in accordance with the Escrow Agreement and shall be
released from escrow in accordance with the Escrow Agreement.
(f) The Sellers acknowledge and agree that the restrictions upon transfer
referred to in this Clause 1.4 are negotiated provisions and in exchange for
good and valuable consideration, the adequacy of which is hereby acknowledged.
1.5 Anti-dilution Adjustments to Consideration Shares
(a) If, prior to the Closing Date:
(i) the Purchaser shall (A) pay a dividend or make a distribution on the
Diamond Shares in Diamond Shares; (B) subdivide the outstanding Diamond
Shares into a greater number of shares; (C) combine the outstanding Diamond
Shares into a smaller number of shares; (D) make a distribution on the
Diamond Shares in shares of capital stock of the Purchaser other than
Diamond Shares; or (E) issue by reclassification of the Diamond Shares any
share of capital stock of the Purchaser, the number of Consideration Shares
to which the Sellers shall be entitled under Clause 1.2(b) and the number
of Diamond Share Options to which the Cluster Partners are entitled under
sub-Clauses (i), (ii), (iii) and (iv) of Clause 1.3(h) and, if such event
occurred after the Valuation Date, sub-Clause (v) of Clause 1.3(h) shall be
adjusted so that, after the date fixed for the determination of
stockholders affected by such actions, (A) such number of Consideration
Shares shall be the number of Diamond Shares or other capital stock which
the Sellers would have owned or have been entitled to receive immediately
following such date of determination if such holder had received the
relevant Consideration Shares immediately prior to such date of
determination and (B) such number of Diamond Stock Options shall be the
number of Diamond Stock Options which such Cluster Partners would have
owned or been entitled to receive had the Diamond Stock Options referred to
in sub-Clauses (i), (ii), (iii) and (iv) and, if such event occurred after
the Valuation Date, sub-Clause (v) of Clause 1.3(h) been granted
immediately prior to such date of determination;
(ii) there shall occur (A) any capital reorganization or any
reclassification of the Diamond Shares (other than a reclassification
covered by Clause 1.5(a)(i)), (B) a consolidation or merger of the
Purchaser with or into any other corporation or (C) the sale, lease or
other disposition or conveyance of the property and assets of the Purchaser
as, or substantially as, an entirety to any other corporation, in each case
as a result of which holders of outstanding Diamond Shares generally will
be entitled to receive shares of stock or other securities or other
property (including cash) with respect to or in exchange for the Diamond
Shares, (A) the Sellers shall be entitled, in lieu of the Consideration
Shares, to the kind and amount of shares of stock or other securities or
property (including cash) which they would have been entitled to receive if
they had held the Consideration Shares immediately prior to the time of
such capital reorganization or reclassification of Diamond Shares,
consolidation, merger or sale, lease or other disposition or conveyance
(assuming that each Seller elected to receive the same kind and amount of
shares of stock or other securities or property (including cash) receivable
upon such capital reorganization or reclassification of Diamond Shares,
consolidation, merger or sale, lease or other disposition or conveyance
receivable by a plurality of the holders of shares of Diamond Shares) and
(B) the Cluster Partners shall be entitled to such options or other rights
which such Cluster Partner would have owned or been entitled to receive had
the Diamond Stock Options referred to in sub-Clauses (i), (ii), (iii) and
(iv) and, if such event occurred after the Valuation Date, sub-Clause (v)
of Clause 1.3(h) been granted immediately prior to the time of such capital
reorganization or reclassification of Diamond Shares, consolidation, merger
or sale, lease or other disposition or conveyance;
and, in any such case, appropriate adjustment shall be made, if necessary, to
the provisions set forth in this Clause 1.5 with respect to the rights and
interests of the Sellers, so that these provisions shall be made applicable, as
closely as reasonably practicable, to any shares of stock or other securities
or property thereafter deliverable in lieu of the Consideration Shares.
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(b) Whenever the number and/or kind of Consideration Shares shall be
adjusted as provided in this Clause 1.5, the Purchaser shall promptly give
written notice to the Sellers in accordance with Clause 14.1.
2. REPRESENTATIONS AND WARRANTIES OF THE SELLERS AND THE CLUSTER PARTNERS
The Sellers and the Cluster Partners hereby represent and warrant to the
Purchaser as follows:
2.1 Organization of the Company
The Company is a corporation duly organized and validly existing under the
Laws of The Netherlands as a private company with limited liability (besloten
vennootscap met beperkte aansprak eljikheid) and has full corporate power and
authority to conduct its business as and to the extent now conducted and to
own, use and lease its Material Assets and Properties. Clause 2.1(a) of the
Disclosure Schedule lists all lines of business in which the Company is
participating or engaged. The Company is duly qualified, licensed or admitted
to do business and is in good standing in all jurisdictions in which the
ownership, use or leasing of its Material Assets and Properties or the conduct
or nature of its business, makes such qualification, licensing or admission
necessary. The name of each director and officer of the Company on the date
hereof, and the position with the Company held by each, are listed in Clause
2.1(b) of the Disclosure Schedule. The Sellers and the Cluster Partners have
prior to the execution of this Agreement delivered to the Purchaser true and
complete copies of the articles of association of the Company as in effect on
the date hereof.
2.2 Capital Stock of the Company
The authorized capital stock of the Company consists solely of shares of
Common Stock, of which only the Shares have been issued. The Shares are duly
authorized, validly issued, fully paid and nonassessable. The Sellers own all
of the Shares, beneficially and of record, free and clear of all Liens. Except
for this Agreement and as disclosed in Clause 2.2 of the Disclosure Schedule,
there are no outstanding Options with respect to the Company. The execution of
the notarial deed of transfer in the manner provided in Clause 1.3 will
transfer to the Purchaser good and valid title to the Shares, free and clear of
all Liens.
2.3 Organization of Sellers
Each of the Sellers is a corporation duly organized, validly existing and in
good standing under the Laws of the jurisdiction of its incorporation. Each of
the Sellers has full corporate power and authority to execute and deliver this
Agreement and the Operative Agreements to which it is a party and to perform
its obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby, including without limitation to own, hold,
sell and transfer (pursuant to this Agreement) the Shares. Each of the Sellers
is duly qualified, licensed or admitted to do business and is in good standing
in all jurisdictions in which the ownership, use or leasing of its Material
Assets and Properties, or the conduct or nature of its businesses, makes such
qualification, licensing or admission necessary and in which the failure to be
so qualified, licensed or admitted and in good standing could reasonably be
expected to have an adverse effect on the validity or enforceability of this
Agreement or any of the Operative Agreements to which it is a party or on the
ability of such Seller to perform its obligations hereunder or thereunder.
2.4 Ownership of the Shares
The Cluster Partners together are the only legal and beneficial owners of
all of the issued shares of the Sellers. The shares of the Sellers are duly
authorized, validly issued, fully paid and non assessable.
2.5 Authority
The execution and delivery by the Cluster Partners and the Sellers of this
Agreement and the Operative Agreements to which they are a party, and the
performance by the Cluster Partners and the Sellers of their
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obligations hereunder and thereunder, have been duly and validly authorized by
the Board of Directors and/or shareholders of each of the Sellers, or by the
Cluster Partners, as the context requires, no other corporate action on the
part of the Sellers or the Cluster Partners being necessary. This Agreement has
been duly and validly executed and delivered by the Cluster Partners and by the
Sellers and assuming due execution and delivery of this Agreement by the
Purchaser constitutes, and upon the execution and delivery by the Cluster
Partners and the Sellers of the Operative Agreements to which they are a party,
assuming due execution and delivery by the other parties thereto, such
Operative Agreements will constitute, legal, valid and binding obligations of
the Cluster Partners and the Sellers enforceable against the Cluster Partners
and the Sellers in accordance with their terms.
2.6 No Conflicts
Neither the execution and delivery of nor the performance of its obligations
under this Agreement or the Operative Agreements to which it is a party by any
of the Cluster Partners or the Sellers, or the consummation of the transactions
contemplated hereby and thereby will:
(a) conflict with or result in a violation or breach of any of the
terms, conditions or provisions of the certificate or articles of
incorporation or by-laws (or other comparable corporate charter documents)
of the Sellers or of the Company or any of its Subsidiaries;
(b) result in, or reasonably be expected to result in, a violation or
breach of any term or provision of any material Law or Order applicable to
the Cluster Partners, the Sellers, the Company or any of its Subsidiaries
or any of their respective Material Assets and Properties; or
(c) except as disclosed in Clause 2.6(c)(i)-(vi) of the Disclosure
Schedule, (i) conflict with or result in a violation or breach of, (ii)
constitute (with or without notice or lapse of time or both) a default
under, (iii) require the Cluster Partners, the Sellers, the Company or any
of its Subsidiaries to obtain any consent, approval or action of, make any
filing with or give any notice to any Person as a result or under the terms
of, (iv) result in or give to any Person any right of termination,
cancellation, acceleration or modification in or with respect to, (v)
result in or give to any Person any additional rights or entitlement to
increased, additional, accelerated or guaranteed payments under, or (vi)
result in the creation or imposition of any Lien (other than a Permitted
Lien, except in the case of Capital Stock) upon the Company or any of its
Subsidiaries or any of their respective Material Assets and Properties
under any Contract required to be listed under Clause 2.20 to which the
Company or any of its Subsidiaries is a party or by which any of their
respective Material Assets and Properties is bound.
2.7 Governmental Approvals and Filings
Except as disclosed in Schedule 15 hereto, no consent, approval or action
of, filing with or notice to any Governmental or Regulatory Authority on the
part of the Cluster Partners, the Sellers, the Company or any of its
Subsidiaries is required in connection with the execution, delivery and
performance of this Agreement or any of the Operative Agreements to which they
are a party or the consummation of the transactions contemplated hereby or
thereby.
2.8 Subsidiaries
Clause 2.8(a) of the Disclosure Schedule lists the name of each Subsidiary
of the Company and its jurisdiction of incorporation. Each Subsidiary is a
corporation duly organized, validly existing and in good standing under the
Laws of its jurisdiction of incorporation and has full corporate power and
authority to conduct its business as and to the extent now conducted and to
own, use and lease its Material Assets and Properties. Each Subsidiary of the
Company is duly qualified, licensed or admitted to do business and is in good
standing in each jurisdiction specified in Clause 2.8(a) of the Disclosure
Schedule, which are the only jurisdictions in which the ownership, use or
leasing of such Subsidiary's Material Assets and Properties, or the conduct or
nature of its business, makes such qualification, licensing or admission
necessary. Clause 2.8(a) of
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the Disclosure Schedule lists for each Subsidiary of the Company the amount of
its authorized capital stock, the amount of its outstanding capital stock and
the record owners of such outstanding capital stock. All of the outstanding
shares of capital stock of each Subsidiary of the Company have been duly
authorized and validly issued, are fully paid and non-assessable, and are
owned, beneficially and of record, by the Company free and clear of all Liens.
There are no outstanding Options with respect to any of the Company's
Subsidiaries. The name of each director and officer of each Subsidiary of the
Company on the date hereof, and the position with such Subsidiary held by each,
are listed in Clause 2.8(c) of the Disclosure Schedule. The Sellers or the
Cluster Partners have prior to the execution of this Agreement delivered to the
Purchaser true and complete copies of the certificate or articles of
incorporation and by-laws (or other comparable corporate charter documents) of
each of the Company's Subsidiaries as in effect on the date hereof.
2.9 Books and Records
The minute books and other similar records of the Company and the
Subsidiaries, copies of which were delivered to the Purchaser prior to the
execution of this Agreement, contain a true and complete record, in all
material respects, of all action taken at all meetings and by all written
consents in lieu of meetings of the stockholders, the boards of directors and
committees of the boards of directors of the Company and its Subsidiaries. The
stock transfer ledgers and other similar records of the Company and its
Subsidiaries, copies of which were delivered to the Purchaser prior to the
execution of this Agreement, accurately reflect all record transfers prior to
the execution of this Agreement in the capital stock of the Company and its
Subsidiaries.
2.10 Financial Statements
Prior to the execution of this Agreement, the Cluster Partners have
delivered to the Purchaser true and complete copies of the following financial
statements:
(a) the audited balance sheets of the Company and its consolidated
subsidiaries as of December 31, 1999, December 31, 1998 and December 31,
1997, and the related audited consolidated statements of operations,
stockholders' equity and cash flows for each of the fiscal years then
ended, together with a true and correct copy of the report on such audited
information by, in the case of each of the two years ended December 31,
1999 and December 31, 1998 Arthur Andersen, and, in the case of the year
ended December 31, 1997 Bouwer & Officier; and
(b) the unaudited balance sheets of the Company and its consolidated
subsidiaries as of June 30, 2000 and the related unaudited consolidated
statements of operations, stockholders' equity and cash flows for the
portion of the fiscal year then ended.
Except as set forth in the notes thereto, such audited financial statements
for the years ended December 31, 1999 and December 31, 1998 were prepared in
accordance with United States GAAP and the audited financial statements for the
year ended December 31, 1997 were prepared in accordance with Netherlands GAAP
and in each case fairly present in all material respects the consolidated
financial condition and results of operations of the Company and its
consolidated subsidiaries as of the respective dates thereof and for the
respective periods covered thereby. The unaudited balance sheets and related
unaudited consolidated statements of operations, stockholders' equity and cash
flows referred to in (b) above were prepared in accordance with United States
GAAP and fairly present in all material respects the consolidated financial
condition and results of operations of the Company and its consolidated
subsidiaries as of the respective dates thereof and for the respective periods
covered thereby. The financial condition and results of operations of each
Subsidiary of the Company are, and for all periods referred to in this Clause
2.10 have been, consolidated with those of the Company.
2.11 Absence of Changes
Except for the execution and delivery of this Agreement and the transactions
to take place pursuant hereto, since June 30, 2000 there has not been any event
or development which, individually or in the aggregate, would result in a
Material Adverse Change with respect to the Company or any of its Subsidiaries.
Without
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limiting the foregoing, except as disclosed in Clause 2.11 of the Disclosure
Schedule, there has not occurred between June 30, 2000 and the date hereof:
(i) any declaration, setting aside or payment of any dividend or other
distribution in respect of the capital stock of the Company or any of its
Subsidiaries not wholly-owned by the Company, or any direct or indirect
redemption, purchase or other acquisition by the Company or any of its
Subsidiaries of any such capital stock of or any Option with respect to the
Company or any of its Subsidiaries not wholly-owned by the Company;
(ii) any authorization, issuance, sale or other disposition by the
Company or any of its Subsidiaries of any shares of capital stock of or
Option with respect to the Company or any of its Subsidiaries, or any
modification or amendment of any right of any holder of any outstanding
shares of capital stock of or Options with respect to the Company or any of
its Subsidiaries other than as described in Clause 4.6(b)(i);
(iii) (x) any increase in the salary, wages or other compensation of any
officer, employee or consultant of the Company or any of its Subsidiaries
which results in the promotion of such individual to a level that is two or
more levels higher than such individual's classification at the date of
this Agreement; (y) any establishment or material modification of (A)
targets, goals, pools or similar provisions in respect of any fiscal year
under any Benefit Plan, employment contract or other employee compensation
arrangement or (B) salary ranges, increase guidelines or similar provisions
in respect of any Benefit Plan, employment contract or other employee
compensation arrangement; or (z) any adoption, entering into, amendment,
modification or termination (partial or complete) of any Benefit Plan
except to the extent required by applicable Law and, in the cases of
clauses (x), (y) and (z), except in the ordinary course of business and
consistent with past practices, provided that employee stock option
programs may be modified or increased only as permitted by Clause
4.6(b)(i);
(iv) (x) incurrences by the Company or any of its Subsidiaries of
Indebtedness in an aggregate principal amount exceeding one million US
dollars ($1,000,000) (net of any amounts discharged during such period), or
(y) any voluntary cancellation, prepayment or complete or partial discharge
in advance of a scheduled payment date with respect to, or waiver of any
right of the Company or any of its Subsidiaries under, any Indebtedness
having an aggregate principal amount exceeding two hundred and fifty
thousand US dollars ($250,000) of or owing to the Company or any of its
Subsidiaries (in either case other than any Indebtedness of the Company or
a Subsidiary owing to the Company or a wholly-owned Subsidiary);
(v) any physical damage, destruction or other casualty loss (whether or
not covered by insurance) affecting any of the plant, real or personal
property or equipment of the Company or any of its Subsidiaries in an
aggregate amount exceeding five hundred thousand US dollars ($500,000);
(vi) any material change in (x) any pricing, investment, accounting,
financial reporting, credit, allowance or Tax practice or policy of the
Company or any of its Subsidiaries or (y) the fiscal year of the Company or
any of its Subsidiaries;
(vii) any write-off or write-down of or any determination to write off
or down any of the Material Assets and Properties of the Company or any of
its Subsidiaries in an aggregate amount exceeding two hundred and fifty
thousand US dollars ($250,000);
(viii) any acquisition or disposition of, or incurrence of a Lien (other
than a Permitted Lien) on, any Material Assets and Properties of the
Company or any of its Subsidiaries, in an aggregate amount (including the
cost of discharging any Lien) exceeding two hundred and fifty thousand US
dollars ($250,000) other than in the ordinary course of business consistent
with past practice;
(ix) any (x) amendment of the articles of association or articles of
incorporation of the Company or any of its Subsidiaries, (y)
reorganization, liquidation or dissolution of the Company or any of its
Subsidiaries or (z) Business Combination involving the Company or any of
its Subsidiaries and any other Person;
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(x) any material amendment or modification, termination (partial or
complete) or granting of a waiver under or giving any consent with respect
to (A) any Contract which is required (or had it been in effect on the date
hereof would have been required) to be disclosed in the Disclosure Schedule
pursuant to Clause 2.20(a) or (B) any material License held by the Company
or any of its Subsidiaries;
(xi) any material change in the lines of business in which the Company
or any of its Subsidiaries participates or is engaged;
(xii) any transaction by the Company or any of its Subsidiaries with the
Sellers, or the Cluster Partners (A) outside the ordinary course of
business consistent with past practice or (B) other than on an arm's-length
basis, other than pursuant to any Contract in effect on June 30, 2000 and
disclosed to the Purchaser pursuant to Clause 2.20(a)(vii);
(xiii) any entering into of an agreement to do or engage in any of the
foregoing after the date hereof; or
(xiv) any other material transaction involving or development affecting
the Company or any of its Subsidiaries outside the ordinary course of
business consistent with past practice.
2.12 No Undisclosed Liabilities
Except as reflected or reserved against in the balance sheet included in the
Unaudited Financial Statements or in the notes thereto there are no Liabilities
against, relating to or affecting the Company or any of its Subsidiaries or any
of their respective Material Assets and Properties, other than Liabilities
incurred in the ordinary course of business consistent with past practice which
individually or in the aggregate do not have a Material Adverse Effect with
respect to the Company and its Subsidiaries.
2.13 Taxes
(a) Except as disclosed in Clause 2.13(a) of the Disclosure Schedule, all
federal, state, local and foreign Tax Returns required to be filed by or on
behalf of the Company and each of its Subsidiaries have been timely filed or
requests for extensions to file such returns or reports have been timely filed
and granted and have not expired and all returns filed are complete and
accurate in all material respects except to the extent any failure to file or
any inaccuracies in filed returns would not, individually or in the aggregate,
reasonably be expected to result in a Material Adverse Effect with respect to
the Company. All Taxes due and owing by the Company or any Subsidiary of the
Company have been paid, or adequately reserved for, except to the extent any
failure to pay or reserve would not, individually or in the aggregate
reasonably be expected to result in a Material Adverse Effect with respect to
the Company. There is no audit examination, deficiency, refund litigation,
proposed adjustment in writing or matter in controversy with respect to any
Taxes due and owing by the Company or any of its Subsidiaries nor has the
Company or any of its Subsidiaries filed any waiver of the statute of
limitations applicable to the assessment or collection of any Tax, in each
case, which would, individually or in the aggregate, reasonably be expected to
result in a Material Adverse Effect with respect to the Company. All
assessments for Taxes due and owing by the Company or any of its Subsidiaries
with respect to completed and settled examinations or concluded litigation have
been paid. Neither the Company nor any of its Subsidiaries is a party to any
tax indemnity agreement, tax sharing agreement or other agreement or otherwise
under which the Company or any of its Subsidiaries is liable or otherwise could
become liable to another Person as a result of the imposition of a Tax upon any
Person, or the assessment or collection of a Tax, except (i) to the extent of
Liabilities arising out of any acts performed by the Purchaser or the Company
after the Closing (other than acts which the Company was obligated to perform
as of Closing) or (ii) for such agreements as would not in the aggregate
reasonably be expected to result in a Material Adverse Effect with respect to
the Company. The Company and each of its Subsidiaries has complied in all
material respects with all rules and regulations relating to the withholding of
Taxes, except to the extent any such failure to comply would not, individually
or in the aggregate, reasonably be expected to result in a Material Adverse
Effect with respect to the Company.
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(b) Except as disclosed in Clause 2.13 of the Disclosure Schedule, the
Company and each of its Subsidiaries are and have been at all times resident
only and liable to the best of their knowledge to pay taxes (other than Taxes
which would not, individually or in the aggregate, reasonably be expected to
result in a Material Adverse Effect with respect to the Company) only in the
country of their incorporation; neither the Company nor any of its Subsidiaries
have entered into between the date of this Agreement and Closing any special
arrangements with any Tax Authority with respect to the Taxes of the Company or
any of its Subsidiaries; neither the Company nor any of its Subsidiaries will
be liable for Tax as a result of the Company, its Subsidiaries or any of their
respective shareholders entering into or completing or closing this Agreement
except as would not result in a Material Adverse Effect with respect to the
Company or any of its Subsidiaries. To the best of the knowledge of the Company
and its Subsidiaries, there have been no transactions (other than transactions
fully disclosed in the Company's and its Subsidiaries' tax returns or Books and
Records) that will give rise to taxable income to the Company or any of its
Subsidiaries in a post closing Tax period, except as would not result in a
Material Adverse Effect with respect to the Company or any of its Subsidiaries.
2.14 Legal Proceedings
(a) There are no Actions or Proceedings pending or, to the knowledge of the
Cluster Partners, the Sellers, the Company and its Subsidiaries, threatened
against, relating to or affecting the Company or any of its Subsidiaries which
(i) could reasonably be expected to result in the issuance of an Order
restraining, enjoining or otherwise prohibiting or making illegal the
consummation of any of the transactions contemplated by this Agreement or any
of the Operative Agreements or otherwise result in a material diminution of the
benefits contemplated by this Agreement or any of the Operative Agreements to
the Purchaser, or (ii) if determined adversely to the Company or any of its
Subsidiaries, could reasonably be expected to result in (x) any injunction or
other equitable relief against the Company or any of its Subsidiaries that
would interfere in any material respect with the business, financial condition
or results of operations of the Company or (y) Losses by the Company or any of
its Subsidiaries, individually or in the aggregate with Losses in respect of
other such Actions or Proceedings, exceeding five hundred thousand US dollars
($500,000)
(b) There are no facts or circumstances known to the Cluster Partners, the
Sellers, the Company or any of its Subsidiaries that could reasonably be
expected to give rise to any Action or Proceeding that would be required to be
disclosed pursuant to Clause 2.14 (a).
(c) There are no Orders outstanding against the Company or any of its
Subsidiaries.
2.15 Compliance With Laws and Orders
Except as would not, individually or in the aggregate, result in a Material
Adverse Effect in respect of the Company, neither the Company nor any of its
Subsidiaries is or has at any time within the last three years been, or has
received any notice that it is or has at any time within the last three years
been, in violation of or in default under, in any material respect, any Law or
Order applicable to the Company or any of its Subsidiaries.
2.16 Pensions
(a) Other than as disclosed in Clause 2.16 of the Disclosure Schedule there
are no agreements, arrangements, customs or practices (whether legally
enforceable against the Company or any of its Subsidiaries or not) or any
obligations (excluding those under any public law, statute or regulation to
which the Company or any of its Subsidiaries contribute in compliance with
applicable Law or regulation and for which the Company is not required to book
an accrual in its financial statements (the "State Schemes")) in existence at
the date hereof for the payment of, provision for, or contribution towards, any
pensions, allowances, lump sums or other like benefits on retirement, death,
termination of employment (whether voluntary or not), or during periods of
sickness or disablement which are for the benefit of any officer or former
officer or employee or former employee of the Company or any of its
Subsidiaries or for the benefit of persons dependent on any such
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persons ("Pension Schemes") nor does the Company or any of its Subsidiaries
have an obligation, nor has any proposal been announced, to establish any such
agreement, arrangement, customer, practice or obligation.
(b) None of the Pension Schemes will without the consent of the Purchaser be
amended or discontinued prior to the Closing Date nor without such consent will
any plan or proposal or intention to amend or discontinue any of the Pension
Schemes be communicated to any officer or employee of the Company or any of its
Subsidiaries prior to Closing.
(c) The Sellers have supplied the Purchaser with copies of all agreements,
deeds, declarations, insurance contracts and other relevant documents creating,
governing or otherwise relating to the Pension Schemes. The Sellers have
supplied the Purchaser with true, complete, accurate and up to date membership
data with respect to each of the Pension Schemes with all particulars relevant
to the interest of the members in the Pension Schemes and necessary to
establish their entitlements to benefits.
(d) The Sellers have supplied the Purchaser with an accurate and up to date
outline description of the amount and nature of the benefits and the
circumstances in which such benefits are payable under each of the Pension
Schemes.
(e) All benefits referred to in the Pension Schemes are paid in accordance
with the terms of the documents referred to in (c) above.
(f) There are no actuarial valuations in respect of the Pension Schemes.
(g) The Pension Schemes and the documents referred to in (c) above are in
compliance and have since the date of commencements of the Pension Schemes been
in compliance in all material respects both as to form and in operation, with
their terms and with all applicable Laws. In particular, but without
limitation, the Sellers are not aware of any failure to comply with any
applicable Law, or any other circumstance, which could reasonably be expected
to result in the loss of tax approval or qualification of any of the Pension
Schemes that might have a Material Adverse Effect in respect of the Company.
(h) The assets of the Pension Schemes and/or the provision made by any of
the Company or any of its Subsidiaries for the liabilities under the Pension
Schemes are sufficient to discharge all benefits payable under the Pension
Schemes. Each of the Pension Schemes is fully financed or provided for in
accordance with applicable actuarial and accounting practice and principles for
an ongoing pension scheme.
(i) There are no Pension Schemes which provide benefits calculated by
reference to a formula under which the amount of benefit is linked to the years
of service of the employee to retirement and to the salary of the employee at
or near to retirement or averaged over a period of his service ("a Salary
Related Scheme").
(j) None of the Company or any of its Subsidiaries has any material
outstanding liability for unpaid benefits, contributions or insurance premiums
with respect to any of the Pension Schemes or the State Schemes.
(k) None of the Company or any of its Subsidiaries would have any further
liability either to the Pension Schemes or to the employees of the Company or
any of its Subsidiaries if it ceased to make contributions to the Pension
Schemes at the Closing Date.
(l) Each Pension Scheme is for the exclusive benefit of employees of the
Company or any of its Subsidiaries and their dependants and beneficiaries
listed against each Pension Scheme in Clause 2.16 of the Disclosure Schedule,
and no other employer is participating in the Pension Schemes other than the
Company or any of its Subsidiaries.
2.17 Real Property
(a) Clause 2.17(a) of the Disclosure Schedule contains a true and correct
list of (i) each parcel of real property owned by the Company or any of its
Subsidiaries, (ii) each parcel of real property leased by the
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Company or any of its Subsidiaries (as lessor or lessee) and (iii) all Liens
(other than Permitted Liens) relating to or affecting any parcel of real
property referred to in this Clause 2.17(a).
(b) The Company and each of its Subsidiaries has a valid and subsisting
leasehold estate in and the right to quiet enjoyment of the real properties
leased by it for the full term of the lease thereof. Each lease referred to in
Clause 2.17(a)(ii) is a legal, valid and binding agreement, enforceable in
accordance with its terms, of the Company or any of its Subsidiaries, and there
is no, and neither the Company nor any of its Subsidiaries has received written
notice of any, material default (or any condition or event which, after notice
or lapse of time or both, would constitute a material default) thereunder.
Neither the Company nor any of its Subsidiaries owes any brokerage commissions
with respect to any such leased space in excess of two hundred and fifty
thousand US dollars ($250,000).
(c) The Cluster Partners have delivered to the Purchaser prior to the
execution of this Agreement true and complete copies of (i) all deeds, leases,
mortgages, deeds of trust, certificates of occupancy, title insurance policies,
title reports, surveys and similar documents, and all amendments thereof, with
respect to all leases (including any amendments and renewal letters) and, to
the extent available, all other documents referred to in this Clause 2.17(c)
with respect to the real property listed in Clause 2.17(a) of the Disclosure
Schedule pursuant to Clause 2.17(a).
(d) To the knowledge of the Cluster Partners, the Sellers, the Company or
any of its Subsidiaries no tenant or other party in possession of any of the
real properties identified in the Disclosure Schedule pursuant to Clause
2.17(a) has any right to purchase, or holds any right of first refusal to
purchase, such properties.
(e) Except as disclosed in Clause 2.17(c) of the Disclosure Schedule, the
improvements on the real property identified in Clause 2.17(a) of the
Disclosure Schedule are in good operating condition and in a state of good
maintenance and repair, ordinary wear and tear excepted, are adequate and
suitable for the purposes for which they are presently being used and, to the
knowledge of the Cluster Partners, the Sellers, the Company or any of its
Subsidiaries, there are no condemnation or appropriation proceedings pending or
threatened against any of such real property or the improvements thereon.
2.18 Tangible Personal Property
The Company or one of its Subsidiaries is in possession of and has good
title to, or has valid leasehold interests in or valid rights under Contract to
use, all tangible personal property reflected on the balance sheet included in
the Unaudited Financial Statements and tangible personal property acquired
since the Unaudited Financial Statement Date other than property disposed of
since such date in the ordinary course of business consistent with past
practice. All such tangible personal property is free and clear of all Liens,
other than Permitted Liens, and is in good working order and condition,
ordinary wear and tear excepted, and its use complies in all material respects
with all applicable Laws.
2.19 Intellectual Property Rights
Clause 2.19(a) of the Disclosure Schedule sets forth all of the patents,
registrations and applications relating to the Intellectual Property that are
owned, held or used by the Company and/or its Subsidiaries (including the
Rights in Relation to the Name). The Company and its Subsidiaries have
interests in or the right to use all the Intellectual Property which is
material in the conduct of the business of the Company or any of its
Subsidiaries as it is currently conducted. Except as disclosed in Clause
2.19(b) through 2.19(d) of the Disclosure Schedule, (i) the Company or one of
its Subsidiaries has, or in the case of the Rights in Relation to the Name, on
the Closing Date will have, the exclusive right to use the Intellectual
Property disclosed in Clause 2.19(a) of the Disclosure Schedule, (ii) all
registrations with and applications to Governmental or Regulatory Authorities
in respect of such Intellectual Property are valid and in full force and effect
and there are no Taxes or maintenance fees due and unpaid or any other actions
by the Company or any of its Subsidiaries required to be taken to maintain the
validity or effectiveness of such Intellectual Property except where the
failure to make such payment or take such action would not, individually or in
the aggregate, result in a Material Adverse
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Effect with respect to the Company (iii) there are no restrictions on the
direct or indirect transfer of any license, or any interest therein, held by
the Company or any of its Subsidiaries in respect of such Intellectual
Property, (iv) the Company and its Subsidiaries have taken reasonable security
measures to protect the secrecy, confidentiality and value of their trade
secrets, (v) neither the Company nor any of its Subsidiaries is, or has
received any notice within the last five (5) years that it is in material
default (or with the giving of notice or lapse of time or both, would be in
default) under any license to use such Intellectual Property and (vi) neither
the Cluster Partners, the Sellers, the Company nor any of its Subsidiaries has
any knowledge that such Intellectual Property is being infringed by any other
Person. Neither the Cluster Partners, the Sellers, the Company nor any of its
Subsidiaries has received written notice within the last five (5) years that
the Company or any of its Subsidiaries is infringing any Intellectual Property
of any other Person, no claim is pending or, to the knowledge of the Cluster
Partners, the Sellers, the Company or any of its Subsidiaries, has been made to
such effect that has not been resolved and, to the knowledge of the Cluster
Partners, the Sellers, the Company or any of its Subsidiaries, neither the
Company nor any of its Subsidiaries is infringing any Intellectual Property
Rights of any other Person except an infringement which would not individually
or in the aggregate result in a Material Adverse Effect with respect to the
Company and its Subsidiaries.
