-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OEh/h7Wp8oxR3HBU2rcNY76k00UZVfTZvRrYnHUXzYrGtX/WzYyByHIuUduZVwgB 6jDlSRYlT1ESxpaPruR55Q== 0000950116-00-001048.txt : 20000503 0000950116-00-001048.hdr.sgml : 20000503 ACCESSION NUMBER: 0000950116-00-001048 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 20 FILED AS OF DATE: 20000501 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEKINSIGHT COM INC CENTRAL INDEX KEY: 0000879465 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 954228470 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-36044 FILM NUMBER: 616211 BUSINESS ADDRESS: STREET 1: 5 HANOVER SQUARE STREET 2: SUITE 101 CITY: NEW YORK STATE: NY ZIP: 10004 BUSINESS PHONE: 2122718511 MAIL ADDRESS: STREET 1: 5 HANOVER SQUARE STREET 2: SUITE 101 CITY: NEW YORK STATE: NY ZIP: 10004 FORMER COMPANY: FORMER CONFORMED NAME: TADEO HOLDINGS INC DATE OF NAME CHANGE: 19980212 FORMER COMPANY: FORMER CONFORMED NAME: UNIVERSAL SELF CARE INC DATE OF NAME CHANGE: 19950808 S-4 1 As filed with the U.S. Securities and Exchange Commission on May 1, 2000 Registration No. 333-_____ ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------- FORM S-4 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 ------------------------- TEKINSIGHT.COM, INC. (Exact name of registrant as specified in its charter) Delaware 7372 95-4228470 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification No.) 5 Hanover Square, 24th Floor New York, New York 10004 (212) 271-8550 (Address, including zip code and telephone number, including area code of registrant's principal executive offices) ------------------------- Steven J. Ross President and Chief Executive Officer TekInsight.Com, Inc. 5 Hanover Square, 24th Floor New York, New York 10004 (212) 271-8550 (Name, address, including zip code and telephone number, including area code, of agent for service) ------------------------- Copies to: PETER W. ROTHBERG ROBERT J. DIEHL, JR. WILLIAM W. BARKER Bodman, Longley & Dahling LLP Nixon Peabody LLP 100 Renaissance Center, 34th Floor 437 Madison Avenue, 25th Floor Detroit, Michigan 48243 New York, New York 10022 Telephone: (313) 259-7777 Telephone: (212) 940-3000 Facsimile: (313) 393-7579 Facsimile: (212) 940-3111 www.bodmanlongley.com www.nixonpeabody.com Approximate date of commencement of proposed sale to public: As soon as practicable after this registration statement becomes effective. 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, please 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(c) 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: [ ]
CALCULATION OF REGISTRATION FEE ======================================================================================================================= Title of Each Class of Securities to Be Registered Amount to Be Registered(1) Amount of Registration Fee - ----------------------------------------------------------------------------------------------------------------------- Series A convertible preferred stock, $0.0001 par value $18,000,000 $4,752 - ----------------------------------------------------------------------------------------------------------------------- Common stock underlying Series A, $0.0001 par value $18,000,000 $0(2) - -----------------------------------------------------------------------------------------------------------------------
(1) Estimated pursuant to Rule 457(o) under the Securities Act solely for the purpose of calculating the registration fee. (2) No filing fee is due pursuant to Rule 457(i.) The registrant hereby amends this registration statement on such date or dates 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 of 1933 or until this registration statement shall become effective on such date as the Commission, acting pursuant to said section 8(a), may determine. SUBJECT TO COMPLETION-APRIL __, 2000 [LOGO OF DATA SYSTEMS] [LOGO OF TEKINSIGHT] Dear Data Systems Shareholder: We are pleased to send you this proxy statement/prospectus for a special meeting of shareholders of Data Systems Network Corporation to be held on June 28, 2000, at 10 a.m. local time, at our headquarters located at 34705 W. 12 Mile Road, Suite 300, Farmington Hills, Michigan. At the special meeting, you will be asked to approve the proposed merger of Data Systems with and into TekInsight Services, Inc., a wholly-owned subsidiary of TekInsight. If the merger is approved, you will exchange your Data Systems common stock for a new class of TekInsight Series A convertible preferred stock that will have an aggregate dollar value of between $12.5 million and $18 million, depending on the average market value of TekInsight common stock as quoted on the Nasdaq SmallCap Market for the 10 consecutive trading days immediately prior to the closing date of the merger. We expect the closing date will be one to two days after the special meeting. Because the exact price will be determined after the meeting date, we cannot tell you today, and you will not know when you vote, what the exact value of your Series A preferred stock will be. However, if the closing of the merger were [April 26], the average market value over the past 10 days would be $[2.92], the aggregate merger consideration would be [12.5 million], each share of Series A preferred stock you receive would be valued at $[3.375] per share, and you would receive [0.774] shares of Series A preferred stock for every share of Data Systems common stock you own. You may call 1-800-___ for a daily update on this information. The proposed merger was negotiated on an arms' length basis. Although not required, the board of directors of each of Data Systems and TekInsight believed it would be helpful to engage its own independent financial advisor and obtain an opinion regarding the fairness of the merger consideration from a financial perspective. Data Systems engaged Valuation Counselors Group, Inc. and TekInsight engaged Valuemetrics, Inc. as their independent financial advisors. Valuation Counselors delivered their opinion to us, and Valuemetrics delivered their opinion to the board of directors of TekInsight, that the merger consideration is fair from a financial perspective. Your board of directors unanimously recommends that you vote "FOR" the merger. Shareholders of Data Systems have appraisal rights under Michigan law, which are explained in detail beginning on page __ of this proxy statement/prospectus. Whether or not you plan to attend the special meeting, please complete the enclosed white proxy card, sign it, and return it to us so that your vote will be counted. Not returning the enclosed white proxy card and not voting at the meeting will have the same effect as voting against the merger. Your proxy can be revoked either by attending the special meeting and voting in person or by sending us a properly executed later-dated proxy card. An investment in TekInsight involves material risks. Please carefully read "Risk Factors" beginning on page __ of this proxy statement/prospectus. Sincerely, Michael W. Grieves President and Chief Executive Officer Data Systems Network Corporation April __, 2000 Farmington Hills, Michigan Neither the Securities and Exchange Commission nor any state securities commission has approved the securities being offered and issued in the merger or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. This proxy statement/prospectus is dated April __, 2000, and is first being mailed to shareholders on April __, 2000. DATA SYSTEMS NETWORK CORPORATION NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON JUNE 28, 2000 --------------------- To the Shareholders of Data Systems: We will hold a special meeting of the shareholders of Data Systems on June 28, 2000, at 10 a.m., local time, at our headquarters located at 34705 W. 12 Mile Road, Suite 300, Farmington Hills, Michigan to consider and vote upon a proposal to adopt the agreement and plan of merger among TekInsight.Com, Inc., its wholly-owned subsidiary, TekInsight Services, Inc., and Data Systems. Under the merger agreement, shareholders of Data Systems will receive their proportionate share of TekInsight Series A convertible preferred stock that will have an aggregate dollar value of between $12.5 million and $18 million depending on the average market value of TekInsight's common stock as quoted on the Nasdaq Small Cap Market for the 10 consecutive trading days immediately prior to the closing date of the merger. Accordingly, based upon 5,542,448 shares of Data Systems common stock outstanding as of [April 26], if the merger is approved, the Series A preferred stock received would be valued at $[3.375] per share. You would receive [0.774] shares of Series A preferred stock for every share of Data Systems common stock you own. Cash will be paid for fractional shares. We do not expect to transact any other business at the special meeting. The record date for the special meeting is May 19, 2000. Only shareholders of Data Systems of record at the close of business on the record date are entitled to notice of, and to vote at, the special meeting and any adjournments or postponements. We cannot complete the merger unless the agreement and plan of merger is adopted by a majority of the outstanding shares held by shareholders of Data Systems. The board of directors of Data Systems unanimously recommends that you vote "FOR" the merger proposal. Shareholders of Data Systems have appraisal rights under Michigan law, which are explained in detail beginning on page ___ of this proxy statement/prospectus. You are cordially invited to attend the special meeting. Whether or not you plan to attend the special meeting, please complete the enclosed white proxy card, sign it and return it to us so that your vote will be counted. Not returning the enclosed white proxy card and not voting at the meeting will have the same effect as voting against the merger. Your proxy can be revoked either by attending the special meeting and voting in person or by sending a properly executed later-dated proxy card. By Order of the Board of Directors, Michael W. Grieves President and Chief Executive Officer Data Systems Network Corporation April __, 2000 Farmington Hills, Michigan Please do not send in your stock certificates at this time. [LOGO OF TEKINSIGHT] Dear TekInsight Stockholder: We are pleased to announce that the board of directors of TekInsight.Com, Inc. and Data Systems Network Corporation have each unanimously approved the merger of Data Systems with and into TekInsight Services, Inc., our wholly-owned subsidiary. You will be asked to approve two proposals at a special meeting of stockholders of TekInsight to be held on June 28, 2000, at 10 a.m. local time, at the law offices of Nixon Peabody LLP, located at 437 Madison Avenue, 24th Floor, New York, New York 10022, in connection with the proposed merger of TekInsight Services and Data Systems. We are soliciting your approval pursuant to Nasdaq Rule 4310 which requires Nasdaq-listed companies to obtain stockholder approval before issuing 20% or more of their common stock or securities convertible into common stock in connection with a transaction other than a public offering. This would include the Series A preferred stock to be issued to shareholders of Data Systems in the merger. The issuance of shares of our Series A preferred stock in the merger will exceed the 20% threshold. We are also soliciting your approval to amend our 1992 employee stock option plan to increase the number of shares of common stock reserved for issuance under the 1992 plan from 500,000 shares to 2,000,000 shares. The purpose of the increase is to cover future option grants to our officers, directors, key employees and consultants. The board of directors of TekInsight unanimously recommends that you vote "FOR" both proposals. Whether or not you plan to attend the special meeting, please complete, sign and date the enclosed blue proxy card, and return it to us so that your vote will be counted. Your proxy can be revoked either by attending the special meeting and voting in person or by sending us a properly executed later-dated proxy card. Sincerely, Steven J. Ross President and Chief Executive Officer TekInsight.Com, Inc. New York, New York April ___, 2000 TEKINSIGHT.COM, INC. NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON JUNE 28, 2000 ------------------------- To the Stockholders of TekInsight: We will hold a special meeting of stockholders of TekInsight on June 28, 2000, at 10 a.m., local time, at the law offices of Nixon Peabody LLP, located at 437 Madison Avenue, 24th Floor, New York, New York to consider and vote upon the following: o Stockholder approval pursuant to Nasdaq Rule 4310 which requires Nasdaq-listed companies to obtain stockholder approval before issuing 20% or more of their common stock or securities convertible into common stock in a transaction other than a public offering. This would include the Series A preferred stock to be issued to shareholders of Data Systems in the merger. The issuance of shares of our Series A preferred stock in the merger will exceed the 20% threshold. o Amendment of our 1992 employee stock option plan to increase the number of shares of common stock reserved for issuance from 500,000 shares to 2,000,000 shares. The purpose of this increase is to cover future option grants to our officers, directors, key employees and consultants. The record date for the special meeting is May 10, 2000. Only stockholders of TekInsight of record at the close of business on the record date are entitled to notice of, and to vote at, the special meeting and any adjournments or postponements. We cannot complete the merger unless pursuant to Nasdaq Rule 4310 the proposal to issue the Series A preferred stock is approved by a majority of the votes cast on the proposal at the special meeting in person or by proxy. The proposed amendment to the 1992 plan must also be approved by a majority of votes cast on the proposal at a special meeting in person or by proxy. You are cordially invited to attend the special meeting. Whether or not you plan to attend the special meeting, please complete, sign and date the enclosed blue proxy and promptly return it in the enclosed postage-paid envelope. Your proxy can be revoked either by attending the special meeting and voting in person or by sending us a properly executed later-dated proxy card. By Order of the Board of Directors, Stephen J. Ross President and Chief Executive Officer TekInsight.Com, Inc. New York, New York April __, 2000 TABLE OF CONTENTS
Page ---- Q&A ABOUT THE MERGER............................................................................................iii SUMMARY...........................................................................................................1 RISK FACTORS......................................................................................................9 BACKGROUND OF THE MERGER.........................................................................................15 Data Systems' Reasons for the Merger; Recommendations of the Board of Directors.............................16 Tekinsight's Reasons for the Merger; Recommendation of Board Of Directors...................................17 Interests of Certain Persons in the Merger..................................................................19 MERGER AGREEMENT.................................................................................................21 OPINIONS OF FINANCIAL ADVISORS...................................................................................26 Opinion of Data Systems' Financial Advisors -- Valuation Counselors Group, Inc..............................26 Opinion of Tekinsight's Financial Advisors -- Valuemetrics, Inc.............................................30 DESCRIPTION OF SERIES A PREFERRED STOCK..........................................................................35 COMPARISON OF SHAREHOLDER RIGHTS.................................................................................37 MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER...........................................................41 DISSENTERS' RIGHTS...............................................................................................43 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF TEKINSIGHT.COM, INC. AND SUBSIDIARIES........................................................45 INFORMATION ABOUT TEKINSIGHT.....................................................................................50 INFORMATION ABOUT DATA SYSTEMS...................................................................................84 VOTING SECURITIES AND PRINCIPAL HOLDERS.........................................................................115 MARKET PRICE INFORMATION........................................................................................118 PROPOSAL 2--APPROVAL BY TEKINSIGHT STOCKHOLDERS OF ISSUANCE OF SHARES PURSUANT TO NASDAQ RULE 4310.....................................................................120 PROPOSAL 3--INCREASE IN AUTHORIZED COMMON STOCK RESERVED FOR ISSUANCE UNDER TEKINSIGHT'S 1992 STOCK OPTION PLAN.....................................................121 LEGAL MATTERS...................................................................................................123 EXPERTS.........................................................................................................123 WHERE YOU CAN FIND MORE INFORMATION.............................................................................123 TEKINSIGHT--INDEX TO FINANCIAL STATEMENTS ......................................................................F- DATASYSTEMS--INDEX TO FINANCIAL STATEMENTS .....................................................................F-
APPENDIX
Michigan Business Corporation Act Section 761 through Section 774...............................................A-1
------------------------------ This proxy statement/prospectus contains "forward-looking statements" for purposes of Section 27A of Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements may involve risks and uncertainties that may cause actual results of TekInsight and Data Systems to be materially different from future results or performance expressed or implied by such statements. These statements may be identified by the use of words such as "expect," "anticipate," "project," "intend," "believe" and "plan." Factors that could contribute to such differences are discussed under "Risk Factors," "Information About TekInsight" and "Information About Data Systems." Shareholders of Data Systems should rely only on the information contained in this prospectus. TekInsight has not authorized anyone to provide you with different information. TekInsight is not making an offer of these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front cover of this prospectus. ------------------------------ -i- Q&A ABOUT THE MERGER Q: Why are TekInsight and Data Systems proposing to merge? A: TekInsight provides advanced Internet, eCommerce and computer network products, and professional services solutions that include XML streaming technology. Data Systems provides computer network integration and data management services in the distributed computing marketplace. Data Systems also provides a wide range of network integration services including installation, consultation, technical support and training to governmental and corporate accounts. TekInsight believes that the merger will give TekInsight access to the superior sales and distribution channel of Data Systems to accelerate market penetration for its products. Q: Why are shareholders of Data Systems receiving this document? A: This proxy statement/prospectus is the proxy statement of Data Systems used by its board of directors to solicit approval of the merger by shareholders of Data Systems. It is also the prospectus of TekInsight covering the offer and sale of the Series A preferred stock to be issued in exchange of Data Systems common stock in the merger. Q: Are there any risks that shareholders of Data Systems should consider in deciding whether or not to vote for the merger? A: An investment in TekInsight involves material risks. In evaluating the merger, please carefully consider the factors discussed in the section entitled "Risk Factors" beginning on page __. Q: What will shareholders of Data Systems receive in the merger? A: In exchange for Data Systems shares, shareholders of Data Systems will receive a new class of TekInsight Series A preferred stock. The merger consideration could be between $12.5 million and $18 million, depending upon the average market value of TekInsight's common stock as quoted on the Nasdaq SmallCap Market for the 10 days immediately prior to the closing date of the merger. Because the value of the merger consideration depends on the trading price of TekInsight stock after the date of the special meeting of Data Systems, you will not know the exact value of your shares at the time you vote. The merger consideration is described in detail under "Merger Consideration" beginning on page __. We currently expect the value of the merger to be $12.5 or $16 million, or $[2.26] or $[2.89] per share of Data Systems common stock, respectively. You may call 1-800-_____ for a daily update on this information. Q: What are the material federal income tax consequences of the merger to shareholders of Data Systems? A: In the opinion of tax counsel, the merger will be a tax-free reorganization. Q: What do I need to do now? A: If you are a Data Systems shareholder, after you carefully read this proxy statement/prospectus, indicate on the enclosed white proxy card whether you are voting "FOR or "AGAINST" the merger or will "ABSTAIN" from voting. Sign and mail the white proxy card to us in the enclosed white prepaid return envelope as soon as possible. Do not send in your Data Systems certificates now. Wait until the exchange agent contacts you with instructions. Then, send your Data Systems certificates to the exchange agent and the exchange agent will send you your Series A preferred stock. The exchange agent is: American Stock Transfer & Trust Company 40 Wall Street, 46th Floor New York, NY 10005 (212) 936-5100 -ii- Q: What do I do if I want to change my vote? A: You may change your vote: o by sending a written notice stating that you would like to revoke your proxy to the corporate secretary of Data Systems before the special meeting; o by signing a later-dated proxy card and returning it by mail before the special meeting; or o by attending the special meeting and voting in person. Q: If my broker holds my shares in "street name," will my broker vote my shares for me? A: If you do not provide your broker with instructions on how to vote your shares held in "street name," your broker will not be permitted to vote them at the special meetings. Broker non-votes and abstentions have the same effect as a vote "AGAINST" the merger. If you want to vote "FOR" the merger, be sure to provide your broker with instructions on how to vote your shares. Q: When do you expect to complete the merger? A: We are working to complete the merger as quickly as possible. We expect to complete the merger within one to two days of obtaining approval of shareholders of Data Systems at their special meeting. Q: Where can I find more information about the companies. A: TekInsight and Data Systems each file reports with the SEC. You may read and copy this information at the SEC's public reference facilities. Call the SEC at 1-800-SEC-0330 for information about these facilities. This information is also available at the Internet Web site of the SEC at www.sec.gov. Q: Whom should I call with questions? A: Data Systems and TekInsight shareholders should direct questions to Katrina Kostes, TekInsight's Communications Director, at (212) 271-8550. Q: Are stockholders of TekInsight required to approve the merger? A: No. Stockholders of TekInsight are not required to approve the merger. However, as part of its corporate governance rules, in a transaction other than a public offering, Nasdaq requires that stockholders of Nasdaq-listed companies approve issuances of 20% or more of certain securities which would have a dilutive effect. Accordingly, TekInsight is soliciting stockholder approval to issue the Series A preferred stock in the proposed merger which is convertible into 20% or more of its currently outstanding shares of its common stock. TekInsight is also soliciting stockholder approval to increase the number of shares of common stock reserved for issuance under its 1992 employee stock option plan. -iii- SUMMARY This is a summary of the proposed merger and other information in this proxy statement/prospectus. While complete in material respects, this summary is qualified by reference to the detailed information appearing elsewhere in this proxy statement/prospectus including appendices. Please carefully read all of these materials. The Bidder--TekInsight.Com, Inc. TekInsight was initially incorporated in Delaware in 1989 as Universal Self Care, Inc. It changed its name to Tadeo Holdings, Inc. in 1998, and changed its name to TekInsight in 1999. TekInsight has been a public company since 1992. TekInsight provides advanced Internet, eCommerce and computer network products and professional services solutions that include XML streaming technology. Customers of TekInsight include Microsoft, IBM and other Fortune 500 companies. Its proprietary products include Web-based diagnostic software agents and Web-based eCommerce performance and analysis tools. TekInsight products are sold throughout the United States and internationally. TekInsight Services is a wholly-owned subsidiary of TekInsight. The principal executive offices of TekInsight are located at 5 Hanover Square, 24th Floor, New York, New York 10004 and its telephone number is (212) 271-8550. The Acquired Company--Data Systems Network Corporation Data Systems was incorporated in Michigan in 1986 and has been a public company since 1994. Data Systems provides computer network integration and data management services in the distributed computing marketplace. Data Systems also provides a wide range of network integration services including installation, consultation, technical support and training to governmental and corporate accounts. The principal executive offices of Data Systems are located at 34705 W. 12 Mile Road, Suite 300, Farmington Hills, Michigan 48331 and its telephone number is (248) 489-8700. Date, Time and Place of the Special Meetings The special meeting of shareholders of Data Systems will be held on June 28, 2000, at 10 a.m., local time, at the headquarters of Data Systems. The special meeting of stockholders of TekInsight will be held on June 28, 2000, at 10 a.m., local time, at the law offices of Nixon Peabody LLP, counsel to TekInsight. Record Date; Voting Rights Only common stockholders of Data Systems of record at the close of business on May 19, 2000 and of TekInsight at the close of business on May 10, 2000 will be entitled to notice of and to vote at their respective special meeting. Holders of record are entitled to one vote per share on each matter properly presented at the special meeting. Neither shareholders of Data Systems nor stockholders of TekInsight have cumulative voting rights. Voting will be based solely upon a majority of votes cast "FOR" or "AGAINST" the proposals such that persons beneficially owning more shares will have greater voting power than persons owning fewer shares. Broker non-votes and abstentions have the same effect as a vote against the merger proposal. Neither the board of directors of Data Systems nor TekInsight expects any other matters to come before either special meeting. However, if any other matters are properly presented at either special meeting for consideration, the persons named in the respective enclosed forms of proxy will have discretion to vote or not vote on those matters in accordance with their judgment, unless authorization to use that discretion is withheld. If a proposal to adjourn either special meeting is properly presented, however, the persons named in the enclosed form of proxy will not have discretion to vote in favor of the adjournment proposal any shares which have been voted against the proposal to approve the merger. - 1 - Revocability of Proxy You may change your vote by attending the meeting and voting in person. You may also change your vote by sending us a later dated properly executed replacement proxy card. Proposal 1--Approval of the Merger by Shareholders of Data Systems TekInsight proposes to exchange a new class of its Series A preferred stock for Data Systems common stock and merge Data Systems with and into TekInsight Services, a wholly-owned subsidiary of TekInsight. To accomplish this, shareholders of Data Systems are being asked to consider and vote upon a proposal to approve the agreement and plan of merger dated as of February 18, 2000, as amended on April 4, 2000, among TekInsight, TekInsight Services and Data Systems. The board of directors of Data Systems has unanimously approved the merger. It recommends that shareholders of Data Systems vote "FOR" approval of the merger. Vote Required for Approval of Merger by Shareholders of Data Systems On the record date 5,542,448 shares of Data Systems common stock were issued and outstanding and held by approximately 2,285 beneficial owners. Michigan law and the bylaws of Data Systems require that the merger be approved by a majority of the outstanding shares of Data Systems common stock entitled to vote. Effect of the Merger If a majority of the outstanding Data Systems shares of common stock are voted to approve the merger, and all required conditions are satisfied or waived, the merger will be completed and Data Systems will be merged with and into TekInsight Services. TekInsight Services will be the surviving company. Each share of Data Systems common stock will be exchanged for the merger consideration. The status of Data Systems as a public company will be terminated. Effective Time of the Merger; Closing Date of the Merger If the merger proposal is approved by the shareholders of Data Systems, and the Nasdaq Rule 4310 proposal is approved by the stockholders of TekInsight, then the merger will be completed upon filing the required documents with the appropriate offices in the State of Delaware and the State of Michigan. The closing of the merger is expected to occur one to two days after the satisfaction or waiver of all material conditions of the merger agreement, including obtaining the requisite shareholder approval. No conditions are expected to be waived. No federal or state regulatory approvals are necessary. The closing will be held at the offices of Nixon Peabody LLP, counsel for TekInsight, 437 Madison Avenue, New York, New York 10022, or at such other time and place as the parties agree. Accounting Treatment The merger will be accounted for as a purchase. This means that after the merger the combined results of operations of Data Systems will be included in the consolidated results of operations of TekInsight. For purposes of preparing consolidated financial statements, the purchase price, including the fees and other costs of TekInsight associated with the merger at the date of completion will be allocated to the assets and liabilities of Data Systems based on their fair market values, with the excess allocated to goodwill to be amortized over the estimated economic life of the assets. - 2 - Conditions to the Merger; Termination Provisions (Page ___) Completion of the merger is subject to a number of customary conditions including approval of the merger by shareholders of Data Systems, obtaining an opinion of special tax counsel regarding federal income tax matters, and obtaining the approval by stockholders of TekInsight of the issuance of the Series A preferred stock pursuant to Nasdaq Rule 4310. It is a condition to completion of the merger that the Series A preferred stock issued to shareholders of Data Systems be listed on the Nasdaq SmallCap Market under the symbol "TEKSX." The merger may also be terminated for a number of reasons including by mutual consent of both companies, if the merger is not completed by June 30, 2000, if the market value of TekInsight common stock falls below $2.00 per share for the 10 consecutive trading days prior to the closing date, or if 5% or more of the shareholders of Data Systems exercise their dissenters' rights. Merger Consideration (Page ___) The Series A preferred stock to be issued in the merger will have a dollar value of between $12.5 million and $18 million, depending on the average market value of the underlying TekInsight common stock as quoted on the Nasdaq SmallCap Market for the 10 consecutive trading days immediately prior to the closing date: If the Market Value of TekInsight Then the Total Value Common Stock Quoted on the Nasdaq of the Merger SmallCap Market on the Closing Date Is: Consideration Will Be: --------------------------------------- ---------------------- Less than $5.00 per share....................... $12.5 million Between $5.00 and $7.00 per share............... $16 million Over $7.00 per share............................ $18 million Because this exact price will be determined after the meeting date, we cannot tell you today, and you will not know when you vote, what the exact value of the merger or the Series A preferred stock will be. However, if the closing of the merger were today, the average closing price of TekInsight common stock as quoted on the Nasdaq SmallCap Market for the past 10 days (excluding today) would be $[2.92]. Under the merger agreement, the total value of the merger consideration would be $[12.5 million]. Based upon 5,542,448 shares outstanding as of today's date, your Data Systems Common Stock would be valued, today, at $[2.26] per share, and the exchange ratio would be [0.774]:1. Shareholders of Data Systems may receive a daily update on this information by calling 1-800-________. Over the last 60 days, TekInsight common stock has closed at a high of $[6.50] and a low of $[2.50]. For [46] days out of the past [60] days, the TekInsight common stock closed at less than $5.00 per share. TekInsight therefore believes the value of the merger consideration will likely be $12.5 million. The actual merger consideration received by you may be higher or lower. Share Ownership of Data Systems Management (Page ___) Officers and directors of Data Systems beneficially own 20.6% of the outstanding common stock. Michael W. Grieves, President and Chief Executive Officer of Data Systems, and Gregory D. Cocke, a founder of Data Systems (together representing 19.1% of the outstanding shares of Data Systems) have entered into lock-up agreements with TekInsight and, accordingly, have agreed to vote their shares "FOR" the merger. Mr. Cocke is not an affiliate of Data Systems. The votes of Mr. Grieves and Mr. Cocke are not by themselves sufficient to assure that the merger will be approved. - 3 - Interests of Directors and Officers in the Merger (Page ___) Officers and directors of Data Systems may have interests in the merger that are different from, or in addition to, yours. Data Systems does not, however, believe that any of these interests presents a material conflict of interest. Fairness Opinions by Financial Advisors of Data Systems and TekInsight (Page ___ and Page _____) TekInsight is not an affiliate of Data Systems. The proposed merger was negotiated on an arms' length basis. Although not required, the board of directors of each of Data Systems and TekInsight believed it would be helpful to engage its own independent financial advisor and obtain an opinion regarding the fairness of the merger consideration from a financial perspective. Data Systems engaged Valuation Counselors, and TekInsight engaged Valuemetrics, as its independent financial advisor. Valuation Counselors delivered its opinion to us, and Valuemetrics delivered its opinion to the board of directors of TekInsight, that the merger consideration is fair from a financial perspective. Both the Valuemetrics fairness opinion and the Valuation Counselors fairness opinion are described in detail in this proxy statement/prospectus. Management of TekInsight after the Effective Date of the Merger (Page ___) The officers of TekInsight before the merger will be the officers of TekInsight after the merger. The board of directors of TekInsight immediately prior to the merger (with the addition of Steven J. Ross, President and Chief Executive Officer of TekInsight, Michael W. Grieves and Walter J. Aspatore), will be the initial board of directors of TekInsight after the merger. Material Federal Income Tax Consequences (Page ___) In the opinion of Nixon Peabody LLP, special tax counsel to TekInsight, and Bodman, Longley & Dahling LLP, special tax counsel to Data Systems, the merger will be a tax-free reorganization under Section 368(a)(2)(D) of the Internal Revenue Code. Comparison of Shareholder Rights (Page ___) The rights of Series A preferred stockholders are determined by Delaware law, by the Series A preferred certificate of designations, and by TekInsight's certificate of incorporation and bylaws. The rights of Series A preferred stockholders are similar to the rights of shareholders of Data Systems but differ in a number of respects. Please review these differences carefully. Dissenters' Rights (Page ___) If you are a Data Systems shareholder, you have appraisal rights with respect to your shares of Data Systems stock under Michigan law as described in Sections 761 through 774 of the Michigan Business Corporation Act, which are attached as Appendix A to this joint proxy statement/prospectus. In order to exercise appraisal rights you must be a holder of record of Data Systems shares on the date that you make your written demand for appraisal, continuously hold your shares through the effective date of the merger, deliver a written demand for appraisal to Data Systems prior to the vote on approval of the merger, not vote "FOR" approval of the merger or deliver an unmarked proxy. A Data Systems shareholder voting by proxy who desires to preserve his or her appraisal rights must either vote "AGAINST" approval of the merger or "ABSTAIN" from voting. Written demands should be addressed to Data Systems Network Corporation, 34705 W. 12 Mile Road, Suite 300, Farmington Hills, Michigan 48331, Attention: Secretary. Voting "FOR" or delivering an unmarked proxy, will, unless revoked prior to the vote on approval of the merger, constitute a waiver of your appraisal rights and will nullify any previous written demand for appraisal submitted by you. The full text of Section 761 through Section 774 of the Michigan Business Corporation Act is attached as Appendix A to this proxy statement/prospectus. - 4 - Per Share Market Price Information of Data Systems and TekInsight (Page ___) TekInsight common stock is traded on the Nasdaq SmallCap Market under the symbol "TEKS." Data Systems shares are traded in the over-the-counter market under the symbol "DSYS." The following table presents trading information for TekInsight common stock and Data Systems common stock on February 17, 2000 and April 27, 2000. February 17, 2000 was the last full trading day before our announcement of the signing of the merger agreement. April 27, 2000 was the last practicable trading day for which information was available before the date of this proxy statement/prospectus.
