<PAGE>
EXHIBIT 99.1
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
<PAGE>
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.
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 $20,855,000. 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 our
stockholders when compared to their ownership prior to the business
combination. Based upon the estimated capitalization of Diamond as of August
31, 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 7,580,000 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 six months ended June 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
<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 three months of fiscal
2001, Diamond had two clients which individually accounted for 8% and 7% of
our net revenues. In the three months ended June 30, 2000, Cluster had five
clients that in the aggregate accounted for approximately 56% 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.
<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.
<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.
<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 30,801,558 shares
of outstanding common stock.
<PAGE>
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.