2.20 Contracts
(a) Clause 2.20(a) of the Disclosure Schedule (with paragraph references
corresponding to those set forth below) contains a true and complete list of
each of the following Contracts (true and complete copies or, if none,
reasonably complete and accurate written descriptions of which, together with
all amendments and supplements thereto and all waivers of any terms thereof,
have been delivered to the Purchaser prior to the execution of this Agreement),
to which the Company or any of its Subsidiaries is a party:
(i) all Contracts involving receipts of more than two hundred and fifty
thousand US dollars ($250,000) which provide for the provision of services
by the Company to a third party;
(ii) (A) all material Contracts (excluding Benefit Plans) providing for
a commitment of employment or consultation services for a specified or
unspecified term, the name, position and rate of compensation of each
Person party to such a Contract and the expiration date of each such
Contract; and (B) any written or unwritten representations or commitments
or courses of conduct (excluding Benefit Plans disclosed under Clause 2.16
of the Disclosure Schedule) involving an obligation of the Company or any
of its Subsidiaries to make payments in any year, other than with respect
to salary or incentive compensation payments in the ordinary course of
business, to any employee exceeding two hundred and fifty thousand US
dollars ($250,000) or any group of employees exceeding five hundred
thousand US dollars ($500,000) in the aggregate;
(iii) all Contracts with any Person containing any provision or covenant
prohibiting or limiting the ability of the Company or any of its
Subsidiaries to engage in any business activity currently engaged in by the
Company or any of its Subsidiaries or to compete with any Person or to
change the lines of business in which it participates or engages;
(iv) all partnership, joint venture, shareholders' or other similar
Contracts with any Person;
(v) all Contracts relating to Indebtedness of the Company or any of its
Subsidiaries in excess of one million US dollars ($1,000,000) or to
preferred stock issued by the Company or any of its Subsidiaries (other
than Indebtedness owing to or preferred stock owned by the Company or any
wholly-owned Subsidiary);
(vi) all Contracts relating to (A) the future disposition or acquisition
of any Material Assets and Properties, other than dispositions or
acquisitions in the ordinary course of business consistent with past
practice, and (B) any Business Combination;
(vii) all Contracts which individually or in the aggregate involve the
payment or receipt of sums exceeding two hundred and fifty thousand dollars
($250,000) and made between or among the
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Company or any of its Subsidiaries, on the one hand, and the Sellers, the
Cluster Partners, any officer, director, Affiliate or Associate of a Seller
or Cluster Partner or any Associate of any such officer, director or
Affiliate (other than the Company or any of its Subsidiaries), on the other
hand;
(viii) all collective bargaining or similar labor Contracts;
(ix) all Contracts that (A) limit or contain restrictions on the ability
of the Company or any of its Subsidiaries to declare or pay dividends on,
to make any other distribution in respect of or to issue or purchase or
redeem or otherwise acquire its capital stock, to incur Indebtedness, to
incur or suffer to exist any Lien, to purchase or sell any Material Assets
and Properties, or to engage in any Business Combination or (B) require the
Company or any of its Subsidiaries to maintain specified financial ratios
or levels of net worth or other indicia of financial condition; and
(x) all other Contracts that (A) involve the payment or potential
payment, pursuant to the terms of any such Contract, by or to the Company
or any of its Subsidiaries of more than one million US dollars ($1,000,000)
over a twelve month period and (B) cannot be terminated within 60 calendar
days after giving notice of termination without resulting in any material
cost or penalty to the Company or any of its Subsidiaries.
(b) Each Contract required to be disclosed by Clause 2.20(a) is in full
force and effect and constitutes a legal, valid and binding agreement,
enforceable in accordance with its terms, of the Company or the Subsidiary
which is party thereto (and, in the case of contracts referred to in Clause
2.20(a)(vii), of each other party thereto); and neither the Company, any of its
Subsidiaries nor, to the knowledge of the Cluster Partners, the Sellers, the
Company or any of its Subsidiaries, any other party to such Contract is, or has
received notice that it is in material violation or breach of or default under
any such Contract (or with notice or lapse of time or both, would be in
material violation or breach of or default under any such Contract).
(c) Neither the Company nor any of its Subsidiaries is a party to or bound
by any Contract that has resulted in, or could reasonably be expected to result
in, individually or in the aggregate with any other such Contract, a Material
Adverse Effect with respect to the Company.
2.21 Licenses
Neither the Company nor any of its Subsidiaries holds or requires any
License to conduct its business and operations as and to the extent now
conducted and to own, use and lease its Material Assets and Properties.
2.22 Insurance
Clause 2.22 of the Disclosure Schedule contains a true and complete list
(including the names and addresses of the insurers, the expiration dates
thereof, the annual premiums and payment terms thereof and a brief description
of the interests insured thereby) of all liability, property, workers'
compensation, directors' and officers' liability and other insurance policies
(other than Pension Scheme and Benefit Plan related policies disclosed pursuant
to Clause 2.16) currently in effect that insure the business, operations or
employees of the Company or any of its Subsidiaries or affect or relate to the
ownership, use or operation of any of the Material Assets and Properties of the
Company or any of its Subsidiaries and that (i) have been issued to the Company
or any of its Subsidiaries or (ii) have been issued to any Person (other than
the Company or any of its Subsidiaries) for the benefit of the Company or any
of its Subsidiaries. The insurance coverage provided by the policies described
in this Clause 2.22 will not terminate or lapse by reason of the transactions
contemplated by this Agreement. Each policy listed in Clause 2.22 of the
Disclosure Schedule is valid and binding and in full force and effect, no
premiums due thereunder have not been paid and neither the Company, any of its
Subsidiaries nor the Person to whom such policy has been issued has received
any notice of cancellation or termination in respect of any such policy or is
in default thereunder. The insurance policies listed in Clause 2.22 of the
Disclosure Schedule are placed with financially sound and reputable insurers
and, in light of the respective business, operations and Material Assets and
Properties of the Company and its Subsidiaries, are in
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amounts and have coverages that are reasonable and customary for Persons
engaged in such businesses and operations and having such Material Assets and
Properties. Neither the Company nor any of its Subsidiaries has received
written notice within the last three years that any insurer under any policy
referred to in this Clause is denying liability with respect to a claim
thereunder or defending under a reservation of rights clause.
2.23 Affiliate Transactions
Except as disclosed in Clause 2.23 of the Disclosure Schedule, (i) there are
no intercompany Liabilities between the Company on the one hand, and any of its
Subsidiaries on the other, (ii) none of the Sellers, the Cluster Partners, any
officer, director, Affiliate or Associate of a Seller or Cluster Partner or any
Associate of any such officer, director or Affiliate (other than the Company or
any of its Subsidiaries) provides or causes to be provided any assets, services
or facilities to the Company or any of its Subsidiaries, (iii) neither the
Company nor any of its Subsidiaries provides or causes to be provided any
assets, services or facilities to any of the Sellers, the Cluster Partners, any
officer, director, Affiliate or Associate of a Seller or Cluster Partner or any
Associate of any such officer, director or Affiliate (other than the Company or
any of its Subsidiaries) and (iv) neither the Company nor any of its
Subsidiaries beneficially own, directly or indirectly, any Investment Assets of
the Sellers, the Cluster Partners, any officer, director, Affiliate or
Associate of a Seller or Cluster Partner or any Associate of any such officer,
director or Affiliate (other than the Company or any of its Subsidiaries).
Except as disclosed in Clause 2.23 of the Disclosure Schedule, each of the
Liabilities and transactions listed in the Disclosure Schedule was incurred or
engaged in, as the case may be, on an arm's-length basis. Since June 30, 2000,
all settlements of intercompany Liabilities between the Company or any of its
Subsidiaries, on the one hand, and the Sellers, the Cluster Partners, any
officer, director, Affiliate or Associate of a Seller or Cluster Partner or any
Associate of any such officer, director or Affiliate (other than the Company or
any of its Subsidiaries) on the other, have been made, and all allocations of
intercompany expenses have been applied, in the ordinary course of business
consistent with past practice.
2.24 Employees; Labour Relations
(a) The Cluster Partners have delivered to the Purchaser a true and correct
list of the names of each officer and full-time employee of the Company and
each of its Subsidiaries having an annual base salary or wages of at least one
hundred thousand US dollars ($100,000) at the date hereof, together with each
such person's position or function, annual base salary or wages and any
incentive share option, profit sharing or bonus arrangement and any termination
arrangements (including redundancy and extra statutory payments) with respect
to such person in effect on such date. Neither the Cluster Partners nor the
Sellers have received any information that would reasonably lead them to
believe that a material number of such persons will or may cease to be
employees, or will refuse offers of employment from the Purchaser.
(b) Except as disclosed in Clause 2.20(a)(viii) of the Disclosure Schedule,
(i) no employee of the Company or any of its Subsidiaries is presently a member
of a collective bargaining unit and, to the knowledge of the Cluster Partners,
the Sellers, the Company or any of its Subsidiaries, there are no threatened or
contemplated attempts to organize for collective bargaining purposes any of the
employees of the Company or any of its Subsidiaries, and (ii) no unfair labor
practice complaint or Action or Proceedings claiming sex, age, race or
disability discrimination have been brought during the last three years against
the Company or any of its Subsidiaries before any Governmental or Regulatory
Authority. Since the Audited Financial Statement Date there has been no work
stoppage, strike or other concerted action by employees of the Company or any
of its Subsidiaries. During that period, except as disclosed in Clause
2.24(b)(iii) of the Disclosure Schedule, the Company and its Subsidiaries have
complied in all material respects with all applicable Laws, customs and
practices relating to the employment of labor, including without limitation
those relating to wages, hours, collective bargaining and termination
arrangements except where the failure to do so would not reasonably be expected
to have a Material Adverse Effect on the Company or any of its Subsidiaries.
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2.25 Environmental Matters
The operation of the Company's business and that of its Subsidiaries, does
not involve and, to the knowledge of the Cluster Partners, the Sellers, the
Company or any of its Subsidiaries, has never involved the use of, or the
release or discharge of, a hazardous substance, article or other pollutant or
contaminant.
2.26 Substantial Customers
Clause 2.26(a) of the Disclosure Schedule lists the ten (10) largest
customers of the Company and its Subsidiaries, on the basis of revenues for
services provided for the most recent fiscal year. Except as disclosed in
Clause 2.26(b) of the Disclosure Schedule, no such customer has terminated its
Contract with the Company or any of its Subsidiaries (other than due to
completion of the transactions and services to be provided under the Contract)
or materially reduced the level of services provided by the Company or any of
its Subsidiaries since June 30, 2000, or to the knowledge of the Cluster
Partners, the Sellers, the Company or any of its Subsidiaries, has threatened
to terminate the Contract or materially to reduce the level of such services
after the date hereof. Except as disclosed in Clause 2.26(c) of the Disclosure
Schedule, to the knowledge of the Cluster Partners, the Sellers, the Company or
any of its Subsidiaries, no such customer is threatened with bankruptcy or
insolvency.
2.27 Bank Accounts
Clause 2.27 of the Disclosure Schedule contains a complete list showing the
name of each bank in which the Company or any of its Subsidiaries has an
account or safety deposit box and a complete list of each such account or
safety box and the name of each person authorized to draw thereon or to have
access thereto.
2.28 No Powers of Attorney
Except as set forth in Clause 2.28 of the Disclosure Schedule, neither the
Company nor any of its Subsidiaries has any powers of attorney or comparable
delegations of authority outstanding.
2.29 Accounts Receivable
Except as set forth in Clause 2.29 of the Disclosure Schedule, the accounts
and notes receivable of the Company and its Subsidiaries reflected on the
balance sheet included in the Unaudited Financial Statements, and all accounts
and notes receivable arising subsequent to the Unaudited Financial Statement
Date, (i) arose from bona fide sales transactions in the ordinary course of
business and are payable on ordinary trade terms, (ii) are valid obligations of
the respective debtors enforceable in accordance with their terms, (iii) are
not subject to any valid set-off or counterclaim, (iv) are collectible in the
ordinary course of business consistent with past practice, but in any event not
later than 180 days, in the aggregate recorded amounts thereof, net of a
reserve in the amount of five percent of the aggregate recorded amounts thereof
to be reflected in the balance sheet generated after Closing reflecting the
combined operations of the Purchaser and the Company, and (v) are not the
subject of any Actions or Proceedings brought by or on behalf of the Company or
any of its Subsidiaries. There are no security arrangements or collateral
securing the repayment or other satisfaction of receivables of the Company or
any of its Subsidiaries.
2.30 Brokers
Except for Goldman Sachs & Co., whose fees, commissions and expenses will be
paid by the Company, all negotiations relative to this Agreement and the
transactions contemplated hereby have been carried out by the Cluster Partners
and the Sellers directly with the Purchaser without the intervention of any
Person on behalf of the Cluster Partners and Sellers in such manner as to give
rise to any valid claim by any Person against the Purchaser, the Company or any
of its Subsidiaries for a finder's fee, brokerage commission or similar
payment.
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2.31 Disclosure
All material facts relating to the business or condition of the Company have
been disclosed to the Purchaser in or in connection with this Agreement. No
representation or warranty contained in this Agreement, and no statement
contained in the Disclosure Schedule or in any certificate, list or other
writing furnished to the Purchaser pursuant to any provision of this Agreement
(including without limitation the Financial Statements), contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements herein or therein, in the light of the
circumstances under which they were made, not misleading.
3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser hereby represents and warrants to the Sellers as follows:
3.1 Organization
The Purchaser is a corporation duly organized, validly existing and in good
standing under the Laws of the State of Delaware and has full corporate power
and authority to conduct its business as and to the extent now conducted and to
own, use and lease its Material Assets and Properties. The Purchaser has full
corporate power and authority to execute and deliver this Agreement and the
Operative Agreements to which it is a party, to perform its obligations
hereunder and thereunder and to consummate the transactions contemplated hereby
and thereby. The Purchaser is duly qualified, licensed or admitted to do
business and is in good standing in all jurisdictions in which the ownership,
use or leasing of its Material Assets and Properties, or the conduct or nature
of its business makes such qualification, licensing or admission necessary and
in which the failure to be so qualified, licensed or admitted and in good
standing could reasonably be expected to have an adverse effect on the validity
or enforceability of this Agreement or any of the Operative Agreements to which
it is a party or on the ability of the Purchaser to perform its obligations
hereunder or thereunder.
3.2 Capital Stock of the Purchaser
As of May 31, 2000, the authorized capital stock of the Purchaser consisted
solely of (i) 40,000,000 shares of Class A common stock, par value $0.001 per
share (the "Class A Shares"), of which twenty one million three hundred and
sixty nine thousand four hundred and sixteen (21,369,416) shares had been
issued; (ii) 20,000,000 shares of Class B common stock, par value $ 0.001 per
share (the "Class B Shares"), of which two million nine hundred and seventeen
thousand five hundred and seventy six (2,917,576) shares had been issued; and
(iii) 2,000,000 shares of preferred stock none of which had been issued. All
the outstanding Class A Shares and Class B Shares are duly authorized, validly
issued, fully paid and nonassessable.
3.3 Authority
The execution and delivery by the Purchaser of this Agreement and the
Operative Agreements to which it is a party, and the performance by the
Purchaser of its obligations hereunder and thereunder, have been duly and
validly authorized by the Board of Directors of the Purchaser, no other
corporate action on the part of the Purchaser or its stockholders being
necessary except as otherwise contemplated by this Agreement. This Agreement
has been duly and validly executed and delivered by the Purchaser and, assuming
due execution and delivery by other parties hereto, constitutes, and upon the
execution and delivery by the Purchaser of the Operative Agreements to which it
is a party, assuming due execution and delivery by other parties thereto, such
Operative Agreements will constitute, legal, valid and binding obligations of
the Purchaser enforceable against the Purchaser in accordance with their terms.
3.4 No Conflicts
The execution and delivery by the Purchaser of this Agreement does not, and
the execution and delivery by the Purchaser of the Operative Agreements to
which it is a party, the performance by the Purchaser of its
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obligations under this Agreement and such Operative Agreements and the
consummation of the transactions contemplated hereby and thereby will not:
(a) conflict with or result in a violation or breach of any of the
terms, conditions or provisions of the certificate of incorporation or by-
laws of the Purchaser;
(b) subject to obtaining the consents, approvals and actions, making the
filings and giving the notices disclosed in Schedule 15 hereto, result in,
or reasonably be expected to result in, a violation or breach of any term
or provision of any Law or Order applicable to the Purchaser or any of its
Material Assets and Properties; or
(c) except as disclosed in Schedule 16 hereto, (i) conflict with or
result in a violation or breach of, (ii) constitute (with or without notice
or lapse of time or both) a default under, (iii) require the Purchaser to
obtain any consent, approval or action of, make any filing with or give any
notice to any Person as a result or under the terms of, (iv) result in or
give to any Person any right of termination, cancellation, acceleration or
modification in or with respect to, (v) result in or give to any Person any
additional rights or entitlement to increased, additional, accelerated or
guaranteed payments under, or (iv) result in the creation or imposition of
any Lien (other than Permitted Liens, except in the case of capital stock
where no Lien shall be permitted whatsoever) upon the Purchaser or any of
its Material Assets or Properties under, any material Contract or material
License to which the Purchaser is a party or by which any of its Material
Assets and Properties is bound.
3.5 Governmental Approvals and Filings
Except as disclosed in Schedule 15 hereto or as otherwise contemplated by
this Agreement, no consent, approval or action of, filing with or notice to any
Governmental or Regulatory Authority on the part of the Purchaser is required
in connection with the execution, delivery and performance of this Agreement or
the Operative Agreements to which it is a party or the consummation of the
transactions contemplated hereby or thereby.
3.6 Legal Proceedings
(a) There are no Actions or Proceedings pending or, to the knowledge of the
Purchaser, threatened against, relating to or affecting the Purchaser or any of
its Subsidiaries which (i) could reasonably be expected to result in the
issuance of an Order restraining, enjoining or otherwise prohibiting or making
illegal the consummation of any of the transactions contemplated by this
Agreement or any of the Operative Agreements or otherwise result in a material
diminution of the benefits contemplated by this Agreement or any of the
Operative Agreements to the Cluster Partners or the Sellers, or (ii) if
determined adversely to the Purchaser, could reasonably be expected to result
in (x) any injunction or other equitable relief against the Purchaser that
would interfere in any material respect with its business or operations or (y)
Losses by the Purchaser or any of its Subsidiaries, individually or in the
aggregate with Losses in respect of other such Actions or Proceedings,
exceeding five hundred thousand US dollars ($500,000);
(b) there are no facts or circumstances known to the Purchaser or any of its
Subsidiaries that could reasonably be expected to give rise to any Action or
Proceeding that would be required to be disclosed pursuant to Clause 3.6 (a);
and
(c) there are no Orders outstanding against the Purchaser.
3.7 No Undisclosed Liabilities
Except as reflected or reserved against in the balance sheet which is
included in the Purchaser's SEC Documents (as defined in Clause 3.14) or in the
notes thereto there are no Liabilities against, relating to or affecting the
Purchaser or any of its Subsidiaries or any of their Material Assets and
Properties, other than
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Liabilities incurred in the ordinary course of business consistent with past
practice which individually or in the aggregate will not result in a Material
Adverse Effect with respect to the Purchaser and its Subsidiaries.
3.8 Intellectual Property Rights
Clause 3.8 of Schedule 16, sets forth all of the patents, registrations and
applications relating to the Intellectual Property that is owned, held or used
by the Purchaser and/or its Subsidiaries. The Purchaser and its Subsidiaries
have interests in or the right to use all the Intellectual Property which is
material in the conduct of the business of the Purchaser or any of its
Subsidiaries as it is currently conducted. Except as disclosed in Clause 3.8 of
Schedule 16 (i) the Purchaser or one of its Subsidiaries has the exclusive
right to use the Intellectual Property disclosed in Clause 3.8 of Schedule 16,
(ii) to the knowledge of the Purchaser and its Subsidiaries, and other than
pending registrations, all registrations with and applications to Governmental
or Regulatory Authorities in respect of such Intellectual Property are valid
and in full force and effect and there are no Taxes or maintenance fees due and
unpaid or any other actions by the Purchaser or any of its Subsidiaries
required to be taken to maintain the validity or effectiveness of such
Intellectual Property except as would, individually or in the aggregate, result
in a Material Adverse Effect with respect to the Purchaser or any of its
Subsidiaries, (iii) there are no material restrictions on the direct or
indirect transfer of any license, or any interest therein, held by the
Purchaser or any of its Subsidiaries in respect of such Intellectual Property,
(iv) the Purchaser and its Subsidiaries have taken reasonable security measures
to protect the secrecy, confidentiality and value of their trade secrets, (v)
neither the Purchaser nor any of its Subsidiaries is, or has received any
written notice within the last five years that it is, in material default (or
with the giving of notice or lapse of time or both, would be in default) under
any license to use such Intellectual Property and (vi) neither the Purchaser
nor any of its Subsidiaries has any knowledge that such Intellectual Property
is being infringed by any other Person. Neither the Purchaser nor any of its
Subsidiaries has received written notice within the last five years that the
Purchaser or any of its Subsidiaries is infringing any Intellectual Property of
any other Person, no claim is pending or, to the knowledge of the Purchaser and
its Subsidiaries, has been made to such effect that has not been resolved and,
to the knowledge of the Purchaser or any of its Subsidiaries, neither the
Purchaser nor any of its Subsidiaries believes it is infringing any
Intellectual Property Rights of any other Person except an infringement which
would not individually or in the aggregate result in a Material Adverse Effect
with respect to the Purchaser or any of its Subsidiaries.
3.9 Purchase for Investment
The Shares will be acquired by the Purchaser (or, if applicable, its
assignee pursuant to Clause 14.9) for its own account for the purpose of
investment, it being understood that the right to dispose of such Shares shall
be entirely within the discretion of the Purchaser (or such assignee, as the
case may be). The Purchaser (or such assignee, as the case may be) will refrain
from transferring or otherwise disposing of any of the Shares, or any interest
therein, in such manner as to cause the Sellers to be in violation of the
registration requirements of the Securities Act of 1933 as amended (the
"Securities Act") or applicable state securities or blue sky laws.
3.10 Substantial Customers
Clause 3.10 of Schedule 16 lists the ten largest customers of the Purchaser
on the basis of revenues for services provided for the most recent fiscal year.
No such customer has terminated its Contract with the Purchaser or materially
reduced the level of services provided by the Purchaser or any of its
Subsidiaries since March 31, 2000 (other than due to completion of the
transactions and services to be provide under the Contract), or to the
knowledge of the Purchaser, has threatened to terminate the Contract or
materially to reduce the level of such services after the date hereof. To the
knowledge of the Purchaser, no such customer is threatened with bankruptcy or
insolvency.
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3.11 Brokers
Except for Morgan Stanley & Co. Incorporated, whose fees, commissions and
expenses are the sole responsibility of the Purchaser, all negotiations in
relation to this Agreement and the transactions contemplated hereby have been
carried out by the Purchaser directly with the Cluster Partners without the
intervention of any Person on behalf of the Purchaser in such manner as to give
rise to any valid claim by any Person against the Cluster Partners, the Company
or any of its Subsidiaries for a finder's fee, brokerage commission or similar
payment.
3.12 Absence of Changes
Except for the execution and delivery of this Agreement and the transactions
to take place pursuant hereto, since June 30, 2000 there has not been any event
or development which, individually or in the aggregate, would have a Material
Adverse Effect with respect to the Purchaser. Without limiting the foregoing,
except as disclosed in Schedule 16, there has not occurred between June 30,
2000 and the date hereof:
(i) any declaration, setting aside or payment of any dividend or other
distribution in respect of the capital stock of the Purchaser or any of its
Subsidiaries not wholly-owned by the Purchaser, or any direct or indirect
redemption, purchase or other acquisition by the Purchaser or any of its
Subsidiaries of any such capital stock of or any Option with respect to the
Purchaser or any of its Subsidiaries not wholly-owned by the Purchaser;
(ii) any authorization, issuance, sale or other disposition by the
Purchaser or any of its Subsidiaries of any shares of capital stock of or
Option with respect to the Purchaser or any of its Subsidiaries, or any
modification or amendment of any right of any holder of any outstanding
shares of capital stock of or Option with respect to the Purchaser or any
of its Subsidiaries;
(iii) (x) any material increase in the salary, wages or other
compensation of any officer, employee or consultant of the Purchaser or any
of its Subsidiaries whose annual salary is, or after giving effect to such
change would be, two hundred and fifty thousand US dollars ($250,000) or
more; (y) any establishment or material modification of (A) targets, goals,
pools or similar provisions in respect of any fiscal year under any Benefit
Plan, employment contract or other employee compensation arrangement or (B)
salary ranges, increase guidelines or similar provisions in respect of any
Benefit Plan, employment contract or other employee compensation
arrangement; or (z) any adoption, entering into, amendment, modification or
termination (partial or complete) of any Benefit Plan except to the extent
required by applicable Law and in the cases of Clauses (x), (y) and (z)
except in the ordinary course of business and consistent with past
practices;
(iv) (x) incurrences by the Purchaser or any of its Subsidiaries of
Indebtedness in an aggregate principal amount exceeding one million US
dollars ($1,000,000) (net of any amounts discharged during such period), or
(y) any voluntary purchase, cancellation, prepayment or complete or partial
discharge in advance of a scheduled payment date with respect to, or waiver
of any right of the Purchaser or any of its Subsidiaries under, any
Indebtedness in an aggregate principal amount exceeding two hundred and
fifty thousand US dollars ($250,000) of or owing to the Purchaser or any of
its Subsidiaries (in either case other than any Indebtedness of the
Purchaser or any of its Subsidiaries owing to the Purchaser or any of its
wholly-owned Subsidiaries);
(v) any physical damage, destruction or other casualty loss (whether or
not covered by insurance) affecting any of the plant, real or personal
property or equipment of the Purchaser or any of its Subsidiaries in an
aggregate amount exceeding five hundred thousand US dollars ($500,000);
(vi) any material change in (x) any pricing, investment, accounting,
financial reporting, credit, allowance or Tax practice or policy of the
Purchaser or any of its Subsidiaries (y) the fiscal year of the Purchaser
or any of its Subsidiaries;
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(vii) any write-off or write-down of or any determination to write off
or down any of the Material Assets and Properties of the Purchaser or any
of its Subsidiaries in an aggregate amount exceeding two hundred and fifty
thousand US dollars ($250,000);
(viii) any acquisition or disposition of, or incurrence of a Lien (other
than a Permitted Lien) on, any Material Assets and Properties of the
Purchaser or any of its Subsidiaries other than in the ordinary course of
business consistent with past practice;
(ix) any (x) amendment of the certificate or articles of incorporation
or by-laws (or other comparable corporate charter documents) of the
Purchaser or any of its Subsidiaries, (y) reorganization, liquidation or
dissolution of the Purchaser or any of its Subsidiaries or (z) Business
Combination involving the Purchaser or any of its Subsidiaries and any
other Person;
(x) any material amendment or modification, termination (partial or
complete) or granting of a waiver under or giving any consent with respect
to (A) any material Contract or (B) any material License held by the
Purchaser or any of its Subsidiaries;
(xi) any commencement or termination by the Purchaser or any of its
Subsidiaries of any line of business;
(xii) any transaction by the Purchaser or any of its Subsidiaries (A)
outside the ordinary course of business consistent with past practice or
(B) other than on an arm's-length basis, other than pursuant to any
Contract in effect on March 31, 2000;
(xiii) any entering into of an agreement to do or engage in any of the
foregoing after the date hereof; or
(xiv) any other material transaction involving or development affecting
the Purchaser or any of its Subsidiaries outside the ordinary course of
business consistent with past practice.
3.13 Compliance With Laws and Orders
Except as would not, individually or in the aggregate, result in a Material
Adverse Effect with respect to the Purchaser, neither the Purchaser nor any of
its Subsidiaries is or has at any time within the last three years been, or has
received any notice that it is or has at any time within the last three years
been in violation of or in default under, in any material respect, any Law or
Order applicable to the Purchaser or any of its Subsidiaries.
3.14 SEC Filings; Purchaser Financial Statements
The Purchaser has filed with the SEC all required reports, schedules, forms,
statements, financial statements and the notes thereto and other documents
(including exhibits and all other information incorporated therein) required
under the Securities Act and the Securities Exchange Act of 1934 as amended
(the "Exchange Act") (the "Purchaser SEC Documents"). As of their respective
dates, the Purchaser's SEC Documents complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be, and
the rules and regulations of the SEC promulgated thereunder applicable to such
Purchaser SEC Documents and none of the Purchaser SEC Documents at the time
they were filed contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they
were made, not misleading. The financial statements of the Purchaser included
in the Purchaser SEC Documents comply as to form and substance, as of their
respective dates of filing with the SEC, in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, in the case of unaudited statements, as permitted by Form 10-Q of the
SEC) applied on a consistent basis during the periods involved (except as may
be indicated in the notes thereto) and fairly present in all material respects
the consolidated financial position of the Purchaser and its consolidated
Subsidiaries as of the dates thereof and the consolidated results of their
operations, stockholders' equity and cash flows for the periods then ended
(subject, in the case of unaudited
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statements, to normal recurring year-end audit adjustments) and are consistent
in all material respects with the books and records of the Purchaser and its
consolidated Subsidiaries.
3.15 Disclosure
All material facts relating to the business or condition of the Purchaser
have been disclosed to the Sellers in or in connection with this Agreement. No
representation or warranty contained in this Agreement, and no statement
contained in Schedule 16 or in any certificate, list or other writing furnished
to the Sellers pursuant to any provision of this Agreement, contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements herein or therein, in the light of the
circumstances under which they were made, not misleading.
4. COVENANTS OF THE SELLERS AND THE CLUSTER PARTNERS
The Sellers and the Cluster Partners covenant and agree with the Purchaser
that they will (and the Cluster Partners further covenant and agree that they
will cause that the Sellers will), at all times from and after the date hereof
until the Closing and, with respect to any covenant or agreement by its terms
to be performed in whole or in part after the Closing, for the period specified
herein or, if no period is specified herein, indefinitely, comply with all
covenants and provisions of this Clause 4, except to the extent the Purchaser
may otherwise consent in writing.
4.1 Regulatory and Other Approvals
The Sellers will, and will cause the Company and its Subsidiaries to, (a)
take all commercially reasonable steps necessary or desirable, and proceed
diligently and in good faith and use all commercially reasonable efforts, as
promptly as practicable to obtain all consents, approvals or actions of, to
make all filings with and to give all notices to Governmental or Regulatory
Authorities or any other Person required of the Sellers, the Company or any of
its Subsidiaries to consummate the transactions contemplated hereby and by the
Operative Agreements, including without limitation those described in Clause 8
and Schedule 15, (b) provide such other information and communications to such
Governmental or Regulatory Authorities or other Persons as the Purchaser or
such Governmental or Regulatory Authorities or other Persons may reasonably
request and (c) cooperate with the Purchaser as promptly as practicable in
obtaining all consents, approvals or actions of, making all filings with and
giving all notices to Governmental or Regulatory Authorities or other Persons
required of the Purchaser to consummate the transactions contemplated hereby
and by the Operative Agreements. The Sellers will provide prompt notification
to the Purchaser when any such consent, approval, action, filing or notice
referred to in this Clause 4.1 is obtained, taken, made or given, as
applicable, and will advise the Purchaser of any communications (and, unless
precluded by Law, provide copies of any such communications that are in
writing) with any Governmental or Regulatory Authority or other Person
regarding any of the transactions contemplated by this Agreement or any of the
Operative Agreements.