Data Systems common stock --------------------------------------- Date High Low Closing ---- ---- --- ------- February 17, 2000............................ $1.50 $1.12 $1.12 April 27, 2000............................... $1.12 $1.01 $1.01 TekInsight common stock --------------------------------------- Date High Low Closing ---- ---- --- ------- February 17, 2000............................ $4.81 $4.40 $4.50 April 27, 2000............................... $3.62 $3.06 $3.62
Proposal 2--Approval by TekInsight stockholders for TekInsight to Issue 20% or More of its Convertible Securities Pursuant to Nasdaq Rule 4310 (Page ___) Nasdaq Rule 4310 requires that TekInsight obtain stockholder approval by a majority of shares cast on the proposal at the special meeting prior to issuing 20% or more of its common stock or securities convertible into common stock, which would include the Series A preferred stock to be issued to shareholders of Data Systems in the merger. Since more than 20% of TekInsight's common stock may be issued or reserved for issuance on conversion of the Series A preferred stock, TekInsight's board of directors is soliciting stockholder approval for this issuance. The TekInsight board of directors unanimously recommends that its stockholders vote "FOR" this proposal. Proposal 3--TekInsight Approval to Increase the Number of Authorized Shares of Stock Reserved Under TekInsight's 1992 plan. (Page ___) The board of directors of TekInsight is required to obtain stockholder approval by a majority of shares cast on the proposal at the special meeting to amend the 1992 plan to increase the number of shares of common stock reserved for issuance under the 1992 plan from 500,000 shares to 2,000,000 shares. Options to purchase 500,000 shares have already been issued under the 1992 plan. This increase is necessary to cover future stock option grants to officers, directors, key employees and consultants of TekInsight. The TekInsight board of directors recommends that the stockholders of TekInsight vote "FOR" this proposal. Persons Making the Solicitation This solicitation of approval of the merger from shareholders of Data Systems is being made by the board of directors of Data Systems. The solicitation of the proposal to issue the Series A preferred stock pursuant to Nasdaq Rule 4310 and amend the 1992 plan is being made by the board of directors of TekInsight. Each company will bear it own costs of solicitation, estimated to be less than $5,000 for each company. - 5 - SELECTED PRO FORMA AND HISTORICAL CONSOLIDATED FINANCIAL DATA (in thousands, except per share data) Selected Pro Forma and Historical Consolidated Financial Data of TekInsight The following table provides selected consolidated financial data for TekInsight for the five years ended June 30, 1999, the six months ended December 31, 1999 and 1998, and pro forma financial data for the year ended June 30, 1999 and the six months ended December 31, 1999. The statement of operations data for 1995 through 1999 and balance sheet data for 1995 through 1999 are derived from our audited financial statements. The statement of operations data for the six months ended December 31, 1999 and 1998 and balance sheet data as of December 31, 1999 are derived from unaudited quarterly information for the six months ended December 31, 1999. Interim unaudited data reflect, in the opinion of management of TekInsight, all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the results for the interim periods presented. The financial data for 1995 through 1999 was derived from the financial statements of TekInsight and of its predecessor companies for those years. The pro forma data reflects TekInsight's acquisition of Data Systems as of each of June 30, 1999 and December 31, 1999. The pro forma information should be read in conjunction with the pro forma condensed consolidated financial statements include elsewhere in this proxy statement/prospectus.
Pro forma Pro forma Six months ended year ended six months ended Year ended June 30, December 31, June 30, 1999 December 31, 1999 ---------------------------------------- ----------------------- ------------- ----------------- 1995 1996 1997 1998 1999 1998 1999 ----- ------ ------ ----- ------ -------- -------- (unaudited) (unaudited) (unaudited) (unaudited) Statement of Operations Data: Revenues............. $ - $ - $ 455 $ 997 $ 1,515 $ 967 $ 962 $ 69,256 $ 26,224 Cost of revenues..... - - 73 248 700 286 459 56,278 21,743 ------ ------- ------- ------- ------- ------- ------- -------- -------- Gross margin........ - - 382 749 815 681 503 12,978 4,481 Operating expenses . 800 1,381 992 2,354 3,573 1,703 982 16,736 6,275 ------ ------- ------- ------- ------- ------- ------- -------- -------- Loss from operations (800) (1,381) (610) (1,605) (2,758) (1,022) (479) (3,758) (1,794) Gain on sale of marketable securities - - - - 1,690 - 93 1,690 93 Other income (expense), net ... - - 2 452 590 533 201 (1,028) 598 ------ ------- ------- ------- ------- ------- ------- -------- -------- Loss from continuing operations ......... - - (608) (1,153) (478) (489) (185) (3,096) (1,103) ------ ------- ------- ------- ------- ------- ------- -------- -------- Discontinued Operations Loss from discontinued operations ......... - - (1,816) (2,122) - - - - - Gain from disposal, including operating losses through disposal date of $1,489,272 (less income taxes of $1,104,000)....... - - - 5,141 1,492 - - 592 - ------ ------- ------- ------- ------- ------- ------- -------- -------- Total income (loss) from discontinued operations - - (1,816) 3,018 1,492 - - - - ------ ------- ------- ------- ------- ------- ------- -------- -------- Net income (loss). $ (800) $(1,381) $(2,424) $(1,865) $ 1,013 $ (489) $ (185) $ (2,504) $ (1,103) ====== ======= ======= ======= ======= ======= ======= ======== ======== Net income (loss) per share........ Continued $(0.21) $ (0.21) $ (0.08) $ (0.11) $ (0.03) $ (0.04) $ (0.01) $ (0.18) $ (0.06) ====== ======= ======= ======= ======= ======= ======= ======== ======== Discontinued.... $ - $ - $ (0.17) $ 0.25 $ 0.10 $ - $ - $ 0.03 $ - ====== ======= ======= ======= ======= ======= ======= ======== ======== Net loss per share basic and diluted $(0.21) $ (0.23) $ (0.25) $ (0.14) $ (0.07) $ (0.04) $ (0.01) $ (0.15) $ (0.06) ====== ======= ======= ======= ======= ======= ======= ======== ======== Weighted average shares outstanding 3,809 .004 10,379 12,019 14,728 12,459 15,808 17,229 18,308 ====== ======= ======= ======= ======= ======= ======= ======== ========
As of December 31, As of June 30, (unaudited) ---------------------------------------------------------- --------------------------- Balance Sheet Data: 1999 Pro forma 1999 1995 1996 1997 1998 1999 (unaudited) (unaudited) ---------- ---------- ------- ------- ------- ------------ -------------- Cash and cash equivalents.. $ 87 $ 91 $ 542 $ 2,406 $ 7,618 $ 5,869 $ 7,137 Working capital............ 768 297 3,129 1,233 5,365 4,831 2,405 Total assets............... 17,132 18,209 18,298 8,864 16,487 14,428 41,844 Total liabilities.......... 13,439 15,242 14,776 1,611 2,872 2,411 17,309 Total stockholders' equity. 3,693 2,966 3,523 5,731 13,615 12,017 24,517
- 6 - Selected Historical Consolidated Financial Data of Data Systems The following table provides selected consolidated financial data for Data Systems for the five years ended December 31, 1999. The statement of operations data for 1996 through 1999 and the balance sheet data for 1996 through 1999 shown below are derived from the audited financial statements of Data Systems. Statement of operations data and the balance sheet data for 1995 are derived from the unaudited financial statements of Data Systems.
Year ended December 31, ------------------------------------------------------------ 1995 1996 1997 1998 1999 ------ ------ ------ ------ ------ (unaudited) Operations Data: Revenues................. $ 30,506 $ 32,577 $ 85,997 $ 85,323 $ 52,825 Cost of revenues......... 27,933 27,616 73,516 71,238 42,825 -------- -------- -------- -------- -------- Gross margin............. 2,573 4,961 12,481 14,085 10,000 Operating expenses....... 3,228 8,211 16,149 15,365 10,787 -------- -------- -------- -------- -------- Loss from operations..... (655) (3,250) (3,668) (1,280) (787) Other income (expense), net.................... (280) (185) (749) (2,419) 978 -------- -------- -------- -------- -------- Net earnings (loss) before discontinued operations & extraordinary item..... (935) (3,435) (4,417) (3,699) 191 Extraordinary Item....... 322 75 - - - -------- -------- -------- -------- -------- Loss before discontinued operations............. (613) (3,360) (4,417) (3,699) 191 Discontinued Operations: Loss from operations of Unified Network Services - (481) (557) (1,686) - Gain on disposal of Unified Network Services - - - 706 - -------- -------- -------- -------- -------- - (481) (557) (980) - -------- -------- -------- -------- -------- Net earnings (loss)...... $ (613) $ (3,841) $ (4,974) $ (4,679) $ 191 -------- -------- -------- -------- -------- Earnings (loss) per common share - basic and diluted Continuing operations.. $ (0.24) $ (1.23) $ (1.02) $ (0.76) $ 0.40 ======== ======== ======== ======== ======== Discontinued operations $ - $ (0.18) $ (0.13) $ (0.20) - ======== ======== ======== ======== ======== Net earnings (loss) per common share........... $ (0.24) $ (1.41) $ (1.15) $ (0.96) $ 0.04 ======== ======== ======== ======== ======== Weighted average shares outstanding - basic and diluted................ 2,560 2,719 4,324 4,859 5,205 ======== ======== ======== ======== ======== As of December 31, ------------------------------------------------------------------- 1995 1996 1997 1998 1999 ------ ------ ------ ------ ------ (unaudited) Balance Sheet Data: Cash and cash equivalents $ 3,171 $ 1,521 $ 4 $ 2,395 $ 1,517 Working capital (deficit) 2,040 (6,073) (2,371) (5,356) (2,177) Total assets............ 11,938 20,565 45,082 22,666 17,308 Long-term obligations, less current portion.. 100 75 - - - Redeemable convertible preferred stock....... - - - - - Total stockholders' (deficit) equity...... 3,477 2,396 6,244 1,571 2,392
- 7 - Comparative Per Share Data Shown separately below are the net loss and book value per common share data for TekInsight on a historical basis, for TekInsight on a pro forma consolidated basis, for Data Systems on a historical basis and for TekInsight on a pro forma consolidated basis per Data Systems equivalent share. The pro forma data are based on the assumption that the average market value as quoted on the Nasdaq Small Cap Market for the 10 days immediately prior to the closing date of the merger is below $5 per share, resulting in an aggregate merger consideration of $12,500,000, and therefore 2,500,000 shares of Series A preferred stock being issued to Data Systems common shareholders. The data are also based on the assumption that all the shares of Series A preferred stock are converted into shares of common stock of TekInsight. The unaudited pro forma consolidated data below are for illustrative purposes only. The companies may have performed differently had they been combined at the assumed dates. Do not rely on this information as being indicative of the historical results that would have been achieved had the companies been combined at the assumed dates or of the future results that TekInsight will experience after the merger. You should read the information below together with the historical financial statements of TekInsight and Data Systems, the related notes, and the Unaudited Pro Forma Consolidated Financial Information and related notes starting on page ___.
For the For the six months year ended ended June 30, 1999 December 31, 1999 ------------- ----------------- TekInsight historical per common share data Net loss per common share............................................... $ 0.07 $(0.01) Book value per share ................................................... $ 0.89 $0.76 TekInsight pro forma consolidated per TekInsight common share data: Net loss per common share (1)........................................... $ (0.15) $(0.06) Book value per share (2)................................................ $1.50 $1.34 Data Systems historical per common share data: Net loss per common share............................................... $ (0.57) $(0.11) Book value per share ................................................... $0.54 $0.45 TekInsight pro forma consolidated per Data Systems equivalent common share data: (3) Net loss per common share............................................... $(0.07) $(0.03) Book value per share ................................................... $0.68 $0.61
- ---------- 1) The TekInsight pro forma consolidated net loss per common share is calculated by dividing the total of the TekInsight weighted average shares outstanding and the assumed conversion of 2,500,000 Series A preferred shares being issued to Data Systems common shareholders into common stock of TekInsight at the beginning of the respective periods. 2) The TekInsight pro forma consolidated book value per share is calculated by dividing the pro forma consolidated stockholders' equity by the total number of TekInsight common shares outstanding and assumes the conversion of 2,500,000 Series A preferred shares being issued to Data Systems common shareholders into common stock of TekInsight. 3) The TekInsight pro forma consolidated per Data Systems equivalent per share data amounts are calculated by multiplying the TekInsight pro forma consolidated common share data by the assumed exchange ratio of .453784417. - 8 - RISK FACTORS An investment in TekInsight involves material risks. Carefully consider all of the risks described in this section and elsewhere in this prospectus. Additional risks that we are not presently aware of or that we currently consider immaterial may also adversely affect our business. Because the merger consideration is based on the average trading price of TekInsight's common stock for the 10 days prior to the closing (one to two days after the special meeting of Data Systems), we cannot tell you today and you will not know when you vote, what the value of the merger consideration will be at the time that you vote. The total value of the merger is based upon the average closing price of TekInsight common stock for the ten days immediately preceding closing as quoted on the Nasdaq SmallCap Market. Since the closing will not occur until one to two days after the special meeting, you will not know when you vote what the exact value of the merger or the Series A preferred stock will be. We expect, however, that the aggregate merger consideration will be $12.5 million. The $2 million termination fee payable by Data Systems if the merger agreement is terminated may discourage other companies from trying to acquire Data Systems. In the merger agreement, Data Systems has agreed to pay a termination fee of $2 million to TekInsight in specified circumstances where a third party agrees to acquire Data Systems. Even though the board of directors of Data Systems may terminate the merger agreement if required to meet its fiduciary duties, this termination fee could discourage other companies from trying to acquire Data Systems even if they would propose terms that are superior to the terms of this merger. Payment by Data Systems of the termination fee could also have a material adverse effect on the financial condition of Data Systems and its results of operations. We may not achieve the cost savings and sales increases that we expect to result from the integration of TekInsight and Data Systems. Data Systems provides sales and marketing channels and experience that we do not have. The merger will not be successful unless Data Systems can increase sales of our existing products. The success of Data Systems and timing in realizing increased sales depends on the quality and speed of the integration of TekInsight and Data Systems. Data Systems may not realize the cost savings and sales increases that it anticipates following completion of the merger as fully or as quickly as it expects. Although we expect synergies to result from the merger, management did not commission a formal analysis of synergies and did not attempt to quantify anticipated synergies. We cannot assure you that synergies will result. TekInsight will face technical, operational and strategic challenges as a result of the merger that may prevent it from successfully integrating with Data Systems. The integration of Data Systems will be a complex, time-consuming and expensive process and may disrupt our business. Following the merger, TekInsight Services and Data Systems must operate as a combined organization using common information and communication systems, operating procedures, financial controls and human resources practices. TekInsight and TekInsight Services may encounter substantial difficulties, costs and delays involved in integrating the operations of Data Systems including: o potential incompatibility of business cultures; o perceived adverse changes in business focus; o difficulties in integrating products and services; - 9 - o the loss of key employees or clients; and o diversion of the attention of management from other ongoing business concerns. The integration of operations and technologies following the merger may distract management of both companies from day-to-day business, the development or acquisition of new products, services and technologies, and the pursuit of other business acquisition opportunities. Successful integration of the sales and marketing departments of the two companies will require TekInsight's sales and marketing personnel to learn about the products, services and technologies of Data Systems. We have lost money on our operations since inception, and we expect to lose more money during the next several years. As of December 31, 1999, we had an accumulated deficit of $8,319,800. We may continue to incur net losses and negative cash flow during the next several years whether or not we consummate the merger. Our ability to generate profits and positive cash flow will depend in large part on our obtaining enough customers for our services and products to offset the costs of marketing and staffing our professional services business and developing the software products that we sell. To the extent that we cannot achieve operating profitability or positive cash flows from operating activities, our business will be adversely affected. Failure to obtain additional funding would limit our ability to expand our business. Following completion of the merger, we expect to incur significant expense during the next several years to expand the number of proprietary products that we develop for public sale and increase research and development and sales and marketing personnel to further develop products and services and increase sales of products and professional and electronic commerce services. We also expect to incur significant expense in connection with the acquisition of businesses that either augment our existing product lines or extend us into new product lines. Actual costs may be more. We will need significant additional capital to complete this product and service expansion and for any additional acquisitions. We cannot assure you that we can raise sufficient capital to follow through with our plans. To the extent that we cannot, our growth and prospects will be limited and our stock price may suffer. If we are not able to manage our growth and changing operations, our business will be adversely affected. Our ability to grow depends, in part, upon our: o successfully implementing our strategy; o evaluating markets; o securing financing; and o hiring and retaining qualified personnel. In addition, as we increase our service and product offerings and expand our sales and marketing expenses, we will have additional demands on our customer support, sales and marketing, administrative, research and development resources. In order to manage growth and change effectively, we must implement and improve our operational systems, procedures and controls on a timely basis. If we cannot effectively manage our growth and implement and improve these systems, our business and results of operations will be adversely affected. - 10 - Acquisitions and joint ventures could strain our business and resources. If we acquire additional companies or businesses, or enter into joint ventures, we may be subject to: o miscalculation of the value of the acquired company or joint venture; o diversion of resources and management time; o difficulties in integration of the acquired business or joint venture with our operations; o damage to customer relationships as a result of changes in management; o additional liabilities or obligations as a result of the acquisition or joint venture; and o additional financial burdens or dilution incurred with the transaction. Our quarterly financial results are subject to significant fluctuations. Our quarterly revenues, expenses and operating results may fluctuate significantly due to a number of factors, including: o change in demand for our products; o size and timing of significant orders and when they are filled; o our ability to develop and upgrade our technology; o changes in our level of operating expenses and unexpected expenses; o our ability to compete in a highly competitive market; and o undetected software errors and other product quality problems. We depend on a limited number of customers for our revenues. We have derived substantially all of our revenues since 1998 from a limited number of customers, including large financial institutions, independent software vendors, or ISVs, and customers entering into electronic commerce. To compete in this market, we believe that we must devote substantial resources to expanding our marketing and advertising, to continuing product development, and to diversifying. Our operating revenues have increased over the last two years but our operations have not produced net income to date. Net income has resulted solely from the sale of securities and the nonrecurring sale of our former operating business. Therefore, unless we increase sales, it is unlikely that we can achieve net income in the future. Our products and services are subject to rapid technological change. The market for our products and services is characterized by rapid technological change, frequent new product introductions, short product life cycles, changes in customer demands and evolving industry standards. Our products and services could be quickly rendered obsolete if new products are introduced or new industry standards emerge and we fail to adapt quickly. We rely on our relationships with Microsoft and attempt to coordinate our product offerings with the future releases of its operating systems. We also believe that operating system software vendors, particularly Microsoft and Novell, could enhance their products to include functionality that we currently provide in our products. If these vendors include our software functionality as standard features of their operating system or other software, our products could quickly become obsolete. Even if the functionality of the standard software features of these vendors is more limited than ours, there is a substantial risk that a significant number of customers would elect to keep this limited functionality rather than purchase additional software. - 11 - The market for the professional services and the electronic commerce services provided by our subsidiaries are fragmented and characterized by few barriers to entry. Competitors include ISVs such as IBM and Microsoft (who are also customers of ours) and consulting firms such as Andersen Consulting. Many of these companies have much greater resources than we do, making it difficult for us to compete. Client/server computing environments and the Internet are inherently complex and continually developing. New products and product enhancements can require long development and testing periods, which depend significantly on our ability to hire and retain or contract with increasingly scarce technically competent personnel. Our ability to provide highly technical professional services related to the Internet and LAN management are similarly constrained. Significant delays in new product releases, or in hiring the necessary technically skilled personnel, could seriously damage our business. We have, on occasion, experienced delays in scheduled introduction of new products. We cannot be sure that such delays will not occur again. To be successful, we must enhance existing products, develop and introduce new products, satisfy customer requirements for our products and services and achieve market acceptance. We cannot be sure that we will successfully identify new product opportunities and develop and bring new products to market in a timely and cost-effective manner. Further, the products, capabilities or technologies developed by others may render our products or technologies obsolete or shorten their life cycles. Similarly, we cannot be sure that we will be able to provide the right professional and electronic commerce services at the right price in the future. To the extent that we cannot do so, our business will be adversely affected. Loss of key personnel would adversely affect us. Our success depends largely on the efforts of our executive officers, in particular, Alexander Kalpaxis, President of TekInsight Services and Chairman of the Board and Chief Technology Officer of TekInsight. We have an employment contract requiring Mr. Kalpaxis to continue his employment through October 2001. The loss of the services of one or more of our key individuals or the failure to attract and retain additional qualified personnel could adversely affect our business. We do not maintain key man life insurance policies on any of our executive officers. There is no assurance our intellectual property rights can be protected. We rely on a combination of trademark, trade secret, patent, and copyright laws and contractual restrictions to protect our technology. These legal protections provide only limited protection. We may not be able to detect unauthorized use or take appropriate steps to enforce our intellectual property rights. Litigation is expensive regardless of the outcome, diverts management resources and may not be adequate to protect our business in any event. We also could be subject to claims alleging infringement by third-parties of their intellectual property rights. In addition, we may be required to indemnify our distribution partners and end-users for similar claims made against them. Any claims against us could require us to spend significant time and money in litigation, pay damages, develop non-infringing intellectual property or acquire licenses to intellectual property that is the subject of the infringement claims. Our investments in other companies may not be successful. We may continue to make investments in companies with technologies, services or products that we find attractive. We may have difficulty integrating the personnel and operations, technology, services or products acquired through these acquisitions. Acquisitions can disrupt our ongoing business, distract management and other resources and make it difficult to maintain our standards, controls and procedures. We may also lose all or a part of our investment if these businesses fail. - 12 - Undetected software errors may damage our business reputation. Our software products are complex and may from time to time contain undetected bugs or errors, particularly when first introduced or when new versions or enhancements are released. Despite testing, we cannot be sure that bugs or errors will be discovered in our products before we commence commercial shipping. Undetected bugs or errors could result in adverse publicity, loss of customer confidence, delay in market acceptance or claims against us, any of which could adversely affect our business. We face risk of product liability claims. Our agreements with customers typically contain provisions intended to limit liability claims. These limitations may not preclude all potential claims, however. Liability claims could require us to spend significant time and money in litigation or to pay significant damages. As a result, any claims against us, whether or not ultimately successful, could adversely impact our business and damage our reputation. Our stock price is volatile which presents an additional litigation risk. The market price of our common stock is sometimes volatile. Trading volume is sometimes low. In the past, companies that have experienced volatility in the market price of their stock have been the object of securities class action litigation in the event of a drop in market price. If we were to become the object of securities litigation, it could result in substantial costs and diversion of management resources. Security breaches could expose us to a risk of loss, litigation and possibly liability. Although we are not aware of any attempts by hackers to penetrate our network security, there is no assurance that security breaches will not occur in the future. A person able to penetrate our network security could misappropriate our proprietary information or that of our clients, or cause interruptions