4.2 Investigation by the Purchaser
The Sellers will, and will cause the Company and its Subsidiaries to, (a)
provide the Purchaser and its officers, directors, employees, agents, counsel,
accountants, financial advisors, consultants and other representatives
(together "Representatives") with reasonable access, upon reasonable prior
notice and during normal business hours, to all officers, employees, agents and
accountants of the Company and its Subsidiaries and their Material Assets and
Properties and Books and Records, and (b) furnish the Purchaser and its
Representatives with all such information and data (including without
limitation copies of Contracts, Benefit Plans and other Books and Records)
concerning the business and operations of the Company and its Subsidiaries as
the Purchaser or its Representatives reasonably may request in connection with
such investigation. The Purchaser will hold any information provided under this
Clause 4.2 that is non-public in confidence to the extent required by, and in
accordance with, the provisions of the letter dated May 19, 2000
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between the Company and the Purchaser (the "Confidentiality Agreement"). Any
investigation by the Purchaser shall not affect the representations and
warranties of the Sellers or the Cluster Partners.
4.3 No Solicitations
The Sellers and/or the Cluster Partners will not take, nor will the Sellers
and/or the Cluster Partners permit the Company, its Subsidiaries or any
Affiliate of the Sellers (or authorize or permit any investment banker,
financial advisor, attorney, accountant or other Person retained by or acting
for or on behalf of the Sellers, the Cluster Partners, the Company, its
Subsidiaries or any such Affiliate) to take, directly or indirectly, any action
to initiate, assist, solicit, negotiate, encourage or accept any offer or
inquiry from any Person (a) to engage in any Business Combination with the
Company or any of its Subsidiaries, (b) to reach any agreement or understanding
(whether or not such agreement or understanding is absolute, revocable,
contingent or conditional) for, or otherwise attempt to consummate, any
Business Combination with the Company or any of its Subsidiaries or (c) to
furnish or cause to be furnished any information with respect to the Company or
any of its Subsidiaries to any Person (other than as contemplated by Clause
4.2) who the Sellers, the Cluster Partners, the Company, any of its
Subsidiaries or such Affiliate (or any such Person acting for or on their
behalf) knows or has reason to believe is in the process of considering any
Business Combination with the Company or any of its Subsidiaries. If the
Sellers, the Cluster Partners, the Company, any of its Subsidiaries or any such
Affiliate (or any such Person acting for or on their behalf) receives from any
Person (other than the Purchaser or any other Person referred to in Clause 4.2)
any offer, inquiry or informational request referred to above, the Sellers
and/or the Cluster Partners will promptly advise such Person, by written
notice, of the terms of this Clause 4.3 and will promptly, orally and in
writing, advise the Purchaser of such offer, inquiry or request and deliver a
copy of such notice to the Purchaser.
4.4 Conduct of Business
The Sellers and the Cluster Partners will cause the Company and its
Subsidiaries to conduct business only in the ordinary course consistent with
past practice. Without limiting the generality of the foregoing and subject
only to the prior written consent of the Purchaser, the Sellers will:
(a) cause the Company and its Subsidiaries to use commercially
reasonable efforts to (i) preserve intact the present business organization
and reputation of the Company and its Subsidiaries, (ii) keep available
(subject to dismissals and retirements in the ordinary course of business
consistent with past practice) the services of the present officers,
employees and consultants of the Company and the Subsidiaries, (iii)
maintain the Material Assets and Properties of the Company and its
Subsidiaries in good working order and condition, ordinary wear and tear
excepted, (iv) maintain the goodwill of material customers, suppliers,
lenders and other Persons to whom the Company or any of its Subsidiaries
sells goods or provides services or with whom the Company or any of its
Subsidiaries otherwise has significant business relationships and (v)
continue all current sales, marketing and promotional activities relating
to the business and operations of the Company and its Subsidiaries;
(b) except to the extent required by applicable Law, (i) cause the Books
and Records to be maintained in the usual, regular and ordinary manner and
(ii) not permit any material change in (A) any pricing, investment,
accounting, financial reporting, inventory, credit, allowance or Tax
practice or policy of the Company or any of its Subsidiaries, (B) any
method of calculating any bad debt, contingency or other reserve of the
Company or any of its Subsidiaries for accounting, financial reporting or
Tax purposes or (C) the fiscal year of the Company or any of its
Subsidiaries;
(c) (i) use, and will cause the Company and its Subsidiaries to use,
commercially reasonable efforts to maintain in full force and effect until
the Closing substantially the same levels of insurance coverage as the
insurance afforded under the Contracts listed in Clause 2.22 of the
Disclosure Schedule, and (ii) use commercially reasonable efforts to cause
any and all benefits under such Contracts paid or payable (whether before
or after the date of this Agreement) with respect to the business,
operations, employees or
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Material Assets and Properties of the Company and its Subsidiaries to be
paid to the Company and the Subsidiaries; and
(d) cause the Company and its Subsidiaries to comply, in all material
respects, with all Laws and Orders applicable to the business and
operations of the Company and its Subsidiaries, and promptly following
receipt thereof to give the Purchaser copies of any notice received from
any Governmental or Regulatory Authority or other Person alleging any
violation of any such Law or Order.
4.5 Financial Statements and Reports
(a) As promptly as practicable and in any event no later than 45 days after
the end of each fiscal quarter ending after the date hereof and before the
Closing Date (other than the fourth quarter) or 90 days after the end of each
fiscal year ending after the date hereof and before the Closing Date, as the
case may be, the Sellers will deliver to the Purchaser true and complete copies
of (in the case of any such fiscal year) the audited and (in the case of any
such fiscal quarter) the unaudited consolidated balance sheet, and the related
audited or unaudited consolidated statements of operations, stockholders'
equity and cash flows, of the Company and its consolidated subsidiaries, in
each case as of and for the fiscal year then ended or as of and for each such
fiscal quarter and the portion of the fiscal year then ended, as the case may
be, together with the notes, if any, relating thereto, which financial
statements shall be prepared on a basis consistent with the Audited Financial
Statements.
(b) As promptly as practicable, the Sellers will deliver to the Purchaser
true and complete copies of such other financial statements and reports as may
be prepared or received by the Sellers, the Company or any of its Subsidiaries
relating to the business or operations of the Company or any of its
Subsidiaries or as the Purchaser may otherwise reasonably request.
4.6 Employee Matters
Except as may be required by Law or in the ordinary course of business
consistent with past practice, the Sellers will refrain, and will cause the
Company and its Subsidiaries to refrain, from directly or indirectly:
(a) making any representation or promise, oral or written, to any
officer, employee or consultant of the Company or any of its Subsidiaries
concerning any Benefit Plan, except for statements as to the rights or
accrued benefits of any officer, employee or consultant under the terms of
any Benefit Plan;
(b) making any material increase in the salary, wages or other
compensation including termination arrangements of any officer, employee or
consultant of the Company or any of its Subsidiaries other than:
(i) the grant of Options with respect to the Company's Common Stock
to persons who become employees of the Company or any of its
Subsidiaries in the period commencing on July 20, 2000 and terminating
on the Closing or to current employees of the Company who have been
promoted in such period; provided however that the number of Options
over the Company's Common Stock granted to such persons referred to
above (including those outstanding on the date hereof) does not exceed
a total amount of five million and six hundred thousand (5,600,000)
Options and such Options have an exercise price equal to Sixteen Euro
((Euro)16) and are granted in a manner consistent with the past
practice of the Company and substantially as set out in Schedule 20;
(ii) payments to the Cluster Partners, the Company's or any of its
Subsidiaries' employees and/or consultants prior to Closing, of (aa)
cash bonuses in an aggregate amount equal to such amounts that the
Company or any of its Subsidiaries would have paid to such persons in
the ordinary course of business on December 31, 2000 absent the
acquisition of the Company by the Purchaser or any other third party;
or (bb) payment of such additional amounts to such persons as shall be
approved by the Purchaser (such approval not to be unreasonably
withheld); provided however that such additional amounts and cash
bonuses referred to in this Clause 4.6(b)(ii) shall not exceed the sum
of fifteen million US dollars ($15,000,000) and shall be calculated in
accordance with the
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Company's current bonus policies, as disclosed in Clause 4.6(b) of the
Disclosure Schedule or as otherwise agreed by the Purchaser;
(c) adopting, entering into, materially amending, materially modifying
or terminating (partially or completely) any Benefit Plan (other than as
set out in Clause 6.13 of this Agreement) except to the extent required by
applicable Law or as a consequence of employees entering into the
Employment Agreements; or
(d) establishing or materially modifying any (i) targets, goals, pools
or similar provisions in respect of any fiscal year under any Benefit Plan,
employment Contract or other employee compensation arrangement or (ii)
salary ranges, increase guidelines or similar provisions in respect of any
Benefit Plan, employment Contract or other employee compensation
arrangement (except in connection with the Employment Agreements).
The Sellers will cause the Company and its Subsidiaries to administer each
Benefit Plan, or cause the same to be so administered, in all material respects
in accordance with applicable laws and, where applicable, the provisions of the
Code and ERISA, except where a failure could not reasonably be expected to have
a Material Adverse Effect with respect to the Company. The Sellers will
promptly notify the Purchaser in writing of each receipt by the Sellers, the
Cluster Partners, the Company or any of its Subsidiaries (and furnish the
Purchaser with copies) of any notice of investigation or administrative
proceeding by the IRS, Department of Labor, PBGC (or comparable body in
jurisdictions other than the United States) or other Person involving any
Benefit Plan.
4.7 Certain Restrictions
Except as disclosed in Clause 4.7 in the Disclosure Schedule or as required
by this Agreement the Sellers will cause the Company and its Subsidiaries to
refrain from:
(a) amending their articles of association, certificates or articles of
incorporation or by-laws (or other comparable corporate charter documents)
or taking any action with respect to any such amendment or any
reorganization, liquidation or dissolution of any such corporation;
(b) authorizing, issuing, selling or otherwise disposing of any shares
of capital stock of or any Option with respect to the Company or any of its
Subsidiaries, or modifying or amending any right of any holder of
outstanding shares of capital stock of or Option with respect to the
Company or any of its Subsidiaries (save for those Options over the
Company's Common Stock referred to in Clause 4.6(b)(i));
(c) declaring, setting aside or paying any dividend or other
distribution in respect of the capital stock of the Company or any of its
Subsidiaries not wholly-owned by the Company, or directly or indirectly
redeeming, purchasing or otherwise acquiring any capital stock of or any
Option with respect to the Company or any of its Subsidiaries not wholly-
owned by the Company;
(d) acquiring or disposing of, or incurring any Lien (other than a
Permitted Lien) on, any Material Assets and Properties, other than in the
ordinary course of business consistent with past practice;
(e) (i) entering into, materially amending or modifying, terminating
(partially or completely), granting any waiver under or giving any consent
with respect to (A) any Contract that is, or would if had it been in
existence on the date of this Agreement have been, required to be disclosed
in the Disclosure Schedule pursuant to Clause 2.20(a) except in the
ordinary course of business and consistent with past practices and provided
that any such Contract entered into in such ordinary course of business and
consistent with past practice or amendment, modification or termination of
such Contract or granting of a waiver or consent with respect to any such
Contract are disclosed to the Purchaser promptly upon the Purchaser's
request or (B) any material License or (ii) granting any irrevocable powers
of attorney;
(f) violating, breaching or defaulting under in any material respect, or
taking or failing to take any action that (with or without notice or lapse
of time or both) would constitute a material violation or breach
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of, or default under, any term or provision of any License held or used by
the Company or any of its Subsidiaries or any Contract to which the Company
or any of its Subsidiaries is a party;
(g) (i) incurring Indebtedness in an aggregate principal amount
exceeding five hundred thousand US dollars ($500,000) (net of any amounts
of Indebtedness discharged during such period), or (ii) voluntarily
cancelling, prepaying or otherwise providing for a complete or partial
discharge in advance of a scheduled payment date with respect to, or
waiving any right of the Company or any of its Subsidiaries under, any
Indebtedness having an aggregate principal amount exceeding two hundred and
fifty thousand US dollars ($250,000) of or owing to the Company or any of
its Subsidiaries (in either case other than Indebtedness of the Company or
any of its Subsidiaries owing to the Company or any of its wholly-owned
Subsidiaries);
(h) engaging with any Person in any Business Combination;
(i) making capital expenditures or commitments for additions to
property, plant or equipment constituting capital assets in an aggregate
amount exceeding two hundred and fifty thousand US dollars ($250,000);
(j) making any material change in the lines of business in which they
participate or are engaged;
(k) writing off or writing down any of their Material Assets and
Properties outside the ordinary course of business consistent with past
practice; or
(l) entering into any agreement to do or engage in any of the foregoing.
4.8 Affiliate Transactions
Except as set forth in Clause 2.23 of the Disclosure Schedule, or as
specifically permitted by this Agreement, immediately prior to the Closing all
Indebtedness and other amounts owing under Contracts (other than the Employment
Agreements) between the Sellers, the Cluster Partners, any officer, director,
Affiliate or Associate of a Seller or Cluster Partner or any Associate of any
such officer, director or Affiliate (other than the Company or any of its
Subsidiaries), on the one hand, and the Company or any of its Subsidiaries, on
the other, will be paid in full, and the Sellers will terminate and will cause
any such officer, director, Affiliate or Associate to terminate each Contract
with the Company or any such Subsidiary. Prior to the Closing, neither the
Company nor any of its Subsidiaries will enter into any Contract or amend or
modify any existing Contract, and will not engage in any transaction outside
the ordinary course of business consistent with past practice or not on an
arm's-length basis (other than pursuant to the Employment Agreements and
Contracts disclosed pursuant to Clause 2.20(a)(vii)), with the Sellers, the
Cluster Partners or any such officer, director, Affiliate or Associate.
4.9 Books and Records
On the Closing Date, the Sellers will deliver or make available to the
Purchaser at the offices of the Company and its Subsidiaries all of the Books
and Records, and if at any time after the Closing a Seller or Cluster Partner
discovers in its possession or under its control any other Books and Records,
it will forthwith deliver such Books and Records to the Purchaser.
4.10 Cluster Name
The Sellers and the Cluster Partners shall cause (a) that prior to the
Closing: (i) the Rights in Relation to the Name will be assigned to the Company
or a wholly-owned Subsidiary of the Company; and (ii) the Purchaser shall be
entitled to use the corporate name "Cluster" (the "Name") and that it and any
of its Subsidiaries shall be entitled to use the Name or any part thereof as
its business name and as a trade mark in relation to the services provided in
connection with its or any of its Subsidiaries' businesses to the same extent
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as the Sellers, the Cluster Partners, the Company or any of their respective
Subsidiaries or Affiliates are entitled to use the Name; and (b) as soon as
practicable after Closing the patents, registrations and applications required
to be disclosed pursuant to Clause 2.19 shall be registered the name of the
Company or a wholly-owned Subsidiary of the Company.
4.11 Notice and Cure
The Sellers and the Cluster Partners will notify the Purchaser promptly in
writing of, and contemporaneously will provide the Purchaser with true and
complete copies of any and all information or documents relating to, and will
use all commercially reasonable efforts to cure before the Closing, any event,
transaction or circumstance occurring after the date of this Agreement that
causes or will cause any covenant or agreement of the Sellers or the Cluster
Partners under this Agreement to be breached or that renders or will render
untrue any representation or warranty of the Sellers or the Cluster Partners
contained in this Agreement as if the same were made on or as of the date of
such event, transaction or circumstance. The Sellers and the Cluster Partners
will also notify the Purchaser promptly in writing of, and will use all
commercially reasonable efforts to cure, before the Closing, any violation or
breach of any representation, warranty, covenant or agreement made by the
Sellers or the Cluster Partners in this Agreement, whether occurring or arising
before, on or after the date of this Agreement. No notice given pursuant to
this Clause shall have any effect on the representations, warranties, covenants
or agreements contained in this Agreement for purposes of determining
satisfaction of any condition contained herein or shall in any way limit the
Purchaser's right to seek indemnity under Clause 11.
4.12 Fulfilment of Conditions
The Sellers and the Cluster Partners will execute and deliver at the Closing
each Operative Agreement that the Sellers and the Cluster Partners are required
hereby to execute and deliver as a condition to the Closing, will take all
commercially reasonable steps necessary or desirable and proceed diligently and
in good faith to satisfy each other condition to the obligations of the
Purchaser contained in this Agreement and will not, and will not permit the
Company or any of its Subsidiaries to, take or fail to take any action that
could reasonably be expected to result in the nonfulfillment of any such
condition.
4.13 Registration Statement
The Sellers and the Cluster Partners shall reasonably assist and cooperate
with the Purchaser, and shall cause the Company and its Subsidiaries reasonably
to assist and cooperate with the Purchaser, in the preparation of the
Registration Statement and shall use their reasonable best efforts to assist
the Purchaser to have the Registration Statement declared effective by the SEC
at the earliest practicable date. The Sellers and the Cluster Partners each
agree that none of the information supplied or to be supplied by it or by the
Company or any of its Subsidiaries for inclusion or incorporation by reference
in the Registration Statement and each amendment or supplement thereto, at the
time of mailing the prospectus relating thereto and on the Closing Date, will
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
If at any time before the Closing Date when a prospectus relating to the
Closing Consideration Shares and the Deferred Consideration Shares is required
to be delivered under the Securities Act in connection with the Transaction,
there shall occur any event with respect to the Company or any of its
Subsidiaries, the Sellers or the Cluster Partners or any information supplied
by the Company or any of its Subsidiaries, the Sellers or the Cluster Partners
for inclusion in the Registration Statement which requires the Registration
Statement to be amended, or the prospectus relating thereto to be amended or
supplemented, the Company, the Sellers or the Cluster Partners, as the case may
be, shall promptly advise the Purchaser of such event.
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4.14 Further Clarification of Disclosure Schedule
The Sellers and the Cluster Partners will supply the Purchaser with such
additional information as the Purchaser may reasonably request to enable
further clarification of matters set out in the Disclosure Schedule.
5. COVENANTS OF THE PURCHASER
The Purchaser covenants and agrees with the Sellers and the Cluster Partners
that, at all times from and after the date hereof until the Closing (and, in
the case of the covenants in Clauses 5.11, 5.12, 5.13, 5.15, 5.16, 5.17, 5.18
and 5.19 only, from Closing onwards), the Purchaser will comply with all
covenants and provisions of this Clause 5, except to the extent that the
Sellers or the Cluster Partners may otherwise consent in writing.
5.1 Regulatory and Other Approvals
The Purchaser shall (a) take all commercially reasonable steps necessary or
desirable, and proceed diligently and in good faith and use all commercially
reasonable efforts, as promptly as practicable to obtain all consents,
approvals or actions of, to make all filings with and to give all notices to
Governmental or Regulatory Authorities or any other Person required of the
Purchaser to consummate the transactions contemplated hereby and by the
Operative Agreements, including without limitation those described in Clause 8
and Schedule 15, (b) provide such other information and communications to such
Governmental or Regulatory Authorities or other Persons as the Sellers, the
Cluster Partners or such Governmental or Regulatory Authorities or other
Persons may reasonably request and (c) cooperate with the Sellers, the Company
and its Subsidiaries as promptly as practicable in obtaining all consents,
approvals or actions of, making all filings with and giving all notices to
Governmental or Regulatory Authorities or other Persons required of the
Sellers, the Cluster Partners, the Company or any of its Subsidiaries to
consummate the transactions contemplated hereby and by the Operative
Agreements. The Purchaser will provide prompt notification to the Sellers when
any such consent, approval, action, filing or notice referred to in this Clause
5.1 is obtained, taken, made or given, as applicable, and will advise the
Sellers of any communications (and, unless precluded by Law, provide copies of
any such communications that are in writing) with any Governmental or
Regulatory Authority or other Person regarding any of the transactions
contemplated by this Agreement or any of the Operative Agreements.
5.2 Investigation by the Sellers
The Purchaser will (a) provide the Sellers and its Representatives with
reasonable access, upon reasonable prior notice and during normal business
hours without causing any interruption in the day-to-day business of the
Purchaser, to all officers, employees, agents and accountants of the Purchaser
and its Subsidiaries and their Material Assets and Properties and Books and
Records, and (b) furnish the Sellers and its Representatives with all such
information and data (including without limitation copies of Contracts, Benefit
Plans and other Books and Records) concerning the business and operations of
the Purchaser and its Subsidiaries as the Sellers or its Representatives
reasonably may request in connection with such investigation. The Sellers will
hold any information provided under this Clause 5.2 that is non-public in
confidence to the extent required by, and in accordance with, the
Confidentiality Agreement. Any investigation by the Sellers shall not affect
the representations and warranties of the Purchaser.
5.3 Conduct of Business
The Purchaser will conduct business only in the ordinary course consistent
with past practice. Without limiting the generality of the foregoing, the
Purchaser will:
(a) use commercially reasonable efforts to (i) preserve intact the
present business organization and reputation of the Purchaser and its
Subsidiaries, (ii) keep available (subject to dismissals and retirements in
the ordinary course of business consistent with past practice) the services
of the present officers, employees and consultants of the Purchaser and its
Subsidiaries, (iii) maintain the Material Assets and
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Properties of the Purchaser and its Subsidiaries in good working order and
condition, ordinary wear and tear excepted, (iv) maintain the goodwill of
material customers, suppliers, lenders and other Persons to whom the
Purchaser or any of its Subsidiaries sells goods or provides services or
with whom the Company or any of its Subsidiaries otherwise has significant
business relationships and (v) continue all current sales, marketing and
promotional activities relating to the business and operations of the
Purchaser and its Subsidiaries to the end that the ongoing business of the
Purchaser and its Subsidiaries shall not be impaired in any material
respect on the Closing Date;
(b) (i) use commercially reasonable efforts to maintain in full force
and effect until the Closing substantially the same levels of insurance
coverage as currently maintained and use commercially reasonable efforts to
cause any and all benefits under such Contracts paid or payable (whether
before or after the date of this Agreement) with respect to the business,
operations, employees or Material Assets and Properties of the Purchaser
and its Subsidiaries to be paid; and
(c) comply, in all material respects, with all Laws and Orders
applicable to its business and operations, and promptly following receipt
thereof to give the Sellers copies of any notice received from any
Governmental or Regulatory Authority or other Person alleging any violation
of any such Law or Order.
5.4 Notice and Cure
The Purchaser shall notify the Sellers and the Cluster Partners promptly in
writing of, and contemporaneously will provide the Sellers and the Cluster
Partners with true and complete copies of any and all information or documents
relating to, and will use all commercially reasonable efforts to cure before
the Closing, any event, transaction or circumstance occurring after the date of
this Agreement that causes or will cause any covenant or agreement of the
Purchaser under this Agreement to be breached or that renders or will render
untrue any representation or warranty of the Purchaser contained in this
Agreement as if the same were made on or as of the date of such event,
transaction or circumstance. The Purchaser will also notify the Sellers and the
Cluster Partners promptly in writing of, and will use all commercially
reasonable efforts to cure, before the Closing, any violation or breach of any
representation, warranty, covenant or agreement made by the Purchaser in this
Agreement, whether occurring or arising before, on or after the date of this
Agreement. No notice given pursuant to this Clause shall have any effect on the
representations, warranties, covenants or agreements contained in this
Agreement for purposes of determining satisfaction of any condition contained
herein or shall in any way limit the Sellers' or the Cluster Partners' right to
seek indemnity under Clause 11.
5.5 Fulfilment of Conditions
The Purchaser will execute and deliver at the Closing each Operative
Agreement that the Purchaser is hereby required to execute and deliver as a
condition to the Closing, will take all commercially reasonable steps necessary
or desirable and proceed diligently and in good faith to satisfy each other
condition to the obligations of the Sellers and the Cluster Partners contained
in this Agreement and will not take or fail to take any action that could
reasonably be expected to result in the nonfulfillment of any such condition.
5.6 Filing of Registration Statement
In connection with the registration pursuant to the Securities Act of the
Diamond Shares to be issued as the Consideration Shares pursuant to the terms
of this Agreement, the Purchaser shall file a Registration Statement on Form S-
4 (together with all amendments, schedules, and exhibits thereto, (the
"Registration Statement")) with the SEC promptly following the execution of
this Agreement. The Registration Statement shall comply in all material
respects with the applicable provisions of the Securities Act and the Exchange
Act, and the rules and regulations promulgated thereunder. The Purchaser shall
use its reasonable best efforts to have the Registration Statement declared
effective by the SEC at the earliest practicable date and to keep the
Registration Statement effective as long as is necessary to consummate the
transactions contemplated under this
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Agreement or any Operative Agreement (the "Transaction"). The Purchaser shall
also take any action required to be taken under applicable Blue Sky Laws or
U.S. Federal securities laws (other than pursuant to state takeover laws) in
connection with the issuance of the Consideration Shares and the Company shall
furnish all information concerning the Company and the holders of the Company's
Shares as the Purchaser may reasonably request in connection with such action.
The Purchaser agrees that none of the information supplied or to be supplied by
the Purchaser for inclusion or incorporation by reference in the Registration
Statement, and each amendment or supplement thereto, at the time of mailing the
prospectus relating thereto and on the Closing Date, will contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading. If at any time before
the Closing Date when a prospectus relating to the Consideration Shares is
required to be delivered under the Securities Act in connection with the
Transaction, any event occurs as a result of which the prospectus as then
amended or supplemented relating to the Transaction would include an untrue
statement of a material fact or omit to state any material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, or if it is necessary at any time to amend such
prospectus to comply with the Securities Act, the Purchaser will promptly
notify the Company, the Sellers, and the Cluster Partners of such event and
will promptly prepare and file with the SEC an amendment or supplement which
will correct such statement or omission or effect such compliance.
The Purchaser will provide the Company, the Sellers and the Cluster Partners
with a reasonable opportunity to review and comment on drafts of, and any
amendment or supplement to, the Registration Statement prior to filing such
with the SEC, and will provide the Company, the Sellers and the Cluster
Partners with a copy of all such filings made with the SEC. No amendment or
supplement to the information supplied by the Company, the Sellers and the
Cluster Partners for inclusion in the Registration Statement shall be made
without the approval of the Company, the Sellers or the Cluster Partners,
respectively, which approval shall not be unreasonably withheld or delayed. The
Purchaser shall notify the Company, the Sellers and the Cluster Partners of any
stop order proceedings in respect of the Registration Statement and will use
its reasonable best efforts to prevent the issuance of any such stop order and
to obtain as soon as possible its removal, if issued.
5.7 Certain Restrictions
Other than as required or permitted by this Agreement or with the reasonable
agreement of the Sellers, the Purchaser will refrain and will cause its
Subsidiaries to refrain from:
(a) except as required to consummate the Transaction, amending their
certificates or articles of incorporation, by-laws or other comparable
corporate charter documents or taking any action with respect to any
reorganisation, liquidation or dissolution of any such corporation;
(b) other than in the ordinary course of business and consistent with
past practice, authorizing, issuing, selling or otherwise disposing of any
share of capital stock of or any Option with respect to the Purchaser or
any of its Subsidiaries, or materially modifying or amending any right of
any holder of outstanding shares of capital stock of or Option with respect
to the Purchaser or any of its Subsidiaries; or
(c) entering into any agreement to do or engage in any of the
foregoing.
5.8 Purchaser Shareholders' Meeting
The Purchaser shall, as promptly as practicable following the execution of
this Agreement, duly call, give notice of, commence and hold a meeting of its
Shareholders (the "Diamond Shareholder Meeting") for the purpose of obtaining
the Diamond Shareholder Approval with respect to the Transaction and shall take
all lawful action to solicit the adoption of this Agreement by the Purchaser
Shareholders. The Board of Directors of the Purchaser shall, subject to
complying with their fiduciary duties, recommend adoption of this Agreement by
the Purchaser Shareholders.
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5.9 Control of Company Business
Nothing contained in this Agreement shall be deemed to give the Purchaser,
directly or indirectly, the right to control or direct the operations of the
Company or any of its Subsidiaries prior to the Closing Date. Prior to the
Closing Date, the Cluster Partners and the Sellers shall exercise, consistent
with the terms and conditions of the Agreement, complete control and
supervision over the operations of the Company and its Subsidiaries.
5.10 Voting Undertaking Letter
The Purchaser shall cause its Chief Executive Officer to deliver,
contemporaneously with the signing of this Agreement, an executed, binding and
enforceable Voting Undertaking Letter, in form and substance reasonably
acceptable to the Sellers, pursuant to which the Chief Executive Officer agrees
to vote all the Diamond Shares he holds or regarding which he holds a
discretionary proxy in favor of the authorization of the Transaction. The
Purchaser shall cause its Chief Executive Officer fully to perform all of his
obligations and commitments set forth in the Voting Undertaking Letter.
5.11 Diamond Share Options
(a) The Purchaser shall (except where it is prevented from doing so by any
Law) cause to be taken all corporate action necessary to adopt the New Diamond
Option Plan and to grant the Diamond Share Options to which the Cluster
Partners or Cluster Employees are entitled under Clause 1.3(h) and cause to be
taken all corporate action necessary to reserve for issuance a sufficient
number of Diamond Shares for delivery upon the exercise of such Diamond Share
Options in accordance with the New Diamond Option Plan.
(b) The new Diamond Option Plan will contain the vesting terms and exercise
prices described in this Agreement.
5.12 Rollover Options
The Purchaser shall cause to be taken all corporate action necessary to
issue Replacement Cluster Diamond Share Options as required by Clause
1.3(h)(v).
5.13 Listing of the Diamond Shares
The Purchaser will use its best efforts to list or otherwise admit for
dealing the Diamond Shares on a European Stock Exchange to be mutually agreed
by the Purchaser and the Cluster Partners as soon as practicable following
Closing.
5.14 Transfer of Know-how
The Purchaser shall transfer a number of European-based employees to the
Purchaser's operations in the United States and United States-based employees
to the Company's operations within Europe on an ongoing basis and for such
periods as are necessary to facilitate a transfer of knowledge between the
Purchaser and the Company and its Subsidiaries.
5.15 Corporate Governance
The Purchaser will apply the corporate governance policies of the Purchaser,
including the Amended and Restated Partners Operating Agreement dated April 1,
1996, and the Voting and Stock Restriction Agreement to the Company and its
Subsidiaries.
5.16 Equity Sales Program
The Purchaser (a) will administer the Equity Sales Program according to the
Purchaser's past practices and (b) will not discriminate against similarly
situated employees based upon the number of shares beneficially
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held. For purposes of the Equity Sales Program, partners are and will be
treated as "non-affiliates" and only partners who are members of the
Purchaser's Executive Committee are and will be treated as "affiliates" unless
otherwise considered an "affiliate" under Rule 144 of the Securities Act.
5.17 Restrictions on Termination of Previous Cluster Employees and Cluster
Partners
During such period as any Diamond Share Option granted pursuant to the
provisions of this Agreement has not vested, the Purchaser will ensure that no
Cluster Employee or Cluster Partner with an option entitlement hereunder will
be terminated without a unanimous vote to so terminate his employment having
been passed by the Purchaser's Executive Committee.
5.18 Appointment to Purchaser's Executive Committee
The Purchaser shall, for the five years following the Closing Date, ensure
that one of the Key Five Partners (or a Cluster Partner designated by the Key
Five Partners) is a member of the Purchaser's Executive Committee.
5.19 Release of Credit Suisse Guarantee
The Purchaser shall give its consent to the release after Closing of Credit
Suisse Sucursal en Espana from the guarantee dated May 24, 2000 provided to
Cluster Consulting S.L. in relation to contingent tax liabilities relating to
independent contractors.
6. CONDITIONS TO OBLIGATIONS OF THE PURCHASER
The obligations of the Purchaser hereunder are subject to the fulfilment, at
or before the Closing, of each of the following conditions (all or any of which
may be waived in whole or in part by the Purchaser in its sole discretion):
6.1 Shareholder Approval
The Diamond Shareholder Approval shall have been obtained.
6.2 Employment Contracts
Each of the Cluster Partners shall have entered into and delivered to the
Purchaser the Employment Agreements.
6.3 Representations and Warranties
Each of the representations and warranties made by the Sellers and/or the
Cluster Partners in this Agreement (other than those made as of a specified
date earlier than the Closing Date) shall be true and correct in all material
respects, except such representations and warranties as are qualified by
materiality which shall be true and correct in all respects, on and as of the
Closing Date as though such representation or warranty was made on and as of
the Closing Date, and any representation or warranty made as of a specified
date earlier than the Closing Date shall have been true and correct in all
material respects, except such representations and warranties as are qualified
by materiality which shall be true and correct in all respects on and as of
such earlier date.
6.4 Performance
The Sellers and the Cluster Partners shall have performed and complied with,
in all material respects, each agreement, covenant and obligation required by
this Agreement to be so performed or complied with by the Sellers and/or the
Cluster Partners at or before the Closing.
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6.5 Officers' Certificates
The Cluster Partners shall each have delivered to the Purchaser a
certificate, dated the Closing Date and executed by the relevant Cluster
Partner, substantially in the form and to the effect of Schedule 5 hereto, and
a certificate, dated the Closing Date and executed by the Secretary or any
Assistant Secretary, director or senior executive officer of each of the
Sellers, substantially in the form and to the effect of Schedule 6 hereto.
6.6 Orders and Laws
There shall not be in effect on the Closing Date any Order or Law
restraining, enjoining or otherwise prohibiting or making illegal the
consummation of the Transaction or which could reasonably be expected to result
in a material diminution of the benefits of the Transaction to the Purchaser,
and there shall not be pending or threatened on the Closing Date any Action or
Proceeding or any other action in, before or by any Governmental or Regulatory
Authority which could reasonably be expected to result in the issuance of any
such Order or the enactment, promulgation or deemed applicability to the
Purchaser, the Company or any of its Subsidiaries or the Transaction of any
such Law.
6.7 Regulatory Consents and Approvals
All consents, approvals and actions of, filings with and notices to any
Governmental or Regulatory Authority necessary to permit the Purchaser, the
Sellers and the Cluster Partners to perform their obligations under this
Agreement and the Operative Agreements and to consummate the Transaction (a)
shall have been obtained, made or given, (b) shall be in form and substance
reasonably satisfactory to the Purchaser, (c) shall not be subject to the
satisfaction of any condition that has not been satisfied or waived and (d)
shall be in full force and effect, and all terminations or expirations of
waiting periods imposed by any Governmental or Regulatory Authority necessary
for the consummation of the Transaction, including any anti-trust or
competition authorities in any jurisdiction in which the Company or any of its
Subsidiaries conducts its business or owns any Material Assets or Properties,
shall have occurred.
6.8 Third Party Consents
All consents and waivers to the performance by the Purchaser, the Sellers
and the Cluster Partners of their obligations under this Agreement and the
Operative Agreements or to the consummation of the Transaction as are required
under any Contract to which the Purchaser, the Sellers, the Cluster Partners,
the Company or any of its Subsidiaries is a party and where the failure to
obtain any such consent could reasonably be expected, individually or in the
aggregate with other such failures, to result in a Material Adverse Effect with
respect to the Purchaser or the Company, (a) shall have been obtained, (b)
shall be in form and substance reasonably satisfactory to the Purchaser, (c)
shall not be subject to the satisfaction of any material condition that has not
been satisfied or waived and (d) shall be in full force and effect.
6.9 Opinions of Counsel
The Purchaser shall have received the opinions of legal counsel to the
Sellers in each of Belgium, the Netherlands, Germany, France, Spain, Portugal,
United Kingdom, United States (which shall include enforceability under New
York law) and Brazil, dated the Closing Date and to the effect of Schedule 11
hereto in the final form to be reasonably agreed prior to the Closing Date and
reflecting the legal requirements of the applicable jurisdiction and to such
other matters as the Purchaser may reasonably request.
6.10 Good Standing Certificates
The Sellers shall have delivered to the Purchaser (a) copies certified true
and up to date of the articles of association, certificates or articles of
incorporation (or other comparable corporate charter documents), including all
amendments thereto, of the Company and each of its Subsidiaries, (b)
certificates from the Secretary of State or other appropriate official of the
respective jurisdictions of incorporation (or comparable
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document, result of a search of an official register or an enquiry of an
official body) to the effect that the Company and each of its Subsidiaries is
in good standing or subsisting in such jurisdiction, listing all charter
documents of the Company and such Subsidiaries on file and attesting to its
payment of, to the extent required by such jurisdiction, all franchise or
similar Taxes, and (c) a certificate from the Secretary of State or other
appropriate official (or comparable document, result of a search of an official
register or an enquiry of an official body) in each jurisdiction in which the
Company and each of its Subsidiaries are required to be qualified or admitted
to do business to the effect that the Company or the applicable Subsidiary is
duly qualified or admitted and in good standing in such jurisdiction.
6.11 Resignations of Directors and Officers
Such members of the boards of directors and such officers of the Company and
each of its Subsidiaries as are designated in a written notice delivered at
least two Business Days prior to the Closing Date by the Purchaser to the
Sellers and the Cluster Partners shall have tendered, effective at the Closing,
their resignations as such directors and officers.
6.12 Escrow Agent
The Sellers, the Cluster Partners and the Escrow Agent shall have entered
into the Escrow Agreement and the Deferred Consideration Escrow Agreement.
6.13 Release of Cluster Share Options
The Cluster Partners and the Cluster Employees shall have released and
waived to the satisfaction of the Purchaser all and any rights, claims or
entitlements to (a) any existing vested Cluster Share Options; and (b) any
existing unvested Cluster Share Options.
6.14 Approval of Certain Option Grants
The Purchaser shall have approved, in the manner contemplated by Clauses
1.3(h)(i) and (iv) of the Disclosure Schedule, the allocation and grant of the
Partners' Diamond Share Options and the Cluster Employees' Diamond Share
Options.
7. CONDITIONS TO OBLIGATIONS OF THE SELLERS
The obligations of the Seller and/or the Cluster Partners hereunder are
subject to the fulfilment, at or before the Closing, of each of the following
conditions (all or any of which may be waived in whole or in part by the Seller
in its sole discretion):
7.1 The Registration Statement
The Registration Statement shall have been declared effective by the SEC
under the Securities Act and no stop order suspending the effectiveness of the
Registration Statement shall have been issued by the SEC and no proceeding for
that purpose shall have been initiated or threatened by the SEC.
7.2 Grant of Diamond Share Options
The Purchaser shall have granted to the Cluster Partners and the Cluster
Employees the Diamond Share Options required by Clause 1.3(h).
7.3 Grant of Replacement Cluster Diamond Share Options
The Purchaser shall have granted to the Cluster Partners and the Cluster
Employees the Replacement Cluster Diamond Share Options.
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7.4 Listing of the Consideration Shares
The Consideration Shares shall have become eligible for trading on NASDAQ,
subject only to them being issued.
7.5 Employment Contracts
The Purchaser shall have made an offer to each of the Cluster Partners to
enter into the Employment Agreements and the Purchaser shall have taken all
corporate action necessary to admit the Cluster Partners as partners entitled
to participate in the Purchaser's Partner Compensation Program pursuant to the
Purchasers Partners' Operating Agreement.
7.6 Representations and Warranties
Each of the representations and warranties made by the Purchaser in this
Agreement (other than those made as of a specified date earlier than the
Closing Date), shall be true and correct in all material respects, except such
representations and warranties as are qualified by materiality which shall be
true and correct in all respects, on and as of the Closing Date as though such
representation or warranty was made on and as of the Closing Date and any
representation or warranty made as of a specified date earlier than the Closing
Date shall have been true and correct on and as of such earlier date or, if not
so true and correct on the earlier date or the Closing Date (as the case may
be), the matter or event which caused such failure to be true and correct has
not resulted in a Material Adverse Effect in respect of the Purchaser.
7.7 Performance
The Purchaser shall have performed and complied with, in all material
respects, each agreement, covenant and obligation required by this Agreement to
be so performed or complied with by the Purchaser at or before the Closing.
7.8 Officers' Certificates
The Purchaser shall have delivered to the Seller a certificate, dated the
Closing Date and executed by the Chief Executive Officer, the President or any
Vice President of the Purchaser, substantially in the form and to the effect of
Schedule 7 hereto, and a certificate, dated the Closing Date and executed by
the Secretary or Assistant Secretary of the Purchaser, substantially in the
form and to the effect of Schedule 8 hereto.
7.9 Orders and Laws
There shall not be in effect on the Closing Date any Order or Law
restraining, enjoining or otherwise prohibiting or making illegal the
consummation of the Transaction or which could reasonably be expected otherwise
to result in a material diminution of the benefits of the Transaction to the
Sellers or the Cluster Partners, and there shall not be pending or threatened
on the Closing Date any Action or Proceeding or any other action in, before or
by any Governmental or Regulatory Authority which could reasonably be expected
to result in the issuance of any such Order or the enactment, promulgation or
deemed applicability to the Sellers or the Cluster Partners or the Transaction
of any such Law.
7.10 Regulatory Consents and Approvals
All consents, approvals and actions of, filings with and notices to any
Governmental or Regulatory Authority necessary to permit the Sellers, the
Cluster Partners and the Purchaser to perform their obligations under this
Agreement and the Operative Agreements and to consummate the Transaction (a)
shall have been duly obtained, made or given, (b) shall not be subject to the
satisfaction of any condition that has not been satisfied or waived and (c)
shall be in full force and effect, and all terminations or expirations of
waiting periods imposed by any Governmental or Regulatory Authority necessary
for the consummation of the
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Transaction, including any anti-trust or competition authorities in any
jurisdiction in which the Company or any of its Subsidiaries conducts it
business or owns any Material Assets or Properties shall have occurred.
7.11 Third Party Consents
All third party consents and waivers to the performance by the Purchaser,
the Sellers and the Cluster Partners of their obligations hereunder and to the
consummation of the Transaction as are required under any Contract to which the
Purchaser, the Company or any of its Subsidiaries is a party and listed in
Clause 2.6(c)(iii) of the Disclosure Schedule (a) shall have been obtained, (b)
shall be in form and substance reasonably satisfactory to the Sellers, (c)
shall not be subject to the satisfaction of any condition that has not been
satisfied or waived and (d) shall be in full force and effect.
7.12 Opinion of Counsel
The Sellers and the Cluster Partners shall have received the opinion of
Winston & Strawn, counsel to the Purchaser, dated the Closing Date, to the
effect of Schedule 12 hereto, and to such matters as the Seller may reasonably
request.
7.13 Escrow Agreement
The Purchaser and the Escrow Agent shall have entered into the Escrow
Agreement and the Deferred Shares Escrow Agreement.
7.14 Appointments to the Purchaser Board of Directors
The Purchaser shall have delivered to the Sellers and the Cluster Partners
evidence, in a form reasonably satisfactory to the Sellers and the Cluster
Partners, that, at the Closing, (a) the chief executive officer of the Company
and two other persons (who are not Cluster Partners or Cluster Employees)
mutually agreed to by the Purchaser, the Sellers and the Cluster Partners have
been appointed to the Board of Directors of the Purchaser and (b) the chief
executive officer of the Company has been appointed as President Europe and
Latin America of the Purchaser.
7.15 Change of Corporate Name
The Purchaser having delivered to the Sellers and the Cluster Partners
evidence, in a form reasonably satisfactory to the Sellers and the Cluster
Partners that, subject to Closing, the name of the combined firm will include
both the Purchaser's and the Company's names provided that the Purchaser has
received evidence satisfactory to it that the Rights in Relation to the Name
will as of Closing be held by the Company or a wholly-owned Subsidiary of the
Company.
8. COVENANTS RELATING TO THE CLOSING ARRANGEMENTS
8.1 The Purchaser, the Sellers and the Cluster Partners hereby covenant and
agree as soon as practicable after the date hereof and subject to the
satisfaction or waiver of the conditions set forth in Clauses 6 and 7 and
immediately prior to the Closing:
(a) to incorporate Belgium Co in and under the Laws of Belgium in which
the Purchaser and the Sellers are the sole shareholders;
(b) to take all actions as shareholders in Belgium Co to effect the
transactions which this Agreement contemplates Belgium Co should undertake
and to ensure that all consents and approvals of any official body required
is given prior to the Closing Date, including:
(i) filing a demerger proposal at the Commercial Court in sufficient
time for the demerger to take place at Closing;
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(ii) sending the necessary notices to convene meetings of
shareholders of Belgium Co needed to approve the demerger proposal and
voting all of their shares in Belgium Co in favour of the demerger
proposal;
(iii) appointing independent auditors qualified to give any
report(s) required and providing all necessary information and
assistance to the independent auditors;
(iv) making all other registrations, filings and notifications
necessary or desirable and paying any necessary fees and expenses;
(v) cause such number of shares of common stock in Belgium Co to be
issued to the Purchaser and the Sellers as is required to ensure that
the Purchaser holds fifty percent (50%) of the issued shares of Belgium
Co and the Sellers and the Cluster Partners together hold fifty percent
(50%) of the shares of Belgium Co immediately prior to Closing; and
(vi) cause Belgium Co and any successors in title to Belgium Co in
respect of the Consideration Shares and the Deferred Consideration
Shares to enter into the Escrow Agreement and the Deferred Shares
Escrow Agreement, as applicable;
(c) in the case of the Sellers and the Cluster Partners to send drafts
of all corporate and other documents, filing and notices to the Purchaser
and allow the Purchaser reasonable time to review and comment on any such
documents, filings and notices and take the Purchaser's comments into
account;
(d) in the case of the Sellers and the Cluster Partners cause legal
counsel in Belgium to deliver an opinion to the Purchaser dated the Closing
Date to the effect that the incorporation and demerger of Belgium Co has
been effected in accordance with the terms of this Agreement and Belgium
Law;
(e) in the case of the Sellers and the Cluster Partners that immediately
prior to the Closing but contingent only upon Closing occurring, the
Sellers shall have transferred the Shares to Belgium Co and Belgium Co
shall have good and valid title in and to all of the shares of common stock
of the Company, free and clear of all Liens;
(f) in the case of the Purchaser, that immediately prior to the Closing
but contingent only upon Closing occurring, the Purchaser shall have
transferred the Cash Consideration to Belgium Co and Belgium Co shall have
good and valid title in and to all of the Consideration Shares, free and
clear of all Liens (except as described in Clauses 1.3 and 1.4).
8.2 Consent of Purchaser
The manner in which the transactions contemplated by this Clause 8 are
effected shall require the prior approval of the Purchaser which may only be
withheld if it is apparent that the manner in which the transactions are to be
effected will result in a material additional liability to the Purchaser or any
of its Affiliates not contemplated by the Purchaser as at the date of this
Agreement. The Purchaser and the Sellers will take all lawful steps open to
them (a) in the event there is a material additional liability, to eliminate
its impact; and (b) in any event, to eliminate the need to pay any capital duty
(or similar tax) payable on the contribution by the Purchaser of the
Consideration to Belgium Co or otherwise to minimise any such amount payable.
8.3 Expedition of re-organisation
Notwithstanding the provisions of Clause 8.1, requiring the actions therein
set out to be effected following the satisfaction and waiver of the conditions
set out in Clauses 6 and 7 of this Agreement, the Purchaser, the Sellers and
the Cluster Partners agree to take all reasonably appropriate steps in relation
to such actions prior to any such satisfaction and waiver in order that such
actions can be effected as soon as possible following the date of such
satisfaction and waiver to enable Closing to occur as expeditiously as possible
following such date.
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9. EMPLOYEE MATTERS
9.1 Employment Obligations
The Sellers recognize and agree that a significant part of the value of the
Company relates to the continuing contributions of the Cluster Partners. To
provide further assurances to the Purchaser regarding the value of the Company,
the Sellers agree (a) to cause the Key Five Partners to comply with their
existing contracts with the Company and/or its Subsidiaries; (b) to cause the
Key Five Partners to enter into Employment Agreements with a term of at least
three years immediately prior to the Closing; (c) to cause the Key Five
Partners to comply, in all material respects, with their obligations under
their respective Employment Agreement from the date on which such Employment
Agreement is entered into until the date three years from the Closing Date. In
the event of certain breaches (as specified in Schedule 3) by the Sellers of
their obligations under this Clause 9.1, the Sellers shall pay damages to the
Purchaser in the form of forfeiture in favor of the Purchaser of such number of
Deferred Consideration Shares as is specified in Schedule 3.
10. SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS
10.1 Survival of Representations, Warranties, Covenants and Agreements
Notwithstanding any right of the Purchaser (whether or not exercised) to
investigate the affairs of the Company or any of its Subsidiaries or any right
of any party (whether or not exercised) to investigate the accuracy of the
representations and warranties of the other party contained in this Agreement,
the Sellers, the Cluster Partners and the Purchaser have the right to rely
fully upon the representations, warranties, covenants and agreements of the
other contained in this Agreement. The representations, warranties, covenants
and agreements of the Sellers, the Cluster Partners and the Purchaser contained
in this Agreement will survive the Closing (other than to the extent that any
representation or warranty relates to the "prospects" of any person in which
case the reference to "prospects" of any person will cease to be part of such
representation or warranty after the Closing) (a) indefinitely with respect to
the representations and warranties contained in Clauses 2.2, 2.8 (but only
insofar as it relates to the capital stock of the Subsidiaries) and 3.2 and (b)
until 30 calendar days after the expiration of all applicable statutes of
limitation (including all periods of extension, whether automatic or
permissive) with respect to matters covered by Clauses 2.13, 2.16 and 9, (c)
until the issuance by the Purchaser's independent auditors of such auditor's
report on the audited financial statements of the Purchaser for the fiscal year
ended March 31, 2001 in the case of all other representations and warranties
and any covenant or agreement to be performed in whole or in part on or prior
to the Closing or (d) with respect to each other covenant or agreement
contained in this Agreement, for a period terminating 30 days following the
last date on which such covenant or agreement is to be performed or, if no such
date is specified, indefinitely, except that any representation, warranty,
covenant or agreement that would otherwise terminate in accordance with Clause
10.1(b), (c) or (d) above will continue to survive if a Claim Notice or
Indemnity Notice (as applicable) shall have been timely given under Clause 11
or a Dispute Notice has been given under Clause 14.11(b) on or prior to such
termination date, until the related claim for indemnification has been
satisfied or otherwise resolved as provided in Clause 11 or Clause 14.11.
11. INDEMNIFICATION
11.1 Tax and Other Indemnification; Post-Closing Adjustments; Notification;
Control; Refunds
Without limiting any representation or warranty of the Sellers and/or the
Cluster Partners or the Purchaser's right to make any claims under any other
indemnities granted to the Purchaser or any Purchaser Indemnified Parties of
the Purchaser's Subsidiaries, the Sellers and the Cluster Partners shall
indemnify the Purchaser in respect of any and all Taxes of the Company and its
Subsidiaries for the taxable periods ending on or before the Closing and for
the portion of any Taxes for a period not ending on or before the Closing which
is attributable to the portion of the period ending on or before the Closing;
provided, however, that the Purchaser shall not be indemnified to the extent
that the amount of any such liability for such Taxes has been provided for in
the Unaudited Financial Statements other than for the accrual referred to in
Clause 2.13(a)(vi)
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of the Disclosure Schedule relating to independent contractors. Notwithstanding
anything herein to the contrary, the Purchaser shall not be entitled to
indemnification for breach of representations and warranties under this Clause
11.1. Any amount otherwise payable by the Sellers and/or the Cluster Partners
pursuant to this Section 11.1 shall be offset against any amount payable to the
Sellers and/or the Cluster Partners pursuant to Section 11.3(d) of this
Agreement.
11.2 Other Indemnification
(a) The Sellers and the Cluster Partners shall indemnify the Purchaser and
its officers, directors, employees, agents and Affiliates ("Purchaser
Indemnified Parties") in respect of, and hold each of them harmless from and
against, any and all Losses suffered, incurred or sustained by any of them or
to which any of them becomes subject ("Purchaser's Losses") resulting from,
arising out of or relating to any misrepresentation, breach of warranty or
nonfulfillment of or failure to perform any covenant or agreement on the part
of the Sellers and/or the Cluster Partners contained in this Agreement
(provided that any Purchaser Losses resulting or arising from or in connection
with any misrepresentation or breach of warranty shall be subject to the
limitations in respect of the relevant representations or warranties set forth
in Clauses 10.1, 11.2(d) and 11.2(f)) determined in all cases as if the terms
"material" or "materially" or "Material Adverse Effect" were not included
therein.
(b) Without limiting any representation or warranty of the Sellers and/or
the Cluster Partners or the Purchaser's right to make claims under any other
indemnities granted to the Purchaser or any Purchaser Indemnified Parties the
Sellers and the Cluster Partners indemnify the Purchaser in respect of each and
every cost, claim, liability, expense or demand arising from or in connection
with any:
(i) guaranteed bonus payment (where the guarantee was given or created
prior to the Closing Date) that the Purchaser, the Company or any of its
Subsidiaries is obliged to pay to any employee of the Company or any or its
Subsidiaries, the details of which were not disclosed in Clause 11.2(b)(i)
of the Disclosure Schedule, and shall include, without limitation, any tax
and social security liabilities that the Purchaser may be obliged to pay in
connection with the payment of any such guaranteed bonus;
(ii) failure on the part of the Company or any of its Subsidiaries to
pay to any fiscal or revenue authority in any jurisdiction the appropriate
amounts of tax or social security contributions in respect of any employee
of the Company or any of its Subsidiaries for services rendered prior to
the Closing Date including, without limitation, any person who is employed
by the Company or any of its Subsidiaries on a consultancy basis but is
subsequently determined to have been an employee of the Company or any of
its Subsidiaries by any fiscal or revenue authority;
(iii) claim by any employee of the Company or any of its Subsidiaries
based on an event or conduct prior to the Closing Date (whether or not
continuing after the Closing Date) whether in contract, tort or statute;
(iv) breach of or non-compliance with any labor or employment Laws in
any jurisdiction prior to the Closing Date (whether or not continuing after
the Closing Date);
(v) any liability of the Company or any of its Subsidiaries outstanding
at the Closing Date in relation to any Pension Scheme or State Scheme
and/or the failure of the Company or any of its Subsidiaries to make
adequate provision for the liabilities under the Pension Schemes to ensure
that as at the Closing Date the assets of the Pension Schemes together with
such provision would be sufficient to discharge all benefits (whether or
not yet payable) under the Pension Schemes; and
(vi) any liability arising from an indemnification agreement dated
August 1, 2000 between Cluster Consulting S.L. and D. Fernando Juan
Oliveros Calvo and an indemnification agreement dated August 1, 2000
between Cluster Consulting S.L. and D. Ricardo Damborenea Isusi.
(c) Without limiting any representation or warranty of the Sellers and/or
the Cluster Partners or the Purchaser's right to make any claims under any
other indemnities granted to the Purchaser or any Purchaser
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Indemnified Parties, the Sellers and the Cluster Partners shall indemnify the
Purchaser in respect of each and every cost, claim, liability, expense or
demand arising from or in connection with any failure of the Company or any of
its Subsidiaries or their officers or representatives prior to the Closing Date
to keep up to date minutes and registers required by any jurisdiction and/or to
file (which shall include the failure to file or register at the prescribed
time) any document including without limitation any notice, resolution, set of
annual accounts or agreement which is required to be so filed or registered
with any corporate or mercantile registry or chamber of commerce in any
jurisdiction.
(d) Other than in respect of any sums payable to the Purchaser pursuant to
the indemnities granted to the Purchaser under Clauses 11.1, 11.2(b) and
11.2(c) (in respect of which the Purchaser shall be indemnified in full and
shall not be subject to any limitation on the amounts it may receive from the
Sellers or the Cluster Partners pursuant to such indemnities other than the
limitations set out in Clause 11.2(f)), no amounts of indemnity shall be
payable in respect of Purchaser Losses unless and until the Indemnified Parties
have suffered, incurred, sustained or become subject to Purchaser's Losses in
excess of $2,500,000 in the aggregate, in which event the Indemnified Parties
shall be entitled to seek indemnity from the Sellers or the Cluster Partners
for the full amount of such Losses. Any indemnification payment pursuant to
this Clause 11 shall be reduced by any amount received and retained by the
Purchaser, the Company or any of its Subsidiaries in respect of any such losses
under an insurance policy or any Tax benefit received with respect to such
Purchaser Losses provided that such indemnification payment is not taxable or
treated as taxable to the Purchaser. Individual Purchaser claims in an amount
of $250,000 or less shall not be entitled to indemnification pursuant to this
Clause 11.2 and shall be excluded from the determination as to whether the
Purchaser Losses are in excess of $2,500,000 unless such individual claims
arise from or relate to the same or similar facts or circumstances and exceed
in the aggregate $250,000.
In the event Purchaser Losses include any amounts relating to accounts
receivable that were not collected in the time period specified in Clause
2.29(iv) and such amounts are collected prior to the second anniversary of the
Closing Date, the amount of the Purchaser Losses shall be reduced to the extent
of any such collected amounts and, to the extent such amounts resulted in a
payment by any Seller or Cluster Partner to the Purchaser, any such amounts
shall be promptly repaid by the Purchaser (and any such claim by a Seller or
Cluster Partner for repayment pursuant to this sentence shall be subject to the
limitations on payment set forth in this Clause 11.2(d)).
(e) Indemnity payments due the Purchaser Indemnified Parties pursuant to
Clauses 11.1 or 11.2 may be satisfied by the Sellers and the Cluster Partners
in their sole discretion by:
(i) payment of an amount in US dollars equal to the Purchaser Losses for
which such indemnity payment is due;
(ii) delivery by the Sellers and Cluster Partners, or by the Escrow
Agent at the Representative's direction, of certificates representing good
and valid title in and to:
(A) Closing Consideration Shares, with respect to which all Transfer
restrictions have lapsed in accordance with Clause 1.4(a), and/or
(B) Deferred Consideration Shares with respect to which all risk of
forfeiture has lapsed in accordance with Clause 9,
free and clear of all Liens in genuine unaltered form, duly endorsed in
blank, with requisite stock transfer tax stamps (in any) attached in
accordance with applicable Law and which have a value equal to the
Purchaser Losses for which such indemnity payment is due based on the
greater of (x) the Market Price and (y) the volume-weighted average of the
closing prices of such Shares on NASDAQ on each of the ten trading days
ending on and including the day prior to the date such indemnity payment is
made;
(iii) surrender in form and substance reasonably satisfactory to the
Purchaser by the Cluster Partners of that number of Key Five Diamond Share
Options and/or Non-Key Five Diamond Share Options which
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have vested in accordance with their terms and have a value equal to the
Purchaser Losses for which such indemnity payment is due based on the then
difference between (A) the exercise price of the Options as determined in
accordance with Clauses 1.3(h)(ii) or (iii) (as applicable) and (B) the
volume-weighted average of the closing prices of the underlying Option
Shares on NASDAQ on each of the ten trading days ending on and including
the day prior to the date such indemnity payment is made; or
(iv) subject to the restrictions set forth above, any combination of
cash, Closing Consideration Shares, Deferred Consideration Shares, Key Five
Diamond Share Options and/or Non-Key Five Diamond Share Options which have
an aggregate value determined as provided above equal to the Purchaser
Losses for which such indemnity payment is due.
(f) The liability of the Sellers and the Cluster Partners to indemnify the
Purchaser Indemnified Parties under Clause 11 shall not exceed:
(i) in respect of any Claim made prior to the second anniversary of the
Closing, a monetary amount equal to twenty five percent (25%) of the
Consideration Value; or
(ii) in respect to any Claim made after the second anniversary of the
Closing and prior to the fifth anniversary of the Closing , the greater of:
(1) one hundred million US Dollars ($100,000,000); or
(2) a monetary amount equal to ten percent (10%) of the
Consideration Value; or
(iii) in respect of any Claim made after the fifth anniversary of the
Closing, the greater of:
(1) fifty million US Dollars ($50,000,000); or
(2) a monetary amount equal to five percent (5%) of the
Consideration Value.
Each Cluster Partner shall be liable to contribute up to its Relative
Benefit. This limitation shall not apply to any breach of Clause 2.2.
(g) The Purchaser agrees to indemnify the Sellers and its officers,
directors, employees, agents and Affiliates in respect of, and hold each of
them harmless from and against, any and all Losses suffered, incurred or
sustained by any of them or to which any of them becomes subject ("Seller
Losses") resulting from, arising out of or relating to any misrepresentation,
breach of warranty or nonfulfillment of or failure to perform any covenant or
agreement on the part of the Purchaser contained in this Agreement (determined
in all cases as if the terms "material", "materially" and "Material Adverse
Effect" were not included therein).
(h) No amounts of indemnity shall be payable in respect of Seller Losses
unless and until the Indemnified Parties have suffered, incurred, sustained or
become subject to Seller Losses in excess of $2,500,000 in the aggregate, in
which event the Indemnified Parties shall be entitled to seek indemnity from
the Purchaser for the full amount of such Losses less any amount received and
retained by the Sellers or Seller Indemnified Parties in respect of any such
losses under an insurance policy. Individual Seller Losses in an amount of
$250,000 or less shall not be entitled to indemnification pursuant to this
Clause 11.2 and shall be excluded from the determination as to whether the
Seller Losses are in excess of $2,500,000 unless such individual claims arise
from or relate to the same or similar facts or circumstances and exceed in the
aggregate $250,000.
(i) The liability of the Purchaser to indemnify the Seller Indemnified
Parties under Clause 11.2(g) shall not exceed the Consideration Value.
(j) The provisions set out in this Clause 11 shall survive the Closing.
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11.3 Method of Asserting Claims
All claims for indemnification by any Indemnified Party under Clause 11.2
will be asserted and resolved as follows:
(a) In the event any claim or demand in respect of which an Indemnified
Party might seek indemnity under Clause 11.2 is asserted against or sought
to be collected from such Indemnifying Party by a Person other than the
Sellers, the Cluster Partners, the Company, any of its Subsidiaries, the
Purchaser or any Affiliate of the Sellers or the Purchaser (a "Third Party
Claim"), the Indemnified Party shall deliver a Claim Notice with reasonable
promptness to the Indemnifying Party. The failure by any Indemnified Party
to give the Claim Notice shall not impair such party's rights hereunder
except to the extent that an Indemnified Party demonstrates that it has
been irreparably prejudiced thereby. The Indemnifying Party will notify the
Indemnified Party as soon as practicable within the Dispute Period whether
the Indemnifying Party disputes its liability to the Indemnified Party
under Clause 11.2 and whether the Indemnifying Party desires, at its sole
cost and expense, to defend the Indemnified Party against such Third Party
Claim.
(i) If the Indemnifying Party notifies the Indemnified Party within
the Dispute Period that the Indemnifying Party desires to defend the
Indemnified Party with respect to the Third Party Claim pursuant to
this Clause 11.3(a), then the Indemnifying Party will have the right to
defend, with counsel reasonably satisfactory to the Indemnified Party,
at the sole cost and expense of the Indemnifying Party, such Third
Party Claim by all appropriate proceedings, which proceedings will be
vigorously and diligently prosecuted by the Indemnifying Party to a
final conclusion or will be settled at the discretion of the
Indemnifying Party (but only with the consent of the Indemnified Party
in the case of any settlement that provides for any relief other than
the payment of monetary damages or that provides for the payment of
monetary damages as to which the Indemnified Party will not be
indemnified in full pursuant to Clause 11.2). The Indemnifying Party
will have full control of such defense and proceedings, including any
compromise or settlement thereof; provided, however, that the
Indemnified Party may, at the sole cost and expense of the Indemnified
Party, at any time prior to the Indemnifying Party's delivery of the
notice referred to in the first sentence of this Clause 11.3(a)(i),
file any motion, answer or other pleadings or take any other action
that the Indemnified Party reasonably believes to be necessary or
appropriate to protect its interests; and provided further, that if
requested by the Indemnifying Party, the Indemnified Party will, at the
sole cost and expense of the Indemnifying Party, provide reasonable
cooperation to the Indemnifying Party in contesting any Third Party
Claim that the Indemnifying Party elects to contest. The Indemnified
Party may participate in, but not control, any defense or settlement of
any Third Party Claim controlled by the Indemnifying Party pursuant to
this Clause 11.3(a)(i), and except as provided in the preceding
sentence, the Indemnified Party will bear its own costs and expenses
with respect to such participation. Notwithstanding the foregoing, the
Indemnified Party may take over the control of the defense or
settlement of a Third Party Claim at any time if it irrevocably waives
its right to indemnity under Clause 11.2 with respect to such Third
Party Claim.