in our operations, which may adversely affect our business. We may be required to spend significant amounts of money to protect us against the threat of security breaches or to alleviate problems caused by security breaches, which could be expensive. Concerns over the security of Internet transactions and the privacy of users may also inhibit the growth of the Internet as a means of conducting commercial transactions. Our electronic commerce services business would be adversely affected if Internet service were interrupted due to hardware, software, telecommunications or other breakdowns. Our operations may be interrupted if the computer hardware or software owned by us, our clients or by service providers upon whom we depend (including Internet service providers) are damaged or prevented from operating. To the extent that we experience temporary or permanent business interruptions, whether due to a casualty or an operating malfunction, our business is adversely affected. If interruptions happen often enough, loss of customer confidence may adversely affect our business; and if such interruptions result from general Internet service deprivations, the loss of generalized confidence in Internet operability may adversely affect our business that is specifically targeted at electronic commerce. We may be liable for online content provided by third parties. The law of the Internet is uncertain and is changing. We may face potential liability for defamation, negligence, copyright, patent or trademark infringement and other claims based on the nature and content of the materials that appear on Web sites that we host through our subsidiaries. Claims of this type have been successfully prosecuted from time to time. Liability could be material. - 13 - Government regulation of Internet communications may influence our business. We currently are not subject to direct regulation by any governmental agency, other than regulations applicable to business generally. However, in the future we could become subject to specific industry regulation by regulatory agencies. Changes in the regulatory environment could have a material adverse impact on our business and financial condition. If our stock becomes subject to the SEC's "penny stock" rules it could become more difficult to buy and sell our stock, which may adversely impact our trading market. Continued quotation of our common stock in the Nasdaq SmallCap Market is conditioned upon continuing to meet Nasdaq eligibility requirements. In addition, if the trading price of TekInsight common stock remains below $5.00 per share, sales of common stock would be subject to Rule 15g-9 under the Securities Exchange Act of 1934, applicable to "low price stocks," which imposes additional sales practice requirements on broker-dealers making sales of low-priced stock to the public. For transactions covered by this rule, a broker-dealer must make a special suitability determination respecting each purchaser and have received each purchaser's written consent to the transaction prior to sale. If TekInsight fails to meet Nasdaq's eligibility requirements or sales of our common stock become subject to Rule 15g-9, the ability of holders to sell their common stock in the secondary market could be adversely affected. A sale of a significant number of our shares may adversely impact us. Sales of substantial amounts of TekInsight common stock (including shares issued upon the exercise of warrants or stock options), or the perception in the market that such sales could occur, could adversely affect the market price of TekInsight common stock and could also impair our ability to raise capital through an offering of our equity securities in the future. Assuming exercise of all outstanding convertible securities, and a market price of $4.99 per share for our common stock used to determine the number of Series A preferred stock to be issued to shareholders of Data Systems, we would have 22,136,172 shares of common stock outstanding, of which 17,243,277 will be transferable without restriction under the Securities Act. The remaining 7,941,242 shares of common stock to be outstanding on completion of the merger are "restricted securities" under Rule 144. Restricted Securities may be publicly sold only if registered under the Securities Act, or if sold pursuant to an applicable exemption and in compliance with Rule 144. Under Rule 144, assuming satisfaction of other conditions, a person, including an affiliate of TekInsight, who has beneficially owned restricted securities for at least one year is entitled to sell within any three-month period up to the greater of 1% of the total number of outstanding shares of the same class or, since our common stock is quoted on the Nasdaq SmallCap Market, the average weekly trading volume during the four calendar weeks preceding the sale. A person who has not been an affiliate of TekInsight for three months and who has beneficially owned the restricted securities for at least two years, is entitled to sell such restricted shares under Rule 144 without regard to any of the limitations described above. - 14 - BACKGROUND OF THE MERGER Background of the Merger In March 1998, the board of directors of Data Systems determined that it would seek to enhance shareholder value. Data Systems subsequently entered into a merger agreement with Information Architects Corp, then named Alydaar Software Corporation, on January 31, 1999. That agreement was mutually terminated on September 15, 1999 and a press release announcing the termination was issued by both companies. On September 16, 1999, Robert Arnold of Amtech, Inc., a business merger and acquisition firm, saw the notice of termination and contacted Michael W. Grieves, Chief Executive Officer of Data Systems. Mr. Arnold wanted to introduce TekInsight to Data Systems in order to discuss a possible merger. TekInsight, then named Tadeo Holdings, Inc., was in the process of changing its business. It had been in the medical services business but had sold its medical services business in 1998 and acquired AstraTek, a privately held technology development and professional services company. TekInsight wanted to combine TekInsight Services' technology, professional services and new electronic commerce capabilities with the sales, support, and infrastructure of Data Systems to create a leading Internet technology and services company. Mr. Arnold was invited to address the board of directors by conference call at a Data Systems board of directors meeting on September 30, 1999. Mr. Arnold addressed Data Systems board of directors and discussed a framework for a possible transaction. The Data Systems board of directors agreed that Mr. Arnold should pursue a possible transaction with TekInsight. On October 4, 1999, TekInsight representatives faxed to Mr. Grieves an outline of a proposal letter. Mr. Grieves, Chief Executive Officer of Data Systems, subsequently met with Mr. Alexander Kalpaxis, at the time Executive Vice President and Chief Technology Officer of TekInsight, and Mr. Damon Testaverde, a member of the TekInsight board of directors, on October 14 and 18, 1999 to discuss the strategic advantages of combining TekInsight and Data Systems, and a possible transaction of some type. Data Systems continued to have discussions with TekInsight representatives, along with other interested parties, throughout the end of the year. During the end of 1999 and into January 2000, TekInsight, Data Systems and their respective representatives discussed the terms of a possible transaction between the parties and each party conducted due diligence. On January 12, 2000 TekInsight proposed a valuation that was in excess of Data Systems' then current market value. Mr. Grieves agreed to present the TekInsight proposal to the board of directors of Data Systems. On January 14, 2000, the board of directors of Data Systems discussed the TekInsight proposal and determined that it was superior to other tentative proposals under consideration due to its superior valuation, its potential for increasing in value as TekInsight stock price increased and its definitiveness. The letter of intent was authorized by the TekInsight board of directors on January 14, 2000. On January 18, 2000, the parties executed a letter of intent and issued a joint press release announcing the merger. During February 2000, the parties and their respective advisors continued their due diligence and negotiated the terms of a definitive merger agreement. In addition, Data Systems engaged Valuation Counselors, and TekInsight engaged Valuemetrics, to evaluate and render a written opinion on the fairness of the merger consideration from a financial perspective to the shareholders of each company, respectively. Valuation Counselors presented the Data Systems board of directors with its fairness opinion on February 8, 2000. - 15 - The board of directors, along with the management, of Data Systems, convened by conference call in a special meeting of the board of directors on February 17, 2000 to consider the merger agreement. Mr. Jansen, Chief Financial Officer of Data Systems, led the discussion of the possible merger transaction. After discussion and analysis of the possible merger transaction and the fairness opinion, the board of directors of Data Systems unanimously approved the merger agreement and recommended its approval by the shareholders of Data Systems. On February 16, 2000, Valuemetrics presented its fairness opinion at a special meeting of the board of directors of TekInsight. At that meeting, the board of directors of TekInsight voted and unanimously authorized the merger and recommended its approval by the stockholders of TekInsight. Data Systems and TekInsight subsequently executed the merger agreement on February 18, 2000. On February 28, 2000, Data Systems and TekInsight issued press releases announcing the merger agreement. After further discussion between the management of Data Systems and TekInsight, in which the post-merger organization of the combined companies was discussed, it was agreed to amend the merger agreement by providing for the merger of Data Systems into TekInsight Services rather than AstraTek. TekInsight Services is a wholly owned subsidiary of TekInsight that provides electronic commerce services to its clients. An amendment to the merger agreement reflecting this modification was authorized by the boards of directors of Data Systems and TekInsight and signed by all parties on April 4, 2000. Data Systems' Reasons for the Merger; Recommendations of the Board of Directors The board of directors of Data Systems has unanimously approved the merger agreement and the merger, has authorized the execution and delivery of the merger agreement and believes that the merger is in the best interests of Data Systems and its shareholders. Accordingly, the board of directors of Data Systems unanimously recommends that the shareholders of Data Systems vote "FOR" the merger. In making its determination with respect to the merger, the board of directors of Data Systems considered the following factors material. This is not an exhaustive list of all the factors considered by the board of directors of Data Systems. Each member of the board of directors may have considered different factors or assigned different weights to different factors and the board of directors of Data Systems evaluated these factors as a whole and did not quantify or otherwise assign relative weights to the factors considered. Those factors were: o The prospective financial condition and results of operations of Data Systems and TekInsight. The board of directors considered this factor important in approving the merger because the listing of TekInsight on the Nasdaq SmallCap Market (which is a condition to the merger) would provide better liquidity for shareholders of Data Systems and better access to capital than Data Systems currently has in the over-the-counter market. o The current financial condition of Data Systems without combining with TekInsight. The board of directors considered this factor important in approving the merger because, although the board considered a number of other alternatives and merger partners, TekInsight offered the best terms and prospects. o The opportunity for Data Systems to accelerate its transition from the reliance on hardware sales into the higher margin business of providing professional and electronic commerce services and the development of software products. The board of directors considered this factor important because it afforded a good opportunity to diversify the revenue stream of Data Systems. - 16 - o The opinion of Valuation Counselors that the exchange ratio is fair from a financial perspective to the shareholders of Data Systems. The board of directors of Data Systems considered this factor important because their independent determination corroborated, from a financial perspective, what the board believed to be the case from a business perspective. o The business and financial opportunities that become available to Data Systems as a result of TekInsight's technical capabilities and product offerings. The board of directors of Data Systems considered this to be important from a long-term business perspective and as a component of adding shareholder value. o The opportunity to provide new Internet technology to its existing customers. The board of directors of Data Systems considered this important as a means of maintaining and expanding its customer base and adding to its revenue stream. o The ease of transition for the combined company after the merger due to the current infrastructure of Data Systems. The board of directors of Data Systems considered this important because it tended to support its belief that the merger made sense from a business perspective. The determination of the board of directors of Data Systems involved judgment with respect to, among other things, future economic, competitive and financial market conditions and future business decisions which may not be realized and are inherently subject to significant business, economic, competitive and other uncertainties, all of which are difficult to predict and many of which are beyond the control of Data Systems. TekInsight's Reasons for the Merger; Recommendation of Board of Directors In making its determination with respect to the merger, the board of directors of TekInsight considered the following factors material. This is not an exhaustive list of all the factors considered by the board of directors of TekInsight. Each member of the board of directors may have considered different factors or assigned different weights to different factors and the board of directors of TekInsight evaluated these factors as a whole and did not quantify or otherwise assign relative weights to the factors considered. Those factors were: o TekInsight seeks to gain access to Data Systems' established sales and distribution channel to promote TekInsight products and services. Data Systems possesses a distribution network covering 16 state and local governments and a variety of commercial accounts. The board of directors of TekInsight considered this factor important because expanding existing sales and distribution channels is critical to future revenue growth. o TekInsight seeks to gain access to Data Systems' seasoned sales team operating in five district offices, without incurring the time and expense required to establish a channel independently, and increasing the likelihood that TekInsight will be able to successfully penetrate target markets. The board of directors of TekInsight considered this factor important for the same reasons. o Data Systems' help desk operations is expected to provide valuable support for TekInsight product rollouts and solutions provided to clients. The board of directors considered this factor important but it was not as heavily weighted as the other factors considered. o Data Systems' professional services group complements the professional services group of TekInsight. The merged entity will be able to provide a broader range of technical services to the combined client bases of both companies. The board of directors of TekInsight considered this factor important because it directly relates to an assessment of the combined company's future revenue stream. - 17 - o Data Systems' network engineers and product procurement sources, combined with the eCommerce development capability and technical know-how of TekInsight, will allow TekInsight to promote an "end-to-end" eCommerce solution to commercial and government clients seeking to leverage the Internet. The board of directors considered this an important factor in expanding the combined company's customer base. o TekInsight expects to realize significant gains in efficiency and operating profits as a result of organization rationalization and process improvements in the combined entity. The board of directors considered this factor important because it tends to support the belief that the merger makes sense from a business and financial perspective. o Although the board of directors of TekInsight did not commission a formal analysis of synergies and did not attempt to quantify synergies, TekInsight expects to realize synergies from the combination of TekInsight's sophisticated product development, professional services and electronic commerce activity teams with Data Systems' extensive sales staff. In this case, each merger participant has particular business operational strengths that are not as highly developed in the other participant's organization. For example, TekInsight expects synergies to develop by pairing its development expertise and lack of sales strength, given its small sales staff, with Data Systems' large national sales organization and more limited development staff sophistication. The board of directors considered this factor important because it tends to support the idea that each merger participant's access to the other's operational strengths will lead to more business advantages for each side than simply the result of adding together the revenues generated by each party to the merger or spreading existing operating expenses over a larger revenue base. The determination of the board of directors of TekInsight involved judgment with respect to, among other things, future economic, competitive and financial market conditions and future business decisions which may not be realized and are inherently subject to significant business, economic, competitive and other uncertainties, all of which are difficult to predict and many of which are beyond the control of TekInsight. - 18 - INTERESTS OF CERTAIN PERSONS IN THE MERGER Except as disclosed, none of the current directors or officers of TekInsight has any substantial interest, direct or indirect, by security holdings or otherwise, in the merger. Officers and directors of Data Systems may have interests in the merger that are different from or in addition to other shareholders of Data Systems. Data Systems does not, however, believe that any of these interests presents a material conflict of interest. Employment Agreement On October 1, 1998, TekInsight entered into a three-year employment contract with Alexander Kalpaxis. Mr. Kalpaxis is Chairman of the Board and Chief Technology Officer of TekInsight. Mr. Kalpaxis's employment agreement provides him with an annual base salary of $160,000. Additionally, Mr. Kalpaxis will receive a performance bonus based upon the operating results of AstraTek if EBITDA of AstraTek equals or exceed $1 million. Consulting Agreements Steven J. Ross entered into a consulting agreement on December 10, 1999 for his services as a consultant to the newly-formed TekInsight subsidiary, BugSolver.Com, Inc. The agreement extended through March 31, 2000 and became automatically renewable for successive 90-day periods unless either party gives notice of termination. Mr. Ross also agreed to serve as a director of BugSolver. For his services, Mr. Ross receives (i) $20,000 monthly, and (ii) a bonus of options to buy 30,000 shares of BugSolver common stock. Following the first renewal of the consulting agreement and the successful completion of a private placement of at least $10,000,000 of BugSolver equity securities, Mr. Ross will receive further options to purchase 4% of the outstanding shares of BugSolver common stock immediately following completion of the private placement. Under the consulting agreement, these options will vest one year from the closing of the private placement. Indemnity Agreement TekInsight has entered into agreements which provide indemnification to each of its directors and officers, to the fullest extent allowed under the Delaware General Corporate Law. The indemnification agreements provide for payment by TekInsight of all expenses, judgments and other amounts required to be paid by an officer or director in connection with a proceeding or suit to which he is a party or witness or is otherwise involved by reason of the fact he acted as an officer, employee, director or agent of TekInsight. TekInsight is not obligated to pay any expenses with respect to any proceeding arising out of acts or omissions for which an officer or director is prohibited by applicable law from receiving indemnification or where the attorney representing the indemnitee has concluded that the indemnitee is not entitled to indemnification of any amounts. Consents to be Named as Director Steven J. Ross, a former director of Data Systems and the current President and Chief Executive Officer of TekInsight, Michael W. Grieves, President and Chief Executive Officer of Data Systems, and Walter J. Aspatore, a director of Data Systems, have each agreed to become a director of TekInsight on the same terms as TekInsight's other directors after the merger. - 19 - Material Contracts with Data Systems The following is a summary of the material terms of agreements between TekInsight and Data Systems pertaining to pre-merger and post-merger operations. Voting Agreement Michael W. Grieves and Gregory Cocke, as principal shareholders of Data Systems, and Data Systems, AstraTek and TekInsight, as parties to the merger, entered into a voting agreement dated as of February 18, 2000. Pursuant to the voting agreement, Mr. Grieves and Mr. Cocke agreed to vote their shares of Data Systems common stock and any other capital stock owned by them (i) in favor of the merger, (ii) against any action discouraging or inhibiting the completion of the merger and (iii) against any other merger or reorganization or sale of Data Systems. During the term of the voting agreement, which shall be effective until the conclusion of Data Systems' meeting of shareholders held for the purpose of voting on the merger, neither Mr. Grieves nor Mr. Cocke will solicit proxies in opposition to the merger, encourage or assist any party in taking action or directly taking any action to compete with or discourage the merger or become a member of a group for the purpose of opposing the merger. In connection with the voting agreement, Mr. Grieves and Mr. Cocke have granted a proxy to either of Brian Bookmeier or Damon Testaverde to vote their shares of Data Systems in favor of the merger at the special meeting. Affiliate Agreement Michael W. Grieves and Gregory Cocke entered into an affiliate agreement dated as of February 18, 2000 with TekInsight and Data Systems. Under the affiliate agreement, Mr. Grieves and Mr. Cocke each agree not to transfer or sell the preferred stock that they shall receive in the merger unless such sale is allowed by the terms of Rules 145(c) and (d) under the Securities Act, or counsel provides an opinion to the effect that sale is exempt from the registration requirements of the Securities Act, or sale of their shares is covered by an effective registration statement filed with the SEC. The shareholders each agree not to transfer or sell Data Systems common stock or TekInsight Series A preferred stock acquired in the merger during a 30-day period beginning immediately prior to the effective time of the merger and ending after TekInsight publishes its first financial statements containing pro forma financial statements. Under the affiliate agreement, Mr. Grieves and Mr. Cocke each agree that they do not have any plan to sell or transfer shares of Series A preferred stock, and do not know of any plan by other shareholders of Data Systems to sell 50% or more of the Series A preferred stock as determined on a pre-merger basis. - 20 - MERGER AGREEMENT The merger agreement is dated as of February 18, 2000, as amended on April 4, 2000, among TekInsight, TekInsight Services and Data Systems. The following summary of the material terms of the merger agreement, while complete in material respects, is nonetheless a summary. It is qualified by reference to the full text of the merger agreement which is attached as an exhibit to this proxy statement/prospectus and incorporated herein by reference. Effect of the Merger The merger agreement provides that if the merger is approved, at the effective time a certificate of merger will be filed with the Michigan Department of Consumer and Industry Services, Securities and Land Development Bureau and a certificate of merger will be filed with the Delaware Secretary of State, and upon such filings Data Systems will be merged with and into TekInsight Services. TekInsight Services will continue as the surviving company. By operation of law, TekInsight Services shall succeed to the property and rights of Data Systems and assume all of its debts, liabilities and duties. The certificate of incorporation and bylaws of TekInsight Services will be the certificate of incorporation and bylaws of the combined entity. Management of TekInsight After the Effective Date of the Merger Steven J. Ross, President and Chief Executive Officer of TekInsight, will also be a director of TekInsight after the merger. The board of directors of TekInsight immediately prior to the merger, with the addition of Steven J. Ross, Michael W. Grieves and Walter J. Aspatore, will be the initial board of directors of TekInsight after the merger. The closing of the merger will occur within one to two days after the satisfaction or waiver of all material conditions of the merger agreement, including obtaining shareholder approval. No conditions are expected to be waived. The closing will be at the offices of Nixon Peabody LLP, counsel for TekInsight, 437 Madison Avenue, New York, New York, or at such other time and place as the parties may agree in writing. Merger Consideration; Effect on Capital Stock of Data Systems Under the merger agreement, the Series A preferred stock of TekInsight paid as merger consideration will have a dollar value of between $12.5 million and $18 million, depending on the average of the market value of TekInsight common stock as quoted on the Nasdaq SmallCap Market for the 10 consecutive trading days immediately prior to the closing date of the merger. The aggregate dollar amount of the merger consideration will be determined on the following basis: If the Market Value of Then the Total Value TekInsight Common Stock Quoted on of the Merger The Nasdaq SmallCap Market at Closing Date Is: Consideration Will Be: ---------------------------------------------- ---------------------- Less than $5.00 per share but more than $12.5 million $2.00 per share Equal to or greater than $5.00 and less than $16 million $7.00 per share Equal to or greater than $7.00 per share $18 million - 21 - Each shareholder of Data Systems will receive his proportionate share of TekInsight's Series A preferred stock based on an exchange ratio equal to the per share amount described immediately above divided by the market value of one share of TekInsight common stock calculated as described in the table above. For a full description of the merger consideration formula, with examples, see "Summary -- Merger Consideration," beginning on page ___ of this proxy statement/prospectus. Data Systems common stock will be cancelled without conversion. Cash will be paid for fractional shares. Treatment of Data Systems Stock Options At the effective time of the merger, each outstanding and unexercised Data Systems stock option which has been issued under its option plan shall be assumed by TekInsight and shall be deemed to be vested as of the effective date of the merger. Each assumed stock option shall be exercisable for shares of Series A preferred stock in accordance with the conversion ratio set forth in this section in the paragraph above entitled "Merger Consideration; Effect on Capital Stock of Data Systems." Shares of Data Systems common stock issued upon the exercise of Data Systems options which have been granted under its option plan prior to the date that is three days prior to the effective time of the merger shall be converted into shares of Series A preferred stock in accordance with the conversion ratio described above. Such exercised Data Systems options shall be deemed to have vested not later than the fifth business day prior to the closing date of the merger. Surrender of Data Systems Certificates American Stock Transfer & Trust Company is the exchange agent in the merger. Immediately after the closing date, TekInsight will give the exchange agent the number of its shares of Series A preferred stock necessary to complete the