Neither party shall, without the prior written consent of the other
party, which consent shall not be unreasonably withheld, settle,
compromise or offer to settle or compromise any such claim or demand on
a basis which would result in the imposition of a consent order,
injunction or decree which would restrict the future activity or
conduct of the other party or any Subsidiary or Affiliate thereof or if
such settlement or compromise does not include an unconditional release
of the other party for any liability arising out of such claim or
demand or any related claim or demand.
(ii) If the Indemnifying Party fails to notify the Indemnified Party
within the Dispute Period that the Indemnifying Party desires to defend
the Third Party Claim pursuant to Clause 11.3(a), or if the
Indemnifying Party gives such notice but fails to prosecute vigorously
and diligently or settle the Third Party Claim, or if the Indemnifying
Party fails to give any notice whatsoever within the Dispute Period,
then the Indemnified Party will have the right to defend, at the sole
cost and expense
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of the Indemnifying Party, the Third Party Claim by all appropriate
proceedings, which proceedings will be prosecuted by the Indemnified
Party in a reasonable manner and in good faith or will be settled at
the discretion of the Indemnified Party (with the consent of the
Indemnifying Party, which consent will not be unreasonably withheld).
The Indemnified Party will have full control of such defense and
proceedings, including any compromise or settlement thereof; provided,
however, that if requested by the Indemnified Party, the Indemnifying
Party will, at the sole cost and expense of the Indemnifying Party,
provide reasonable cooperation to the Indemnified Party and its counsel
in contesting any Third Party Claim which the Indemnified Party is
contesting. Notwithstanding the foregoing provisions of this Clause
11.3(a)(ii), if the Indemnifying Party has notified the Indemnified
Party within the Dispute Period that the Indemnifying Party disputes
its liability hereunder to the Indemnified Party with respect to such
Third Party Claim and if such dispute is resolved in favor of the
Indemnifying Party in the manner provided in Clause 11.3(a)(iii) below,
the Indemnifying Party will not be required to bear the costs and
expenses of the Indemnified Party's defense pursuant to this Clause
11.3(a)(ii) or of the Indemnifying Party's participation therein at the
Indemnified Party's request, and the Indemnified Party will reimburse
the Indemnifying Party in full for all reasonable costs and expenses
incurred by the Indemnifying Party in connection with such litigation.
The Indemnifying Party may participate in, but not control, any defense
or settlement controlled by the Indemnified Party pursuant to this
Clause 11.3(a)(ii), and the Indemnifying Party will bear its own costs
and expenses with respect to such participation.
(iii) If the Indemnifying Party notifies the Indemnified Party that
it does not dispute its liability to the Indemnified Party with respect
to the Third Party Claim under Clause 11.2 or fails to notify the
Indemnified Party within the Dispute Period whether the Indemnifying
Party disputes its liability to the Indemnified Party with respect to
such Third Party Claim, the Loss in the amount specified in the Claim
Notice will be conclusively deemed a liability of the Indemnifying
Party under Clause 11.2 and the Indemnifying Party shall pay the amount
of such Loss to the Indemnified Party on demand. If the Indemnifying
Party has timely disputed its liability with respect to such claim, the
Indemnifying Party and the Indemnified Party will proceed in good faith
to negotiate a resolution of such dispute in accordance with Clause
14.11(b) and if not so resolved through negotiations may be submitted
to litigation or arbitration in accordance with Clause 14.11;
(b) In the event any Indemnified Party should have a claim under Clause
11.2 against any Indemnifying Party that does not involve a Third Party
Claim, the Indemnified Party shall deliver an Indemnity Notice with
reasonable promptness to the Indemnifying Party. The failure by any
Indemnified Party to give the Indemnity Notice shall not impair such
party's rights hereunder except to the extent that an Indemnifying Party
demonstrates that it has been irreparably prejudiced thereby. If the
Indemnifying Party notifies the Indemnified Party that it does not dispute
the claim described in such Indemnity Notice or fails to notify the
Indemnified Party within the Dispute Period whether the Indemnifying Party
disputes the claim described in such Indemnity Notice, the Loss in the
amount specified in the Indemnity Notice will be conclusively deemed a
liability of the Indemnifying Party under Clause 11.2 and the Indemnifying
Party shall pay the amount of such Loss to the Indemnified Party on demand.
If the Indemnifying Party has timely disputed its liability with respect to
such claim, the Indemnifying Party and the Indemnified Party will proceed
in good faith to negotiate a resolution of such dispute in accordance with
Clause 14.11(b) and if not so resolved through negotiations may be
submitted to litigation or arbitration in accordance with Clause 14.11.
(c) In the event of any Loss resulting from a misrepresentation, breach
of warranty or nonfulfillment or failure to be performed of any covenant or
agreement contained in this Agreement as to which an Indemnified Party
would be entitled to claim indemnity under Clause 11.2 but for the
provisions of paragraph (d) or (h) thereof (and excluding claims not
exceeding two hundred and fifty thousand US Dollars ($250,000) which do not
arise from or relate to same or similar facts), such Indemnified Party may
nevertheless deliver a written notice to the Indemnifying Party containing
the information that would be required in a Claim Notice or an Indemnity
Notice, as applicable, with respect to such Loss. If the
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Indemnifying Party notifies the Indemnified Party that it does not dispute
the claim described therein or fails to notify the Indemnified Party within
the Dispute Period whether the Indemnifying Party disputes the claim
described in such Claim Notice or Indemnity Notice, as the case may be, the
Loss specified in the notice will be conclusively deemed to have been
incurred by the Indemnified Party for purposes of making the determination
set forth in paragraph (d) or (h) of Clause 11.2. If the Indemnifying Party
has timely disputed the claim described in such Claim Notice or Indemnity
Notice, as the case may be, the Indemnifying Party and the Indemnified
Party will proceed in good faith to negotiate a resolution of such dispute
in accordance with Clause 14.11(b) and if not so resolved through
negotiations may be submitted to litigation or arbitration in accordance
with Clause 14.11. For the avoidance of doubt, this Clause 11.3(c) is
intended to assist the parties to ascertain the value of a claim and does
not of itself form a separate head of indemnity.
(d) Any refunds of Taxes with respect to any taxable period ending on or
before the Closing and for the portion of any Taxes for a period not ending
on or before the Closing which is attributable to the portion of the period
ending on or before the Closing shall be for the account of the Sellers
and/or Cluster Partners and the Purchaser shall pay or cause its Affiliates
to pay such amounts to the Sellers and/or the Cluster Partners as soon as
practicable after receipt of such refunds. Any amount otherwise payable by
the Purchaser and/or the Cluster Partners pursuant to this Section 11.3(d)
shall be offset by any amount payable to the Sellers or the Cluster
Partners pursuant to Section 11.1(a) of this Agreement.
12. TERMINATION
12.1 Termination
This Agreement may be terminated, and the transactions contemplated hereby
may be abandoned:
(a) at any time before the Closing, by mutual written agreement of the
Sellers and the Purchaser;
(b) at any time before the Closing, by the Sellers on the one part or
the Purchaser on the other part, in the event (i) of a material breach
hereof by the non-terminating party if such non-terminating party fails to
cure such breach within five Business Days following written notification
thereof by the terminating party or (ii) upon written notification of the
non-terminating party by the terminating party that the satisfaction of any
condition to the terminating party's obligations under this Agreement
becomes impossible or impracticable with the use of commercially reasonable
efforts if the failure of such condition to be satisfied is not caused by a
breach hereof by the terminating party;
(c) at any time after December 31, 2000 by the Sellers on the one part
or the Purchaser on the other part upon written notification to the non-
terminating party by the terminating party if the Closing shall not have
occurred on or before such date and such failure to consummate is not
caused by a breach of this Agreement by the terminating party;
(d) by the Sellers on the one part or the Purchaser on the other part by
written notice to the other parties if there shall be any law or regulation
that makes consummation of the Transaction illegal or otherwise prohibited
or if any judgment, injunction, order or decree enjoining the Sellers or
the Purchaser from closing the transaction contemplated herein.
12.2 Effect of Termination
If this Agreement is validly terminated pursuant to Clause 12.1, this
Agreement will forthwith become null and void, and there will be no liability
or obligation on the part of the Sellers, the Cluster Partners or the
Purchaser (or any of their respective officers, directors, employees, agents
or other representatives or Affiliates), except as provided in the next
succeeding sentence and except that the provisions with respect to expenses in
Clause 14.3 will continue to apply following any such termination.
Notwithstanding any other provision in this Agreement to the contrary, upon
termination of this Agreement pursuant to Clause 12.1(b), (c) or (d), the
Sellers and/or the Cluster Partners will remain liable to the Purchaser for
any breach of this Agreement by the
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Sellers and/or the Cluster Partners existing at the time of such termination,
and the Purchaser will remain liable to the Sellers and/or the Cluster Partners
for any breach of this Agreement by the Purchaser existing at the time of such
termination, and the Sellers and/or the Cluster Partners or the Purchaser may
seek such remedies, including damages and fees of attorneys, against the other
with respect to any such breach as are provided in this Agreement or as are
otherwise available at Law or in equity.
12.3 Termination Fee
(a) In the event that (i) the Company actively pursues an initial public
offering of its shares or (ii) the Company, the Sellers or any holding company
of the Company or the Sellers actively pursues an acquisition offer by a third
party whether by merger, consolidation or otherwise which would result in a
majority of the Company's stock or the Sellers' stock or a substantial portion
of the Company's business or assets, being transferred and, in either case such
initial public offering or such offer is not abandoned within ten Business Days
of receipt by the Company and/or the Sellers of written notice from the
Purchaser instructing the Company and/or the Sellers to cease and desist such
activities, or (if earlier) prior to the date set for the shareholders' meeting
of the Purchaser, the Purchaser may terminate this Agreement pursuant to
Section 12.1, and the Company shall pay (failing which the Sellers shall pay)
to the Purchaser a fee equal to the amount set forth below (the "Termination
Fee") as liquidated damages.
(b) The Termination Fee shall be calculated as follows:
(i) in the event that the Termination Fee is payable pursuant to Clause
12.3(a)(i), the Termination Fee shall be paid in a number of shares of the
stock of the Company equal to 3% of the total equity capital of the Company
valued at the initial public offering price, the number of shares to be
adjusted in a reasonable manner so that it will equal 3% of the fully-
diluted equity capital of the Company immediately after the completion of
the initial public offering, and in addition the Purchaser shall receive a
pre-emptive right (if permitted by statute) to participate proportionately
in any future equity issuances by the Company;
(ii) in the event that the Termination Fee is payable pursuant to Clause
12.3(a)(ii), the Termination Fee shall be an amount in cash equal to 3% of
the total value offered to be paid to the Sellers, the Cluster Partners or
any Affiliate or Associate of the Sellers or the Cluster Partners and shall
be payable within 180 days after the date of termination by the Purchaser
pursuant to this Clause.
13. DEFINITIONS
13.1 Definitions
As used in this Agreement, the following defined terms shall have the
meanings indicated below:
"Actions or Proceedings" means any action, suit, proceeding, arbitration
or Governmental or Regulatory Authority investigation or audit.
"Affiliate" means any Person that directly, or indirectly through one of
more intermediaries, controls or is controlled by or is under common
control with the Person specified. For purposes of this definition, control
of a Person means the power, direct or indirect, to direct or cause the
direction of the management and policies of such Person whether by Contract
or otherwise and, in any event and without limitation of the previous
sentence, any Person owning ten percent (10%) or more of the voting
securities of a second Person shall be deemed to control that second
Person.
"Agreement" means this Stock Purchase Agreement and the Schedules hereto
and the certificates delivered in accordance with Clauses 6.5 and 7.8, as
the same shall be amended from time to time.
"Associate" means, with respect to any Person, any corporation or other
business organization of which such Person is an officer or partner or is
the beneficial owner, directly or indirectly, of ten percent (10%) or more
of any class of equity securities, any trust or estate in which such Person
has a substantial
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beneficial interest or as to which such Person serves as a trustee or in a
similar capacity and any relative or spouse of such Person, or any relative
of such spouse, who has the same home as such Person.
"Audited Financial Statement Date" means the last day of the most recent
fiscal year of the Company for which audited Financial Statements are
delivered to the Purchaser pursuant to Clause 2.10.
"Audited Financial Statements" means the Financial Statements for the
most recent fiscal year of the Company delivered to the Purchaser pursuant
to Clause 2.10.
"Benefit Plan" means any Plan established by the Company or any of its
Subsidiaries, or any predecessor or Affiliate of any of the foregoing,
existing at the Closing Date or prior thereto, to which the Company or any
of its Subsidiaries contributes or has contributed, or under which any
employee, former employee or director of the Company or any of its
Subsidiaries or any beneficiary thereof is covered, is eligible for
coverage or has benefit rights.
"Black-Scholes Assumptions" means the following assumptions:
(a) the Diamond Shares have a value equal to the Market Price;
(b) the relevant Diamond Share Options have the exercise price set
out therein;
(c) the relevant Diamond Share Options have a life of seven years;
(d) an interest rate equal to the interpolated yield on a US
treasury note with a seven year maturity; and
(e) a volatility of the price of Diamond Shares in return to holders
of Diamond Shares of fifty percent (50%).
"Books and Records" means all files, documents, instruments, papers,
books and records relating to the business or condition of the Company,
including without limitation financial statements, Tax Returns and related
work papers and letters from accountants, budgets, pricing guidelines,
ledgers, journals, deeds, title policies, minute books, stock certificates
and books, stock transfer ledgers, Contracts, Licenses, customer lists,
computer files and programs, retrieval programs, operating data and plans.
"Business Combination" means with respect to any Person any merger,
consolidation or combination to which such Person is a party; any sale,
dividend, split or other disposition of capital stock or other equity
interests of such Person; or any sale, dividend or other disposition of all
or substantially all of the Material Assets and Properties of such Person.
"Business Day" means a day other than Saturday, Sunday or any day on
which banks located in the States of New York or Illinois or in the Kingdom
of Spain are authorized or obligated to close.
"Cash Consideration" has the meaning ascribed to it in Clause 1.2(a).
"Claim Notice" means written notification pursuant to Clause 11.3(a) of
a Third Party Claim as to which indemnity under Clause 11.2 is sought by an
Indemnified Party, enclosing a copy of all papers served, if any, and
specifying the nature of and basis for such Third Party Claim and for the
Indemnified Party's claim against the Indemnifying Party under Clause 11.2,
together with the amount or, if not then reasonably ascertainable, the
estimated amount, determined in good faith, of such Third Party Claim.
"Class A Shares" has the meaning ascribed to it in Clause 3.2.
"Class B Shares" has the meaning ascribed to it in Clause 3.2.
"Closing" means the closing of the transactions contemplated by Clause
1.3.
"Closing Consideration Shares" has the meaning ascribed to it in Clause
1.2(b)(i).
"Closing Date" means (a) the fifth Business Day after the day on which
the last of the consents, approvals, actions, filings, notices or waiting
periods described in or related to the filings described in
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Clauses 6.6, 6.7, 6.8, 7.9, 7.10 and 7.11 has been obtained, made or given
or has expired, as applicable, or (b) such other date as the Purchaser and
the Seller mutually agree upon in writing.
"Cluster Employees" means all employees of the Company (for the purposes
of this Agreement this shall exclude any and all of the Cluster Partners)
as of the Closing Date and who are listed in Schedule 18.
"Cluster Employees Diamond Share Options" has the meaning ascribed to it
in Clause 1.3(h)(iv).
"Cluster Share Options" means the Options with respect to the Company or
its Subsidiaries outstanding on the Valuation Date and either disclosed in
Clause 2.2 of the Disclosure Schedule or granted in accordance with Clause
4.6(b)(i).
"Cluster Partners" has the meaning ascribed to it in the forepart of
this Agreement.
"Code" means the United States Internal Revenue Code of 1986, as
amended, and the rules and regulations promulgated thereunder.
"Common Stock" means the common stock, par value one hundred (100) Dutch
Guilders per share, of the Company.
"Company" has the meaning ascribed to it in the beginning of this
Agreement.
"Confidentiality Agreement" has the meaning ascribed to it in Clause
4.2.
"Consideration" has the meaning ascribed to it in Clause 1.2(b).
"Consideration Shares" has the meaning ascribed to it in Clause 1.2(b).
"Consideration Value" means the total value of the Consideration; the
Consideration Shares being valued at the Market Price and the Diamond Share
Options being valued in accordance with the commonly understood Black-
Scholes Formula using the Black-Scholes Assumptions.
"Contract" means any agreement, lease, evidence of Indebtedness,
mortgage, indenture, security agreement or other contract (whether written
or oral).
"Deferred Consideration Escrow Agreement" means the Deferred
Consideration Escrow Agreement regarding the Deferred Consideration Shares,
to be entered into as of the Closing Date by and among the Escrow Agent,
the Purchaser and the Sellers, as such agreement may be, from time to time,
amended, modified or supplemented.
"Deferred Consideration Shares" has the meaning ascribed to it in Clause
1.2(b)(iii).
"Diamond Shareholder Approval" means the approval of not less than 50
percent of the holders of Diamond Shares present at a meeting of Diamond
Shareholders to the transactions contemplated in this Agreement and the
Operative Agreements.
"Diamond Shareholder Meeting" has the meaning ascribed to it in Clause
5.8.
"Diamond Share Options" means options to purchase Diamond Shares granted
under the New Diamond Option Plan as amended from time to time, with such
terms as to exercise price and vesting dates as are specified in this
Agreement.
"Diamond Shares" means the Class B Shares;
"Diamond (Partners') Equity Sales Program" means Diamond's Equity Sales
Program attached as Schedule 17.
"Disclosure Schedule" means the schedule attached hereto as Schedule 14.
"Dispute Notice" has the meaning ascribed to it in Clause 14.11(b).
"Dispute Period" means the period ending 30 calendar days following
receipt by an Indemnifying Party of either a Claim Notice or an Indemnity
Notice.
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"Employment Agreements" means the employment agreements for each of the
Cluster Partners which shall be in substantially the same form as the
employment agreements currently used by the Purchaser for similarly
situated employees of the Purchaser (subject to modifications required to
adapt to the applicable Law of, and to include commercial terms standard
for employment agreements in the consulting sector in the jurisdiction of
each employee or Cluster Partner, and to reflect the covenants and
agreements contained in this Agreement) and substantially in the form(s)
outlined in Schedule 13.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the rules and regulations promulgated thereunder.
"Escrow Agent" means such bank or financial institution with its
headquarters in Chicago as shall be selected by the Purchaser with the
consent of the Sellers, such consent not to be unreasonably withheld, in
its capacity as escrow agent under the Escrow Agreement or the Deferred
Consideration Escrow Agreement, as the case may be, or its successor
pursuant to the terms of the Escrow Agreement.
"Escrow Agreement" means the Escrow Agreement, to be entered into as of
the Closing Date, by and among the Escrow Agent, the Purchaser and the
Sellers, as such agreement may be, from time to time, amended, modified or
supplemented.
"Escrow Consideration Shares" has the meaning ascribed to it in Clause
1.2(b)(ii).
"Event" means an event, act, transaction or omission, including without
limitation, a receipt or accrual of income or gains, distribution, failure
to distribute, acquisition, disposal transfer, payment, loan or advance
including without limitation any Event deemed to have occurred for Tax
purposes and any combination of Events only the first or some of which has
or have taken place on or before Closing.
"Exchange Ratio" has the meaning ascribed to it in Schedule 4.
"Exchange Act" has the meaning ascribed to it in Clause 3.14.
"Financial Statements" means the consolidated financial statements of
the Company and its consolidated Subsidiaries delivered to the Purchaser
pursuant to Clause 2.10 or 4.5.
"GAAP" means generally accepted accounting principles, consistently
applied throughout the specified period and in the immediately prior
comparable period.
"Governmental or Regulatory Authority" means any court, tribunal,
arbitrator, authority, agency, commission, official or other
instrumentality of the United States, any foreign country or any domestic
or foreign state, county, city or other political subdivision.
"ICC" has the meaning ascribed to it in Clause 14.11(d).
"Indebtedness" of any Person means all obligations of such Person (i)
for borrowed money, (ii) evidenced by notes, bonds, debentures or similar
instruments, (iii) for the deferred purchase price of goods or services
(other than trade payables incurred in the ordinary course of business),
(iv) under capital leases and (v) in the nature of guarantees of the
obligations described in clauses (i) through (iv) above of any other
Person.
"Indemnified Party" means any Person claiming indemnification under any
provision of Clause 11, including without limitation a Person asserting a
claim pursuant to paragraph (c) of Clause 11.3.
"Indemnifying Party" means any Person against whom a claim for
indemnification are being asserted under any provision of Clause 11,
including without limitation a Person against whom a claim is asserted
pursuant to paragraph (c) of Clause 11.3.
"Indemnity Notice" means written notification pursuant to Clause 11.3(b)
of a claim for indemnity under Clause 11, by an Indemnified Party,
specifying the nature of and basis for such claim, together with the amount
or, if not then reasonably ascertainable, the estimated amount, determined
in good faith, of such claim.
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"Intellectual Property" means all patents and patent rights, trademarks
and trademark rights, trade names and trade name rights, service marks and
service mark rights, service names and service name rights, brand names,
internet domain names and e-mail addresses, inventions, processes,
formulae, copyrights and copyright rights, trade dress, business and
product names, logos, slogans, trade secrets, industrial models, designs,
methodologies, computer programs (including all source codes) and related
documentation, technical information, manufacturing, engineering and
technical drawings, know-how and all pending applications for and
registrations of patents, trademarks, service marks and copyrights.
"Investment Assets" means all debentures, notes and other evidences of
Indebtedness, stocks, securities (including rights to purchase and
securities convertible into or exchangeable for other securities),
interests in joint ventures and general and limited partnerships, mortgage
loans and other investment or portfolio assets owned of record or
beneficially by the Company or any of its Subsidiaries (other than
securities issued by any Subsidiary).
"IRS" means the United States Internal Revenue Service.
"Key Five Partners" means Javier Rubio Planellas, Jordi Vinas Bricall,
Ferran Soriano Compte, Marcel Rafart Vicent and Marc Ingla Mas and a "Key
Five Partner" means any of them.
"Knowledge", "Know" or "Known" means, when used in relation to a non-
natural person, that any of the directors or other executive officers of
that person has actual knowledge of such matter.
"Laws" means all laws, statutes, rules, regulations, ordinances and
other pronouncements having the effect of law of the United States, any
foreign country or any domestic or foreign state, county, city or other
political subdivision or of any Governmental or Regulatory Authority.
"Liabilities" means all Indebtedness, obligations and other liabilities
of a Person (whether absolute, accrued, contingent, fixed or otherwise, or
whether due or to become due).
"Licenses" means all licenses, permits, certificates of authority,
authorizations, approvals, registrations, franchises and similar consents
granted or issued by any Governmental or Regulatory Authority.
"Liens" means any mortgage, pledge, assessment, security interest,
lease, lien, adverse claim, levy, charge or other encumbrance of any kind,
or any conditional sale Contract, title retention Contract or other
Contract to give any of the foregoing.
"Lock-up Termination Date" means the final day of each 180 day period
following the Closing Date, or, if any such day is not a Business Day, the
next succeeding Business Day.
"Loss" means any and all damages, fines, fees, penalties, deficiencies,
losses and expenses (including without limitation interest, court costs,
fees of attorneys, accountants and other experts or other expenses of
litigation or other proceedings or of any claim, default or assessment).
"Market Price" means the volume-weighted average of the closing prices
of the Diamond Shares on NASDAQ on each of the 10 trading days ending on
(and including) the Valuation Date.
"Material Adverse Change" means any adverse change in the business,
financial condition or results of operations or prospects of the Company or
the Purchaser (as applicable), or their respective Subsidiaries that is
material to the Company or the Purchaser (as applicable), and their
respective Subsidiaries taken as a whole except for (i) any change
resulting from general economic, financial or market conditions or (ii) any
change resulting from conditions or circumstances generally affecting the
business and industries in which the Company or the Purchaser (as
applicable), or their respective Subsidiaries participate.
"Material Adverse Effect" means any adverse effect on the business,
financial condition, results of operations or prospects of the Company or
the Purchaser (as applicable), or any of their respective Subsidiaries,
that is material to the Company or the Purchaser (as applicable), and their
respective Subsidiaries taken as a whole.
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"Material Assets and Properties" of any Person means all material assets
and properties of every kind, nature, character and description (whether
real, personal or mixed, whether tangible or intangible, whether absolute,
accrued, contingent, fixed or otherwise and wherever situated), including
the goodwill related thereto, operated, owned or leased by such Person,
including without limitation cash, cash equivalents, Investment Assets,
accounts and notes receivable, chattel paper, documents, instruments,
general intangibles, real estate, equipment, inventory, goods and
Intellectual Property.
"Name" has the meaning ascribed to it in Clause 4.10.
"NASDAQ" means Nasdaq National Market.
"New Diamond Option Plan" means the option plan to be adopted by the
Purchaser which shall have all of the same terms as the Purchaser's option
plan in effect on the date hereof and previously delivered by the Sellers
to the Purchaser except as otherwise provided for in this Agreement or
otherwise agreed by the Key Five Partners.
"Operative Agreements" means the Escrow Agreement, the Deferred Shares
Escrow Agreement and any support or other agreements to be entered into in
connection with the transaction pursuant to Clause 6.
"Option" with respect to any Person means any security, right,
subscription, warrant, option, "phantom" stock right or other Contract that
gives the right to (i) purchase or otherwise receive or be issued any
shares of capital stock of such Person or any security of any kind
convertible into or exchangeable or exercisable for any shares of capital
stock of such Person or (ii) receive any benefits or rights similar to any
rights enjoyed by or accruing to the holder of shares of capital stock of
such Person, including any rights to participate in the equity, income or
election of directors or officers of such Person.
"Order" means any writ, judgment, decree, injunction or similar order of
any Governmental or Regulatory Authority (in each such case whether
preliminary or final).
"Partners Diamond Share Options" has the meaning ascribed to it in
Clause 1.3(h)(i).
"PBGC" means the Pension Benefit Guaranty Corporation established under
ERISA.
"Pension Schemes" has the meaning ascribed to it in Clause 2.16(a).
"Permitted Lien" means (i) any Lien for Taxes not yet due or delinquent
or being contested in good faith by appropriate proceedings for which
adequate reserves have been established in accordance with GAAP, (ii) any
statutory Lien arising in the ordinary course of business by operation of
Law with respect to a Liability that is not yet due or delinquent and (iii)
any minor imperfection of title or similar Lien which individually or in
the aggregate with other such Liens does not materially impair the value of
the property subject to such Lien or the use of such property in the
conduct of the business of the Company or any of its Subsidiaries.
"Person" means any natural person, corporation, general partnership,
limited partnership, proprietorship, other business organization, trust,
union, association or Governmental or Regulatory Authority.
"Piggyback Registration Rights Agreement" means the Piggyback
Registration Rights Agreement, substantially in the form attached as
Schedule 19.
"Plan" means any bonus, incentive compensation, deferred compensation,
pension, profit sharing, retirement, stock purchase, stock option, stock
ownership, stock appreciation rights, phantom stock, leave of absence,
layoff, vacation, day or dependent care, legal services, cafeteria, life,
permanent health, medical, accident, disability, workmen's compensation or
other insurance, severance, separation or other employee benefit plan,
practice, policy or arrangement of any kind, whether written or oral,
including, but not limited to, any "employee benefit plan" within the
meaning of Clause 3(3) of ERISA.
"Purchaser" has the meaning ascribed to it in the forepart of this
Agreement.
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"Purchaser Co" has the meaning ascribed to it in Clause 1.3(c).
"Purchaser Indemnified Parties" has the meaning ascribed to it in Clause
11.2(a).
"Purchaser's Losses" has the meaning ascribed to it in Clause 11.2(a).
"Purchaser SEC Documents" has the meaning ascribed to it in Clause 3.14.
"Registration Rights" has the meaning ascribed to it in Clause 1.4(a).
"Registration Statement" has the meaning ascribed to it in Clause 5.6.
"Relative Benefit" in respect of a Cluster Partner means the proportion
of the Consideration Value attributed to that Cluster Partner in the fourth
column of the table in Schedule 2(B);
"Relief" means any loss, relief, allowance, exemption, set off, right to
repayment or credit or other relief of similar nature granted by or
available in relation to Tax pursuant to any legislation or otherwise.
"Replacement Cluster Diamond Share Option" has the meaning ascribed to
it in Clause 1.3(h)(v).
"Representatives" has the meaning ascribed to it in Clause 4.2.
"Rights in Relation to the Name" means the rights currently held by the
Sellers and to be held by the Company at Closing, pursuant to the
provisions of this Agreement to use the Name (as defined in Clause 4.10) or
any part thereof as a business name or service mark in relation to the
services provided by the Company in connection with it, or any of its
Subsidiaries' businesses.
"Salary Related Scheme" has the meaning ascribed to it in Clause
2.16(i).
"SEC" means the United States Securities and Exchange Commission.
"Securities Act" has the meaning ascribed to it in Clause 3.9.
"Sellers" has the meaning ascribed to it in the forepart of this
Agreement.
"Seller Losses" has the meaning ascribed to it in Clause 11.2(g).
"Sellers' Co" has the meaning ascribed to it in Clause 1.3(c)
"Shares" has the meaning ascribed to it in the forepart of this
Agreement.
"State Schemes" has the meaning ascribed to it in Clause 2.16(a).
"Subsidiary" means any Person in which the Company or the Purchaser, as
applicable, directly or indirectly through Subsidiaries or otherwise,
beneficially owns more than fifty percent (50%) of either the equity
interests in, or the voting control of, such Person.
"Tax" and "Taxation" mean any form of taxation, levy, duty, charge,
contribution, withholding or impost of whatever nature (including any
related fine, penalty, surcharge or interest) imposed, collected or
assessed by, or payable to any Tax Authority.
"Tax Authority" means any government, state or municipality or any
local, state, federal or other fiscal, revenue, customs or excise
authority, body or official anywhere in the world.
"Tax Returns" means any return, report or similar statement (including
the schedules thereto) required to be filed with respect to any Tax,
including, without limitation, any information return, claim for refund,
amended return or declaration of estimated Tax.
"Third Party Claim" has the meaning ascribed to it in Clause 11.3(a).
"Transaction" has the meaning ascribed to it in Clause 5.6.
"Transfer" has the meaning ascribed to it in Clause 1.4(a)
"Unaudited Financial Statement Date" means June 30, 2000.
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"U.S. dollars", "US$" or "dollars" means the lawful currency of the
United States.
"Unaudited Financial Statements" means the Financial Statements of the
Company dated June 30, 2000 delivered to the Purchaser pursuant to Clause
2.10.
"Valuation Date" means the NASDAQ trading day which is the NASDAQ
trading day prior to the Closing Date.
"Voting and Stock Restriction Agreement" has the meaning ascribed to it
in Clause 1.4.
13.2 Unless the context of this Agreement otherwise requires, (i) words of
any gender include each other gender; (ii) words using the singular or plural
number also include the plural or singular number, respectively; (iii) the
terms "hereof," "herein," "hereby" and derivative or similar words refer to
this entire Agreement; (iv) the terms "Clause" or "Clause" refer to the
specified Clause or Clause of this Agreement; (v) the phrases "ordinary course
of business" and "ordinary course of business consistent with past practice"
refer to the business and practice of the Company or any of its Subsidiaries
and (vi) the term "includes" and the "including" and words of similar import
shall be deemed to be followed by the words "without limitation". All
accounting terms used herein and not expressly defined herein shall, except
where the context requires otherwise, have the meanings given to them under
U.S. GAAP.