exchange. TekInsight will also give the exchange agent sufficient cash to pay cash for fractional shares. The exchange agent will send each shareholder of Data Systems of record a transmittal letter covering the exchange of shares, together with instructions for effecting the exchange. Upon surrender of Data Systems stock certificates, the holders of the surrendered Data Systems certificates will be entitled to receive their proportionate share of Series A preferred stock, plus any cash paid for fractional shares. Shareholders of Data Systems will not be entitled to any dividends or distributions on Series A preferred stock until their Data Systems share certificates are surrendered to the exchange agent. Following the surrender of Data Systems share certificates to the exchange agent, along with a signed and completed transmittal letter, the exchange agent will deliver to shareholders of Data Systems certificates representing their shares of Series A preferred stock, plus cash for any fractional shares. Interest will not be paid between the closing date and the date shareholders receive their Series A preferred stock. If a shareholder is the registered holder and would like his Series A preferred stock issued in any name other than his own, Data Systems certificates surrendered to the exchange agent must be properly endorsed and proper instructions must be given to the exchange agent. Any such person to be issued Series A preferred stock must establish that any transfer or other taxes required to be paid by reason of the transfer have been paid or are not payable. The exchange agent will not be liable for any amount properly paid to a public official pursuant to any applicable abandoned property, escheat or similar laws. After one year from the closing date of the merger, the exchange agent will no longer be obligated to exchange Data Systems common stock on behalf of TekInsight or pay cash in lieu of fractional shares or for dividends. After that date shareholders of Data Systems must look to TekInsight for payment of their claims. - 22 - No Further Ownership Rights in Data Systems Common Stock After Exchange All shares of TekInsight Series A preferred stock issued pursuant to the merger agreement shall be deemed to have been issued in full satisfaction of all claims pertaining to exchanged shares of Data Systems common stock. Data Systems certificates presented after the effective time of the merger will be canceled and exchanged as provided in the merger agreement. Lost, Stolen or Destroyed Certificates Certificates for shares of Data Systems common stock that have been lost, stolen or destroyed may nonetheless be exchanged for Series A preferred stock by the exchange agent upon proper proof of ownership, including an affidavit of the holder and bond sufficient to indemnify TekInsight, TekInsight Services or the exchange agent against possible loss with respect to such certificates. Tax Consequences It is a condition of the merger that TekInsight and Data Systems each receives a legal opinion that the merger constitute a tax-free reorganization within the meaning of Section 368(a)(2)(D) of the Internal Revenue Code. Further Actions by the Parties The parties each agree that if further action is necessary or desirable to carry out the purposes of the merger agreement and to vest TekInsight Services with full right, title and possession to all assets, property, rights, privileges, powers and franchises of Data Systems, that the officers and directors of Data Systems and TekInsight Services agree to take all such lawful and necessary action. TekInsight shall cause TekInsight Services to perform its obligations under the merger agreement. Representations and Warranties The merger agreement contains customary representations and warranties by both parties. Covenants The parties have agreed to a number of customary covenants including the following: Each party has agreed to help to prepare and file a proxy statement/prospectus with the SEC. Data Systems has agreed to use its best efforts promptly to hold a special meeting and solicit proxies in favor of the merger and secure shareholder approval of the merger as required by the rules of the National Association of Securities Dealers, Michigan law and Delaware law to obtain such approvals. Both parties have agreed to keep the books and records of the other party confidential. Data Systems has agreed to a "no shop" provision subject to fiduciary duties owed by the board of directors of Data Systems to its shareholders. TekInsight has agreed to use its best efforts to have the Series A preferred stock listed on the Nasdaq SmallCap Market. Both parties have agreed to confidentiality provisions, limitations on publicity, labor and other matters. Conditions to Closing The obligations of the parties under the merger agreement are subject to the satisfaction of a number of customary conditions, none of which is expected to be waived. Waiver by either board of directors of a material condition will result in resolicitation of shareholders. The material conditions of the merger agreement require that: o shareholders of Data Systems approve the merger; - 23 - o this proxy statement/prospectus be declared effective by the SEC; o there is no governmental action, including a statute, rule, regulation, executive order, decree, injunction or order that would prevent completion of the merger; o TekInsight and Data Systems each receives from its respective special tax counsel a tax opinion to the effect that the merger will be a tax free reorganization within the meaning of Section 368(a)(2)(D) of the Internal Revenue Code; o Nasdaq list the Series A preferred stock on the Nasdaq SmallCap Market; o all third party consents (including consents of lenders) have been obtained; o any necessary approvals by TekInsight stockholders have been obtained; o other customary covenants have been complied with (that all representations and warranties are true at closing, no material adverse changes in the business of TekInsight, receipt of legal opinions, etc.); and o no more than 5% of holders of Data Systems common stock have exercised dissenters' rights. Events of Termination The merger agreement may be terminated in the event of any of the following: o by mutual consent of the boards of directors of TekInsight and Data Systems; o by either party, if the merger is not completed by June 30, 2000 for any reason; o automatically on September 30, 2000 if the merger has not been completed; o if a governmental entity issues an order, decree, or ruling or takes any other action after a final order has been entered, or there shall be any law or regulation having the effect of permanently restraining, enjoining or otherwise prohibiting the merger; o if the required approval of the shareholders of Data Systems is not obtained; o if the board of directors of Data Systems unanimously fails to recommend shareholder approval of the merger, withdraws or adversely changes its recommendation to approve the merger prior to the approval of its shareholders; o if the board of directors of Data Systems accepts, publicly endorses, recommends or executes a letter of intent or similar document with respect to a proposal more financially favorable to the shareholders of Data Systems with respect to a sale of Data Systems or substantially all its assets; o a tender or exchange offer is commenced with respect to Data Systems securities and Data Systems does not recommend rejection of the offer within 10 business days after commencement; o if an acquisition proposal (other than a tender or exchange offer relating to the securities of Data Systems) is publicly announced and, upon TekInsight's request, the board of directors of Data Systems does not within 10 days issue a press release announcing its opposition; o if the board of directors of TekInsight fails unanimously to recommend stockholder approval of the merger, or amends or adversely changes its recommendation to approve the merger; o by either party, if the other breaches any representation, warranty, covenant or agreement contained in the merger agreement, or if any representation or factual basis for a covenant becomes inaccurate; - 24 - o by either party, if a tender or an exchange offer with respect to the securities of Data Systems is accepted by holders of more than 50% of the outstanding shares of Data Systems common stock; o if in the opinion of outside legal counsel either TekInsight or Data Systems is required to terminate the merger agreement pursuant to its fiduciary duties to its shareholders under applicable laws; o if the average market value for TekInsight common stock for the 10 consecutive trading days prior to the closing date of the merger is less than $2.00 per share; o if at any time prior to any required approval of the merger by the stockholders of TekInsight, the board of directors of TekInsight withdraws its recommendation; or o if any necessary approval by the stockholders of TekInsight is not obtained under the Nasdaq National Stock Market rules and/or Delaware law. Fees and Expenses Each party to the merger will pay its own fees and expenses but will share fees and expenses incurred in relation to printing and filing of the Data Systems proxy statement and the registration statement. In addition, Data Systems has agreed to pay TekInsight $2 million in the event that: o the merger is not approved by the shareholders of Data Systems; o a tender or exchange offer is accepted by more than 50% of the outstanding shares of Data Systems common stock; o outside legal counsel of either TekInsight or Data Systems is of the opinion that the merger agreement should be terminated because of the fiduciary duties the board of directors of either TekInsight or Data Systems owes its shareholders; or o prior to approval of the shareholders of Data Systems, the board of directors of Data Systems withdraws its recommendation that the shareholders of Data Systems vote "FOR" the merger or except, publicly endorses, recommends or executes a letter of intent with respect to a proposal that is more financially favorable to shareholders of Data Systems; o the board of directors of Data Systems fails unanimously to recommend that the shareholders of Data Systems vote "FOR" the merger, or amend or modify their unanimous recommendation of Data Systems shareholder approval; o if the board of directors of Data Systems accepts, publicly endorses, recommends or executes a letter of intent or similar document with respect to a proposal more financially favorable to the shareholders of Data Systems with respect to a sale of Data Systems or substantially all its assets; o a tender or exchange offer is commenced with respect to Data Systems securities and Data Systems does not recommend rejection of the offer within 10 business days after commencement; or o if an acquisition proposal (other than a tender or exchange offer relating to the securities of Data Systems) is publicly announced and, upon TekInsight's request, the board of directors of Data Systems does not within 10 days issue a press release announcing its opposition. However, with respect to the first four reasons given above, the $2 million fee will not be payable in the absence of a proposal to acquire at least 10% control of Data Systems. Choice of Law The merger agreement is to be governed and construed under the laws of the State of New York. - 25 - OPINIONS OF FINANCIAL ADVISORS Opinion of Data Systems' Financial Advisors-- Valuation Counselors Group, Inc. The board of directors of Data Systems retained Valuation Counselors to render its opinion as to whether the consideration to be paid to shareholders of Data Systems by TekInsight pursuant to the merger agreement is fair from a financial perspective to the shareholders of Data Systems. Data Systems retained Valuation Counselors based upon its prominence as a valuation and financial advisory firm with experience in the valuation of businesses and their securities in connection with mergers and acquisitions, divestitures, leveraged buyouts, private placements, and other situations. On February 8, 2000, Valuation Counselors delivered its written opinion to the board of directors of Data Systems that, as of the date of the opinion, based on the review of Valuation Counselors' and subject to the assumptions, limitations, procedures followed and qualifications described below and set forth in the opinion, the consideration to be received by the shareholders of Data Systems from the merger is fair to the shareholders of Data Systems from a financial perspective. Valuation Counselors is not making, and the opinion should not be construed as, a recommendation as to whether or not a shareholder of Data Systems should approve the merger. Additionally, the fairness opinion of Valuation Counselors does not compare the relative merits of the merger with those of any other transactions or business strategies available to Data Systems as alternatives to the merger, and Valuation Counselors was not requested to, and did not, solicit the interest of any other party in acquiring similar companies. The full text of the fairness opinion which contains a description of the material assumptions and qualifications made, matters considered and limitations imposed on the review and analysis is set forth in an exhibit attached to this proxy statement/prospectus and should be read in its entirety. The board of directors of Data Systems imposed no conditions or limitations on the scope of the investigation or the methods or procedures to be followed by Valuation Counselors in rendering the fairness opinion. In rendering the fairness opinion, Valuation Counselors, among other things: (i) reviewed the merger agreement; (ii) reviewed and analyzed consolidated historic and projected financial and operating data of Data Systems, including audited financial statements for Data Systems; (iii) reviewed and analyzed other internal information concerning the business and operations of Data Systems furnished by management; (iv) reviewed and analyzed publicly available information concerning Data Systems; (v) reviewed and analyzed publicly available information concerning the terms of selected merger and acquisition transactions that Valuation Counselors deemed relevant to its inquiry (based on business line, size, and similar financial characteristics); (vi) reviewed and analyzed selected market purchase price data that Valuation Counselors considered relevant to its inquiry; (vii) held meetings and discussions with TekInsight and employees of Data Systems concerning the operations, financial condition and prospectus of Data Systems; and (viii) conducted such other financial studies, analysis investigations, including a visit to Data Systems' Farmington Hills, Michigan corporate offices, and considered such other information as Valuation Counselors deemed appropriate. In arriving at its opinion, Valuation Counselors relied, without independent verification, on the accuracy and completeness of all of the financial and other information that was publicly available, supplied or otherwise communicated to it by Data Systems and TekInsight. Valuation Counselors assumed that the financial estimates (including the underlying assumptions and bases thereof) examined by it were reasonably prepared and reflected the best currently available estimates and good faith judgments as to the future performance of Data Systems. Valuation Counselors expressed no opinion with respect to any forecasts or the assumptions on which they were based. Valuation Counselors did not make an independent evaluation or appraisal of the assets or liabilities (contingent or otherwise) of Data Systems. The fairness opinion is based upon financial, economic, market, and other conditions and circumstances existing and disclosed to it as of the date of its opinion. As background for its analyses, Valuation Counselors held discussions regarding the history, current business operations, financial condition, and future prospects of Data Systems. - 26 - For purposes of its analysis, Valuation Counselors relied upon the following SEC filings of Data Systems: Form 10-Ks for the periods ending December 31, 1996 through December 1, 1998, Form 8-Ks dated January 8, 2000, and September 15, 1999, Form S-1 dated December 16, 1996, and Form 10-Qs, for the periods ending September 30, 1999, June 30, 1999, and March 31, 1999. Valuation Counselor's opinion is directed only to the fairness to Data Systems and to the shareholders of Data Systems from a financial perspective of the consideration to be received by the shareholders of Data Systems from the merger, and does not address any other aspect of the merger. The summary set forth below describes the material analyses undertaken but is nonetheless a summary. In conjunction with rendering its fairness opinion, Valuation Counselors considered the following financial and comparative analyses: o a contribution analysis; o a pro forma merger analysis; o a discounted cash flow analysis; o an analysis of selected publicly traded companies; o an analysis of transactions pursuant to which selected public and private companies have acquired data networking companies similar to those of Data Systems; and o an analysis of other factors. Contribution Analysis Valuation Counselors analyzed the respective current contributions of Data Systems and TekInsight to the estimated revenue, EBITDA, and net income of the combined company. This analysis indicated that (i) in fiscal 1999, Data Systems would contribute approximately 94.0% of revenue, 170.0% of EBITDA, and 50.4% of net income, and (ii) TekInsight would contribute approximately 6.0% of revenue, 70.0% of EBITDA, and 49.6% of net income of the combined company. Pro Forma Merger Analysis Valuation Counselors analyzed pro forma effects resulting from the merger, including, among other things, the impact of the merger on TekInsight's projected EPS for fiscal years 2000 through 2004 based, in the case of Data Systems, on internal estimates of the management of Data Systems for fiscal year 2000 and extrapolated for subsequent years based on management's growth rate estimates and, in the case of TekInsight, on estimates of selected investment banking firms for fiscal years 2000 through 2004 and extrapolated for subsequent fiscal years based on analysts' growth estimates for TekInsight. The results of the pro forma merger analysis suggested that the merger could be accretive to TekInsight's EPS in each of the fiscal years analyzed. The actual results achieved by the combined company may vary from projected results and the variations may be material. Discounted Cash Flow Analysis Valuation Counselors analyzed the financial terms of the merger using a discounted cash flow analysis. The discounted cash flow approach assumes, as a basic premise, that the intrinsic value of any business or property is the current value of the future cash flow that the business will generate for its owners. To establish a current implied value under this approach, future cash flow must be estimated and an appropriate discount rate determined. The projected cash flows and terminal value were discounted to present value using a discount rate of 19%. Valuation Counselors estimated the free cash flows, defined as total projected cash revenue minus total projected cash expenses. Valuation Counselors performed a discounted cash flow analysis of the projected debt-free net cash flow of Data Systems for the fiscal years ending September 30, 2000 through 2004, partially based on internal estimates of the Company's management. Based on financial information and input from management at Data Systems, revenues were projected at $58.1 million, $66.9 million, $80.2 million, $96.3 million, and $115.5 million for the years ending 2000 through 2004. Cost of sales were projected at $46.3 million, $53.2 million, $63.9 million, $76.7 million, and $92.0 million for the years ending 2000 through 2004. Total operating expenses, exclusive of depreciation, were projected at $10.2 million, $11.4 million, $13.3 million, $15.0 million, and $18.0 million for the years ending 2000 through 2004. After the deduction of depreciation and amortization expense, other income, and income tax expense, debt-free net income was $330,000, $589,000, $995,000, $1.8 million, and $2.2 million for the years ending 2000 through 2004. - 27 - The indicated enterprise value was determined by adding the present value of the projected debt-free net cash flows over the fiscal years 2000 through 2004 and the present value of Data Systems' estimated terminal value in 2004. This analysis yielded an enterprise value below the purchase price. Selected Comparable Acquisition Analysis Valuation Counselors, using publicly available information, reviewed the purchase prices and implied transaction multiples paid or proposed to be paid for 69 companies, deemed comparable on the basis of size, financial data and the like, engaged in the computer networking and information technology industries. From these transactions Valuation Counselors calculated market value of invested capital (MVIC) multiples of revenue and earnings before depreciation, interest, and taxes (EBITDA.) The MVIC/Revenue multiples ranged from 0.02X to 19.33x with a median of 0.90X. The MVIC/EBITDA multiples ranged from 0.02X to 38.96X with a median of 9.86X. As detailed in Valuation Counselors' fairness opinion, Data Systems' multiples derived from the purchase price fall within the range of the transacted companies' market multiples. These comparable acquisitions (by acquiree) are as follows: May & Speh, Barefoot Computer Training, PCM, Metrologie International, Claremont Technology Group, Spargo Consulting PLC, CSA Holdings, Sentient Systems, Synexus, Technology Management, ROW Sciences, Vanstar Corp., Computer Power Group, Logical Software Solutions Corp., FullTime Software, Carnegie Group, Open Business Systems Group, Mastering, Global Technology Solutions, Traid Data, Scopus Technology, Video Management, Olivetti, Computer Data Systems, Micros-To-Mainframes, On-Line Networking, Allegiant Legacy Solutions, Menhir, Logicon, Expert Business Systems, BDM International, Datalogix International, Datasvar Support, Future Now, Enterprise Technology Group, Vail Research and Technology Corp, Vail Research and Technology Corp, Eclipse Information Systems, H.V. Jones, Confidential, Automated Business Systems of NC, Kent Consulting Group, Sabor Software Corp., TRECOM Business Systems, 3D Information Services, Connect Computer Company, Data Aid, Innova Solutions, ESP Software Services, Lior, Cray Communications, Consolidated Computer Investors, Comtex Information Systems, Concepts in Communications, Integrex Systems Corp., Hi-Tech Connections, STMS, PC Business Solutions, Novadyne Computer Systems, Costello & Associates, BTG, Solsource Computers, Open System Technologies, Software Analysis and Management, KCS Computer Services, Delta CompuTec, Conversion Services International, Quicksilver Group, E-BusinessSolutions.com. Publicly Traded Guideline Company Analysis Using publicly available information, Valuation Counselors analyzed the market values and trading multiples of the following publicly traded guideline companies: Tier Technologies, Microstrategy, Peregrine Systems, Eltrax Systems, Socrates Technologies Corporation, Micros to Mainframes, Osage Systems Group, and Government Technology Services From these guideline companies Valuation Counselors calculated market value of invested capital (MVIC) multiples of revenue and earnings before depreciation, interest, and taxes (EBITDA.) These companies were deemed comparable on the basis of size, financial data and the like. The MVIC/Revenue multiples ranged from 0.12x to 84.49x with a median of 1.74x. The MVIC/EBITDA multiples ranged from 11.31x to 577.79x with a median of 76.64x. As detailed in Valuation Counselors' fairness opinion, the indicated multiples based on the purchase price offered for Data Systems fall within the ranges of the guideline companies' market multiples but below the median levels. Such a placement is warranted due to Data Systems' smaller size, higher leverage, and inferior historical and projected growth rates in comparison to the guideline companies. - 28 - Other Factors and Analysis In rendering the fairness opinion, Valuation Counselors also considered other factors relevant to a valuation of Data Systems. These factors included (i) the premiums paid in acquisitions of companies in the computer networking and information technology industries and (ii) other offers to purchase Data Systems' securities. The purchase price for Data Systems equates to a premium of 113.5% to 207.5% over Data Systems' pre-January 19, 2000 common stock share price. By comparison, between 1995 and 1999, the premiums paid for transacted companies within the computer networking and information technology industries ranged between 13.0% and 81.4% with a median of 57.0%. Given this as well as Data Systems' market presence, the premium to the shareholders of Data Systems appears fair. Competing offers of expressions of interest were received from Micros to Mainframes, Dyn Corporation, American United Global, and Alydaar Software Corporation. With the exception of the Alydaar Software Corporation offer, all the competing offers were relayed verbally to Data Systems' business broker. The Micros to Mainframes offer for Data Systems indicated a value between $12 million and $13 million. The offer was declined due to business logistics and the fact that Micros to Mainframes was undergoing an assimilation of a recent acquisition. The Dyn Corporation offer, also presented verbally, had a value between $12 million to $13 million and was declined due to the use of privately held stock as a portion of the purchase price. American United Global offered $12 million for Data Systems but the offer was declined since American United Global would have had to liquidate a subsidiary in order to finance the acquisition. These offers compare to the purchase price range between $12,500,000 and $18,000,000. The summary set forth above describes the material analyses undertaken by Valuation Counselors. The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant methods of financial analysis and the application of these methods to the particular circumstances. Each of the analyses was performed by Valuation Counselors to provide a different perspective on the transaction and contribute to the total mix of information available to Data Systems. Valuation Counselors did not form a conclusion as to whether any one of the analyses, considered in isolation, supported or failed to support an opinion as to the fairness from a financial perspective of the merger consideration. Instead, Valuation Counselors, in reaching its conclusion, considered the results of the analyses taken as a whole. Valuation Counselors' conclusion involved significant elements of judgment and qualitative analysis as well as a financial and qualitative analysis. Valuation Counselors did not place particular emphasis or weighting on any individual factor, but instead concluded that its analysis taken as a whole supported its opinion. Accordingly, notwithstanding the separate factors summarized above, Valuation Counselors believes that its analyses must be considered as a whole and that selecting portions of its analysis and the factors it considered without considering all analyses and factors, could create an incomplete or misleading view of the evaluation process underlying its opinion. Any estimates contained in these analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than as set forth therein. Accordingly, such analyses and estimates are inherently subject to substantial uncertainty and Valuation Counselors does not assume responsibility for any future variations from such analyses or estimates. Valuation Counselors' fairness opinion relates to the relative values of Data Systems and TekInsight. Valuation Counselors did not express any opinion as to what the value of TekInsight common stock actually will be when issued to the shareholders of Data Systems pursuant to the merger or the price at which TekInsight common stock will trade subsequent to the merger. Although Valuation Counselors evaluated the exchange ratio from a financial perspective, Valuation Counselors was not asked to and did not recommend the specific consideration payable in the merger, which was determined through negotiation between Data Systems and TekInsight. - 29 - In performing its analyses, Valuation Counselors made numerous assumptions with respect to industry performance, general business, financial, economic, and market conditions and other matters, many of which are beyond the control of Data Systems. Furthermore, events occurring after the date of the Valuation Counselors fairness opinion may materially affect the assumptions used in preparing the Valuation Counselors fairness opinion and accordingly the Valuation Counselors fairness opinion is necessarily based upon market, economic, and other conditions that exist and can be evaluated as of the date of the opinion, and on information available to Valuation Counselors as of such date. In addition, analyses relating to the value of the business or securities do not purport to be appraisals, or to reflect the