14. MISCELLANEOUS
14.1 Notices
All notices, demands and other communications which are required or may be
given under this Agreement shall be in writing and shall be deemed to have been
duly given when delivered personally; transmitted electronically by email or
facsimile, receipt acknowledged; or in the case of documented overnight
delivery service or registered or certified mail, return receipt requested,
delivery charge or postage prepaid, on the date shown on the receipt therefor,
and
If to the Purchaser, to:
875 North Michigan Avenue
Suite 3000
Chicago, Illinois
60611
Facsimile No.:+312 255 6000
Attn: Karl E. Bupp, Chief Financial Officer
with a copy to:
Vice-President and General Counsel
875 North Michigan Avenue
Suite 3000
Chicago, Illinois
60611
Facsimile No:+312 255 6000
Attn:Nancy K. Bellis
If to the Sellers, to:
Torre Mapfre
Marina 16-18
Planta 38-39
08005
Barcelona, Spain
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Facsimile No.:+34 93 507 9010
Attn:Javier Rubio Planellas
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017-3954
Facsimile:(212) 455-2502
Attention:Philip T. Ruegger III
If to the Cluster Partners, to:
Torre Mapfre
Marina 16-18
Planta 38-39
08005
Barcelona, Spain
Facsimile No.:+34 93 507 9010
Attn:Javier Rubio Planellas
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017-3954
Facsimile:(212) 455-2502
Attention:Philip T. Ruegger III
All such notices, requests and other communications will (i) if delivered
personally to the address as provided in this Clause, be deemed given upon
delivery, (ii) if delivered by facsimile transmission to the facsimile number
as provided in this Clause, be deemed given upon receipt, and (iii) if
delivered by mail in the manner described above to the address as provided in
this Clause, be deemed given upon receipt (in each case regardless of whether
such notice, request or other communication is received by any other Person to
whom a copy of such notice is to be delivered pursuant to this Clause). Any
party from time to time may change its address, facsimile number or other
information for the purpose of notices to that party by giving notice
specifying such change to the other party hereto.
14.2 Entire Agreement
Other than the Confidentiality Agreement which shall remain in full force
and effect, this Agreement and the Operative Agreements supersede all prior
discussions and agreements between the parties with respect to the subject
matter hereof and thereof, including without limitation the Non-Binding Term
Sheet between the parties dated July, 20 2000, and contains the sole and entire
agreement between the parties hereto with respect to the subject matter hereof
and thereof.
14.3 Expenses
Except as otherwise expressly provided in this Agreement (including without
limitation as provided in Clause 12.2), in the event that the transactions
contemplated hereby are not consummated, each party will pay its own costs and
expenses (and, to avoid any confusion, fees and expenses of legal counsel,
brokers, accountancy firms and other professionals or experts appointed by or
advising the Sellers and/or the Cluster Partners are expenses of the Sellers
and/or the Cluster Partners not the Company), and the Sellers shall pay any
costs and expenses of the Company and the Subsidiaries incurred in connection
with the negotiation, execution
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and closing of this Agreement and the Operative Agreements and the transactions
contemplated hereby and thereby. In the event the transactions contemplated
hereby are consummated, the Purchaser shall be responsible for the costs and
expenses of all parties incurred in the negotiation, execution and closing of
this Agreement and the Operative Agreements and the transactions contemplated
hereby and thereby (including any capital duty payable on the contribution of
the Purchaser Consideration payable hereunder to Belgium Co pursuant to Clause
1.2 and Clause 1.3(a) of this Agreement).
14.4 Public Announcements
At all times at or before the Closing, the Sellers, the Cluster Partners and
the Purchaser will not issue or make any reports, statements or releases to the
public or generally to the employees, customers, suppliers or other Persons to
whom the Company or its Subsidiaries sell goods or provide services or with
whom the Company or its Subsidiaries otherwise have significant business
relationships with respect to this Agreement or the transactions contemplated
hereby without the consent of each other party, which consent shall not be
unreasonably withheld or delayed. If any party is unable to obtain the approval
of its public report, statement or release from another party and such report,
statement or release is, in the opinion of legal counsel to such party,
required by Law in order to discharge such party's disclosure obligations, then
such party may make or issue the legally required report, statement or release
and promptly furnish the other parties with a copy thereof. The Sellers, the
Cluster Partners and the Purchaser will also obtain the each other party's
prior approval of any press release to be issued immediately following the
Closing announcing the consummation of the transactions contemplated by this
Agreement.
14.5 Further Assurances; Post-Closing Cooperation
(a) At any time or from time to time after the Closing, the Sellers and the
Cluster Partners shall execute and deliver to the Purchaser such other
documents and instruments, provide such materials and information and take such
other actions as the Purchaser may reasonably request more effectively to vest
title to the Shares in the Purchaser and, to the full extent permitted by Law,
to put the Purchaser in actual possession and operating control of the Company
and its Subsidiaries and their Material Assets and Properties and Books and
Records, and otherwise to cause the Sellers and the Cluster Partners to fulfil
its obligations under this Agreement and the Operative Agreements to which it
is a party and the Purchaser shall execute and deliver to the Sellers such
other documents and instruments, and take such other actions as reasonably
necessary to vest title to the Closing Consideration Shares in the Sellers.
(b) Following the Closing, each party will afford the other party, its
counsel and its accountants, during normal business hours, reasonable access to
the books, records and other data relating to the business or condition of the
Company in its possession with respect to periods prior to the Closing and the
right to make copies and extracts therefrom, to the extent that such access may
be reasonably required by the requesting party in connection with (i) the
preparation of Tax Returns, (ii) the determination or enforcement of rights and
obligations under this Agreement, (iii) compliance with the requirements of any
Governmental or Regulatory Authority, (iv) the determination or enforcement of
the rights and obligations of any Indemnified Party or (v) in connection with
any actual or threatened Action or Proceeding. Further, each party agrees for a
period extending six years after the Closing Date not to destroy or otherwise
dispose of any such books, records and other data unless such party shall first
offer in writing to surrender such books, records and other data to the other
party and such other party shall not agree in writing to take possession
thereof during the 10 day period after such offer is made.
(c) If, in order properly to prepare its Tax Returns, other documents or
reports required to be filed with Governmental or Regulatory Authorities or its
financial statements or to fulfil its obligations hereunder, it is necessary
that a party be furnished with additional information, documents or records
relating to the business or condition of the Company not referred to in
paragraph (b) above, and such information, documents or records are in the
possession or control of the other party, such other party shall use its best
efforts to furnish or make available such information, documents or records (or
copies thereof) at the recipient's request, cost and
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expense. Any information obtained by the Sellers and/or the Cluster Partners in
accordance with this paragraph shall be held confidential by the Sellers and/or
the Cluster Partners in accordance with the Confidentiality Agreement.
(d) Notwithstanding anything to the contrary contained in this Clause 14.5,
if the parties are in an adversarial relationship in litigation or arbitration,
the furnishing of information, documents or records in accordance with any
provision of this Clause shall be subject to applicable rules relating to
discovery.
14.6 Waiver
Any term or condition of this Agreement may be waived at any time by the
party that is entitled to the benefit thereof, but no such waiver shall be
effective unless set forth in a written instrument duly executed by or on
behalf of the party waiving such term or condition. No waiver by any party of
any term or condition of this Agreement, in any one or more instances, shall be
deemed to be or construed as a waiver of the same or any other term or
condition of this Agreement on any future occasion. All remedies, either under
this Agreement or by Law or otherwise afforded, will be cumulative and not
alternative.
14.7 Amendment
This Agreement may be amended, supplemented or modified only by a written
instrument duly executed by or on behalf of each party hereto.
14.8 No Third Party Beneficiary
The terms and provisions of this Agreement are intended solely for the
benefit of each party hereto and their respective successors or permitted
assigns, and it is not the intention of the parties to confer third-party
beneficiary rights upon any other Person other than any Person entitled to
indemnity under Clause 11.
14.9 No Assignment; Binding Effect
Neither this Agreement nor any right, interest or obligation hereunder may
be assigned by any party hereto without the prior written consent of the other
parties hereto, such consent not to be unreasonably withheld, and any attempt
to do so will be void, except that the Purchaser may assign any or all of its
rights, interests and obligations hereunder (including without limitation its
rights under Clause 11) to (i) a wholly-owned subsidiary provided that any such
subsidiary agrees in writing to be bound by all of the terms, conditions and
provisions contained herein, (ii) any post-Closing purchaser of all of the
issued and outstanding stock of the Company or a substantial part of its assets
or (iii) any financial institution providing purchase money or other financing
to the Purchaser or the Company from time to time as collateral security for
such financing, but no such assignment referred to this Clause 14.9 shall
relieve the Purchaser of its obligations hereunder. Subject to the preceding
sentence, this Agreement is binding upon, inures to the benefit of and is
enforceable by the parties hereto and their respective successors and assigns.
14.10 Headings
The headings used in this Agreement have been inserted for convenience of
reference only and do not define or limit the provisions hereof.
14.11 Choice of Law and Dispute Resolution
(a) This Agreement shall be construed, interpreted and the rights of the
parties determined in accordance with the law of the State of New York. The
parties hereby submit to the personal jurisdiction of, and agree that any legal
proceeding with respect to or arising under this Agreement shall be brought in,
the United States District Court for the Southern District of New York or the
state courts of the State of New York for New York City.
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<PAGE>
(b) The parties shall attempt to resolve any dispute, controversy or claim
arising out of or relating to this Agreement through good faith negotiations
between the Purchaser's executive officers and the Cluster Partners. Any party
wishing to enter into such negotiations may serve a notice on the other parties
specifying the nature of any dispute (a "Dispute Notice"). In the event that
such negotiations are not successful, the parties may agree to refer the matter
to arbitration in accordance with Clause 14.11(d), failing which any party may
institute legal proceedings.
(c) The Sellers and the Cluster Partners hereby irrevocably appoint CT
Corporation System, at its office at 111 Eighth Avenue, New York, NY 10011, its
lawful agent and attorney to accept and acknowledge service of any and all
process against it in any action, suit or proceeding arising in connection with
this Agreement or any of the Operative Agreements and upon whom such process
may be served, with the same effect as if such party were a resident of the
State of New York and had been lawfully served with such process in such
jurisdiction, and waives all claims of error by reason of such service. As soon
as practicable following the date hereof (but no later than five (5) business
days following the date hereof), the Sellers and the Cluster Partners will
enter into such agreements with such agents as may be necessary to constitute
and continue the appointment of such agents hereunder. In the event that such
agent and attorney resigns or otherwise becomes incapable of acting as such,
such party will notify the other parties and will appoint a successor agent and
attorney in New York, New York reasonably satisfactory to the other parties,
with like powers.
(d) Subject to Clause 14.11(b), any disputes, claims or controversies
arising out of or relating to this Agreement, including any question regarding
its existence, validity or termination, may be referred to, and if so referred
shall be finally resolved under the Rules of Arbitration of the International
Chamber of Commerce ("ICC"). The arbitral tribunal shall have three arbitrators
chosen in accordance with the ICC Rules. The two party-nominated arbitrators
shall attempt to agree upon the nomination of a chairperson of the arbitral
tribunal. If the two party-nominated arbitrators fail to agree upon the
nomination of a chairperson within 30 days after the ICC's confirmation of the
second arbitrator, the ICC shall appoint the chairperson. The place of
arbitration shall be New York, New York. The arbitral tribunal shall apply the
laws of the State of New York. The arbitral proceedings shall be conducted in
the English language. Judgment upon the arbitral award may be entered in any
court having jurisdiction thereof or having jurisdiction over any party or any
party's assets. Notwithstanding the foregoing, any party may seek a preliminary
injunction or other preliminary judicial relief if, in its reasonable good
faith judgment, such action is necessary to avoid irreparable damage. Despite
such action, such party shall continue to participate in good faith in the
procedures specified in Clause 14.11(b). All applicable statutes of limitation
shall be tolled while the procedures specified in this Clause 14.11 are pending
and the parties shall take any and all actions required to effectuate such
tolling.
14.12 Invalid Provisions
If any provision of this Agreement is held to be illegal, invalid or
unenforceable under any present or future Law, and if the rights or obligations
of any party hereto under this Agreement will not be materially and adversely
affected thereby, (a) such provision will be fully severable, (b) this
Agreement will be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part hereof, (c) the remaining
provisions of this Agreement will remain in full force and effect and will not
be affected by the illegal, invalid or unenforceable provision or by its
severance herefrom and (d) in lieu of such illegal, invalid or unenforceable
provision, there will be added automatically as a part of this Agreement a
legal, valid and enforceable provision as similar in terms to such illegal,
invalid or unenforceable provision as may be possible.
14.13 Counterparts
This Agreement may be executed in any number of counterparts, each of which
will be deemed an original, but all of which together will constitute one and
the same instrument.
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officer of each party hereto as of the date first above
written.
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Imison Investments N.V.
/s/ Javier Rubio Planellas
By: _________________________________
Name: Javier Rubio Planellas
Title: Managing Director
Eagle 2000 S.L.
/s/ Jordi Vinas Bricall
By: _________________________________
Name: Jordi Vinas Bricall
Title: Managing Director
Diamond Technology Partners
Incorporated
/s/ Melvyn E. Bergstein
By: _________________________________
Name: Melvyn E. Bergstein
Title: Chairman and Chief
Executive Officer
Alfonso Aguilar Jimenez
/s/ Alfonso Aguilar Jimenez
By: _________________________________
Name: Alfonso Aguilar Jimenez
Address: Florencio del Castillo,
44
28043 Madrid (Spain)
Raul Aguirre Zegarra
/s/ Raul Aguirre Zegarra
By: _________________________________
Name: Raul Aguirre Zegarra
Address: Rua Wizard 192, Apto.
1202
Vila Madalena
CEP Sao Paulo (Brasil)
Juan Antonio Gil Serra
/s/ Juan Antonio Gil Serra
By: _________________________________
Name: Juan Antonio Gil Serra
Address: C/. Almanzora, 41-2
28023 Madrid (Spain)
Ferran Soriano Compte
/s/ Ferran Soriano Compte
By: _________________________________
Name: Ferran Soriano Compte
Address: C/. Llull, 133,6B
08005 Barcelona (Spain)
Till Jaspert
/s/ Till Jaspert
By: _________________________________
Name: Till Jaspert
Address: C/. Rossic, 1, 3o2a
08003 Barcelona (Spain)
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Javier Baigorri Insa
/s/ Javier Baigorri Insa
By: _________________________________
Name: Javier Baigorri Insa
Address: Avda. de los Madronos,
13, 5o H
28043 Madrid (Spain)
Olaf Theilmann
/s/ Olaf Theilmann
By: _________________________________
Name: Olaf Theilmann
Address: Am Eulenhorst, 77A
81827 Munchen (Germany)
Marc Ingla Mas
/s/ Marc Ingla Mas
By: _________________________________
Name: Marc Ingla Mas
Address: C/. Sant Gervasi de
Cassolas, 88-90, 4-B
08022 Barcelona (Spain)
Jordi Vinas Bricall
/s/ Jordi Vinas Bricall
By: _________________________________
Name: Jordi Vinas Bricall
Address: C/. Corcega, 213, 5o2a
08036 Barcelona (Spain)
Alberto Pamias Romero
/s/ Alberto Pamias Romero
By: _________________________________
Name: Alberto Pamias Romero
Address: C/. Bori i Fontesta, 12,
5o1a
08021 Barcelona (Spain)
Jerome Moitry
/s/ Jerome Moitry
By: _________________________________
Name: Jerome Moitry
Address: 28, Avenue Charles
Floquet
75007 Paris (France)
Rui Manuel Da Rosa Laurentino
/s/ Rui Manuel Da Rosa
Laurentino
By: _________________________________
Name: Rui Manuel Da Rosa
Laurentino
Address: Rua 9 de Abril, 531, 1o
Esq.
S. Pedro do Estoril
2675 Estoril (Portugal)
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Marcel Rafart Vicent
/s/ Marcel Rafart Vicent
By: _________________________________
Name: Marcel Rafart Vicent
Address: C/. Llull, 133, 4-B
08005 Barcelona (Spain)
Scott Alan Jacobs
/s/ Scott Alan Jacobs
By: _________________________________
Name: Scott Alan Jacobs
Address: 1514 Burchwood Dr.
Fairborn, Ohio 45324 (USA)
Francisco Javier De Paz Lagar
/s/ Francisco Javier De Paz
Lagar
By: _________________________________
Name: Francisco Javier De Paz
Lagar
Address: Avenida Claveles, 58
28220 Majadahonda, Madrid
(Spain)
Nevid Nikravan
/s/ Nevid Nikravan
By: _________________________________
Name: Nevid Nikravan
Address: Torre Mapfre
C/. Marina, 16, 38th floor
08005 Barcelona (Spain)
Carmen Miro Cloutier
/s/ Carmen Miro Cloutier
By: _________________________________
Name: Carmen Miro Cloutier
Address: C/. Casp, 45, Apt. 2-1
08010 Barcelona (Spain)
Javier Rubio Planellas
/s/ Javier Rubio Planellas
By: _________________________________
Name: Javier Rubio Planellas
Address: 12 Avenue des Spelugues
Monte Carlo (Monaco)
Christian Klaus Terfloth
/s/ Christian Klaus Terfloth
By: _________________________________
Name: Christian Klaus Terfloth
Address: Schumannstrasse 9
81679 Munchen (Germany)
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Fernando Oliveros Calvo
/s/ Fernando Oliveros Calvo
By: _________________________________
Name: Fernando Oliveros Calvo
Address: Avenida de Europa, 20
28224 Madrid (Spain)
N.M. Fredrik Johnsson
/s/ N.M. Fredrik Johnsson
By: _________________________________
Name: N.M. Fredrik Johnsson
Address: C/. Notariat, 10, 2o2a
08007 Barcelona (Spain)
Juan Eusebio Pujol Chimeno
/s/ Juan Eusebio Pujol Chimeno
By: _________________________________
Name: Juan Eusebio Pujol Chimeno
Address: C/. Sant Gervasi de
Cassoles, 88-90
08022 Barcelona (Spain)
Ricardo Damborenea Isusi
/s/ Ricardo Damborenea Isusi
By: _________________________________
Name: Ricardo Damborenea Isusi
Address: C/. Espalter, 5, 7oIzda.
28014 Madrid (Spain)
Ulrich Kuhn
/s/ Ulrich Kuhn
By: _________________________________
Name: Ulrich Kuhn
Address: Heierbusch 43
45133 Essen (Germany)
Didier Collignon
/s/ Didier Collignon
By: _________________________________
Name: Didier Collignon
Address:
Dominic Endicott
/s/ Dominic Endicott
By: _________________________________
Name: Dominic Endicott
Address: 61 Mt Pleasant Street
Rockport MA 01966 (USA)
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SCHEDULE 9
ESCROW AGREEMENT
ESCROW AGREEMENT, dated as of , 2000 (this "Agreement") among
Diamond Technology Partners, Incorporated, a Delaware corporation (the
"Purchaser"), Imison Investments N.V., a company incorporated in the
Netherlands Antilles, Eagle 2000 S.L., a company incorporated in the Kingdom of
Spain, (together, the "Sellers"), [[Belgium Co], a company incorporated in the
Kingdom of Belgium,] those persons whose names and addresses appear in Schedule
1 to the Stock Purchase Agreement (together, the "Cluster Partners"), and
, as escrow agent (the "Escrow Agent").
WHEREAS, concurrently with the execution and delivery of this Agreement and
pursuant to a Stock Purchase Agreement dated as of September , 2000 (the
"Stock Purchase Agreement") between the Purchaser, the Sellers and the Cluster
Partners relating to the Purchaser's acquisition of Cluster Telamones B.V., a
company incorporated in the Netherlands (the "Company"), from the Sellers, the
Sellers are selling (and the Cluster Partners are causing the Sellers to sell)
to the Purchaser the Shares (as that term is defined in the Stock Purchase
Agreement); and
WHEREAS, in connection therewith, Purchaser has issued in the name of
Belgium Co, the sole shareholders of which are the Sellers and the Purchaser,
Consideration Shares for and on behalf of the Sellers; and
WHEREAS, Clause 1.2(b)(ii) of the Stock Purchase Agreement requires such
number of the Consideration Shares issued in the name of Belgium Co having a
Market Price equal to five percent of the Consideration Value be delivered by
the Purchaser to the Escrow Agent in order to provide a fund to satisfy when
and as directed by the Sellers indemnity payments due the Purchaser Indemnified
Parties pursuant to Clauses 11.1 and 11.2 of the Stock Purchase Agreement.
Capitalized terms not defined herein shall have the meanings ascribed to
them in the Stock Purchase Agreement.
NOW, THEREFORE, the Purchaser, the Sellers, the Cluster Partners and the
Escrow Agent hereby agree as follows:
1. Appointment of the Escrow Agent; Deposit of Escrow Consideration Shares
The Sellers, the Cluster Partners and the Purchaser hereby constitute and
appoint the Escrow Agent as, and the Escrow Agent hereby agrees to assume and
perform the duties of, the escrow agent under and pursuant to this Agreement.
The Escrow Agent acknowledges receipt of an executed copy of the Stock Purchase
Agreement and that number of Consideration Shares issued to Belgium Co as have
in the aggregate a Market Price equal to five percent (5%) of the Consideration
Value.
2. The Escrow Fund
The Escrow Consideration Shares and all dividends paid thereon (whether in
cash, in property or shares) (the Escrow Consideration Shares and all such
dividends as well as any other cash that may be held in escrow at any time
being referred to herein together as the "Escrow Fund") shall be held by the
Escrow Agent in a separate account maintained for the purpose, on the terms and
subject to the conditions of this Agreement. The Escrow Fund shall not be
subject to lien or attachment by any creditor of any party hereto and shall be
used solely for the purpose set forth in this Agreement. The Escrow Fund shall
not be available to, and shall not be used by, the Escrow Agent to set off any
obligations of the Purchaser, the Sellers or the Cluster Partners owing to the
Escrow Agent in any capacity.
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3. Appointment of Representative on behalf of the Sellers and the Cluster
Partners
3.1 The Sellers and the Cluster Partners hereby appoint as
representative (the "Representative") to act on behalf of all of the Sellers
and the Cluster Partners in dealings with the Escrow Agent pursuant to this
Agreement.
3.2 The Representative shall have the duties and responsibilities as set out
herein, and immediately following the execution of this Agreement shall notify
the Escrow Agent of all details relating to the Representative's bank account
and stock account to which Escrow Consideration Shares and/or cash may be
transferred under this Agreement. The Representative shall promptly notify the
Escrow Agent of any changes with respect to the above-noted accounts.
3.3 Each of the Sellers and the Cluster Partners agree that the Escrow Agent
shall be entitled to treat the Representative as acting on behalf of the
Sellers and Cluster Partners and to rely on any instruction from the
Representative without being required to determine the correctness of any fact
stated therein or validity of the service thereof. Any transfer of Escrow
Consideration Shares or cash made by the Escrow Agent to a bank account and/or
stock account designated by the Representative pursuant to the terms of this
Agreement shall constitute full and final settlement by the Escrow Agent and
the Purchaser of any obligation to transfer Escrow Consideration Shares or cash
to the Sellers and/or the Cluster Partners.
4. Release of Escrow Consideration Shares
The Escrow Agent shall release Escrow Consideration Shares from the Escrow
Fund upon the following terms and conditions:
4.1 Following receipt by the Escrow Agent of written instructions signed
by the Representative, the Escrow Agent shall deliver to the Purchaser that
number of Escrow Consideration Shares designated by the Representative in
such instructions to satisfy (in whole or in part) indemnity payments due
the Purchasers Indemnified Parties pursuant to Clauses 11.1 or 11.2 of the
Stock Purchase Agreement.
4.2 The Escrow Agent shall deliver to the Representative for and on
behalf of the Sellers and the Cluster Partners:
(i) On the first anniversary of the date hereof that number of
Escrow Consideration Shares which following release results in the
Escrow Fund holding the greater of (A) Consideration Shares having a
Market Price equal to two percent (2%) of the Consideration Value and
(B) Consideration Shares having a Market Price equal to the amount of
Purchaser Losses for which Claim Notices have been given pursuant to
Clause 11.3 of the Stock Purchase Agreement and have not been resolved
in accordance with Clause 11.3(c), provided that if the Market Price of
Escrow Consideration Shares is less that the amount of such Purchaser
Losses no Escrow Consideration Shares shall be released.
(ii) On the fifth anniversary of the date hereof that number of
Escrow Consideration Shares which following release results in the
Escrow Fund holding the greater of (A) Consideration Shares having a
Market Price equal to one percent (1%) of the Consideration Value and
(B) Consideration Shares having a Market Price equal to the amount of
Purchaser Losses for which Claim Notices have been given pursuant to
Clause 11.3(a) of the Stock Purchase Agreement and have not been
resolved in accordance with Clause 11.3(c), provided that if the Market
Price of Escrow Consideration Shares is less that the amount of such
Purchaser Losses no Escrow Consideration Shares shall be released.
(iii) On the earlier of the seventh anniversary of the date of this
Agreement and the thirtieth day following the expiration of all
applicable statues of limitation (including all periods of extension,
whether automatic or permissive) with respect to matters covered by
Clauses 2.13, 2.16 and 11.1 of the Stock Purchase Agreement that number
of Escrow Consideration Shares which following release results in the
Escrow Fund holding Consideration Shares having a Market Price equal to
the amount of Purchaser Losses for which Claim Notices have been given
pursuant to Clause 11.3(a) of the Stock
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Purchase Agreement and have not been resolved in accordance with Clause
11.3(c), provided that if the Market Price of Escrow Consideration
Shares is less that the amount of such Purchaser Losses no Escrow
Consideration Shares shall be released.
(iv) At any time following receipt by the Escrow Agent of written
instructions signed by the Purchaser that number of Escrow
Consideration Shares designated by the Purchaser in such instructions.
4.3 The Escrow Agent shall release to the Sellers and the Cluster
Partners all dividends (whether in cash, property or shares), all interest
on the Escrow Fund and other income (if any) following receipt of written
instructions signed by the Representative.
5. Investment of the Escrow Fund; Taxes
5.1 In the event that cash is held in the Escrow Fund, the Escrow Agent
shall invest and reinvest all cash funds held from time to time as part of the
Escrow Fund, in its discretion (or, if the Representative has expressed a
preference in writing, in accordance with that preference), in any of the
following kinds of investments, or in any combination thereof: (i) bonds or
other obligations of, or guaranteed by, the government of the United States of
America or any State thereof or the District of Columbia, or agencies of any of
the foregoing, having maturities of not greater than 90 days (or, if earlier,
the later of the dates set out in Clause 4.2 hereof (the "Termination Date"));
(ii) commercial paper rated, at the time of the Escrow Agent's investment
therein or contractual commitment providing for such investment, at least P-1
by Moody's Investors Service, Inc. ("Moody's") and A-1 by Standard & Poor's
Corporation ("S&P") and having maturities of not greater than 90 days (or, if
earlier, the Termination Date); (iii) demand or time deposits in, certificates
of deposit of or bankers' acceptances issued by (A) a depository institution or
trust company incorporated under the laws of the United States of America, any
State thereof or the District of Columbia or (B) a United States branch office
or agency of a foreign depository institution or trust company if, in any such
case, the depository institution, trust company or office or agency has
combined capital and surplus of not less than two billion dollars
($2,000,000,000) (any such institution being herein called a "Permitted Bank")
having maturities of not greater than 90 days (or, if earlier, the Termination
Date); (iv) repurchase obligations of a Permitted Bank or securities dealer
(acting as principal) meeting the capital and surplus requirements specified
for a Permitted Bank with respect to any bond or other obligation referred to
in clause (i) above; or (v) such other investments as the Purchaser and the
Representative shall approve in writing.
5.2 (a) For tax purposes:
(i) the Escrow Fund shall be the property of the Sellers and the Cluster
Partners;
(ii) all dividends (whether in cash, property or shares), interest or
other income earned by the Escrow Fund ("Escrow Earnings") shall be income
of the Sellers;
(iii) all Taxes in respect of Escrow Earnings shall be the obligation
of, and be paid when due by, the Sellers and the Cluster Partners, who
shall indemnify and hold the Purchaser and the Escrow Agent harmless from
and against all such Taxes; and
(iv) all Tax returns filed by the Purchaser or the Escrow Agent shall be
consistent with the provisions of this Section 5.2(a).
(b) Upon the written request of the Representative, the Escrow Agent shall
distribute to the Sellers and Cluster Partners from the Escrow Earnings an
amount equal to the product of (i) the Seller's actual effective combine
federal, state and local income tax rate multiplied by (ii) Escrow Earnings for
the immediately preceding quarter (or such lesser amount as may then be
available for distribution from the Escrow Earnings). The Sellers and Cluster
Partners together shall pay, be jointly and severally liable for and indemnify
the Purchaser and hold it harmless from and against all fees of and expenses
incurred by the Escrow Agent in making distributions in accordance with the
provisions of this Clause 5.2(b).
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6. Duties and Obligations of the Escrow Agent
6.1 The duties and obligations of the Escrow Agent shall be limited to and
determined solely by the provisions of this Agreement and the written
instructions delivered in accordance herewith, and the Escrow Agent is not
charged with knowledge of or any duties or responsibilities in respect of any
other agreement or document. In furtherance and not in limitation of the
foregoing:
(a) the Escrow Agent shall not be liable for any loss of interest
sustained as a result of investments made hereunder in accordance with the
terms hereof, including any liquidation of any investment of the Escrow
Fund prior to its maturity effected in order to make a payment required by
the terms of this Agreement;
(b) the Escrow Agent shall be fully protected in relying in good faith
upon any written certification, notice, direction, request, waiver,
consent, receipt or other document that the Escrow Agent reasonably
believes to be genuine and duly authorized, executed and delivered;
(c) the Escrow Agent shall not be liable for any error of judgment, or
for any act done or omitted by it, or for any mistake in fact or law, or
for anything that it may do or refrain from doing in connection herewith;
provided, however, that notwithstanding any other provision in this
Agreement, the Escrow Agent shall be liable for its wilful misconduct or
gross negligence or breach of this Agreement;
(d) the Escrow Agent may seek the advice of legal counsel selected with
reasonable care in the event of any dispute or question as to the
construction of any of the provisions of this Agreement or its duties
hereunder, and it shall incur no liability and shall be fully protected in
respect of any action taken, omitted or suffered by it in good faith in
accordance with the opinion of such counsel;
(e) the event that the Escrow Agent shall in any instance, after seeking
the advice of legal counsel pursuant to the immediately preceding clause,
in good faith be uncertain as to its duties or rights hereunder, it shall
be entitled to refrain from taking any action in that instance and its sole
obligation, in addition to those of its duties hereunder as to which there
is no such uncertainty, shall be to keep safely all property held in the
Escrow Fund until it shall be directed otherwise in writing by each of the
parties hereto or by a final, nonappealable order of a court of competent
jurisdiction; provided, however, in the event that the Escrow Agent has not
received such written direction or court order within 180 calendar days
after requesting the same, it shall have the right to interplead Purchaser,
the Representative, the Sellers and the Cluster Partners in any court of
competent jurisdiction and request that such court determine its rights and
duties hereunder; and
(f) the Escrow Agent may execute any of its powers or responsibilities
hereunder and exercise any rights hereunder either directly or by or
through agents or attorneys selected with reasonable care, nothing in this
Agreement shall be deemed to impose upon the Escrow Agent any duty to
qualify to do business or to act as fiduciary or otherwise in any
jurisdiction other than the State of Illinois and the Escrow Agent shall
not be responsible for and shall not be under a duty to examine into or
pass upon the validity, binding effect, execution or sufficiency of this
Agreement or of any amendment hereto.
7. Co-operation
The Purchaser, the Representative, the Sellers and the Cluster Partners
shall each provide to the Escrow Agent all instruments and documents within
their respective powers to provide that are necessary for the Escrow Agent to
perform its duties and responsibilities hereunder.
8. Fees and Expenses; Indemnity
Except as otherwise provided in Clause 5.2(b):
8.1 the Purchaser shall pay fifty percent (50%) and the Sellers and the
Cluster Partners shall together pay (and shall be jointly and severally
liable to pay) fifty percent (50%) of the fees and expenses of the Escrow
Agent for its services hereunder as and when billed by the Escrow Agent;
and
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8.2 the Purchaser shall reimburse and indemnify the Escrow Agent for, and
hold it harmless against, fifty percent (50%) of any loss, damages, cost or
expense, including but not limited to reasonable attorneys' fees, reasonably
incurred by the Escrow Agent in connection with the Escrow Agent's performance
of its duties and obligations under this Agreement, as well as the reasonable
costs and expenses of defending against any claim or liability relating to this
Agreement and the Sellers and the Cluster Partners shall be jointly and
severally liable for the remaining fifty percent (50%).
Notwithstanding the foregoing, none of the Purchaser, the Sellers or the
Cluster Partners shall be required to indemnify the Escrow Agent for any such
loss, liability, cost or expense arising as a result of the Escrow Agent's
wilful misconduct or gross negligence or breach of this Agreement.
9. Resignation and Removal of the Escrow Agent
9.1 Escrow Agent may resign as such 30 calendar days following the giving of
prior written notice thereof to the Representative and the Purchaser. In
addition, the Escrow Agent may be removed and replaced on a date designated in
a written instrument signed by the Representative and the Purchaser and
delivered to the Escrow Agent. Notwithstanding the foregoing, no such
resignation or removal shall be effective until a successor escrow agent has
acknowledged its appointment as such as provided in Clause 9.3 below. In either
event, upon the effective date of such resignation or removal, the Escrow Agent
shall deliver the property comprising the Escrow Fund to such successor escrow
agent, together with such records maintained by the Escrow Agent in connection
with its duties hereunder and other information with respect to the Escrow Fund
as such successor may reasonably request.
9.2 If a successor escrow agent shall not have acknowledged its appointment
as such as provided in Clause 9.3 below, in the case of a resignation, prior to
the expiration of 30 calendar days following the date of a notice of
resignation or, in the case of a removal, on the date designated for the Escrow
Agent's removal, as the case may be, because the Representative and the
Purchaser are unable to agree on a successor escrow agent, or for any other
reason, the Escrow Agent may select a successor escrow agent and any such
resulting appointment shall be binding upon all of the parties to this
Agreement, provided that any such successor selected by the Escrow Agent shall
be a Permitted Bank.
9.3 Upon written acknowledgement by a successor escrow agent appointed in
accordance with the foregoing provisions of this Clause 9 of its agreement to
serve as escrow agent hereunder and the receipt of the property then comprising
the Escrow Fund, the Escrow Agent shall be fully released and relieved of all
duties, responsibilities and obligations under this Agreement, and such
successor escrow agent shall for all purposes hereof be the Escrow Agent.
10. Notices
All notices, demands and other communications which are required or may be
given hereunder shall be in writing and shall be deemed to have been duly given
when delivered personally; transmitted electronically by email or facsimile,
receipt acknowledged; or in the case of documented overnight delivery service
or registered or certified mail, return receipt requested, delivery charge or
postage prepaid, on the date shown on the receipt therefor, and addressed
If to the Purchaser, to:
875 North Michigan Avenue
Suite 3000
Chicago, Illinois
IL 60611
Facsimile No.: +312 255 6000
Attn: Chief Financial Officer
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with a copy to:
General Counsel
875 North Michigan Avenue
Suite 3000
Chicago, Illinois
IL 60611
Facsimile No: +312 255 6000
If to the Representative, Sellers or the Cluster Partners (or any of
them), to:
[Representative]
[Address]
Facsimile No.:
Attn:
If to the Escrow Agent, to
Address
Facsimile No.:
Attn:
Any party from time to time may change its address, facsimile number or
other information for the purpose of notices to that party by giving notice
specifying such change to the other parties hereto.
11. Amendments, etc
This Agreement may be amended or modified, and any of the terms hereof may
be waived, only by a written instrument duly executed by or on behalf of the
Purchaser, the Representative, the Sellers and the Cluster Partners and, with
respect to any amendment that would adversely affect the Escrow Agent, the
Escrow Agent. No waiver by any party of any term or condition contained of this
Agreement, in any one or more instances, shall be deemed to be or construed as
a waiver of the same or any other term or condition of this Agreement on any
future occasion.
12. Governing Law
This Agreement shall be construed, interpreted and the rights of the parties
determined in accordance with the law of the State of New York. The parties
hereby submit to the personal jurisdiction of, and agree that any legal
proceeding with respect to or arising under this Agreement shall be brought in,
the United States District Court for the Southern District of New York or the
state courts of the State of New York for New York City.
13. Miscellaneous
This Agreement is binding upon and will inure to the benefit of the parties
hereto and their respective successors and permitted assigns. The headings used
in this Agreement have been inserted for convenience of reference only and do
not define or limit the provisions hereof. This Agreement may be executed in
any number of counterparts, each of which will be deemed an original, but all
of which together will constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
Diamond Technology Partners,
Incorporated
By: _________________________________
Name:
Title:
Imison Investments N.V.
By: _________________________________
Name:
Title:
Eagle 2000 S.L.
By: _________________________________
Name:
Title:
Cluster Partners
[to be copied from Stock Purchase
Agreement]
[By: ________________________________
Name:]
[ESCROW AGENT]
By: _________________________________
Name:
Title:
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SCHEDULE 19
PIGGYBACK REGISTRATION RIGHTS AGREEMENT
This Agreement is made the day of , 2000 by and among Diamond
Technology Partners, Incorporated, a Delaware corporation (the "Company"), and
the persons named on the signature page hereto (the "Signatories").
Recitals
The Company has agreed to issue 4,000,000 shares (the "Shares") of its
Class B Common Stock to the Signatories upon the Closing (as such term is
defined in the Stock Purchase Agreement of even date herewith among the
parties hereto (the "Stock Purchase Agreement")). The Company has agreed to
provide piggyback registration rights to the Signatories on the terms and
conditions set forth in this Agreement.
1. Definitions
"Commission" means the U.S. Securities and Exchange Commission or any
successor thereto.
"Common Stock" means the Company's Class A Common Stock, par value $.001
per share, and its Class B Common Stock, par value $.001 per share.
"Exchange Act" means the U.S. Securities Exchange Act of 1934, as amended,
or any successor thereto.
"Partner" means an employee of the Company so designated in accordance with
the Company's policies in effect from time to time.
"Registrable Securities" means that portion of the Shares and any other
shares of Common Stock that may be distributed with respect to the Shares by
way of a stock dividend, stock split or other conversion, distribution,
recapitalization, or reclassification, that are (i) from time to time issued
and outstanding, (ii) vested within the meaning of the Company's Partners'
compensation program in effect from time to time or to be vested on the next
succeeding Lock-Up Termination Date as providing in Section 1.4(a) of the
Stock Purchase Agreement, (iii) not disposed of by the holder thereof pursuant
to the provisions of Rule 144 or any successor thereto adopted under the
Securities Act, and (iv) not previously disposed of by the holder thereof
pursuant to a registration statement that was declared effective by the
Securities and Exchange Commission.
"Securities Act" means the U.S. Securities Act of 1933, as amended, or any
successor thereto.
2. Piggyback Registrations.
2.1 Right to Piggyback
If the Company at any time proposes to register any of its Common Stock
under the Securities Act (other than registrations solely for the registration
of shares in connection with an employee benefit plan or a merger or share
exchange or consolidation) in an underwritten offering whether or not for sale
for its own account, and the registration form to be used may be used for the
registration of Registrable Securities (a "Piggyback Registration"), the
Company will at each such time give prompt written notice to all holders of
Registrable Securities (who also hold contractual rights to a Piggyback
Registration) of its intention to do so and of such holders' rights under this
Section 2. Upon the written request of any such holder made within ten (10)
days after the receipt of any such notice (which request shall specify the
Registrable Securities intended to be disposed of by such holder), the Company
shall use its reasonable best efforts to effect the registration under the
Securities Act of all Registrable Securities which the Company has been so
requested to register by the
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holders thereof on the same terms and conditions as the securities otherwise
being sold in such registration, to the extent requisite to permit the
disposition of the Registrable Securities so to be registered.
2.2 Priority in Piggyback Registrations
If the managing underwriter of such underwritten offering shall inform the
Company in writing of its belief that the number of securities requested to be
included in such registration exceeds the number which can be sold in (or
during the time of) such offering without adversely affecting the price to be
received thereon, then the Company will include in such registration, to the
extent of the number which the Company is so advised can be sold in (or during
the time of) such offering, first, all securities proposed by the Company to be
sold for its own account; and second, the Registrable Securities proposed to be
sold and any securities requested to be included in the registration by any
Partners of the Company on a pro rata basis with respect to the number of
shares so preferred to be sold or so requested to be included in the
registration.
3. Registration Procedures
If and whenever the Company is required to use its reasonable best efforts
to effect the registration of any Registrable Securities under the Securities
Act as provided in Section 2, the Company shall as expeditiously as possible:
(a) prepare and file with the Commission the requisite registration
statement to effect such registration and thereafter use its best efforts
to cause such registration statement to become and remain effective for a
period of one hundred eighty (180) days or until all of such Registrable
Securities and/ or other Common Stock have been disposed of (if earlier),
provided that the Company may discontinue any registration of its
securities (including in the Registrable Securities) at any time prior to
the effective date of the registration statement relating thereto;
(b) prepare and file with the Commission such amendments and supplements
to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective
for a period of not less than one hundred eighty (180) days and to comply
with the provisions of the Securities Act with respect to the disposition
of all securities covered by such registration statement until such time as
all of such securities have been disposed of in accordance with the
intended methods of disposition by the seller or sellers thereof set forth
in such registration statement; provided that, before filing a registration
statement or prospectus or any amendments or supplements thereto (including
documents that would be incorporated or deemed to be incorporated therein
by reference) the Company will furnish to not more than one counsel chosen
by holders holding a majority of the Registrable Securities being
registered copies of all such documents proposed to be filed.
(c) use its reasonable best efforts to register or qualify all
Registrable Securities covered by such registration statement under such
other securities or blue sky laws of such United States jurisdictions as
each holder of Registrable Securities thereof shall reasonably request, to
keep such registration or qualification in effect for so long as such
registration statement remains in effect, and to take any other action
which may be reasonably necessary or advisable to enable such holder to
consummate the disposition in such jurisdictions of the securities owned by
such holder, except that the Company shall not for any such purpose be
required to qualify generally to do business as a foreign corporation in
any jurisdiction wherein it would not but for the requirements of this
Section 3(c) be obligated to be so qualified, to subject itself to taxation
in any such jurisdiction or to consent to general service of process in any
such jurisdiction;
(d) notify each holder of Registrable Securities covered by such
registration statement (i) of the issuance by the Commission or any other
federal or state governmental authority of any stop order suspending the
effectiveness of a registration statement or the initiation of any
proceeding for that purpose, (ii) of the receipt by the Company of any
notification with respect to the suspension of the qualification or
exemption from qualification of any of the Registration Securities for sale
in any jurisdiction or the initiation of any proceedings for that purpose,
or (iii) at any time when a prospectus relating thereto is
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required to be delivered under the Securities Act, upon discovery that, or
upon the happening of any event as a result of which, the prospectus
included in such registration statement, as then in effect, includes an
untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances under which they were
made, and at the request of any such holder promptly prepare and furnish to
such holder a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such securities, such prospectus shall not
include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances under which they
were made;
(e) otherwise use its reasonable best efforts to comply with all
applicable rules and regulations of the Commission; and make generally
available to its security holders earnings statements satisfying the
provisions of Section 11(a) of the Securities Act and Rule 158 thereunder
(or any similar rule promulgated under the Securities Act) no later than 45
calendar days after the end of any 12-month period (or 90 calendar days
after the end of any 12-month period if such period is a fiscal year) (i)
commencing at the end of any fiscal quarter in which Registrable Securities
are sold to underwriters in a firm commitment or best efforts underwritten
offering, or (ii) if not sold to underwriters in such an offering,
commencing on the first day of the first fiscal quarter of the Company
after the effective date of a registration statement, which statements
shall cover said 12-month period;
(f) provide and cause to be maintained a transfer agent and registrar
for all Registrable Securities covered by such registration statement from
and after a date not later than the effective date of such registration
statement and provide the transfer agent with a CUSIP number and printed
certificates for the Registrable Securities in a form eligible for deposit
with The Depository Trust Company;
(g) list such Registrable Securities on any national securities exchange
or Nasdaq on which any shares of Common Stock are listed or quoted or, if
shares of Common Stock are not listed on a national securities exchange or
quoted on Nasdaq, use its reasonable best efforts to qualify such
Registrable Securities for inclusion on such national securities exchange
as the holders of a majority of such Registrable Securities shall request;
and
(h) use its reasonable best efforts to take all other steps necessary to
effect the registration of such Registrable Securities contemplated hereby.
The Company may require each holder of Registrable Securities as to which
any registration is being effected to furnish to the Company such information
regarding such holder and the distribution of such securities as the Company
may from time to time reasonably request in writing.
Each holder of Registrable Securities covered by any such registration
statement agrees that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 3(d), such holder will
forthwith discontinue such holder's disposition of Registrable Securities
pursuant to such registration statement until such holder's receipt of the
copies of the supplemented or amended prospectus contemplated by Section 3(d)
and, if so directed by the Company, will deliver to the Company (at the
Company's expense) all copies, other than permanent file copies, then in such
holder's possession of the prospectus included in such registration statement
which is current at the time of receipt of such notice.
4. Underwriter Arrangements
4.1 Piggyback Registrations.
If the Company at any time proposes to register any of its securities under
the Securities Act as contemplated by Section 2 and such securities are to be
distributed by or through one or more underwriters, the Company shall, if
requested by any holder of Registrable Securities as provided in Section 2 and
subject to the provisions of Section 2(b), use its reasonable best efforts to
arrange for such underwriters to include all the Registrable Securities
requested to be offered and sold by such holder among the securities to be
distributed by
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such underwriters. The holders of Registrable Securities to be distributed by
such underwriters shall be parties to the underwriting agreement between the
Company and such underwriters and may, at their option, require that any or all
of the representations and warranties by, and the other agreements on the part
of, the Company to and for the benefit of such underwriters shall also be made
to and for the benefit of such holders and that any or all of the conditions
precedent to the obligations of such underwriters under such underwriting
agreement be conditions precedent to the obligations of such holders to the
extent that such representations, warranties, other agreements, and conditions
precedent bear on such holders' liability or otherwise impose obligations on
such holders.
4.2 Holdback Agreements
If, in connection with the initial public offering of shares of Common Stock
of the Company registered pursuant to the Securities Act, the managing
underwriter for such registration shall so request, the holders of Registrable
Securities shall not sell, make any short sale of, grant any option for the
purchase of, or otherwise dispose of any Registrable Securities (other than
those shares of Common Stock included in such registration) without the prior
written consent of the Company for a period designated by the Company in
writing to the holders of Registrable Securities, which period shall begin not
more than fourteen (14) days prior to the effectiveness of the registration
statement pursuant to which such public offering shall be made and shall not
last more than one hundred eighty (180) days (or lesser other period as the
managing underwriter may permit) after the effective date of such registration
statement.
5. Indemnification
(a) Indemnification by the Company
In the event of any registration of any securities of the Company under the
Securities Act, the Company shall indemnify and hold harmless each holder of
Registrable Securities selling such Registrable Securities, each affiliate of
such holder and their respective officers and directors or general and limited
partners (and the directors, officers, affiliates and controlling persons
thereof), each underwriter, broker or any other person acting on behalf of such
seller and each other person, if any, who controls any of the foregoing persons
within the meaning of the Securities Act (collectively the "Indemnified
Persons") against any losses, claims, damages or liabilities, joint or several,
to which such seller or any such director or officer or underwriter or
controlling person may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings, whether commenced or threatened, in respect thereof) arise out of
or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any registration statement under which such
securities were registered under the Securities Act, any preliminary
prospectus, final prospectus or summary prospectus contained therein, or any
amendment or supplement thereto or any document incident to registration or
qualification of any Registrable Securities or arise out of or are based upon
the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading
or, with respect to any prospectus, necessary to make the statements therein in
light of the circumstances under which they were made not misleading, or any
violation by the Company of the Securities Act or state securities or blue sky
laws applicable to the Company and relating to action or inaction required of
the Company in connection with such registration or qualification under such
state securities or blue sky laws; and the Company will reimburse such
Indemnified Person for any legal or any other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim,
liability, action or proceeding; provided that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage, liability (or
action or proceeding in respect thereof) or expense arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in such registration statement, any such preliminary prospectus,
final prospectus, summary prospectus, amendment or supplement in reliance upon
and in conformity with written information furnished to the Company through an
instrument duly executed by such Indemnified Person, specifically stating that
it is for use in the preparation thereof and, provided further, that the
Company shall not be liable to any Indemnified Person to the extent that any
such loss, claim, damage, liability (or action or proceeding in respect
thereof) or expense arises out of such
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Person's failure to send or give a copy of the final prospectus, as the same
may be then supplemented or amended, to the Person asserting an untrue
statement or alleged untrue statement or omission or alleged omission at or
prior to the written confirmation of the sale of Registrable Securities and/or
the Common Stock to such Person if such statement or omission was corrected in
such final prospectus. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such seller or any such
director, officer, underwriter or controlling person and shall survive the
transfer of such securities by such seller.
(i) Indemnification by the Sellers
The Company may require, as a condition to including any Registrable
Securities in any registration statement filed pursuant to Section 2, that the
Company shall have received an undertaking satisfactory to it from the
prospective sellers of such securities, to indemnify and hold harmless (in the
same manner and to the same extent as set forth in Section 5(a)) the Company,
each director of the Company, each officer of the Company and each other
Person, if any, who controls the Company within the meaning of the Securities
Act, with respect to any statement or alleged statement in or omission or
alleged omission from such registration statement, any preliminary prospectus,
final prospectus or summary prospectus contained therein, or any amendment or
supplement thereto, if such statement or alleged statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company through an instrument duly executed by
such sellers specifically stating that it is for use in the preparation of such
registration statement, preliminary prospectus, final prospectus, summary
prospectus, amendment or supplement, provided that the obligation to indemnify
shall be several, and not joint and several, among such sellers of and the
liability of each such seller shall be in proportion to and limited to the net
amount received by such seller from the sale of Registrable Securities pursuant
to such registration statement. Such indemnity shall remain in full force and
effect, regardless of any investigation made by or on behalf of the Company or
any such director, officer or controlling person and shall survive the transfer
of such securities by such seller.
(j) Notices of Claims, etc.
Promptly after receipt by an indemnified party of notice of the commencement
of any action or proceeding involving a claim referred to in the preceding
subdivisions of this Section 5, such indemnified party will, if a claim in
respect thereof is to be made against an indemnifying party, give written
notice to the latter of the commencement of such action, provided that the
failure of any indemnified party to give notice as provided herein shall not
relieve the indemnifying party of its obligations under the preceding
subdivisions of this Section 5, except to the extent that the indemnifying
party is actually prejudiced by such failure to give notice. In case any such
action is brought against an indemnified party, the indemnifying party shall be
entitled to participate in and to assume the defense thereof, jointly with any
other indemnifying party similarly notified to the extent that it may wish,
with counsel reasonably satisfactory to such indemnified party, and after
notice from the indemnifying party to such indemnified party of its election so
to assume the defense thereof, the indemnifying party shall not be liable for
any legal or other expenses subsequently incurred by the indemnified party in
connection with the defense thereof other than reasonable costs of
investigation, unless in such indemnified party's reasonable judgment a
conflict of interest between such indemnified and indemnifying parties may
exist in respect of such claim (in which event such indemnified party and any
other indemnified party to which such conflict of interest applies shall be
reimbursed for the reasonable expenses incurred in connection with retaining
one separate legal counsel for all such indemnified parties in connection with
any one such action or separate but substantially similar or related actions in
the same jurisdiction arising out of the same general allegations or
circumstances). No indemnifying party shall, without the consent of the
indemnified party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving
by the claimant or plaintiff to such indemnified party of a release from all
liability in respect to such claim or litigation.
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(k) Contribution
If the indemnification provided for in this Agreement shall for any reason
be unavailable or insufficient to an indemnified party under Sections 5(a) or
5(b) hereof in respect of any loss, claim, damage or liability, or any action
in respect thereof, or referred to therein, then each indemnifying party shall,
in lieu of indemnifying such party, contribute to the amount paid or payable by
such indemnified party as a result of such loss, claim, damage or liability, or
action in respect thereof, in such proportion as shall be appropriate to
reflect (i) the relative benefits received by the Company, on the one hand, and
the holders of the Registrable Securities included in the offering, on the
other hand, from the offering of the Registrable Securities and (ii) the
relative fault of the Company, on the one hand, and the holders of the
Registrable Securities included in the offering, on the other hand, with
respect to the statements or omissions which resulted in such loss, claim,
damage or liability, or action in respect thereof, as well as any other
relevant equitable considerations. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a
material fact relates to information supplied by the Company or the holders of
the Registrable Securities, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the holders of the Registrable
Securities agree that it would not be just and equitable if contribution
pursuant to this Section 5 were to be determined by pro rata allocation or by
any other method of allocation which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an indemnified
party as a result of the loss, claim, damage or liability, or action in respect
thereof, referred to in this Section 5 shall be deemed to include, for purposes
of this Section 5, any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
6. Registration Expenses
All customary expenses incident to the Company's performance of or
compliance with the registration provisions of this Agreement, including
without limitation all registration, filing and NASD fees, all fees and
expenses of compliance with securities or blue sky laws, all word processing,
duplicating and printing expenses, messenger and delivery expenses, and fees
and disbursements of counsel for the Company and its independent certified
public accountants, including the expenses of any special audits or "cold
comfort" letters required by or incident to such performance and compliance,
the reasonable fees and disbursements, (all such expenses being herein called
"Registration Expenses"), shall be borne by the Company and, in addition, the
Company shall pay its internal expenses (including, without limitation, all
salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit or quarterly review, the
expense of any liability insurance, and the expenses and fees for listing the
securities to be registered on each securities exchange on which similar
securities issued by the Company are then listed or other expenses for the
preparation of financial statements or other data normally prepared by the
Company in the ordinary course of its business or which the Company would have
incurred in any event.
7. Miscellaneous.
(a) Assignment. This Agreement shall be binding upon and inure to the
benefit and be enforceable by the parties hereto, and with respect to the
Company, its successors and assigns. This Agreement shall be assignable by the
Signatories only to the extent that the Registrable Securities are transferable
pursuant to the Voting and Stock Transfer Restriction Agreement, as in effect
from time to time, executed by the Partners of the Company.
(b) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the state of New York,
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(c) Severability. If any term or other provision of this Agreement is
invalid, illegal, or incapable of being enforced by any rule of law or public
policy, all other provisions of this Agreement shall nevertheless remain in
full force and effect.
(d) Notices. Notices under this Agreement shall be sent to the Company to
the attention of the General Counsel at the address specified in the Stock
Purchase Agreement governing the issuance of the Shares and to the Signatories
to the address shown in the employment records of the Company. Any party may
change its notice address by giving notice to the counterparty. Notices may be
given in writing by overnight delivery service, fax, or e-mail, but notice
given to the Company by e-mail must be sent to the specific e-mail of the then
general counsel of the Company.
(e) Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one instrument.
(f) Additional Signatories. Additional Signatories may be added from time to
time as such persons become holders of Shares.
In witness whereof, the parties have executed this Agreement on the dates
shown opposite their respective signatures.
Date: _________________________ Diamond Technology Partners,
Incorporated
By: ___________________________
Its: __________________________
Signatories:
Date: _________________________ _______________________________
Date: _________________________ _______________________________
Date: _________________________ _______________________________
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ANNEX B
[LETTERHEAD OF MORGAN STANLEY & CO. INCORPORATED]
September 11, 2000
Board of Directors
Diamond Technology Partners Incorporated
875 North Michigan Avenue
Suite 3000
Chicago, Illinois 60611
Members of the Board:
We understand that the shareholders (collectively, the "Sellers") of
Cluster Telecom B.V. (the "Company") and Diamond Technology Partners
Incorporated ("Diamond") propose to enter into a Stock Purchase Agreement
dated September 11, 2000 (the "Agreement"), which provides, among other
things, for the sale (the "Combination") by the Sellers to Diamond of all the
issued and outstanding capital stock of the Company for an aggregate of
$44,000,000 in cash, 6,315,377 shares of Class B common stock, par value
$0.001 per share, of Diamond (the "Common Stock") and up to 7,630,000 options
for Common Stock (the "Options"), subject to certain post-closing adjustments
and based on the formulas set forth in the Agreement (together, the
"Consideration"). The terms and conditions of the Combination are more fully
set forth in the Agreement.
You have asked for our opinion as to whether the Consideration to be paid
by Diamond, pursuant to the Agreement, is fair from a financial point of view
to Diamond.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of Diamond;
(ii) reviewed certain internal financial statements and other financial
and operating data concerning the Company and Diamond prepared by the
managements of the Company and Diamond, respectively;
(iii) reviewed certain financial projections of the Company and Diamond
prepared by the managements of the Company and Diamond;
(iv) discussed the past and current operations and financial condition
and the prospects of the Company with senior executives of the Company;
(v) discussed the past and current operations and financial condition
and the prospects of Diamond, including information relating to certain
strategic, financial and operational benefits anticipated as a result of
the Combination, with senior executives of Diamond;
(vi) reviewed the pro forma impact of the Combination on Diamond's cash
earnings per share and other financial ratios;
(vii) reviewed the reported prices and trading activity for the Class A
Common Stock of Diamond;
(viii) compared the financial performance of the Company and Diamond and
the prices and trading activity of the Class A Common Stock of Diamond with
that of certain other comparable publicly-traded companies and their
securities;
(ix) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
(x) participated in discussions and negotiations among representatives
of the Company and Diamond and their financial and legal advisors;
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(xi) reviewed the Agreement and certain related documents; and
(xii) performed such other analyses and considered such other factors as
we deemed appropriate.
We have assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. With respect to the internal financial projections and other
financial and operating data and discussions relating to strategic, financial,
and operational benefits anticipated from the Combination provided by the
Company and Diamond, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
prospects and future financial performance of the Company and Diamond,
respectively. We have relied upon the assessment by the managements of the
Company and Diamond of their ability to retain key employees of the Company and
Diamond, respectively. We have also relied upon, without independent
verification, the assessment by the managements of the Company and Diamond of:
(i) the strategic, financial, and operational benefits expected to result from
the Combination, (ii) the Company's and Diamond's technologies, products or
services, (iii) the timing and risks associated with the integration of the
Company with Diamond, and (iv) the validity of, and risks associated with the
Company's and Diamond's existing and future technologies, products or services.
We have not made any independent valuation or appraisal of the assets or
liabilities of the technology of the Company or Diamond, nor have we been
furnished with any such appraisals. In addition, we have assumed that the
Combination will be consummated in accordance with the terms of the Agreement.
Our opinion is necessarily based on financial, economic, market and other
conditions as in effect on, and the information made available to us as of, the
date hereof.
We have acted as financial advisor to the Board of Directors of Diamond in
connection with this transaction and will receive a fee for our services. In
the past, Morgan Stanley & Co. Incorporated and its affiliates have provided
financial advisory and financing services for Diamond and have received fees
for the rendering of these services.
It is understood that this letter is for the information of the Board of
Directors of Diamond only and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its
entirety, if required, in any filings made by Diamond in respect of the
transaction with the Securities and Exchange Commission. In addition, Morgan
Stanley & Co. Incorporated expresses no opinion or recommendation as to how
shareholders of Diamond should vote at the shareholders' meeting to be held in
connection with the Combination.
Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the Consideration to be paid by Diamond pursuant to the Agreement
is fair from a financial point of view to Diamond.
Very truly yours,
Morgan Stanley & Co. Incorporated
/s/ William H. Strong
By: _________________________________
William H. Strong
Managing Director
Vice Chairman Investment Banking
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<PAGE>
ANNEX C
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
AUDIT COMMITTEE CHARTER
The primary function of the Diamond Technology Partners Incorporated Audit
Committee of the Board of Directors is to assist the Board in fulfilling its
oversight responsibilities by reviewing the financial information which will be
provided to the shareholders and others, the systems of internal controls which
management and the board of directors have established, and the audit process.
In meeting its responsibilities, the audit committee is expected to:
1. Provide an open avenue of communication between the independent
accountant and the board of directors.
2. Review and update the committee's charter annually.
3. Recommend to the board of directors the independent accountants to be
nominated and review and approve the discharge of the independent
accountants.
4. Confirm and assure the independence of the independent accountant,
including a review of non-audit related services provided by the
independent accountant. Affirm with the auditor that they are
accountable to the Board of Directors and the Audit Committee.
5. Inquire of management and the independent accountant about significant
risks or exposures and assess the steps management has taken to minimize
such risk to the company.
6. Consider, in consultation with management and the independent accountant
the audit scope and plan.
7. Consider and review with the independent accountant:
a) The adequacy of the company's internal controls.
b) Any related significant findings and recommendations of the
independent accountant together with management's responses thereto.
8. Review with management and the independent accountant at the completion
of the annual examination.
a) The company's annual financial statements and related footnotes.
b) The independent accountant's audit of the financial statements and
report thereon.
c) Any significant changes required in the independent accountant's
audit plan.
d) Any serious difficulties or disputes with management encountered
during the course of the audit.
e) Other matters related to the conduct of the audit which are to be
communicated to the committee under generally accepted auditing
standards.
9. Review draft filings with the SEC and other published documents
containing the company's financial statements as appropriate.
10. Review policies and procedures with respect to officers' expense
accounts and perquisites, including their use of corporate assets, and
consider the results of any review of these areas by the independent
accountant.
11. Review legal and regulatory matters that may have material impact on
the financial statements, related company compliance policies, and
programs and reports received from regulators.
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12. Meet with the independent accountant, and management in separate
executive sessions to discuss any matters that the committee or these
groups believe should be discussed privately with the audit committee.
13. Report committee actions to the board of directors with such
recommendations as the committee may deem appropriate.
14. The audit committee shall have the power to conduct or authorize
investigations into any matters within the committee's scope of
responsibilities. The committee shall be empowered to retain
independent counsel, accountants, or others to assist it in the conduct
of any investigation.
15. The committee shall meet at least two times per year or more frequently
as circumstances require. The committee may ask members of management
or others to attend the meeting and provide pertinent information as
necessary.
16. The committee will perform such other functions as assigned by law, the
company's charter or bylaws, or the board of directors.
The membership of the audit committee shall consist of at least three
independent members of the board of directors who shall serve at the pleasure
of the board of directors. Audit committee members and the committee chairman
shall be designated by the full board of directors.
The duties and responsibilities of a member of the audit committee are in
addition to those duties set out for a member of the board of directors.
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<PAGE>
ANNEX D
DIAMONDCLUSTER INTERNATIONAL, INC.
2000 STOCK OPTION PLAN
1. Purpose. The DiamondCluster International, Inc. 2000 Stock Option Plan
(the "Plan") is intended to promote the long-term success of DiamondCluster
International, Inc. (the "Company") and its stockholders by strengthening the
Company's ability to attract and retain highly competent executives and other
selected employees and to provide a means to encourage stock ownership and
proprietary interest in the Company.
2. Term. The Plan shall become effective upon the date (the "Effective
Date") it is approved by the affirmative vote of the holders of a majority of
the securities of the Company present or represented, and entitled to vote at a
meeting of stockholders of the Company and shall terminate at the close of
business on the tenth anniversary of the Effective Date unless terminated
earlier under Section 14. After termination of the Plan, no future awards may
be granted, but previously granted awards shall remain outstanding in
accordance with their applicable terms and conditions and the terms and
conditions of the Plan.
3. Plan Administration. The Company's Management Committee, as constituted
from time to time, or any other committee appointed by the Board (the
"Committee"), shall be responsible for administering the Plan. Except as
otherwise provided in the Plan, the Committee shall have full and exclusive
power to interpret the Plan and to adopt such rules, regulations and guidelines
for carrying out the Plan as it may deem necessary or proper, and such power
shall be executed in the best interests of the Company and in keeping with the
objectives of the Plan. The interpretation and construction of any provision of
the Plan or any option or right granted hereunder and all determinations by the
Committee in each case shall be final, binding and conclusive with respect to
all interested parties.