prices at which such businesses or securities can actually be sold. Analyses based on future results are not necessarily indicative of actual future results that may be significantly more or less favorable than suggested by such analyses. Pursuant to an engagement letter dated January 12, 2000, Valuation Counselors will receive $50,000 for its services in rendering a fairness opinion to Data Systems. Valuation Counselors will also be reimbursed for its expenses. Data Systems has agreed to indemnify Valuation Counselors, its affiliates and each of its directors, officers, employees, agents, consultants and attorneys and each controlling person, if any, from any liabilities under federal securities, law, that may arise out of Valuation Counselors' engagement. Valuation Counselors is principally and continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, divestitures, leveraged buyouts, private placements, and other situations. Prior to this engagement, Valuation Counselors has had no relationship with either Data Systems or TekInsight Opinion of TekInsight's Financial Advisors -- Valuemetrics, Inc. The following summary of the written opinion of Valuemetrics and the material analyses undertaken by it is qualified in its entirety by reference to the full text of its opinion. On January 10, 2000, the TekInsight board of directors retained Valuemetrics to act as financial advisor to the TekInsight board of directors and to render an opinion as to the fairness from a financial perspective to TekInsight of the merger consideration to be paid in the proposed acquisition of the stock of Data Systems. Valuemetrics was selected by the TekInsight board of directors because of its reputation as a recognized firm which is actively engaged in the valuation of businesses and their securities, particularly in connection with midsize private and public companies. Valuemetrics also provides financial advisory and investment banking services, providing fairness and solvency opinions, structuring transactions and types of securities through affiliated entities, raising senior and mezzanine debt, placement of private equity and offering companies for sale. The amount of the merger consideration to be paid in the proposed acquisition of the stock of Data Systems pursuant to the merger was determined by negotiations between TekInsight and Data Systems, not by Valuemetrics. On February 16, 2000 Valuemetrics delivered to the TekInsight board of directors its oral opinion that the merger consideration is fair from a financial perspective to TekInsight. The full text of Valuemetrics' opinion, which sets forth assumptions made, procedures followed, matters considered and any limitations on the review undertaken by Valuemetrics, is attached as an exhibit to this proxy statement/prospectus. As set forth in the opinion, Valuemetrics relied upon and assumed without independent verification the accuracy and completeness of the financial and other information provided to it by the management of Data Systems and TekInsight, including assurances of Data Systems and TekInsight management that they were unaware of any facts that would make such information provided to Valuemetrics incomplete or misleading. Valuemetrics also assumed that the transaction described in the agreement and plan of merger dated February 18, 2000 would be consummated on the terms set forth therein, without waiver of any such terms. Valuemetrics did not make or obtain an independent appraisal of the assets of Data Systems. No limitations were imposed by Data Systems, TekInsight or their respective boards of directors on Valuemetrics with respect to the investigation made, or the procedures followed by it in rendering its opinion. TekInsight, its management, Data Systems, and its management cooperated fully with Valuemetrics in connection therewith. Shareholders are urged to read this opinion in its entirety for a description of the procedures followed, matters considered, assumptions made and methods employed by Valuemetrics in arriving at its opinion. - 30 - The opinion of Valuemetrics is necessarily based upon conditions as they existed and could be evaluated on the date thereof. Valuemetrics has no obligation to update its opinion to take into account any subsequent changes or events. The opinion of Valuemetrics does not address the underlying business decision of TekInsight to effect the merger, and Valuemetrics expressed no view of the effect on TekInsight of the merger. Although Valuemetrics evaluated the merger consideration from a financial perspective, Valuemetrics did not recommend the specific merger consideration payable in connection with the merger, which was determined by TekInsight. Except for the opinion of Valuemetrics, TekInsight has not received any report, opinion or appraisal from an outside party which is related to the valuation of the merger. In conducting its analysis and arriving at its opinion, Valuemetrics, among other things, (i) reviewed the letter of intent of the merger between Data Systems and TekInsight, dated January 18, 2000, (ii) reviewed the agreement and plan of merger agreement dated February 18, 2000 by and among TekInsight, AstraTek (before the amendment which changed this party to TekInsight Services) and Data Systems, (iii) reviewed Data Systems' audited financial statements for the fiscal years ended December 31, 1996 through December 31, 1998, (iv) reviewed the unaudited financials of Data Systems for the quarters ended March 31, 1999, June 30, 1999 and September 30, 1999, (v) reviewed operating and financial information, including interim financial statements and other financial information provided to Valuemetrics by management of Data Systems relating to the business and prospects of Data Systems, (vi) met with members of senior management of Data Systems to discuss the company's operations, historical financial statements and future prospects, (vii) reviewed the historical prices and trading volume of Data Systems common stock, (viii) reviewed publicly available financial data and stock market performance data of public companies which were deemed generally comparable to Data Systems, including on the basis of customers served, products and services offered, size and financial characteristics, (ix) reviewed schedules of options outstanding and stock ownership prepared by Data Systems and (x) conducted such other studies, analyses, inquiries and investigations as it deemed appropriate. In making its presentation to the TekInsight board of directors at a meeting held on February 16, 2000, and in delivering its opinion dated February 18, 2000, Valuemetrics discussed financial analyses and other factors it deemed relevant to the determinations of the board of directors of TekInsight, including: o errors in planning or integration; o a review of historical and current trading data of the common stock; o comparable companies analysis; o future earnings analysis; o capitalized cash flow analysis; o mergers and acquisition analysis; and o equity premiums analysis. - 31 - In preparing its opinion, Valuemetrics performed a variety of financial and comparative analyses the material aspects of which are described below. The following summary, while complete in material respects, is nonetheless a summary description of the analyses underlying the opinion of Valuemetrics. Market Price Analysis Valuemetrics reviewed historical and current data with respect to prices and trading volume of the shares of Data Systems common stock. Valuemetrics analyzed the trading market for the shares of Data Systems common stock, including a review of the historical trading price of the shares of Data Systems during the prior three months, the last twelve months, and for the three years preceding February 15, 2000; historical data relating to the trading price and volume of the shares of Data Systems common stock for the same periods; and the range of prices at which the shares of Data Systems common stock traded in the period from January 13, 1997 to February 15, 2000. This analysis indicated three-year, last twelve months and thirty-day prior to February 15, 2000 average stock prices of $5.217, $0.980 and $1.25 per share, respectively. On February 15, 2000, the last trading day prior to the TekInsight board of director's receipt of Valuemetrics' presentation, the closing trade price of Data Systems common stock was $1.375 per share. Valuemetrics further noted that during the last three years, Data Systems common stock traded at a high of $16.469 and a low of $0.4375 per share. Comparable Company Analysis Valuemetrics reviewed and compared the financial and market performance of Data Systems to the financial and market performance of publicly traded companies which Valuemetrics deemed to be comparable to Data Systems, including, on the basis of customers served, product and services offered, size and financial characteristics. Such comparable companies included A Consulting Team, Inc., Alphanet Solutions, Inc., ASA International, LTD., CACI International, Inc., Ciber, Inc., Condor Technology Solutions, Inc., Cotelligent, Inc., Government Technology Services, Metro Information Services, Inc., Micros to Mainframes, Inc., Systems and Computer Technology Corp., Tier Technology, Inc., Transnet Corp. and Whittman Hart, Inc. Although such companies were considered similar to Data Systems in some respects, none of such companies possessed characteristics identical to those of Data Systems. In particular, such companies may have different product mixes or geographic markets than does Data Systems. Valuemetrics computed selected ratios of market value to key financial measures, including sales, earnings, cash flow, EBIT and EBITDA. These calculations created the following range of multiples: a range of revenue multiples of .35X to .41X; a range of earnings multiples of 13.8X to 16.0X; a range of cash flow multiples of 8.4X to 9.7X; a range of EBIT multiples of 9.6X to 11.1X; and a range of EBITDA multiple of 5.5X to 6.4X. All of these multiples were then applied to Data Systems' financial measures to calculate a range of market values for Data Systems. This methodology generated a range of equity values from $12,417,805 to $21,512,177; and per share prices of $2.25 and $3.90, respectively. Future Earnings Analysis Valuemetrics reviewed and compared the projected earnings performance of Data Systems to the forecasted earnings performance and current market performance of the fourteen publicly traded companies which Valuemetrics deemed to be comparable to Data Systems. Those companies from the Comparable Company Analysis with publicly available earnings estimates included in the Future Earnings Analysis were: A Consulting Team, Inc., Alphanet Solutions, Inc., CACI International, Inc., Ciber, Inc., Condor Technology Solutions, Inc., Metro Information Services, Inc., Systems and Computer Technology Corp., Tier Technology, Inc., Whittman Hart, Inc. After review, Valuemetrics chose these nine companies to compute the ratios of market value to one-year forward earnings (as determined from mean consensus earnings estimates provided by IBES through Bloomberg.) These calculations yielded a range of multiples from 16.3X to 18.8X. These multiples were then applied to Data Systems' projected future earnings to calculate a market value for Data Systems. This methodology generated an equity values ranging from $29,453,136 to $34,831,928; and per share prices of $5.35 and $6.32, respectively. - 32 - Capitalized Cash Flow Analysis Valuemetrics presented the results of a capitalized cash flow analysis of Data Systems based upon specified operating and financial assumptions. In its analysis, Valuemetrics relied partially on estimates and other financial information provided by Data Systems management for the one-year fiscal period ending December 31, 2000. Based on forecasts and input from management at Data Systems, Valuemetrics gave consideration to the following range of financial performance in deriving estimates of future net free cash flows: revenues within the range of $53.0 million to $59.8 million; gross profit (defined as revenues less cost of goods sold) within the range of $10.6 million to $13.9 million; total operating expenses, exclusive of depreciation and amortization, within the range of $10.2 million to $10.5 million; operating income after depreciation and amortization and before other income, interest expense and income taxes within the range of ($0.93) million to $2.7 million. The comparable company sample was used to develop a capitalization rate for Data Systems. Data Systems' current and one-year forward financial information was then used to compute normalized debt-free cash flows. These debt-free cash flows were then used to calculate a market value for Data Systems. Using this methodology, Valuemetrics calculated a range of equity values for Data Systems ranging from $8,664,096 to $27,888,072 and a per share value ranging from $1.57 to $5.06, using capitalization rates ranging between 10.8 and 18.3, which are based upon a discount rates between 18% and 16% and growth rates between 8% and 10%, respectively. Mergers and Acquisitions Analysis Valuemetrics reviewed and compared the financial performance of Data Systems to merger and acquisition data from market transactions involving companies which Valuemetrics deemed to be comparable to Data Systems, based upon, but not limited to, customers served, product and services offered, their size and financial characteristics. Although such companies were considered similar to Data Systems in some respects, none of these companies possessed characteristics identical to those of Data Systems. In particular, such companies may have different product mixes or geographic markets than does Data Systems. There were eleven transactions that occurred in the last three years deemed similar in respect to Data Systems. The comparable acquisitions (targets) included the following companies: Computer Data Systems Inc., Claremont Technology Group Inc, Donnelley Enterprise Solutions, Integrated Systems Consulting, Transition Systems Inc, Computer Management Sciences, Marcam Solutions Inc, Nichols Research Corp, Template Software Inc, Government Systems, Inc. and Questech. Valuemetrics computed selected ratios of market value to key financial and operating measures, including sales, earnings, EBITDA, total number of employees and the total number of technical employees. These calculations created a range of sales multiples of .50X to .66X; a range of earnings multiples of 20.21X to 26.28X; a range of EBITDA multiples of 8.59X to 11.17X; a range of total number of employees multiples of .07X to .09X; and a range of total number of technical employees of .21X to .27X. All of these multiples were then applied to Data Systems' financial and operating measures to calculate a market value for Data Systems. This methodology generated a range of equity values from $17,900,735 to $34,588,756; and per share prices of $3.25 and $6.28, respectively. Equity Premiums Analysis Valuemetrics analyzed and compared the merger consideration and the implied premium paid relative to Data Systems' stock price as of the close of trading on February 15, 2000 to implied equity premiums in comparable transactions. Based upon Data Systems' stock price as of the close of trading on February 15, 2000, the merger consideration (when valued at $12,500,000) represented an implied equity premium of approximately 65%. Valuemetrics' analysis of standard published industry data concerning comparable transactions found a range of implied equity premiums of 9% to 193%, with a mean of 76% and a median of 64%. - 33 - Based on the foregoing analyses, Valuemetrics concluded that the merger consideration to be paid for the stock of Data Systems is fair, from a financial point of view, to TekInsight. Valuemetrics did not base its conclusion on any individual ratio or range set forth above. Valuemetrics, in presenting its conclusion to the TekInsight board of directors, did not describe any specific methodology by which it determined the fairness of the merger consideration in relation to such ranges and ratios. The summary set forth above describes the material analyses undertaken by Valuemetrics. Valuemetrics believes that its analyses must be considered as a whole and that selecting portions of its analyses and of the factors considered by it, without considering all factors and analyses, may create an incomplete view of the processes underlying its analyses and fairness opinion. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. In its analyses, Valuemetrics made numerous assumptions with respect to industry performance, general business and economic conditions and other matters. Any estimates contained therein are not necessarily indicative of actual values, which may be significantly more or less favorable than those set forth therein. Estimates of value do not purport to be appraisals or necessarily reflect the values which may be realized if assets are sold. Because such estimates are inherently subject to uncertainty, neither TekInsight, Data Systems, Valuemetrics nor any other person assumes responsibility for their accuracy. Valuemetrics' opinion and analyses were only one of many factors considered by the board of directors of TekInsight in its evaluation of the merger and should not be viewed as determinative of the views of TekInsight's board of directors or TekInsight's management with respect to the merger consideration and the Merger. Neither Valuemetrics nor any affiliate of Valuemetrics has performed any investment banking or other financial services for or had any other material relationship with Data Systems, or any of their affiliates during the two years preceding the date of this proxy statement/prospectus. Pursuant to an engagement letter dated January 10, 2000, Valuemetrics will receive $50,000 for its services in rendering a fairness opinion to the board of directors of TekInsight. Valuemetrics will also be reimbursed for its expenses. TekInsight has indemnified Valuemetrics, and its affiliated entities, directors, officers, employees, legal counsel, agents and controlling persons against costs, expenses and liabilities to which they may become subject as a result of Valuemetrics acting for TekInsight. Prior to this engagement, Valuemetrics provided services to TekInsight and its affiliates but had no material relationship with those persons. - 34 - DESCRIPTION OF SERIES A PREFERRED STOCK The following summary of the terms of our Series A preferred stock, while complete in material respects, is nonetheless a summary. It is qualified by reference to the full description our certificate of designation for the Series D preferred stock, filed as an exhibit to this registration statement. Ranking of the Series A Preferred Stock The Series A preferred stock will rank senior to common stock and any other classes of capital stock subsequently authorized by the board of directors. The board of directors may, however, authorize classes or series of capital stock to be issued on equal footing with the Series A preferred stock. Voting Rights Except as otherwise required by law, the holders of shares of Series A preferred stock are entitled to attend all annual and special meetings of stockholders. Together with the holders of all other classes of stock, holders of Series A preferred stock are entitled to attend and vote on any matter properly put before stockholders. Holders of Series A preferred stock will vote with holders of common stock as a group on an as-converted basis. In addition, holders of Series A preferred stock are entitled to a separate class vote if TekInsight: o takes any action that would alter or change the rights of the Series A preferred stock; o creates a new class of capital stock that has a liquidation preference over the Series A preferred stock or that adversely changes the rights of the Series A preferred stockholders; o increases the authorized number of shares of the Series A preferred stock; or o takes any action not contemplated by the articles of incorporation that would result in a tax to Series A preferred stockholders. All of the preceding actions require approval by holders of a majority of the Series A preferred shares voting as a class in order to be implemented. If any of the preceding actions were to be approved, any holders that did not approve of the transaction have the right for 30 days to convert their shares into TekInsight common stock. Dividends Holders of the Series A preferred stock are entitled to receive dividends on a pro rata as converted basis to the same extent as holders of common stock are entitled to receive dividends. Dividends will generally not be paid to any capital stockholders unless dividends are also paid to the Series A preferred stockholders. In addition, except for employee repurchases and similar events, junior securities will not be redeemed unless an equal amount is available for payment to holders of Series A preferred stock. Liquidation Preference Series A preferred stockholders are entitled to a liquidation preference equal to the average of the closing sales price of TekInsight common stock as quoted on the Nasdaq SmallCap Market for the 10 consecutive trading days immediately preceding the closing date of the merger, as adjusted. - 35 - Conversion The Series A preferred stock is convertible at any time beginning one year after the closing date of the merger. The Series A preferred stock is also generally immediately convertible in the event of a: o reclassification or change in number of shares issuable on conversion of the Series A preferred (other than changes in par value); o consolidation, merger or mandatory share exchange (other than mergers or exchanges where TekInsight is the surviving company); or o sale of substantially all of TekInsight's property to another company. Anti-dilution Adjustments The conversion ratio of the Series A preferred stock is subject to pro rata anti-dilution adjustment in the event of stock dividends, stock splits, and reverse stock splits. In the event a nonstock dividend is declared, Series A preferred stockholders will receive their pro rata share of the dividend on an as converted basis along with the common stock, including any adjustments. Automatic Conversion Any shares of Series A preferred stock that remain outstanding on the fifth anniversary of the closing date are subject to mandatory conversion on a one-for-one basis, as adjusted, subject to payment of any accrued and unpaid dividends. - 36 - COMPARISON OF SHAREHOLDER RIGHTS If the merger is completed, holders of Data Systems common stock will become holders of TekInsight Series A preferred stock. The rights of holders of Data Systems common stock are governed by Data Systems' articles of incorporation, bylaws and the Michigan Business Corporation Act. The rights of Series A preferred stock holders will be governed by TekInsight's certificate of designation, for the Series A preferred stock, certificate of incorporation, bylaws and the Delaware General Corporation Law. The rights of shareholders of Data Systems differ in a number of respects from the rights of stockholders of TekInsight. The following is a summary of the material differences. Unless otherwise noted, the rights of stockholders of TekInsight are generally the same as those of shareholders of Data Systems.
Data Systems TekInsight ------------ ---------- CAPITALIZATION Authorized to issue 10,000,000 shares of Authorized to issue 100,000,000 shares of common stock, $.01 par value, and common stock, $.0001 par value, and 1,000,000 shares of preferred stock, 10,000,000 shares of preferred stock, $.01 par value. 5,542,448 shares of $.0001 par value. A sufficient number of common stock outstanding as of March 8, shares of preferred stock will be 2000. designated as Series A preferred stock in order to consummate the merger. 15,913,529 shares of common stock outstanding as of March 23, 2000. BLANK CHECK PREFERRED Board of directors can authorize the Similar. issuance of Data Systems preferred stock in one or more Series and fix the designation, dividend rate, terms of redemption, preferences, sinking fund provisions, terms of conversion, voting rights and any other rights, preferences, powers and restrictions of each series without any further vote or action by the holders of Data Systems common stock. NUMBER, ELECTION, VACANCY Board of directors may be between one The number of the board of directors to be AND REMOVAL and eleven persons. Current number of determined by the board. The current OF DIRECTORS directors is three. number of directors is four. Directors are elected at its annual Similar. meeting of shareholders and serve until the following annual meeting of shareholders or until their successors are elected and qualified. Elections of directors shall be effected by a quorum of the holders consisting of shareholders of at least a majority of the outstanding shares of Data Systems. Those individuals receiving a plurality of the votes shall be elected. Vacancies filled by the vote of a majority of the remaining directors, unless filled by proper action of shareholders of Data Systems. Each person so elected shall be a director for a term of office continuing only until the next election of directors by the shareholders.
-37-
Data Systems TekInsight ------------ ---------- One director or the entire board of Similar. directors may be removed, with or without cause, by vote of holders of a majority of shares entitled to vote at an election of directors. VOTING RIGHTS Each holder of common stock is entitled Similar. The Series A preferred stock to one vote for every share held. shall vote along with the common stock as a single class on all matters, unless the separate vote of the Series A preferred stock voting as a separate class is required by the terms of the certificate of designations, including altering the rights, preferences or privileges of the Series A preferred stock, creating a new series or class of stock having preference over the Series A preferred stock, increasing the number of shares of Series A preferred stock, or doing anything which would cause taxation of the holders of the shares of Series A preferred stock not contemplated under the certificate of designations, or as is otherwise required under the Delaware General Corporation Law. PREEMPTIVE RIGHTS Holders of common stock do not have Same. preemptive rights. AMENDMENTS Bylaws may be altered, amended or Similar. TO BYLAWS repealed by the shareholders, or by a majority of its board of directors, at any meeting duly held in accordance with the bylaws, provided that notice of the meeting includes notice of the proposed amendment. AMENDMENT TO CERTIFICATE OF Changes to the articles of incorporation Similar. Holders of shares of common INCORPORATION of Data Systems are governed by the stock and Series A preferred stock vote applicable provisions of the Michigan together as a class. Business Corporation Act, and must be approved by holders of a majority of the shares of common stock. SHAREHOLDER Shareholders may take action by vote at Similar. ACTION a meeting or by written consent of the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all of the shares entitled to vote thereon were present and voted. SPECIAL SHAREHOLDER Special meetings of shareholders may be Similar, except that special meetings may MEETINGS called by the board of directors, by the not be called by stockholders of Chairman of the Board (if such office is TekInsight. filled) or by the President, and shall be called by the President or Secretary at the written request of shareholders holding a majority of the shares of stock of Data Systems outstanding and entitled to vote. The request shall state the purpose for which the meeting is to be called.
-38-
Data Systems TekInsight ------------ ---------- LIQUIDATION If Data Systems is liquidated, a If TekInsight is liquidated, a distribution of its remaining assets distribution will be made to the holders will be made to the holders of its of the Series A preferred stock. The common stock. distribution shall be, with respect to each share of Series A preferred stock, equal to the average of the closing sales price per share of common stock as reported on the Nasdaq SmallCap Market for the 10 consecutive trading days ending on the trading day immediately preceding the closing date of the merger. The remaining assets shall be paid to the holders of common stock. DIVIDENDS May pay dividends to shareholders Cash dividends may be paid to the holders subject to the relevant provisions of of common stock so long as each holder of the Michigan Business Corporation Act. shares of Series A preferred stock receives the same dividend. The dividend must be paid in accordance with the relevant provisions of the Delaware General Corporation Law. CONVERSION Not applicable. Series A preferred stock issued to holders OF TEKINSIGHT'S of Data Systems common stock is SERIES A convertible into shares of TekInsight PREFERRED common stock at any time after the first anniversary of the closing of the merger. The Series A preferred stock shall be automatically converted into TekInsight common stock, together with all accrued and unpaid dividends, on the fifth anniversary of the closing date of the merger.
Control Share Acquisitions under the Michigan Business Corporation Act Under Chapter 7B of the Michigan Business Corporation Act, a company that acquires a substantial portion of the shares of a target company may only gain voting control of such shares if both holders of an absolute majority of shares of the target company and holders of a majority of non-interested shares of the target company vote to grant voting control. Interested shares are those held by officers or employee-directors of the target company, or shares of the target company held by stockholders of a potential acquiring corporation. Therefore, the statute ensures that the acquisition of voting control of the target company shall not take effect without the affirmative vote of holders of a majority of the disinterested shareholders of the target company. The bylaws of Data Systems provide that Chapter 7B does not apply to it. Delaware Anti-Takeover Law The combined company will be subject to the provisions of Section 203 of the Delaware General Corporation Law. Under Section 203, TekInsight would generally be prohibited from engaging in any business combination with any -39- stockholder for a period of three years following the time that such stockholder becomes an interested stockholder unless: o prior to this time, the board of directors of TekInsight approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; o upon completion of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding shares owned by persons who are directors and also officers, and by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or o at or subsequent to such time, the business combination is approved by the board of directors and approved by the affirmative vote of at least 66-2/3% of shares not owned by the interested stockholder. In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by such entity or person. Under Section 203, a "business combination" includes: o any merger or consolidation involving the corporation and the interested stockholder; o any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholders; o any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholders, subject to limited exceptions; o any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or o the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. -40- MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER The following is the joint opinion of Nixon Peabody LLP, special tax counsel to TekInsight, and Bodman, Longley & Dahling LLP, special tax counsel to Data Systems, as to the material federal income tax consequences of the merger. The joint opinion is based upon the Internal Revenue Code, existing and proposed treasury regulations, published rulings and court decisions in effect on the date of this proxy statement/prospectus, all of which are subject to retroactive change. Our opinion is not binding on the Internal Revenue Service or the courts. No ruling will be requested from the Internal Revenue Service on any of the issues described in our opinion. We cannot assure you that the Internal Revenue Service will not take a position that is contrary to ours. Our opinion assumes that the information contained in this proxy statement/prospectus is complete, that the factual representations made to us by the management of each of TekInsight and Data Systems are accurate, and that the merger will be completed as described in the merger agreement. Our opinion also assumes that the Series A preferred stock of TekInsight is not considered nonqualified preferred stock ("NQPS") under Internal Revenue Code Section 351(g). Special tax counsel does not believe the new NQPS rules should apply to the Series A preferred stock of TekInsight. However, because of the lack of guidance from the Internal Revenue Service on this issue, there can be no assurance that such rules do not apply to the Series A preferred stock of TekInsight. If the Series A preferred stock of TekInsight is treated as NQPS, it will be treated as property other than stock for purposes of taxing its recipients in the merger, and the nonrecognition provisions of the Internal Revenue Code will not apply. The NQPS provisions were added to the Internal Revenue Code in August of 1997, and no Internal Revenue Service guidance, in the form of regulations or otherwise, has been promulgated to clarify definitional issues and the scope of applicability of the new NQPS rules. If the Internal Revenue Service were to successfully challenge the status of the merger as part of a tax-free reorganization, holders of Data Systems common stock would be treated as if they sold their Data Systems common stock in a taxable transaction. In such event, each holder would recognize gain or loss equal to the difference between the holder's tax basis in the shares of Data Systems common stock surrendered in the merger and the fair market value, at the effective time of the merger, of the Series A preferred stock of TekInsight received in exchange therefor (plus any cash received in lieu of a fractional share of the Series A preferred stock of TekInsight.) Our opinion applies only to shareholders of Data Systems that hold their Data Systems common stock as a capital asset. Our opinion does not address tax consequences that may be relevant to particular taxpayers in light of their individual circumstances. Our opinion does not address tax consequences to taxpayers that are subject to special treatment under the federal income tax laws (such as persons who hold restricted stock or stock options or who otherwise received compensation for services in the form of stock, options or other interests in Data Systems common stock, financial institutions, dealers in securities, tax-exempt organizations, insurance companies, persons holding Data Systems common stock as part of a hedge, straddle or conversion transaction, persons subject to the alternative minimum tax, and non-U.S. taxpayers.) Our opinion does not address any tax consequences arising under the laws of any state, locality or foreign jurisdiction. If you are a shareholder of Data Systems prior to the merger, and the merger is completed as described in the merger agreement, subject to the assumptions described above, it is our opinion that: o Except to the extent that you receive cash for fractional shares, if you exchange your Data Systems common stock for shares of Series A preferred stock of TekInsight in the merger, you will not recognize any gain or loss on the exchange. o Your adjusted tax basis for the Series A preferred stock of TekInsight received by you in the merger will be the same as your adjusted tax basis of your Data Systems common stock prior to the exchange. -41- o Your holding period for the Series A preferred stock of TekInsight received in the merger will include the holding period of your Data Systems common stock surrendered in the merger. o To the extent that you receive cash for shares of Data Systems common stock, you will recognize gain or loss equal to the difference between the amount of cash received and your tax basis in such Data Systems common stock surrendered in the exchange. Any gain or loss will generally be capital gain or loss. The foregoing discussion is for general information only. You are strongly urged to consult with your own tax advisor to determine the specific impact that the exchange would have on your own tax situation, including tax consequences under state, local foreign or other tax laws. -42- DISSENTERS' RIGHTS If you are a shareholder of Data Systems, you have the right to dissent from the merger and obtain payment of fair value of your Data Systems shares if you follow the procedures required by Section 761 through Section 774 of the Michigan Business Corporation Act, the material provisions of which are summarized below. The full text of these statutes is set out in Appendix A to this proxy statement/prospectus. Under the Michigan Business Corporation Act, you may dissent and Data Systems will pay you the fair value of your shares of Data Systems common stock if (a) you file with Data Systems before the vote is taken written notice of your intent to demand payment for your shares if the merger is approved and (b) you do not vote in favor of the merger. Written demands should be addressed to Data Systems Network Corporation, 34705 W. 12 Mile Road, Suite 300, Farmington Hills, Michigan 48331, Attention: Corporate Secretary. For purposes of Section 761 through Section 774, the "fair value" of shares of a dissenting shareholder is the value of Data Systems shares immediately before the effectuation of the merger, excluding any appreciation or depreciation in anticipation of the merger unless the exclusion would be inequitable. Fair value may be determined to be more than or the same as the merger consideration offered in the merger, but it may also be determined to be less than the merger consideration. Because a proxy which does not contain voting instructions will, unless revoked, be voted for adoption of the merger agreement, a holder of Data Systems shares who votes by proxy and who wishes to exercise his or her dissenters' rights must (i) vote against, or (ii) abstain from voting on the merger. If the merger is approved at the Data Systems special meeting of shareholders, Data Systems will deliver a written dissenters' notice to those shareholders of Data Systems who complied with the requirements to provide notice of intent to demand payment for shares. This dissenters' notice will be sent no later than 10 days after the effective time of the merger. The dissenters' notice will (a) state where payment demand must be sent and when certificates must be deposited, (b) supply a form for demanding payment that includes the date of the first announcement to the news media or to shareholders of the terms of the merger and requires that the shareholder certify whether he or she acquired beneficial ownership of the shares before such date and (c) set a date by which the payment demand must be received, which date may be not less that 30 nor more than 60 days after the date the dissenters' notice was delivered to shareholders. A shareholder who sends a dissenters' notice must demand payment, certify whether he or she acquired beneficial ownership of Data Systems common stock before the date required to be set forth in the dissenters' notice and deposit his or her certificates in accordance with the terms of the notice. Shareholders of Data Systems who do not demand payment or deposit certificates within the time set forth in the dissenters' notice lose all rights to payment for their Data Systems common stock under the provisions of Section 761 through Section 774 of the Michigan Business Corporation Act. Except for shares acquired after the date of the first announcement to news media or shareholders of the terms of a proposed merger, which are discussed below, within seven days after the effective time of the merger or receipt of a payment demand is received, whichever is later, Data Systems will pay each dissenter the amount Data Systems estimates to be the fair value of the shares plus accrued interest. The payment will be accompanied by (a) Data Systems' balance sheet as of the most recent fiscal year end, an income statement for such fiscal year and a statement of changes in shareholders' equity for that year plus the latest available interim financial statements; (b) Data Systems' estimate of the fair value of Data Systems common stock; (c) an explanation of how interest was calculated; and (d) a statement of the dissenter's right to make a supplemental demand for payment if the shareholder believes that the amount paid is less than the fair value of his or her shares or that the interest due is incorrectly calculated. After-acquired shares may -43- receive different and somewhat less favorable treatment than those shares acquired before such announcements. At its election, Data Systems may withhold payment from a dissenter who holds "after-acquired" shares, until such time as payment to other shareholders is required. Should Data Systems elect to withhold payment after the effective time, Data Systems will estimate the fair value of the dissenter's shares plus interest and offer to pay this amount to each dissenter who agrees to accept it in full satisfaction. Along with its offer, Data Systems will send a statement of its estimate of the fair value of the shares, an explanation of how interest was calculated and a statement of the dissenter's right to make a supplemental demand for payment if the shareholder believes that the amount offered is less than the fair value of his or her shares or that the interest due is incorrectly calculated. If you believe the payment received, or the amount offered, in the case of after-acquired shares, is less than the fair value of your shares or that the interest due is incorrectly calculated, you must notify Data Systems in writing of your own estimate of the fair value of the shares and interest due and make a supplemental demand for payment of the amount you believe to be owing. This right is waived unless you make your demand within 30 days after Data Systems made or offered payment for your shares. If a supplemental demand remains unsettled, Data Systems shall commence a proceeding within 60 days after receiving the demand and petition the circuit court of the county in which Data Systems' principal place of business was located to determine the fair value and accrued interest. Should Data Systems fail to do so, it must pay each dissenter whose demand remains unsettled the amount demanded. If fair value is determined to be more than the merger consideration, each dissenter that is a party to the proceeding is entitled to judgment for the amount of the excess with respect to his or her shares plus interest or, in the case of after-acquired shares for which payment was not made, the total amount of the fair value plus interest. A proxy or vote against the merger will not, by itself, be regarded as a written objection for purposes of asserting dissenters' rights. This summary is qualified in its entirety by the text of Sections 761 through 774 of the Michigan Business Corporation Act, which is attached to this proxy statement/prospectus as Appendix A. Shareholders intending to exercise dissenters' rights are urged to seek the advice of counsel. Failure to comply with all requirements of Sections 761 through 774 of the Michigan Business Corporation Act will result in the loss of dissenters' rights. -44- UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF TEKINSIGHT.COM, INC. AND SUBSIDIARIES The accompanying unaudited pro forma condensed financial statements have been prepared to show the effects of the acquisition of Data Systems by TekInsight pursuant to the terms and conditions of the agreement and plan of merger dated as of February 18, 2000, as amended April 4, 2000, with an assumption that the average market value as quoted on the Nasdaq SmallCap Market for the 10 days immediately prior to the closing date of the merger is below $5.00 per share resulting in an aggregate merger consideration of $12.5 million. There are three alternative scenarios for the merger consideration: (i) $12.5 million if the average market value of TekInsight common stock is less than $5.00, (ii) $16 million if the average market value of TekInsight common stock is $5.00 or more but less than $7.00, or (iii) $18 million if the average market value of TekInsight common stock is $7.00 or more per share. The merger consideration will be adjusted accordingly through the issuance of Series A preferred stock in exchange for all of the common stock of Data Systems. The acquisition is accounted for as a purchase. The following unaudited pro forma consolidated balance sheet presents the pro forma financial position of TekInsight at December 31, 1999 as if the acquisition of Data Systems had occurred on such date. Included is an adjustment to record the elimination of Data Systems' previous shares and the issuance of TekInsight's shares of Series A preferred stock to former shareholders of Data Systems. The unaudited pro forma consolidated statements of operations for the six months ending December 31, 1999 and the year ended June 30, 1999 reflect the combined results of TekInsight and Data Systems as if the acquisition had occurred on July 1, 1999 and July 1, 1998, respectively. The unaudited pro forma consolidated statements of operations do not necessarily represent actual results that would have been achieved had the companies been together as of July 1, 1998, nor may they be indicative of future operations. These unaudited pro forma consolidated financial statements should be read in conjunction with TekInsight's and Data Systems' historical financial statements and notes thereto. -45- TekInsight.Com, Inc. and Subsidiaries Unaudited Pro Forma Consolidated Balance Sheet as of December 31, 1999
Assets Pro Forma Adjustments --------------------------------------- TekInsight Data Systems Total Debit Credit Pro Forma ------------ ------------- ---------- ----------- ------------ ------------ CURRENT ASSETS: Cash $ 5,868,957 $ 1,516,709 $ 7,385,666 $ $ 250,000 $ 7,135,666 Accounts receivable, net allowance for doubtful 339,633 9,132,585 9,472,218 9,472,218 accounts of $111,500 and $290,000 respectively Inventories -- 907,207 907,207 907,207 Prepaid expenses 166,667 1,132,070 1,298,737 1,298,737 Note receivable - other 850,000 50,000 900,000 900,000 ------------ ------------ ------------ ------------ TOTAL CURRENT ASSETS 7,225,257 12,738,571 19,963,828 19,713,828 LONG--TERM NOTES RECEIVABLE 1,490,766 -- 1,490,766 1,490,766 INVESTMENTS - Marketable Securities 4,333,049 -- 4,333,049 4,333,049 PROPERTY AND EQUIPMENT, net of accumulated 98,292 1,385,498 1,483,790 1,483,790 depreciation of $62,701 and $2,258,235 respectively INTANGIBLE ASSETS, net of accumulated -- 2,832,070 2,832,070 10,357,661 13,189,731 amortization of $0 and $557,938 respectively CAPITALIZED SOFTWARE COSTS, net 1,237,814 -- 1,237,814 1,237,814 DEPOSITS AND OTHER ASSETS 43,058 351,956 395,014 395,014 ------------ ------------ ------------ ------------ ------------ ------------ $ 14,428,23 $ 17,308,095 $ 31,736,331 $ 10,357,661 $ 250,000 $ 41,843,992 ============ ============ ============ ============ ============ ============ Liabilities And Shareholders' Equity CURRENT LIABILITIES: Accounts payable $ 196,499 $ 6,356,961 $ 6,553,460 $ $ 6,553,460 Bank line of credit -- 5,217,794 5,217,794 5,217,794 Accrued expenses 222,666 1,742,977 1,965,643 1,965,643 Income tax payable 326,480 -- 326,480 326,480 State audit reserves 1,400,000 -- 1,400,000 1,400,000 Deferred revenue -- 1,598,024 1,598,024 1,598,024 Accrued termination costs, short-term 247,750 -- 247,750 247,750 ------------ ------------ ------------ ------------ TOTAL CURRENT LIABILITIES 2,393,395 14,915,756 17,309,151 17,309,151 ------------ ------------ ------------ ------------ LONG-TERM NOTES PAYABLE, net of current portion 17,675 -- 17,675 17,675 ------------ ------------ ------------ ------------ REVOLVING CREDIT LOAN -- -- -- DEFERRED INCOME TAXES PAYABLE--long term -- -- -- REDEEMABLE PREFERRED STOCK, Series A -- -- -- STOCKHOLDERS' EQUITY Preferred stock, $.0001 par value, -- -- -- (1) 12,500,000 12,500,000 10,000,000 shares authorized 2,500,000 (pro forma) (1) Common stock, $.0001 par value 1,585 55,092 56,677 55,092 -- 1,585 100,000,000 shares authorized, 15,848,529 shares issued and outstanding as of December 31, 1999 Additional paid-in capital 19,302,332 18,575,219 37,877,551 18,575,219 -- 19,302,332 Unrealized gain on securities 1,033,049 -- 1,033,049 1,033,049 Accumulated (deficit) (8,319,800) (16,237,972) (24,557,772) (1) 16,237,972 (8,319,800) ------------ ------------ ------------ ------------ ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 12,017,166 2,392,339 14,409,505 18,630,311 28,737,972 24,517,166 ------------ ------------ ------------ ------------ ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,428,23 $ 17,308,095 $ 31,736,331 $ 28,987,972 $ 28,987,972 $ 41,843,992 ============ ============ ============ ============ ============ ============
See notes to pro forma financial statements -46- TekInsight.Com, Inc. and Subsidiaries Unaudited Pro Forma Consolidated Statement Of Operations for the Six Month Period Ended December 31, 1999
Pro Forma Adjustments ------------------------------------ TekInsight Data Systems Total Debit Credit Pro Forma ------------- ------------- ------------- ----------- ------------ ----------- REVENUES $ 962,179 $ 25,261,893 $ 26,224,072 $0,107, $ $26,224,072 COST OF GOODS SOLD 459,516 2,283,264 21,742,780 21,742,780 ------------- ------------- ------------- ----------- GROSS PROFIT 502,663 3,978,629 4,481,292 4,481,292 ------------- ------------- ------------- ----------- SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative 781,619 4,483,103 5,264,722 5,264,722 Research and development 174,474 -- 174,474 174,474 Depreciation and amortization 25,946 465,561 491,507 (1) 345,000 836,507 ------------- ------------- ------------- ----------- ----------- TOTAL OPERATING EXPENSES 982,039 4,948,664 5,930,703 6,275,703 ------------- ------------- ------------- ----------- OPERATING LOSS (479,376) (970,035) (1,449,411) (1,794,411) GAIN ON SALE OF MARKETABLE SECURITIES 93,439 -- 93,439 93,439 OTHER INCOME (EXPENSE) Interest income (expense) 200,962 (265,966) (65,004) (65,004) Other income (expense) -- 662,820 662,820 662,820 ------------- ------------- ------------- ----------- NET LOSS $ (184,974)$ (573,181) $ (758,156) $ (1,103,156) ============= ============= ============= ============ NET LOSS APPLICABLE TO COMMON SHARE $ (184,974)$ (573,181) $ (758,155) $ 345,000 $ (1,103,156) HOLDERS ============= ============= ============= =========== ============ NET LOSS PER SHARE - BASIC AND DILUTED $ (0.01)$ (0.11) $ -- $ -- $ -- $ (0.06) ============= ============= ============= =========== =========== =========== WEIGHTED AVERAGE NUMBER OF SHARES USED IN COMPUTATION 15,808,455 5,204,703 -- 2,500,000 -- 18,308,455 ============= ============= ============= =========== =========== =========== NET LOSS (184,974) (573,181) (758,155) (1,103,156) =========== OTHER COMPREHENSIVE LOSS, NET OF TAX - Unrealized loss on available-for-sale securities (1,413,460) -- (1,413,460) -- -- (1,413,460) ------------- ------------- ------------- ----------- ----------- ----------- COMPREHENSIVE LOSS $ (1,598,434)$ (573,181) $ (2,171,615) $ 345,000 -- $ (2,516,616) ============= ============= ============= =========== =========== ============
See notes to pro forma financial statements -47- TekInsight.Com, Inc. and Subsidiaries Unaudited Pro Forma Consolidated Statement of Operations for the Year Ended June 30, 1999
Pro Forma Adjustments ----------------------------------- TekInsight Data Systems Total Debit Credit Pro Forma ------------ ------------- ----------- ---------- ----------- ----------- REVENUES $ 1,514,849 $ 67,741,420 $69,256,269 $ $ $69,256,269 - Cost of goods sold 700,254 55,577,676 56,277,930 56,277,930 ------------ ------------- ----------- ----------- GROSS PROFIT 814,595 12,163,744 12,978,339 12,978,339 ------------ ------------- ----------- ----------- SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative 3,387,874 11,326,005 14,713,879 14,713,879 Research and development 161,709 -- 161,709 161,709 Depreciation and amortization 23,279 1,146,572 1,169,851(1) 691,000 1,860,851 ------------ ------------- ----------- ----------- Total operating expenses 3,572,862 12,472,577 16,045,439 16,736,439 ------------ ------------- ----------- ----------- OPERATING LOSS (2,758,267) (308,833) (3,067,100) (3,758,100) GAIN ON SALE OF MARKETABLE SECURITIES 1,689,664 -- 1,689,664 1,689,664 OTHER INCOME (EXPENSE) Shareholder settlement -- (630,500) (630,500) (630,500) Loss on sale of equipment -- (385,419) (385,419) (385,419) Interest income (expense) 590,092 (547,445) 42,647 42,647 Other income (Expense) -- (54,630) (54,630) (54,630) ------------ ------------- ----------- ----------- 590,092 (1,617,994) (1,027,902) (1,027,902) ------------ ------------- ----------- ----------- INCOME (LOSS) FROM CONTINUING OPERATIONS (478,511) (1,926,827) (2,405,338) (3,096,338) DISCONTINUED OPERATIONS Loss from discontinued operations -- -- -- -- Gain from disposal, including operating losses, through disposal date, of $1,489,272 (less applicable income taxes of $1,104,000) 1,491,923 (899,562) 592,361 592,361 ------------ ------------- ----------- ----------- TOTAL INCOME (LOSS) FROM DISCONTINUED OPERATIONS 1,491,923 (899,562) 592,361 592,361 ------------ ------------- ----------- ----------- NET INCOME (LOSS) 1,013,412 (2,826,389) (1,812,978) (2,503,979) PREFERRED STOCK DIVIDENDS (27,288) -- (27,288) (27,288) ------------ ------------- ----------- ----------- NET INCOME (LOSS) APPLICABLE TO COMMON SHARE HOLDERS $ 986,124 $ (2,826,389) $(1,840,266) $ 691,000 $ -- $(2,531,265) ============= ============= =========== ========== =========== =========== NET INCOME (LOSS) PER SHARE Continuing $ (0.03) $ (0.39) -- $ -- $ -- $ (0.18) Discontinued 0.10 (0.18) -- -- -- 0.03 ------------ ------------ ------------- ---------- ----------- ----------- NET INCOME (LOSS) PER SHARE - basic and diluted $ 0.07 $ (0.57) $ -- $ -- $ -- $ (0.15) ============= ============= =========== ========== =========== =========== WEIGHTED AVERAGE NUMBER OF SHARES USED IN COMPUTATION 14,728,969 4,895,156 -- 2,500,000 -- 17,228,969 ============= ============= =========== ========== =========== =========== NET INCOME (LOSS) 1,013,412 (2,826,389) (1,812,977) 691,000 (2,503,979) OTHER COMPREHENSIVE INCOME, NET OF TAX Unrealized gain on available-for-sale securities 2,446,509 -- 2,446,509 -- -- 2,446,509 ------------- ------------- ----------- ---------- ----------- ----------- COMPREHENSIVE INCOME $ 3,459,921 $ (2,826,389) $ 633,532 $ 691,000 $ -- $ 57,470 ============= ============= =========== ========== =========== ===========
See notes to pro forma financial statements -48- TekInsight.Com, Inc. and Subsidiaries/Data Systems Network Corporation Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements A. The following unaudited pro forma adjustments are included in the accompanying unaudited pro forma consolidated balance sheet at December 31, 1999: (1) To record the acquisition of all of the issued stock of Data Systems with an assumption that the average market value of TekInsight common stock as quoted on the Nasdaq SmallCap Market for the 10 days immediately prior to the closing date of the merger is at or below $5.00 per share resulting in a purchase price of $12.5 million. However, there are two alternative scenarios for the merger consideration: (i) $16 million if the average market value of TekInsight common stock is more than $5.00 but less than $7.00, or (ii) $18 million if the average market value of TekInsight common stock is more than $7.00 per share. The merger consideration will be adjusted accordingly through the issuance of Series A preferred stock in exchange for all of the common stock of Data Systems. The conversion ratio of the Series A preferred stock is one to one. The acquisition is accounted for as a purchase. Costs of the acquisition have been estimated at $250,000. B. The following pro forma adjustments are included in the accompanying unaudited pro forma consolidated statements of operations for the six months ended December 31, 1999 and for the year ended June 30, 1999: (1) To record the amount of amortized goodwill recognized in the six-month period and one-year period, respectively. If the average market value of TekInsight common stock is $5.00 or more, the amount of amortization of goodwill will increase by $39,000 for the six-month period and $232,000 for the one-year period respectively. If the average market value of TekInsight common stock is $7.00 or more, the amount of amortization of goodwill will increase by $67,000 for the six-month period and $133,000 for the one-year period, respectively. The goodwill is amortized over a fifteen-year period. C. The weighted average number of shares used in the pro forma computation of net loss per share assumes the conversion of all of the Series A preferred shares issued to the shareholders of Data Systems into common stock of TekInsight. -49- INFORMATION ABOUT TEKINSIGHT Business TekInsight was initially incorporated in Delaware on May 27, 1989 as Universal Self Care, Inc. and changed its name to Tadeo Holdings, Inc. on February 2, 1998. Tadeo changed its name to TekInsight in November 1999. Prior to TekInsight's acquisition of AstraTek and the creation of TekInsight Services (formerly known as Tadeo-E Commerce Corp.), TekInsight supplied and distributed both prescription and non-prescription medications and durable medical equipment and supplies principally to persons suffering from diabetes. These businesses were sold in January 1998. Since January 1998, TekInsight has operated as a holding company which, through its two principal operating subsidiaries, AstraTek and TekInsight Services, (i) develops computer software products and provides computer network related services for the management of distributed client/server networks operating on systems such as Microsoft Windows NT, through AstraTek, and (ii) provides consulting, technical and other services to eCommerce clients on the Internet, including consulting and development services for the maintenance, design and enhancement of eCommerce sites through TekInsight Services. Products and services provided by AstraTek include software solutions for systems management, security management and network-wide problem management and resolution. Recent Developments On April 4, 2000 TekInsight announced that it signed a letter of intent to acquire Big Technologies, Inc. for $1.2 million in market value of TekInsight common stock and an incentive plan which could earn an additional $650,000 in market value of TekInsight common stock. Big Technologies is an Internet-solutions firm specializing in the development of government sites with advanced transactional applications. Big Technologies enhances communications between governments and constituents, saving both parties time and money. Since 1995 Big Technologies has been creating transactional Web applications for municipal agencies. The firm's most notable municipal sites are the City of Boston (www.cityofboston.com) and Suffolk County Registry of Deeds (www.suffolkdeeds.com.) BugSolver.Com, Inc., a wholly-owned subsidiary of TekInsight, provides technology and services for the resolution of computer hardware and software systems failures. On April 14, 2000, BugSolver announced the public availability of its first service, BugSolver Developer. BugSolver Developer is capable of generating an in-depth profile of an operating failure experienced by the user's personal computer. Using the BugSolver Developer service, the profile is sent automatically via the Internet to the BugSolver Web site where a professional reviews the profile, bypassing the need to communicate with the user and cutting down greatly on the time needed to diagnose and correct a computer failure or problem. The Help Desk Institute, a computer services industry research group, estimates that up to 80% of technical support cost stems from the time it takes to uncover and re-create the series of events leading to a computer failure. BugSolver Developer reduces this time significantly and generates information regarding the condition of the computer at the time of failure, allowing for more efficient problem-solving. Industry Overview -- AstraTek The use of distributed, client/server networks has grown tremendously in the last ten years, with the increase in PC-based Local Area Networks being one of the fastest-growing aspects of the client/server market. These LANs, largely dependent on servers running network operating systems provided by companies such as Microsoft, are enabling