4. Eligibility. Any employee of the Company shall be eligible to receive one
or more awards under the Plan. Directors of the Company who are not employed by
the Company will be considered "employees" eligible to receive awards under the
Plan, but only for purposes of nonqualified stock options. Consultants of the
Company qualifying as "employees" within the meaning of Form S-8 under the
Securities Act of 1933, as amended (the "Securities Act"), shall also be
eligible to receive awards under the Plan. "Company" includes any entity that
is directly or indirectly controlled by the Company or any entity in which the
Company has a significant equity interest, as determined by the Committee.
5. Shares of Common Stock Subject to the Plan. Subject to the provisions of
Section 6 of the Plan, the aggregate number of shares of Class B Common Stock,
$0.001 par value (and shares of Class A Common Stock into which such Class B
Common Stock may be converted), of the Company ("Stock") which may be
transferred to participants under the Plan shall be 8,500,000 shares. The
aggregate number of shares of Stock that may be granted in the form of
incentive stock options ("ISOs") intended to comply with Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), shall be 8,500,000.
Unless otherwise determined by the Committee, the aggregate number of shares of
Stock that may be covered by awards granted to any single individual under the
Plan shall not exceed 50,000 shares per fiscal year of the Company.
Shares subject to awards under the Plan which expire, terminate, or are
canceled prior to exercise or, in the case of awards granted under Section 8.3,
do not vest, shall thereafter be available for the granting of other awards.
Shares which have been exchanged by a participant as full or partial payment to
the Company in connection with any award under the Plan also shall thereafter
be available for the granting of other awards. In instances where a stock
appreciation right ("SAR") or other award is settled in cash, the shares
covered by such award shall remain available for issuance under the Plan.
Likewise, the payment of cash dividends and dividend equivalents paid in cash
in conjunction with outstanding awards shall not be counted against the shares
available for issuance.
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<PAGE>
Any shares of Stock issued under the Plan may consist in whole or in part of
authorized and unissued shares or of treasury shares, and no fractional shares
shall be issued under the Plan. Cash may be paid in lieu of any fractional
shares in settlements of awards under the Plan.
6. Adjustments. In the event of any stock dividend, stock split, combination
or exchange of shares, merger, consolidation, spin-off, recapitalization or
other distribution (other than normal cash dividends) of Company assets to
stockholders, or any other change affecting shares of Stock or share price,
such proportionate adjustments, if any, as the Committee in its discretion may
deem appropriate to reflect such change shall be made with respect to (1) the
aggregate number of shares of Stock that may be issued under the Plan; (2) each
outstanding award made under the Plan; and (3) the exercise price per share for
any outstanding stock options, SARs or similar awards under the Plan.
7. Fair Market Value. "Fair Market Value," for all purposes of the Plan,
shall mean the average of the closing price of a share of Stock on the NASDAQ
National Market System for the ten trading days immediately preceding the date
of grant.
8. Awards. Except as otherwise provided in this Section 8, the Committee
shall determine the type or types of award(s) to be made to each participant
and the number of shares of Stock subject to each such award, and any other
terms, conditions and limitations applicable to such award. Awards may be
granted singly, in combination or in tandem. Awards also may be made in
combination or in tandem with, in replacement of, as alternatives to or as the
payment form for grants or rights under any other compensation plan or
individual contract or agreement of the Company including those of any acquired
entity. The types of awards that may be granted under the Plan are:
8.1 Stock Options. A stock option is a right to purchase a specified
number of shares of Stock during a specified period. A stock option may be
in the form of an ISO which complies with Section 422 of the Code. The
purchase price per share for each stock option shall be not less than 100%
of Fair Market Value on the date of grant; except that the Committee may
set the purchase price per share for an award not intended to be an ISO at
less than 100% of Fair Market Value on the date of grant. The price at
which shares may be purchased under a stock option shall be paid in full by
the optionee at the time of the exercise in cash or such other method
permitted by the Committee, including (1) tendering shares; (2) authorizing
a third party to sell the shares (or a sufficient portion thereof) acquired
upon exercise of a stock option and assigning the delivery to the Company
of a sufficient amount of the sale proceeds to pay for all the shares
acquired through such exercise; or (3) any combination of the above.
8.2 SARs. A SAR is a right to receive a payment, in cash and/or shares,
equal to the excess of the Fair Market Value of a specified number of
shares of Stock on the date the SAR is exercised over the Fair Market Value
on the date the SAR was granted as set forth in the applicable award
agreement; except that if a SAR is granted retroactively in tandem with or
in substitution for a stock option, the designated Fair Market Value set
forth in the award agreement shall be no lower than the Fair Market Value
of a share for such tandem or replaced stock option.
8.3 Stock Awards. A stock award is a grant made or denominated in shares
or units equivalent in value to shares. All or part of any stock award may
be subject to conditions and restrictions as set forth in the applicable
award agreement, which may be based on continuous service with the Company
or the achievement of performance goals related to profits, profit growth,
profit-related return ratios, cash flow or total stockholder return, where
such goals may be stated in absolute terms or relative to comparable
companies.
9. Dividends and Dividend Equivalents. Any awards under the Plan may earn
dividends or dividend equivalents as set forth in the applicable award
agreement. Such dividends or dividend equivalents may be paid currently or may
be credited to a participant's account. Any crediting of dividends or dividend
equivalents may be subject to such restrictions and conditions may be
established in the applicable award agreement, including reinvestment in
additional shares or share equivalents.
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<PAGE>
10. Deferrals and Settlements. Payment of awards may be in the form of cash,
stock, other awards or combinations thereof as shall be determined at the time
of grant, and with such restrictions as may be imposed in the award agreement.
The Committee also may require or permit participants to elect to defer the
issuance of shares or the settlement of awards in cash under such rules and
procedures as it may establish under the Plan. It also may provide that
deferred settlements include the payment or crediting of interest on the
deferral amounts, or the payment or crediting of dividend equivalents where the
deferral amounts are denominated in shares.
11. Transferability and Exercisability. Awards granted under the Plan shall
not be transferable or assignable other than (1) by will or the laws of descent
and distribution; (2) by gift or other transfer of an award to any trust or
estate in which the original award recipient or such recipient's spouse or
other immediate relative has a substantial beneficial interest, or to a spouse
or other immediate relative, provided that any such transfer is permitted by
Rule 16b-3 under the Securities Exchange Act of 1934, as amended, as in effect
when such transfer occurs and the Board does not rescind this provision prior
to such transfer; or (3) pursuant to a domestic relations order (as defined by
the Code). However, any award so transferred shall continue to be subject to
all the terms and conditions contained in the instrument evidencing such award.
12. Award Agreements. Awards under the Plan shall be evidenced by agreements
as approved by the Committee that set forth the terms, conditions and
limitations for each award, which may include the term of an award (except that
in no event shall the term of any ISO exceed a period of ten years from the
date of its grant), the provisions applicable in the event the participant's
employment terminates, and the Committee's authority to amend, modify, suspend,
cancel or rescind any award. The Committee need not require the execution of
any such agreement, in which case acceptance of the award by the participant
shall constitute agreement to the terms of the award.
13. Acceleration and Settlement of Awards. The Committee shall have the
discretion, exercisable at any time before a sale, merger, consolidation,
reorganization, liquidation or change of control of the Company, as defined by
the Committee, to provide for the acceleration of vesting and for settlement,
including cash payment of an award granted under the Plan, upon or immediately
before the effectiveness of such event. However, the granting of awards under
the Plan shall in no way affect the right of the Company to adjust, reclassify,
reorganize or otherwise change its capital or business structure, or to merge,
consolidate, dissolve, liquidate, sell or transfer all or any portion of its
businesses or assets.
14. Plan Amendment. The Plan may be amended by the Committee as it deems
necessary or appropriate better to achieve the purposes of the Plan, except
that no such amendment shall be made without the approval of the Company's
stockholders that would increase the number of shares available for issuance in
accordance with Sections 5 and 6 of the Plan. The Board may suspend the Plan or
terminate the Plan at any time; provided, that no such action shall adversely
affect any outstanding benefit. Any shares authorized under Section 5 (or any
amendment thereof) with respect to which no award is granted prior to
termination of the Plan, or with respect to which an award is terminated,
forfeited or canceled after termination of the Plan, shall automatically be
transferred to any subsequent stock incentive plan or similar plan for
employees of the Company.
15. Tax Withholding. The Company shall have the right to deduct from any
settlement of an award made under the Plan, including the delivery or vesting
of shares, a sufficient amount to cover withholding of any taxes required by
law, or to take such other action as may be necessary to satisfy any such
withholding obligations. The Committee may, in its discretion and subject to
such rules as it may adopt, permit participants to use shares to satisfy
required tax withholding and such shares shall be valued at the Fair Market
Value as of the settlement date of the applicable award.
16. Registration of Shares. Notwithstanding any other provision of the Plan,
the Company shall not be obligated to offer or sell any shares unless such
shares are at that time effectively registered or exempt from registration
under the Securities Act and the offer and sale of such shares are otherwise in
compliance with all applicable federal and state securities laws and the
requirements of any stock exchange or similar agency on which the Company's
securities may then be listed or quoted. The Company shall have no obligation
to register
D-3
<PAGE>
the shares under the federal securities laws or take any other steps as may be
necessary to enable the shares to be offered and sold under federal or other
securities laws. Prior to receiving shares a Plan participant may be required
to furnish representations or undertakings deemed appropriate by the Company to
enable the offer and sale of the shares or subsequent transfers of any interest
in such shares to comply with the Securities Act and other applicable
securities laws. Certificates evidencing shares shall bear any legend required
by, or useful for the purposes of compliance with, applicable securities laws,
this Plan or award agreements.
17. Other Benefit and Compensation Programs. Unless otherwise specifically
determined by the Committee, settlements of awards received by participants
under the Plan shall not be deemed a part of a participant's regular, recurring
compensation for purposes of calculating payments or benefits from any Company
benefit plan or severance program. Further, the Company may adopt other
compensation programs, plans or arrangements as it deems appropriate or
necessary.
18. Unfunded Plan. Unless otherwise determined by the Committee, the Plan
shall be unfunded and shall not create (or be construed to create) a trust or a
separate fund or funds. The Plan shall not establish any fiduciary relationship
between the Company and any participant or other person. To the extent any
person holds any rights by virtue of an award granted under the Plan, such
rights shall be no greater than the rights of an unsecured general creditor of
the Company.
19. Use of Proceeds. The cash proceeds received by the Company from the
issuance of shares pursuant to awards under the Plan shall constitute general
funds of the Company.
20. Regulatory Approvals. The implementation of the Plan, the granting of
any award under the Plan, and the issuance of shares upon the exercise or
settlement of any award shall be subject to the Company's procurement of all
approvals and permits required by regulatory authorities having jurisdiction
over the Plan, the awards granted under it or the shares issued pursuant to it.
21. Employment Rights. The Plan does not constitute a contract of employment
and participation in the Plan will not give a participant the right to continue
in the employ of the Company on a full-time, part-time or any other basis.
Participation in the Plan will not give any participant any right or claim to
any benefit under the Plan, unless such right or claim has specifically accrued
under the terms of the Plan.
22. Governing Law. The validity, construction and effect of the Plan and any
actions taken or relating to the Plan shall be determined in accordance with
the laws of the State of Illinois and applicable federal law.
23. Successors and Assigns. The Plan shall be binding on all successors and
assigns of a participant, including, without limitation, the estate of such
participant and the executor, administrator or trustee of such estate, or any
receiver or trustee in bankruptcy or representative of the participant's
creditors.
D-4
<PAGE>
ANNEX E
DIAMOND TECHNOLOGY PARTNERS INCORPORATED
AMENDED AND RESTATED 1998 EQUITY INCENTIVE PLAN
1. Purpose. The Diamond Technology Partners Incorporated 1998 Equity
Incentive Plan (the "Plan") is intended to promote the long-term success of
Diamond Technology Partners Incorporated (the "Company") and its stockholders
by strengthening the Company's ability to attract and retain highly competent
executives and other selected employees and to provide a means to encourage
stock ownership and proprietary interest in the Company.
2. Term. The Plan shall become effective upon the date (the "Effective
Date") it is approved by the Board of Directors of the Company (the "Board"),
subject to its ratification and approval by the affirmative vote of the holders
of a majority of the securities of the Company present or represented, and
entitled to vote at a meeting of stockholders of the Company, and shall
terminate at the close of business on the tenth anniversary of the Effective
Date unless terminated earlier under Section 14. Certain awards made with the
approval of the Company's Management Committee in March and April 1998 (the
"March/April Awards") prior to the Effective Date were intended to be pursuant
to the Plan and are therefore included under the Plan. After termination of the
Plan, no future awards may be granted, but previously granted awards shall
remain outstanding in accordance with their applicable terms and conditions and
the terms and conditions of the Plan.
3. Plan Administration. The Company's Management Committee, as constituted
from time to time, or any other committee appointed by the Board (the
"Committee") shall be responsible for administering the Plan. Except as
otherwise provided in the Plan, the Committee shall have full and exclusive
power to interpret the Plan and to adopt such rules, regulations and guidelines
for carrying out the Plan as it may deem necessary or proper, and such power
shall be executed in the best interests of the Company and in keeping with the
objectives of the Plan. The interpretation and construction of any provision of
the Plan or any option or right granted hereunder and all determinations by the
Committee in each case shall be final, binding and conclusive with respect to
all interested parties.
4. Eligibility. Any employee of the Company shall be eligible to receive one
or more awards under the Plan. Directors of the Company who are not employed by
the Company will be considered "employees" eligible to receive awards under the
Plan, but only for purposes of nonqualified stock options. Consultants of the
Company qualifying as "employees" within the meaning of Form S-8 under the
Securities Act of 1933, as amended (the "Securities Act"), shall also be
eligible to receive awards under the Plan. "Company" includes any entity that
is directly or indirectly controlled by the Company or any entity in which the
Company has a significant equity interest, as determined by the Committee.
5. Shares of Common Stock Subject to the Plan. Subject to the provisions of
Section 6 of the Plan, the aggregate number of shares of Class B Common Stock,
$0.001 par value (and shares of Class A Common Stock into which such Class B
Common Stock may be converted), of the Company ("Stock") which may be
transferred to participants under the Plan shall be:
(i) 13,000,000 shares (including the March/April Awards); plus
(ii) any shares that are represented by awards or portions of awards
under the Diamond Technology Partners Incorporated 1994 Stock Option Plan,
as amended (the "Prior Plan") that are forfeited, expired, cancelled or
settled without the issuance of shares; plus
(iii) any shares that are represented by options or portions of options
not awarded under the Prior Plan but included in clause (i) of Section 3 of
the Prior Plan that are forfeited, expired, cancelled or settled without
the issuance of shares; plus
(iv) any shares issued and included in clause (i) of Section 3 of the
Prior Plan that are repurchased by the Company.
E-1
<PAGE>
The aggregate number of shares of Stock that may be covered by awards
granted to any single individual under the Plan shall not exceed 150,000 shares
per fiscal year of the Company. The aggregate number of shares of Stock that
may be granted in the form of incentive stock options ("ISOs") intended to
comply with Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code") shall be 13,000,000 shares.
Shares subject to awards under the Plan which expire, terminate, or are
canceled prior to exercise or, in the case of awards granted under Section 8.3,
do not vest, shall thereafter be available for the granting of other awards.
Shares which have been exchanged by a participant as full or partial payment to
the Company in connection with any award under the Plan also shall thereafter
be available for the granting of other awards. In instances where a stock
appreciation right ("SAR") or other award is settled in cash, the shares
covered by such award shall remain available for issuance under the Plan.
Likewise, the payment of cash dividends and dividend equivalents paid in cash
in conjunction with outstanding awards shall not be counted against the shares
available for issuance. Any shares that are issued by the Company, and any
awards that are granted through the assumption of, or in substitution for,
outstanding awards previously granted by an acquired entity shall not be
counted against the shares available for issuance under the Plan.
Any shares of Stock issued under the Plan may consist in whole or in part of
authorized and unissued shares or of treasury shares, and no fractional shares
shall be issued under the Plan. Cash may be paid in lieu of any fractional
shares in settlements of awards under the Plan.
6. Adjustments. In the event of any stock dividend, stock split, combination
or exchange of shares, merger, consolidation, spin-off, recapitalization or
other distribution (other than normal cash dividends) of Company assets to
stockholders, or any other change affecting shares of Stock or share price,
such proportionate adjustments, if any, as the Committee in its discretion may
deem appropriate to reflect such change shall be made with respect to (1) the
aggregate number of shares of Stock that may be issued under the Plan; (2) each
outstanding award made under the Plan; and (3) the exercise price per share for
any outstanding stock options, SARs or similar awards under the Plan.
7. Fair Market Value. "Fair Market Value," for all purposes of the Plan,
shall mean the average of the closing price of a share of Stock on the NASDAQ
National Market System for the ten trading days immediately preceding the date
of grant.
8. Awards. Except as otherwise provided in this Section 8, the Committee
shall determine the type or types of award(s) to be made to each participant
and the number of shares of Stock subject to each such award, and any other
terms, conditions and limitations applicable to such award. Awards may be
granted singly, in combination or in tandem. Awards also may be made in
combination or in tandem with, in replacement of, as alternatives to or as the
payment form for grants or rights under any other compensation plan or
individual contract or agreement of the Company including those of any acquired
entity. The types of awards that may be granted under the Plan are:
8.1 Stock Options. A stock option is a right to purchase a specified
number of shares of Stock during a specified period. The purchase price per
share for each stock option shall be not less than 100% of Fair Market
Value on the date of grant, except if a stock option is granted
retroactively in tandem with or as a substitution for a SAR, the exercise
price may be no lower than the Fair Market Value of a share as set forth in
award agreements for such tandem or replaced SAR. A stock option may be in
the form of an ISO which complies with Section 422 of the Code. The price
at which shares may be purchased under a stock option shall be paid in full
by the optionee at the time of the exercise in cash or such other method
permitted by the Committee, including (1) tendering shares; (2) authorizing
a third party to sell the shares (or a sufficient portion thereof) acquired
upon exercise of a stock option and assigning the delivery to the Company
of a sufficient amount of the sale proceeds to pay for all the shares
acquired through such exercise; or (3) any combination of the above.
8.2 SARs. A SAR is a right to receive a payment, in cash and/or shares,
equal to the excess of the Fair Market Value of a specified number of
shares of Stock on the date the SAR is exercised over the Fair Market Value
on the date the SAR was granted as set forth in the applicable award
agreement; except that
E-2
<PAGE>
if a SAR is granted retroactively in tandem with or in substitution for a
stock option, the designated Fair Market Value set forth in the award
agreement shall be no lower than the Fair Market Value of a share for such
tandem or replaced stock option.
8.3 Stock Awards. A stock award is a grant made or denominated in shares
or units equivalent in value to shares. All or part of any stock award may
be subject to conditions and restrictions as set forth in the applicable
award agreement, which may be based on continuous service with the Company
or the achievement of performance goals related to profits, profit growth,
profit-related return ratios, cash flow or total stockholder return, where
such goals may be stated in absolute terms or relative to comparable
companies.
9. Dividends and Dividend Equivalents. Any awards under the Plan may earn
dividends or dividend equivalents as set forth in the applicable award
agreement. Such dividends or dividend equivalents may be paid currently or may
be credited to a participant's account. Any crediting of dividends or dividend
equivalents may be subject to such restrictions and conditions may be
established in the applicable award agreement, including reinvestment in
additional shares or share equivalents.
10. Deferrals and Settlements. Payment of awards may be in the form of cash,
stock, other awards or combinations thereof as shall be determined at the time
of grant, and with such restrictions as may be imposed in the award agreement.
The Committee also may require or permit participants to elect to defer the
issuance of shares or the settlement of awards in cash under such rules and
procedures as it may establish under the Plan. It also may provide that
deferred settlements include the payment or crediting of interest on the
deferral amounts, or the payment or crediting of dividend equivalents where the
deferral amounts are denominated in shares.
11. Transferability and Exercisability. Awards granted under the Plan shall
not be transferable or assignable other than (1) by will or the laws of descent
and distribution; (2) by gift or other transfer of an award to any trust or
estate in which the original award recipient or such recipient's spouse or
other immediate relative has a substantial beneficial interest, or to a spouse
or other immediate relative, provided that any such transfer is permitted by
Rule 16b-3 under the Exchange Act as in effect when such transfer occurs and
the Board does not rescind this provision prior to such transfer; or (3)
pursuant to a domestic relations order (as defined by the Code). However, any
award so transferred shall continue to be subject to all the terms and
conditions contained in the instrument evidencing such award.
12. Award Agreements. Awards under the Plan shall be evidenced by agreements
as approved by the Committee that set forth the terms, conditions and
limitations for each award, which may include the term of an award (except that
in no event shall the term of any ISO exceed a period of ten years from the
date of its grant), the provisions applicable in the event the participant's
employment terminates, and the Committee's authority to amend, modify, suspend,
cancel or rescind any award. The Committee need not require the execution of
any such agreement, in which case acceptance of the award by the participant
shall constitute agreement to the terms of the award.
13. Acceleration and Settlement of Awards. The Committee shall have the
discretion, exercisable at any time before a sale, merger, consolidation,
reorganization, liquidation or change of control of the Company, as defined by
the Committee, to provide for the acceleration of vesting and for settlement,
including cash payment of an award granted under the Plan, upon or immediately
before the effectiveness of such event. However, the granting of awards under
the Plan shall in no way affect the right of the Company to adjust, reclassify,
reorganize or otherwise change its capital or business structure, or to merge,
consolidate, dissolve, liquidate, sell or transfer all or any portion of its
businesses or assets.
14. Plan Amendment. The Plan may be amended by the Committee as it deems
necessary or appropriate to better achieve the purposes of the Plan, except
that no such amendment shall be made without the approval of the Company's
stockholders which would increase the number of shares available for issuance
in accordance with Sections 5 and 6 of the Plan. The Board may suspend the Plan
or terminate the Plan at any time; provided, that no such action shall
adversely affect any outstanding benefit. Any shares authorized under Section 5
(or
E-3
<PAGE>
any amendment thereof) with respect to which no Award is granted prior to
termination of the Plan, or with respect to which an Award is terminated,
forfeited or canceled after termination of the Plan, shall automatically be
transferred to any subsequent stock incentive plan or similar plan for
employees of the Company.
15. Tax Withholding. The Company shall have the right to deduct from any
settlement of an award made under the Plan, including the delivery or vesting
of shares, a sufficient amount to cover withholding of any federal, state or
local taxes required by law, or to take such other action as may be necessary
to satisfy any such withholding obligations. The Committee may, in its
discretion and subject to such rules as it may adopt, permit participants to
use shares to satisfy required tax withholding and such shares shall be valued
at the Fair Market Value as of the settlement date of the applicable award.
16. Registration of Shares. Notwithstanding any other provision of the Plan,
the Company shall not be obligated to offer or sell any shares unless such
shares are at that time effectively registered or exempt from registration
under the Securities Act of 1933, as amended (the "Securities Act") and the
offer and sale of such shares are otherwise in compliance with all applicable
federal and state securities laws and the requirements of any stock exchange or
similar agency on which the Company's securities may then be listed or quoted.
The Company shall have no obligation to register the shares under the federal
securities laws or take any other steps as may be necessary to enable the
shares to be offered and sold under federal or other securities laws. Prior to
receiving shares a Plan participant may be required to furnish representations
or undertakings deemed appropriate by the Company to enable the offer and sale
of the shares or subsequent transfers of any interest in such shares to comply
with the Securities Act and other applicable securities laws. Certificates
evidencing shares shall bear any legend required by, or useful for the purposes
of compliance with, applicable securities laws, this Plan or award agreements.
17. Other Benefit and Compensation Programs. Unless otherwise specifically
determined by the Committee, settlements of awards received by participants
under the Plan shall not be deemed a part of a participant's regular, recurring
compensation for purposes of calculating payments or benefits from any Company
benefit plan or severance program. Further, the Company may adopt other
compensation programs, plans or arrangements as it deems appropriate or
necessary.
18. Unfunded Plan. Unless otherwise determined by the Committee, the Plan
shall be unfunded and shall not create (or be construed to create) a trust or a
separate fund or funds. The Plan shall not establish any fiduciary relationship
between the Company and any participant or other person. To the extent any
person holds any rights by virtue of an award granted under the Plan, such
rights shall be no greater than the rights of an unsecured general creditor of
the Company.
19. Use of Proceeds. The cash proceeds received by the Company from the
issuance of shares pursuant to awards under the Plan shall constitute general
funds of the Company.
20. Regulatory Approvals. The implementation of the Plan, the granting of
any award under the Plan, and the issuance of shares upon the exercise or
settlement of any award shall be subject to the Company's procurement of all
approvals and permits required by regulatory authorities having jurisdiction
over the Plan, the awards granted under it or the shares issued pursuant to it.
21. Employment Rights. The Plan does not constitute a contract of employment
and participation in the Plan will not give a participant the right to continue
in the employ of the Company on a full-time, part-time or any other basis.
Participation in the Plan will not give any participant any right or claim to
any benefit under the Plan, unless such right or claim has specifically accrued
under the terms of the Plan.
22. Governing Law. The validity, construction and effect of the Plan and any
actions taken or relating to the Plan shall be determined in accordance with
the laws of the State of Illinois and applicable federal law.
23. Successors and Assigns. The Plan shall be binding on all successors and
assigns of a participant, including, without limitation, the estate of such
participant and the executor, administrator or trustee of such estate, or any
receiver or trustee in bankruptcy or representative of the participant's
creditors.
E-4
<PAGE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
The Registrant's by-laws require the Registrant to indemnify any person who
was or is a party or is threatened to be made a party to any threatened,
pending or completed proceeding by reason of the fact that he or she is or was
a director or officer of the Registrant or is or was serving at the request of
the Registrant as a director, officer, employee, fiduciary or agent of another
corporation, trust or other enterprise against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by them in connection with such proceeding if they acted in good faith
and in a manner they reasonably believed to be in, or not opposed to, the best
interests of the Registrant, and, with respect to any such criminal proceeding,
had no reasonable cause to believe their conduct was unlawful. Such
indemnification as to expenses is mandatory to the extent the individual is
successful on the merits of the matter. Delaware law permits the Registrant to
provide similar indemnification to employees and agents who are not directors
or officers. The determination of whether an individual meets the applicable
standard of conduct may be made by the disinterested directors, independent
legal counsel or the stockholders. Delaware law also permits indemnification in
connection with a proceeding brought by or in the right of the Registrant to
procure a judgment in its favor. Insofar as indemnification for liabilities
arising under the Securities Act of 1933, as amended (the "Act") may be
permitted to directors, officers, or persons controlling the Registrant
pursuant to the foregoing provisions, the Registrant has been informed that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in that Act and is therefore unenforceable.
The Registrant maintains a directors and officers liability insurance policy.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
2.1 Stock Purchase Agreement, dated as of September 11, 2000, by
and among Diamond Technology Partners Incorporated
("Diamond"), and the other parties named therein (incorporated
by reference to Annex A to Diamond's Registration Statement on
Form S-4 of which this proxy statement/prospectus is a part).
3.1(a) Restated Certificate of Incorporation of Diamond (incorporated
by reference to Exhibit 3.1 to Diamond's Registration
Statement on Form S-1 (File No. 333-17785)).
*3.1(b) Form of Certificate of Amendment to the Restated Certificate
of Incorporation of Diamond.
*5.1 Opinion of Winston & Strawn.
10.1 DiamondCluster 2000 Stock Option Plan (incorporated by
reference to Annex D to Diamond's Registration Statement on
Form S-4 of which this proxy statement/prospectus is a part).
10.2 Amended and Restated 1998 Equity Incentive Plan of Diamond
(incorporated by reference to Annex E to Diamond's
Registration Statement on Form S-4 of which this proxy
statement/prospectus is a part).
*23.1 Consent of Winston & Strawn (included in Exhibit 5.1 hereto).
*23.2 Consent of KPMG LLP.
*23.3 Consent of Arthur Andersen.
*23.4 Consent of Bouwer & Officier Accountants.
+24.1 Powers of Attorney (included on signature page hereto).
99.1 Consent of Morgan Stanley & Co. Incorporated (included in
Annex B to Diamond's Registration Statement on Form S-4 of
which this proxy statement/prospectus is a part).
</TABLE>
--------
+Filed previously.
*Filed herewith.
II-1
<PAGE>
(b) Financial Statement Schedules.
Not applicable.
(c) Reports, Opinions, or Appraisals.
The opinion of Morgan Stanley & Co. Incorporated, Diamond's financial
advisor, is included as Annex B to the proxy statement/prospectus contained in
this registration statement.
Item 22. Undertakings
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Act, each filing of the Registrant's annual
report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange
Act of 1934 (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934)
that is incorporated by reference in the Registration Statement shall be deemed
to be a new registration statement relating to the securities offered therein,
and this offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions described under Item 21 above, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes as follows:
(1) Prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of the Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the Registrant undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
(2) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to
meet the requirements of section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the Registration Statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such post-
effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be a part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and this offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-2
<PAGE>
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 above, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the Registration Statement through the date
of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Act, the Registrant certifies that it
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chicago, State of
Illinois, on November 6, 2000.
Diamond Technology Partners
Incorporated
/s/ Melvyn E. Bergstein
By: _________________________________
Name: Melvyn E. Bergstein
Title:Chairman and Chief
Executive Officer
Pursuant to the requirements of the Act, this registration statement has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman and Chief Executive Officer November 6, 2000
____________________________________ (Principal Executive Officer)
Melvyn E. Bergstein
* Chief Financial Officer and Treasurer November 6, 2000
____________________________________ (Principal Financial and Accounting
Karl E. Bupp Officer)
* Vice Chairman, Secretary and Director November 6, 2000
____________________________________
Michael E. Mikolajczyk
* President and Director November 6, 2000
____________________________________
Adam J. Gutstein
* Vice Chairman and Director November 6, 2000
____________________________________
John J. Sviokla
* Director November 6, 2000
____________________________________
Edward R. Anderson
* Director November 6, 2000
____________________________________
Donald R. Caldwell
* Director November 6, 2000
____________________________________
Mark L. Gordon
* Director November 6, 2000
____________________________________
Alan C. Kay
* Director November 6, 2000
____________________________________
John D. Loewenberg
* Director November 6, 2000
____________________________________
Christopher J. Moffitt
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C> <C>
* Director November 6, 2000
____________________________________
Arnold R. Weber
</TABLE>
/s/ Michael E. Mikolajczyk
*By: ___________________________
Michael E. Mikolajczyk
as attorney in fact
Michael E. Mikolajczyk was appointed the lawful attorney-in-fact with power
and authority to execute this registration statement on behalf of the officers
and directors named above pursuant to the power of attorney incorporated into
the signature pages at the time of the initial filing of this registration
statement.
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
2.1 Stock Purchase Agreement, dated as of September 11, 2000, by and
among Diamond Technology Partners Incorporated ("Diamond"), and the
other parties named therein (incorporated by reference to Annex A to
Diamond's Registration Statement on Form S-4 of which this proxy
statement/prospectus is a part).
3.1(a) Restated Certificate of Incorporation of Diamond (incorporated by
reference to Exhibit 3.1 to Diamond's Registration Statement on Form
S-1 (File No. 333-17785)).
*3.1(b) Form of Certificate of Amendment to the Restated Certificate of
Incorporation of Diamond.
*5.1 Opinion of Winston & Strawn.
10.1 DiamondCluster 2000 Stock Option Plan (incorporated by reference to
Annex D to Diamond's Registration Statement on Form S-4 of which
this proxy statement/prospectus is a part).
10.2 Amended and Restated 1998 Equity Incentive Plan of Diamond
(incorporated by reference to Annex E to Diamond's Registration
Statement on Form S-4 of which this proxy statement/prospectus is a
part).
*23.1 Consent of Winston & Strawn (included in Exhibit 5.1 hereto).
*23.2 Consent of KPMG LLP.
*23.3 Consent of Arthur Andersen.
*23.4 Consent of Bouwer & Officier Accountants.
+24.1 Powers of Attorney (included on signature page hereto).
99.1 Consent of Morgan Stanley & Co. Incorporated (included in Annex B to
Diamond's Registration Statement on Form S-4 of which this proxy
statement/prospectus is a part).
</TABLE>
--------
+Filed previously.
*Filed herewith.