a new generation of client/server applications, such as e-mail and group collaboration software such as Microsoft Exchange and Lotus Notes. As a result, LANs which were originally intended to be used as -50- relatively simple workgroup systems, have lost their "local" characteristic and have developed into mission-critical platforms for enterprise-scale applications. As LANs, and the network operating systems that support them, have been used to operate mission-critical applications and services, organizations have become increasingly dependent upon them. Additionally, TekInsight believes that the average number of users supported by these LANs has been increasing. As LANs have grown larger and technically more complex, the problems associated with maintaining their security and integrity have increased and become more difficult for information technology departments to manage. The management challenges associated with maintaining the security and integrity of LANs include: Systems Administration Systems administrators within technology, or IT, departments need to resolve a wide range of issues and problems on a daily basis, including managing the configuration of network servers, administering users and groups and managing disk space on critical servers and workstations. Problems such as these may not be solved quickly, placing the availability of the network at risk and the use of mission-critical, client/server applications throughout an enterprise in jeopardy. Additionally, the implementation of new or upgraded network operating systems ("NOS") will result in increased strain on an organization's IT resources. Each NOS upgrade adds levels of complexity and TekInsight believes this will be particularly true of the next major upgrade of Windows NT. Computer security breaches are a pervasive and growing problem. Although many IT organizations have installed firewalls and implemented security management strategies focusing on preventing "hacking in" from outside the organization, these efforts do not address the most serious security-related losses which are the result of unauthorized access by insiders. IT departments are faced with conflicting pressures both to: (i) manage increasing complexity and guarantee better service for users who are demanding assurance of high productivity and availability and (ii) reduce the total cost of ownership for client/server computing. Adding to this challenge is a lack of qualified IT personnel. Pressure to reduce the total cost of ownership and the increasing difficulty and expense in locating qualified IT personnel has driven IT management to establish processes and develop or purchase tools to manage IT assets. AstraTek's mission is: (i) to provide customized professional services to clients by designing new or altering existing LAN configurations, or by developing customized systems management tools that manage the security and integrity of the clients' distributed client/server networks as they increase in size and complexity, and remediate discovered network problems, all of which leads to reduced total cost of ownership for their enterprise computing, as well as (ii) to develop, market (either on its own or through third-party distributors) and support "shrink wrapped" software products that accomplish the same network management goals. TekInsight Services, Inc. The Internet is an increasingly significant global medium for communications. The increasing functionality, accessibility and overall usage of the Internet, and online service providers, such as America Online and The Microsoft Network, have made the Internet an attractive commercial medium. The portion of the Internet known as the Web, which has become almost synonymous with the Internet as a whole, has experienced the fastest growth and the most acceptance among ordinary users. Growth in Internet usage has been fueled by a number of factors, including: o the availability of a growing number of useful products and services via the Internet; o the large and growing installed base of personal computers in the workplace and home; o advances in the performance and speed of personal computers and modems; -51- o improvements in Internet network infrastructure; o easier and cheaper access to the Internet; and o increased awareness of the Internet among businesses and consumers. As Internet accessibility, usage and functionality continue to grow, the Internet is increasingly being used as a medium for direct communication among users, such as e-mail and bulletin boards, as well as a rapidly growing sales and marketing channel. A growing number of users has transacted business over the Web, such as trading securities, buying goods, purchasing airline tickets and paying bills. Given the size of the projected number of Internet transactions and the demographics of existing and projected Internet users, management believes that a large market exists for the provision of services by companies, like TekInsight Services, that have the capacity to design, maintain and operate a commercial presence on the Internet (through Web design, hosting and other arrangements) and to provide further technical and consulting services related to additional aspects of a client's electronic commerce operations on the Internet. Current Operation--AstraTek Background AstraTek began operations in 1995, developing software and related products for Internet and intranet technology and providing consulting and professional services for several companies. It originally was formed as the Advanced Technology Consulting group at Bankers Trust and split off from Bankers Trust and began operating independently in April 1997. TekInsight acquired AstraTek in October 1998. Products Since 1997 AstraTek has had a software license agreement with Viasoft, Inc. whereby AstraTek granted Viasoft exclusive rights to use AstraTek products, principally the VisualAudit product. Since February 1998, Viasoft has promoted, marketed and distributed the VisualAudit products as part of its OnMark 2000 Workbench suite of products. OnMark 2000 Workbench for Excel, which includes VisualAudit for Excel, is a PC-based software program that discovers, analyzes and repairs Year 2000 problems in Microsoft Excel spreadsheet applications. This product has been successfully marketed to Fortune 1000 companies for their desktop PC-based software Year 2000 compliance needs. AstraTek's VisualAudit product for Access has also been released by Viasoft as the OnMark 2000 Workbench for Access product. According to the terms of the Viasoft software license agreement, Viasoft pays a royalty fee to AstraTek equal to 25% of the gross revenues generated by the sales of AstraTek's products which have been licensed to Viasoft. AstraTek is obligated under the terms of the Viasoft software license agreement to provide Viasoft with enhancements to the Viasoft licensed products and is obligated to devote man hours to the development of such enhancements. The Viasoft software license agreement sets an absolute limit for such support to a dollar value, at $100 per man hour, equal to 40% of royalties received by AstraTek. As of December 31, 1999, AstraTek had earned $1,022,978 under the Viasoft software license agreement, of which $17,339 remained unpaid. Under the Viasoft software license agreement, Viasoft has a right of first negotiation. If AstraTek desires either to sell ownership rights to its technology not already subject to the Viasoft software license agreement or to distribute such technology exclusively through another third-party distributor, AstraTek is obligated first to negotiate in good faith exclusively for a period of fifteen days with Viasoft for such sale or distribution. The right of first negotiation does not apply to products AstraTek distributes on a non-exclusive basis, except that AstraTek is obliged to make available to Viasoft equal terms. AstraTek is also obligated to grant what is termed Level 2 support to Viasoft customers who purchase Viasoft licensed products, subject to Viasoft's option to assign to AstraTek its maintenance contracts for Level 1 support of Viasoft -52- licensed products under specified circumstances. Level 1 support is defined as initial questions and reports from customers. Level 2 support is more technical, engineering-type support provided after Viasoft has been unable to respond to a customer's immediate needs or questions. Problems requiring Level 2 support usually involve more in-depth review and may require a number of days to resolve. The software license agreement with Viasoft terminates on June 30, 2001 and is automatically renewable for successive one-year periods unless either party provides the other with written notice of cancellation at least 90 days prior to the applicable expiration date. Professional Services AstraTek provides professional services to clients encompassing all aspects of distributed systems applications, including multi-tier client/servers, Internet-enabled applications, network security, systems management and performance enhancement. AstraTek has performed these services for several major software companies and financial institutions and has acted as a development partner for ISVs, including Microsoft, by assisting them in building their computer software products. AstraTek has performed the following services for the following companies: o helped IBM develop a global single sign-on product allowing a user to log into and open simultaneously heterogeneous computer systems; o developed the software registration tool for Microsoft's Windows 2000 and Windows 98 operating systems, allowing customers to use the Internet to register Windows and other Microsoft products; o developed a software testing system for Microsoft. The testing facility is an automated framework that controls testing across distributed systems. Its capabilities include multi-threaded test scheduling, unattended installation of software on test clients, and automatic re-creation of testing environments for regression testing; o developed a monitoring and analysis infrastructure for Microsoft to improve the quality of its software testing process. The system complements the previously developed testing facility by monitoring systems under test and collecting log files and other data made available by plug-in diagnostic probes. The collected data will be stored in a repository, to be processed by coverage and error analysis tools for generation of statistical data; and o developed and enhanced the encryption functionality of the WinFrame product for Citrix. The work leveraged industry standard encryption technologies from RSA Data Security. The enhanced encryption abilities allow WinFrame to be used in secure application markets. AstraTek entered into a consulting and professional services agreement with 4th Peripheral Technologies, Inc. pursuant to which AstraTek is engaged to provide executive advisory consulting services, as requested, and on a fee schedule to be negotiated at the time an assignment is made, intended to increase 4th Peripheral's value and strategic position in connection with its business as a developer of cyber extension technology to provide remote access to data from handheld devices. In an effort to strengthen AstraTek's strategic relationships with 4th Peripheral, TekInsight purchased in a private placement of securities 250,000 shares of 4th Peripheral common stock, par value $.0001 per share, for $250,000. TekInsight Services General TekInsight Services provides technical and consulting services to eCommerce companies (including Web site design, development, maintenance, enhancement and hosting or operation) and other Internet-based activities, as well as develops its own proprietary eCommerce businesses. As part of its operating activities, in order to further strategic alliances generally with companies for which it is -53- providing consulting and technical services, TekInsight may make working capital loans to or equity investments in such partners. To date, TekInsight Services has entered into the following two significant contracts for its services: Customer Relationships On May 28, 1999, as amended by agreements dated as of June 1, 1999, TekInsight Services entered into a Web design and consulting agreement with Azurel, Ltd. Under the terms of the Azurel Web agreement, based upon the fee schedule to be included in that agreement, TekInsight Services agreed to provide all necessary consulting and development services to design, maintain and enhance Azurel's electronic commerce Internet sites and other related electronic commerce marketing vehicles. TekInsight Services paid Azurel $500,000 for Azurel's provision of content and marketing consulting services in connection with assistance provided to TekInsight's Services' electronic commerce development activities for Azurel and other clients. At the same time, to enhance the strategic relationship between Azurel, TekInsight Services and TekInsight, TekInsight Services lent to Azurel an aggregate of $1,528,167 under the terms of a credit agreement, as amended, dated as of June 1, 1999 (with part of the aggregate principal reflecting the restructuring of a March 31, 1999 short-term $500,000 promissory note), with interest payable at the rate of 8% per annum, payable monthly, and with all principal and accrued interest due on May 28, 2001. Repayment of amounts outstanding under the credit agreement was secured by a pledge of approximately 66.66% of the outstanding shares of Azurel operating subsidiaries under the terms of a pledge security agreement, but which pledge has since been released pending a sale of those subsidiaries by Azurel and the restructuring of the security arrangement with a pledge to TekInsight Services of part of the purchase price therefor when it becomes available at closing. In consideration for its pledge release, the exercise price on warrants to acquire 500,000 shares of Azurel common stock held by TekInsight and TekInsight Services was lowered to $.60 per share (the current market price of Azurel common stock) from $1.50 per share. The Azurel warrants were received from Azurel originally in further consideration for advances to Azurel under the credit agreement. The shares acquired upon exercise of such Azurel warrants are subject to registration rights provided under the terms of a registration rights agreement, as amended, dated as of June 1, 1999. Under agreements dated as of June 30, 1999, TekInsight Services entered into both a Web design and consulting agreement and an online hosting agreement with StyleSite Marketing, Inc. (formerly Diplomat Direct Marketing Corporation), a public company engaged in the business of distributing women's and children's fashion apparel and related accessories through catalogue sales, including the Lew Magram and Brownstone studios catalogues, and over the Internet. Under the terms of the Web agreement, based upon the fee schedules provided in that agreement, TekInsight Services was to provide all necessary consulting and development services to design, maintain and enhance Style's electronic commerce Internet sites and other related electronic commerce marketing vehicles, as well as to host those sites on behalf of Style. TekInsight Services paid Style $500,000 for Style's provision of content and marketing consulting services in connection with assistance provided to TekInsight Services' electronic commerce development activities for Style and other clients. In addition to payments by Style for the services provided under the Style Web agreements, in further consideration for its services to Style under the Style Web agreements, TekInsight Services will receive royalties from Style based upon Style's ongoing electronic commerce businesses. Style filed for protection under Chapter 11 of the federal bankruptcy code, and all work under the Web design consulting agreement and the hosting agreement, has ceased. TekInsight Services has entered into an agreement with Business Talk Radio.Net, Inc. under which, for a payment of $250,000, TekInsight Services obtained an assignable credit for the purchase of advertising time on radio programs operated by Business Talk having a value of $1,200,000, and shares of Series C preferred stock convertible into 5% of the currently outstanding capital stock of Business Talk. As part of the transaction, TekInsight Services obtained an option to acquire an equivalent number of shares of Business Talk capital stock for an exercise price of $250,000 (which it exercised in February 2000), as well as the right to "stream" the content of Business Talk programming on its and its affiliates Web sites during the course of a three-year period -54- without an additional payment to Business Talk. Business Talk creates and distributes the content of its business-oriented radio programming for broadcasting on third-party operated radio stations in a variety of markets throughout the United States. Other Activities TekInsight makes strategic investments in other companies as opportunities arise. TekInsight views these investments as a way to promote strategic alliances with companies that either provide synergistic products and/or services, or present opportunities for sales by TekInsight of its own products and services. Competition The market for TekInsight products and services is highly competitive. TekInsight anticipates that competition will continue to intensify as the use of computers and the use of the Internet grows. The tremendous potential of the Internet has attracted many companies from start-ups to well-established businesses. AstraTek's principal competition is from providers of security analysis and audit products, such as Axent Technologies, Inc. and Security Dynamics Technologies, Inc., and from companies which make desktop management products such as Microsoft and Intel Corporation. TekInsight expects competition for AstraTek's products to grow as new companies enter the market and current competitors expand their line of products and services. ISVs, such as Microsoft, can also enhance existing products to include the systems management and functionality aspects which TekInsight currently provides in its own proprietary products and in its services. The markets for AstraTek professional services and TekInsight Services' electronic commerce services are highly fragmented and are attracting many newer companies, as there are few barriers to entry to the professional services and Internet technology businesses. ISVs such as IBM and Microsoft are competitive in this area, as are numerous consulting firms. TekInsight expects that it will continue to create and offer innovative products and creative professional services and that TekInsight will continue to attract new clients in need of TekInsight's value-added electronic commerce services. However, there is no assurance that TekInsight's competitors will not introduce comparable products and services at similar or more attractive prices in the future or that some companies may not create products which they can integrate directly into their software and NOS. Increased competition could erode the market for TekInsight's products and services and have a material adverse affect on TekInsight's business, financial condition and results of operation. Future Strategy TekInsight has not yet actively advertised its products and services, but has relied on its reputation and contacts in the financial and computer world for its sources of business. TekInsight has had significant repeat business from Microsoft and believes that such companies and other large institutions will be a source of revenues in the future. To date, TekInsight has preferred to rely on the services of companies like Viasoft and their significant connections, marketing contacts and expertise to promote and distribute TekInsight's products. TekInsight believes that its Web-based and other products and services will give it greater exposure to the marketplace and will help it more efficiently to develop products that meet the needs of and reach a greater corporate and home-user audience that is in need of its various diagnostic tools and other services. TekInsight has created separate subsidiaries through which it plans to develop additional specific products and services for future commercialization. -55- On March 31, 2000, TekInsight signed a non-binding letter of intent to acquire by merger into a newly formed TekInsight subsidiary Big Technologies, Inc., a Boston-based Web designer whose reputation has been established in the municipal and other governmental authority markets. The proposed merger consideration is up to $1.85 million market value of TekInsight common stock. A definitive agreement has not yet been reached, and there is no guarantee that this acquisition will be consummated. Patents and Trademarks All employees of TekInsight (and its subsidiaries) are required to sign confidentiality and non-disclosure agreements which seek to protect TekInsight's rights in its intellectual property. These agreements assign to TechInsight rights to intellectual property developed by TekInsight and its subsidiaries' employees. TekInsight is a party to a software license agreement with Viasoft through which it is has granted an exclusive license to use the name VisualAudit and AstraTek. TekInsight has pending trademarks for the following: AstraTek, BugSolver, TrendSeeker, Testwatch, and Applications Instrumentation Wizard. Employees As of December 31, 1999, TekInsight and TekInsight Services had no employees. AstraTek had 12 full-time employees, four of whom are management employees. TekInsight believes that its relationships with AstraTek's employees are good. AstraTek also employs three contract consultants. Description of Properties TekInsight does not own any real property. The following table sets forth information as to the material properties leased by TekInsight.
Expiration Annual Size/Square Purchase Location and Use Date Rental Feet Option ---------------- ---------- ------ ----------- -------- 11585 Farmington Road(1) Livonia, September 2002 $113,928 6,600 Yes Michigan 48150 (former executive, sales and administrative offices) 5 Hanover Square, 24th Floor New York, November 2002 $126,169 6,729 No New York 10004 (executive, sales and administration offices) - -------------------- (1) On August 1, 1999 TekInsight subleased 3,400 square feet to a tenant that is paying $3,967 a month in base rent, plus an additional 42.5% of the common area expenses. The sublease ends October 31, 2002.
Legal Proceedings TekInsight is not currently a party to any material legal proceedings. Submission of Matters to a Vote of Security Holders None. -56- Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations The following table set forth, for the periods indicated, the relative percentages that specified income and expense items bear to net sales.
Six months ended December 31, Year ended June 30, ---------------- ------------------------------- 1999 1998 1999 1998 1997 ---- ---- ---- ---- ---- REVENUES 100% 100% 100% 100% 100% COST OF REVENUES 48 30 46 25 16 ---- ---- ---- ---- ---- GROSS PROFIT 52 70 54 75 84 ---- ---- ---- ---- ---- OPERATING EXPENSES: Selling, general and administrative 81 135 178 159 218 Research and development costs 18 6 11 7 1 Depreciation and amortization 3 1 - - Settlement of employee contract, (non cash) - 34 - - - Provisions for state audit - - 46 70 - ---- ---- ---- ---- ---- 102 176 235 236 219 INCOME (LOSS) FROM OPERATIONS (50) (106) (181) (161) (135) GAIN ON SALE OF MARKETABLE SECURITIES 10 - 111 - - INTEREST INCOME, NET 21 55 39 45 0.6 ---- ---- ---- ---- ---- TOTAL INCOME (LOSS) FROM CONTINUING OPERATIONS (19) (51) (31) (116) (134) DISCONTINUED OPERATIONS Loss from discontinued operations - - - (212) (399) Gain from disposal - - 98 515 - ---- ---- ---- ---- ---- TOTAL INCOME (LOSS) FROM DISCONTINUED OPERATIONS 0 0 98 303 (399) ---- ---- ---- ---- ---- NET INCOME (LOSS) (19) (51) 67 187 (533) ---- ---- ---- ---- ----
Six Months Ended December 31, 1999 Compared to Six Months Ended December 31, 1998 Revenue for the 1999 six month period was $962,179, a decrease of $5,000, or less than 1% from the 1998 six-month period. Several offsetting factors contributed to this variance. A net increase of $189,000 in revenue during the 1999 six-month period, VisualAudit sales decrease of $240,000 for the 1999 six-month period and a decrease of $65,000 in professional services fees from clients during the 1999 six-month period (a 6% decrease from the 1998 six-month period.) Total cost of goods sold during the 1999 six-month period were $459,516, representing costs of approximately 48% of revenue for the period, while total cost of goods sold for the 1998 six-month period were $285,749 or approximately 30% of revenue. The increased labor, both time and effort associated with the various projects, drove up the cost of goods sold during the 1999 six-month period as compared to the 1998 six-month period. Total operating expenses during the 1999 six-month period decreased to $982,039, or 102% of revenue, as compared to $1,703,798, or 176% of revenue, during the 1998 six-month period. A contributing factor relates to the improved -57- process by which operations record and capture capitalized software costs as it relates to salary expenses during the 1999 six-month period. Other income and expenses include interest income of $200,962 during the 1999 six-month period compared to $532,777 during the 1998 six-month period. Interest expense was $11,184 during the 1999 six-month period and during the 1998 six-month period the expense did not exist. Net loss for the 1999 six-month period of $184,974 is primarily attributable to the losses from operations, in the amount of $479,375. Fiscal Year Ended June 30, 1999 Compared to Fiscal Year Ended June 30, 1998 Revenues for the year ended June 30, 1999 were $1,514,849, an increase of $518,376, or 52%, from the year ended June 30, 1998. Several factors contributed to this increase. Revenue associated with the VisualAudit product that is distributed by Viasoft on behalf of TekInsight increased by $57,988 for the year ended June 30, 1999, or a 13% increase over the year ended June 30, 1998, and revenue associated with professional services provided to various clients increased by $570,900 for the year ended June 30, 1999, or a 235% increase over the year ended June 30, 1998. Total cost of goods sold for the year ended June 30, 1999 was $700,254, representing costs of approximately 46% of revenues for the period, while total cost of goods sold for the year ended June 30, 1998 was $248,261 or approximately 25% of revenue. This 21% unfavorable variance as a percent of revenue is in part the result of increased utilization of outside consultants in completing time sensitive, single occurrence professional services projects. Selling, general and administrative expenses for the year ended June 30, 1999 increased to $3,387,874 from $2,259,349 for the year ended June 30, 1998. Contributing to the unfavorable variance is $1,250,000 in advertising and marketing expenses associated with services provided by various Internet organizations that TekInsight has determined to be beneficial to market its products and services. Net interest income increased for the year ended June 30, 1999 to $590,092 from $452,016 for the year ended June 30, 1998. This increase is primarily due to quarterly interest from a promissory note made by Gainor Medical Management LLC which was paid in April 1999. Net income decreased to $1,013,412 for the year ended June 30, 1999 from $1,865,288 for the year ended June 30, 1998. This decrease is primarily due to the gain from the sale of the discontinued operations which occurred in the 1998 fiscal year. The sale of marketable securities resulted in a gain of $1,689,664 in revenue for the year ended June 30, 1999, a 100% increase over the year ended June 30, 1998. Fiscal Year Ended June 30, 1998 Compared to Fiscal Year Ended June 30, 1997 Revenues for the year ended June 30, 1998 were $997,433, an increase of $542,662, or 219%, from the year ended June 30, 1997. Several factors contributed to this increase. Revenue associated with sales of proprietary software products increased by $574,200 for the year ended June 30, 1998, or a 100% increase over the year ended June 30, 1997, and revenue associated with professional services provided to various clients decreased by $32,498 for the year ended June 30, 1998, or a 7% decrease over the year ended June 30, 1997. Total cost of goods sold for the year ended June 30, 1998 were $248,261, representing costs of approximately 25% of revenues for the period, while total cost of goods sold for the year ended June 30, 1997 were $73,188 or approximately 16% of revenue. This 9% unfavorable variance as a percent of -58- revenue is in part the result of increased utilization of outside consultants in completing time sensitive, single occurrence professional services projects. Selling, general and administrative expenses for the year ended June 3, 1998 increased to $2,354,489 from $992,372 for the year ended June 30, 1997. Contributing to TekInsight's unfavorable variance is the realization of a full year of expenses for the year ended June 30, 1998 as compared to only three months of operations for the year ended June 30, 1997. Salaries, wages and fringes increased by $612,398, rent and storage increased by $100,000, professional and consulting services increased by $78,946, contract manpower increased by $76,181 and research and development expenses increased by $66,424. Net interest income increased for the year ended June 30, 1998 to $452,016 from $2,673 for the year ended June 30, 1997. This increase is primarily due to quarterly interest from the Note. Net income increased to $1,856,288 for the year ended June 30, 1998 from a loss of $2,242,453 for the year ended June 30, 1997. This increase is primarily due to the gain from the sale of the discontinued operations which occurred in the 1998 fiscal year. Liquidity and Capital Resources As of December 31, 1999, TekInsight had working capital of $4,831,862, compared to working capital of $5,365,143 at June 30, 1999. This decrease in working capital during the 1999 six-month period is primarily due to losses from operations. TekInsight currently receives on average $22,763 a month in interest from its various money market and certificate of deposit accounts. On September 24, 1998, TekInsight completed a stock purchase agreement with ViewCast.com Inc. (VCST.) VCST purchased $2,000,000 worth of restricted TekInsight common stock valued at $2,000,000 for $2,000,000 worth of VCST common stock. TekInsight issued 1,240,310 shares of its common stock at the sale price of $1.6125 per share and received 1,000,000 shares of VCST's common stock for the purchase price of $2.00 per share. In the case of each corporation, the number of shares issued was less than 20% of the outstanding common stock of the issuer on September 24, 1998. On November 16, 1999, TekInsight sold approximately 43,334 shares of VCST in the open market for $4.15625 per share. TekInsight realized a net gain of $93,439 in this sale. TekInsight currently has 500,000 shares of VCST's common stock remaining in investments--marketable securities as of December 31, 1999. On June 30, 1999, TekInsight Services entered into an agreement with Business Talk, under which an aggregate payment of $250,000 was made in July and August 1999, whereby TekInsight Services obtained an assignable credit for the purchase of advertising time on radio programs operated by Business Talk having a value of $1,200,000, and 564,056 shares of Series C preferred stock, par value $.0001 per share, convertible into 5% of the current outstanding capital stock of Business Talk. Each share of Class C preferred stock had a liquidation preference of $.4432 until January 1, 2000, at which time the Class C preferred stock preference become $.2217. As part of the transaction, TekInsight Services obtained an option to acquire an equivalent number of shares of Business Talk capital stock for an exercise price of $250,000, as well as the right to "stream" the content of Business Talk programming on its and its affiliates Web sites during the course of a three-year period without an additional payment to Business Talk. Business Talk creates and distributes the content of its business-oriented radio programming for broadcasting on third party operated radio stations in a variety of markets throughout the United States. On January 3, 2000, TekInsight Services exercised its option and, for a payment of $250,000, acquired an additional 564,056 shares of Business Talk Series C preferred stock for $.4432 per share. -59- The aforementioned marketable securities have been classified as available for sale securities at December 31, 1999 and accordingly, the unrealized gain resulting from valuing such securities at market value is reflected as a component of stockholders' equity. TekInsight provided Azurel, Ltd., a cosmetic manufacturing and marketing company, with $1,528,167 in loan financing through the issuance of one note bearing interest at 8% due in May 2001, and $500,000 through the issuance of a note bearing interest at 20.8% due in August 1999. The $500,000 note was later amended on August 12, 1999 to (i) extend the due date to June 2000, (ii) reduce the interest rate to 10%, and (iii) increase the principal of the note from $500,000 to $550,000 for accrued interest of $26,580 and a premium of $23,420 for lowering the interest rate. In addition, TekInsight received warrants to acquire 500,000 shares of common stock of such company at an exercise price of $1.50 per share. On November 25, 1999, TekInsight provided an additional $200,000 to Azurel, Ltd. to secure computer equipment for increased capacity for its operation. The $200,000 note bears 10.5% interest on the unpaid principal, matures on November 25, 2001, and has principal and interest payments made monthly. Azurel is behind in its interest and principal payments but a default has not been declared. On April 20, 2000, TekInsight filed an action against Style and its lender, First Source Financial LLP, in the United States Bankruptcy Court, Southern District of New York, to establish a constructive trust in its favor with respect to, and to request that the court order Style and First Source to deliver to TekInsight, the $1,000,000 purchase price paid for 10,000 shares of Style Series G Preferred Stock and the shares of TekInsight common stock having a $1,000,000 market value delivered to Style in exchange for an equal market value of Style common stock under an agreement dated June 30, 1999. One of TekInsight's discontinued wholly-owned subsidiaries underwent an audit by the California State Controller's Office, Division of Audits, for the purpose of determining compliance with guidelines of the California Department of Health Services and the California State Board of Equalization. The Controller's Office issued a report to the effect that the subsidiary owed, and issued a Letter of Demand for, $1.3 million, contending that for the period July 1, 1990 to June 30, 1993, the subsidiary practiced unfair pricing to its customers. Additionally, accrued interest on the amount demanded is also sought by the Controller's Office. On January 20, 1999, the Superior Court recommended that the overpayment determination be upheld. In March 1999, the Company's wholly-owned subsidiary filed an appeal to the Superior Court's decisions with the California Court of Appeals. On January 26, 2000, TekInsight lost its appeal with the California Court of Appeals. TekInsight has provided a reserve for the principal amount of $1,339,785 and $60,215 in accrued interest, or $1,400,000. TekInsight's appeal of this finding was denied. A demand for payment has not yet been made by the Controller's Office. Cash proceeds from the sale of TekInsight's operating assets and the stock of its two former principal operating subsidiaries, Diabetes Self Care, Inc. and USCI Healthcare Management Solutions, Inc., to Gainor Medical Management, LLC, a privately held Georgia company, along with the proceeds from the $9,300,000 prepayment in April 1999 of the Note, has been partially used in operations and for the investment in and loans to the strategic partners described above. In connection with these agreements, as part of TekInsight's provision of professional services to strategic partners, TekInsight's has either made loans to or equity investments in these strategic partners. The resulting financial transactions have reduced TekInsight's cash reserves and reduced TekInsight's monthly interest received on those reserves. TekInsight's material ongoing fixed expenses are as follows: (1) monthly rent expense net of sublease of approximately $20,139, (2) $7,633 a month to Mr. Buchholz's under his employment termination agreement, an aggregate of $247,750 remaining as of December 31, 1999, and (3) approximately $21,657 monthly for employee salaries and benefits. -60- Year 2000 Compliance TekInsight did not experience any material Year 2000 compliance issues. Net Operating Loss Carry Forward During the year ended June 30, 1999, TekInsight utilized approximately $3,100,000 of available net operating loss carryforwards. AstraTek has approximately $1,200,000 of net operating loss carryforwards subject to limitations on annual utilization because there was "equity structure shifts" or "owner shifts" involving 5% shareholders (as these terms are defined in Section 382 of the Internal Revenue Code), which have resulted in a more than 50% change in ownership. Quantitative and Qualitative Disclosures About Market Risk Not applicable. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None Directors and Executive Officers of TekInsight The executive officers and directors of TekInsight as of April 28, 2000 are as follows: Name Age Position with TekInsight ---- --- ------------------------ Steven J. Ross 42 President, Chief Executive Officer and Director Brian D. Bookmeier 41 Director Arion Kalpaxis 44 Chief Operating Officer, Acting Chief Financial Officer and Acting Principal Accounting Officer Alexander Kalpaxis 46 Chairman of the Board and Chief Technology Officer James Linesch 45 Director Damon Testaverde 51 Director Michael W. Grieves 49 Director Nominee Walter J. Aspatore 55 Director Nominee Mr. Ross was nominated to become a director of TekInsight after the effective date of the merger. Mr. Ross has been President and Chief Executive Officer of TekInsight since February 2000. He was a director of Data Systems from October 1999 until February 2000. Since February 2000, Mr. Ross has been chairman of the board and chief executive officer of VarsOnly.com, Inc., an Internet start-up focusing on computer resellers. Since August 1999, Mr. Ross has been a director of Interactive Frontiers, Inc., a developer, manufacturer and marketer of computer-based digital video instructional software. From July 1998 to July 1999 Mr. Ross was Vice President and General Manager of Toshiba -61- America Information Systems, a subsidiary of Toshiba Corp. active in computer sales, support and manufacturing in North and South America. From October 1995 through June 1998, he was President and General Manager of the reseller division, and President, Corporate Marketing, for Inacom Corp., a computer product and service company. Mr. Bookmeier is an investor and Vice President of Seven Sons, Inc., d/b/a Las Vegas Golf & Tennis. Seven Sons, Inc. is in the business of franchised retailing of golf and tennis products. Mr. Bookmeier has held this position since August 1997. Mr. Bookmeier served as President and Chief Executive Officer of TekInsight from July 1995 to February 2000, and has served as a director of TekInsight from July 1995 to the present. From September 1989 until its merger into TekInsight, Mr. Bookmeier served as Executive Vice President and a Director of Patient Care Services, a home medical equipment supply company that specialized in diabetes management, and the sale of related equipment and supplies. He has been a Director of the American Diabetes Association since June 1995. Mr. Alexander Kalpaxis has been TekInsight's Chairman of the Board since February 2000 and Chief Technology Officer since November 1998. He was Executive Vice President of TekInsight from November 1998 until February 2000. Mr. Kalpaxis is the CEO and President of AstraTek, Inc. From October 1984 to April 1997 Mr. Kalpaxis was Bankers Trust Chief Technology Officer. Mr. Kalpaxis led projects in global infrastructure development, client/server systems and tools, object technology, and engineering. Prior to Bankers Trust, Mr. Kalpaxis was a research electrical engineer for Photonics Laser Institute at the City University of New York. He has received several patents and awards, including the Simon Sokin Medal for Excellence in Experimental Physics. Mr. Linesch has served as a Director of TekInsight since February 1997. Mr. Linesch is currently an independent financial consultant. Since April 1996 he has been the President, Chief Executive Officer and Chief Financial Officer of CompuMed, a public computer company involved with computer assisted diagnosis of medical conditions. He joined CompuMed in April 1996 as Vice President and Chief Financial Officer. Mr. Linesch served as a Vice President, Chief Financial Officer and Controller of TekInsight from August 1991 to April 1996. Mr. Testaverde has been a director since January 1998. From May 1991 until June 1995, Mr. Testaverde served as President and Chief Executive Officer of TekInsight. Since March 1994, Mr. Testaverde has been a registered representative with Network One Financial Services, Inc., a full service securities broker-dealer. Mr. Arion Kalpaxis was appointed Chief Operating Officer of TekInsight in February 2000. Mr. Kalpaxis has served as Chief Operating Officer of AstraTek since April 1997. From 1995 to May 1996 Mr. Kalpaxis was Vice President for BT Ventures and the Bankers Trust Electronic Commerce group responsible for the development of business models for new initiatives in electronic commerce. Prior to 1995 Mr. Kalpaxis was a partner at Metron Consulting Group where he advised clients in business strategy and development, and managed efforts designed to bring about fundamental changes in support of new business initiatives. Mr. Grieves was nominated to become a director of TekInsight effective after the effective date of the merger, and has consented to do so. Mr. Grieves previously served as Data Systems' President, Chief Executive Officer and Chairman of the Board from its inception in 1986. In August 1991, Data Systems filed for protection under Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court for the Eastern District of Michigan (Case No. 91-09916-S.) In May 1992, Data Systems' plan of reorganization was confirmed by the Bankruptcy Court and the case was ordered closed in January 1997. Mr. Aspatore was nominated to become a director of TekInsight effective after the effective date of the merger, and has consented to do so. Mr. Aspatore has been a director of Data Systems since November 1994, has been Managing Director of Amherst Capital Partners, which provides investment banking services to medium and small businesses, since its founding in 1994. Prior to the -62- formation of Amherst Capital Partners, Mr. Aspatore was President of Onset BIDCO, which supplies financing and management services to companies with strong growth potential, from 1991 to November 1994. Mr. Aspatore was the President of Cross & Trecker Corporation, a $500 million worldwide factory automation company, from 1988 to 1991 and served that company in various capacities for approximately 22 years. Mr. Aspatore has a total of more than 27 years of senior level management experience in operations and finance in the worldwide factory automation, automotive and aerospace industries. Section 16(a) Beneficial Ownership Reporting Compliance Based solely on its review of the copies of Section 16(a) forms received by it since July 1, 1998, or written representations from reporting persons that no Form 5's were required for those persons, TekInsight believes that its officers, directors and greater than 10% beneficial owners, other than the Rubin Family Trust, filed all reports required under Section 16(a) of the Securities Exchange Act of 1934, as amended. Executive Compensation Summary Compensation Table
Long-Term Compensation Annual Compensation Awards Payouts --------------------------------------------------------------------------------- Other All Name and Annual Restricted Other Principal Compen- Stock Options/ LTIP Compen- Position Year Salary Bonus sation Awards SARS(#) Payouts sation - -------- ---- ------ ----- -------- ------ ------- ------- ------ Brian Bookmeier. 1997 $116,667 0 $9,000 $ 0 $ 0 $ 0 $ 0 President and Chief 1998 $ 87,500 0 1,000 $ 0 $ 0 $ 0 $ 0 Executive Officer 1999 $ 17,308 0 $ 0 $ 0 $ 0 $128,333 $ 0 and Director Alex Kalpaxis, 1997 $160,000 0 $ 0 $ 0 $ 0 $ 0 $ 0 Executive V.P., Chief 1998 $160,000 0 $ 0 $ 0 $ 0 $ 0 $ 0 Technology Officer 1999 $160,000 0 $ 0 $ 0 $ 0 $ 0 $ 0
Employment and Consulting Agreements Mr. Buchholz was the President and Chief Executive Officer of Healthcare Management Solution, Inc., a former subsidiary of TekInsight, from 1996 to January 1998. On January 28, 1998, TekInsight and Mr. Buchholz entered into a termination agreement with respect to his employment agreement. TekInsight agreed to make severance payments aggregating $708,000 to Mr. Buchholz, (i) $250,000 paid by TekInsight, Inc. as the initial payment and (ii) $458,000 to be paid by TekInsight in sixty equal monthly installments of $7,633. On July 10, 1998, TekInsight and each of Messrs. Brian Bookmeier, Alan Korby and Matthew Gietzen, entered into TekInsight termination agreements. Messrs. Korby and Gietzen are former officers and Directors of TekInsight. Severance payments were made as follows: (i) $128,333.33 was paid to each and (ii) each received a $75,000 promissory note bearing 7% annual interest with principal payable on January 1, 2000. Messrs. Korby and Gietzen were each issued 84,166 shares of TekInsight common stock for the purchase price of $1 per share (which subscriptions were paid for in exchange for additional severance payments of $84,167 under the termination agreements) and (iv) Mr. Bookmeier was granted stock options under the TekInsight-Employee Stock Option Plan to purchase 84,167 shares of common stock exercisable at $1.00 per share (which options were exercised by Mr. Bookmeier in exchange for an additional $84,167 severance payment under the termination agreements.) On October 1, 1998, TekInsight entered into a three-year employment contract with Mr. Kalpaxis. Mr. Kalpaxis is Chairman of the Board and Chief Technology Officer of TekInsight. Mr. Kalpaxis's employment agreement provides him with an annual base salary of $160,000. Additionally, Mr. Kalpaxis will receive a -63- performance bonus based upon the operating results of AstraTek, in which EBITDA equals or exceed one million dollars. Consulting Agreements Steven J. Ross entered into a consulting agreement on December 10, 1999 for his services as a consultant to the newly-formed TekInsight subsidiary, BugSolver.Com, Inc. The agreement extended through March 31, 2000 and became automatically renewable for successive 90-day periods unless either party gives notice of termination. Mr. Ross also agreed to serve as a director of BugSolver. For his services, Mr. Ross receives (i) $20,000 monthly, and (ii) a bonus of options to buy 30,000 shares of BugSolver common stock. Following the first renewal of the consulting agreement and the successful completion of a private placement of at least $10,000,000 of BugSolver equity securities, Mr. Ross will receive further options to purchase 4% of the outstanding shares of BugSolver common stock immediately following completion of the private placement. Under the consulting agreement, these options will vest one year from the closing of the private placement. Compensation of Directors Each director of TekInsight receives a $25,000 annual directors' fee for attendance at board meetings, as well as reimbursement for the actual expenses incurred in attending such meetings. Officers and key employees of TekInsight receive employment benefits (e.g., health insurance, automobile allowances) other than cash compensation and interests in TekInsight's employee stock option plan. In November 1997, TekInsight established the 1997 stock option plan for non-employee directors, which authorizes the issuance of up to 300,000 options to purchase common stock at an exercise price of 100% of the common stock's market price. Subsequent to its adoption at the annual meeting in February 1998, 30,000 five- year options were granted under this plan to directors at an exercise price of $1.81 per share. The following table sets forth information concerning individual grants of stock options made during the last completed fiscal year to each of the executive officers named in the Summary Compensation Table. Option/SAR Grants in Last Fiscal Year
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term - --------------------------------------------------------------------------------- ---------------------------------- Number of % of Total Securities Options/SARs Exercise Underlying Granted to or Base Options/SARs Employees in Price Expiration Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10% (%) - ---- ------------ ------------ -------- ---------- --------- -------- Brian Bookmeier 84,167 22% $ 1.00 7/10/01 $ 259,603 $271,965 10,000 3% $ .9375 3/23/04 $ 31,500 $ 33,000
-64- The following table sets forth information concerning options exercised and the number of unexercised options, and the value of such unexercised options, for any persons named in the Summary Compensation Table. Aggregated Option Exercises in Fiscal Year 1999 and Fiscal Year-End Option Values
Number of Securities Underlying Value of Unexercised In-the-Money Unexercised Options at June 30, 1999 (#) Options at June 30, 1999 ($)(1) ---------------------------------------- ------------------------------- Shares Acquired on Exercise Value Name (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- ------------ ----------- ------------- ----------- ------------- Brian Bookmeier 84,167 0 135,000 0 $349,730 0
Certain Relationships and Related Party Transactions On November 25, 1998, TekInsight advanced $70,000 to Brian Bookmeier, TekInsight's President, in exchange for a note receivable which bore interest at the rate of 10% per annum. This note was paid in full during the fiscal year ended June 30, 1999. In September 1998, TekInsight acquired and retained for investment purposes approximately 9.2% of the common stock of ViewCast.com. In May 1999, as amended as of June 1999, TekInsight Services entered into a Web design and consulting agreement with Azurel. In June 1999, TekInsight Services entered into both a Web design and consulting agreement and a online hosting agreement with Style. Mr. Testaverde, who is a director of TekInsight, is also a director and officer of Network One Financial, Inc., which has acted over the last year and currently acts as a market maker for the common stock of TekInsight, ViewCast, Azurel and Style. See "Information About TekInsight-Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources" and "-TekInsight Services-Customer Relationships." On November 22, 1999, TekInsight loaned Seven Sons, Inc., a golf and tennis equipment store, of which Brian Bookmeier, a director of TekInsight, is a principal, $100,000 for its operations. The $100,000 secured note bore interest at 10% (per annum) and its original December 30, 1999 maturity was extended to March 31, 2000 in consideration for an increase in interest rate to 11% per annum. The note was paid in full at maturity. -65- INFORMATION ABOUT DATA SYSTEMS General Data Systems was incorporated in Michigan in 1986. Data Systems and its subsidiaries provide computer network services and products that allow companies to control their complex distributed computing environments, allowing companies to capitalize on their investments in technology and people. Data Systems provides a wide range of services including applications development, network services, enterprise management, help desk and security services. Data Systems also provides a wide range of network integration services including installation, consultation, technical support and training to governmental and corporate accounts. Recent Developments On February 1, 1999, Data Systems announced a definitive merger agreement with Alydaar Software Corporation, now known as Information Architechs Corp. of Charlotte, North Carolina. Under the terms of the agreement Alydaar was to exchange 1.6 million shares of its common stock for all outstanding shares of Data Systems stock. On September 15, 1999, Data Systems and Information Architects mutually agreed to terminate their Agreement and Plan of Merger dated January 31, 1999. Information Architects gave a promissory note to Data Systems in the amount of $250,000 as reimbursement for expenses incurred as a result of the terminated merger. On February 17, 1999, Data Systems announced that it had entered into a stipulation of settlement of the consolidated complaint in a shareholder class action lawsuit captioned, In Re: Data Systems Securities Litigation (Case No. 98-70854, Michigan Federal District Court) The complaints alleged violations of the Securities Exchange Act of 1934 resulting from alleged non-disclosures and misrepresentations of information concerning Data Systems' financial results and future prospects due to accounting irregularities. On May 24, 1999, the court determined the settlement to be fair. Under the terms of the settlement and subject to various conditions, Data Systems created a gross settlement fund for the benefit of purchasers who bought Data Systems stock during the period from May 16, 1996 through February 24, 1998. The fund was comprised of $900,000 provided by Data Systems' insurer, and 650,000 shares of Data Systems common stock which were issued June 22, 1999. In agreeing to the settlement, Data Systems and individual defendants made no admission of any wrongdoing. On February 18, 2000, as amended April 4, 2000, Data Systems and TekInsight entered into an agreement and plan of merger pursuant to which Data Systems will be merged with and into TekInsight Services. Products and Services Data Systems provides computer network services and products that allow companies to control their complex distributed computing environments. Such services include the design, sale and service of LANs and WANs. Data Systems generates revenues by providing consulting and network installation services, selling add-on hardware components to existing clients and providing after-installation service and support, training services and network management services. Data Systems is an authorized dealer, reseller or integrator for the products of many major vendors including Compaq, Sun Microsystems, Dell, Nortel Networks, Hewlett-Packard, Novell, Microsoft, Cisco, Meridian Data, 3COM, Intel, and Oracle. Data Systems has developed applications for remote network management and can sell private label computer systems, primarily to state governments. In addition, Data Systems provides application development services in database management. -66- Resellers who meet specified qualifications receive customer referrals and recommendations and advanced technical assistance and support from manufacturers, giving the qualifying resellers a competitive advantage over other resellers in the market. These qualifications vary from manufacturer to manufacturer and typically include some or all of the following components: specific training for technical personnel, specific training for sales personnel, possession of some advanced equipment, ongoing training requirements, and minimum purchase targets. The process of obtaining and maintaining these manufacturer authorizations is time-consuming and has cost associated with obtaining and maintaining a single authorization. These costs include, but are not limited to, acquisition of hardware, software, facilities and spare parts, training fees, personnel and travel expenses and fees paid to the manufacturer for certification. Data Systems generally sells equipment in conjunction with its higher margin network engineering services. These services include design, consulting, installation, and network administration for both LANs and WANs. Data Systems provides turnkey implementation and support services and, for some customers, on-site support personnel who work in conjunction with the customer's personnel on a continuous basis. Data Systems also provides on-going technical and maintenance support through a variety of service programs tailored to fit each specific customer's service needs and budget. These programs include a two-hour response service for critical network components, help desk, Computer Associates, Unicenter and dispatch services. Data Systems generally passes through warranties provided by manufacturers to the purchaser. Data Systems offers no warranty separate from manufacturers' warranties. Marketing and Customers Data Systems markets its products and services through its internal sales force in the following states: Florida, Louisiana, Massachusetts, Michigan and New York. Data Systems has no retail sales outlets and has no intention of entering the retail market. Data Systems directs its marketing efforts at state and local governments, Fortune 1000, middle market corporations and institutional users, such as hospitals and universities. Current marketing efforts are generally focused on customers located in the states in which Data Systems has offices. The State of Michigan accounted for 4% of Data Systems' revenue in 1999 and 29% of Data Systems revenue in each of 1998 and 1997. Purchases by agencies of the State of Michigan were made pursuant to a blanket agreement, which expired in September 1998. Data Systems continues to provide network services and maintenance services to the State of Michigan through a third-party master contractor blanket purchase order. As with all of Data Systems' service contracts and purchase orders, there are no assurances that any contract can be extended further or that, if re-bid, Data Systems will be awarded a new agreement under the same terms and conditions. The State of New York accounted for 25% of Data Systems revenue in 1999 and 12% of Data Systems' revenue in 1998. Data Systems was awarded a three-year contract, renewable in one-year increments, to provide system peripheral equipment. The first year expired May 1999. The contract was renewed and the second year expires May 2000. Data Systems is also an authorized reseller of Novell, Nortel Systems and Cisco products and software to the State of New York. -67- Vendors Data Systems purchases the microcomputers and related products it sells directly from manufacturers and indirectly through distributors such as Merisel, Tech Data and Ingram Micro Corporation. In general, Data Systems must be authorized by a manufacturer in order to sell its products, whether the products are purchased from distributors or directly from manufacturers. Data Systems is an authorized reseller for microcomputers, workstations, and related products of over 50 manufacturers. Sales by Data Systems of products manufactured by Compaq, Hewlett-Packard, Cisco, Novell, Sun Microsystems, Nortel Networks, Dell, and IBM accounted for between 35% an 40% of revenues during each of the last three fiscal years. However, sales of commodity products, such as IBM and Dell, have substantially declined over this period. Typically, vendor agreements provide that Data Systems has been appointed, on a non-exclusive basis, as an authorized reseller of specified products at specified locations. The agreements generally are terminable on 30 to 90 days' notice or immediately upon the occurrence of specified events, and are subject to periodic renewal. The loss of a major manufacturer or the deterioration of Data Systems' relationship with a major manufacturer could have a material adverse effect on Data Systems' business as some product offerings that are requested by customers would not be available to Data Systems. Data Systems determines whether to purchase products from distributors or directly from manufacturers by surveying prices and product availability among the manufacturers and the distributors with whom it has contractual relationships. Distributors, which purchase products in large quantities, often are able to offer a better price on products due to volume discounts granted by manufacturers. Data Systems' agreement with Ingram Micro, through which it made 17.6% of its product purchases in 1999, provides competitive pricing, inventory and asset management terms and conditions. The loss of Data Systems relationships with distributors could result in higher product prices to Data Systems and potentially reduce Data Systems' profit margins. Data Systems believes, however, that the loss of its relationship with any particular distributor would not have a material adverse effect on Data Systems' results of operations or financial condition due to the availability of other sources of supply. Competition The network integration market is highly competitive. Data Systems competes with different classes of competitors, depending on the type of business opportunity. For project-oriented sales, Data Systems competes with system integrators and with computer hardware manufacturers. Data Systems also competes with a wide variety of local, regional and national hardware resellers for add-on equipment sales. Because Data Systems is not as price-aggressive as some of these competitors, Data Systems relies on its sales force to provide superior servicing and post-sale technical support to maintain its customer relationships. Depending on the customer, Data Systems competes on the basis of technological capability, price, breadth of product offerings and quality of service. Competitors also vary project-to-project depending upon the geographic location of the work to be performed. Many competitors are larger than Data Systems and have significantly greater financial, marketing and human resources, and geographic coverage. Data Systems believes that it can compete against these competitors on the basis of its extensive experience in the network integration and management market, authorization to sell a broad range of products and experienced technical staff. Employees As of December 31, 1999, Data Systems employed 180 employees, 44 were sales personnel, 118 were service personnel and 18 were administrative or management personnel. Data Systems' employees have no union affiliations. Data Systems believes its relationship with its employees is good. -68- Properties Data Systems' corporate headquarters is located in Farmington Hills, Michigan, in a leased facility consisting of approximately 12,555 square feet of office space rented under a lease expiring in November 2002. Data Systems also leases a technical facility located in Farmington Hills, Michigan with approximately 7,000 square feet rented under a lease expiring in March 2003. Data Systems also has a telephone "help desk" center located in Baton Rouge, Louisiana, which is part of its State of Louisiana maintenance contract, and is located in a facility with 8,200 square feet rented under a lease that expired in November 1999, and is currently leased on a month-to-month basis. Data Systems also leases direct sales offices totaling approximately 25,000 square feet under leases with terms of one to five years, in 10 locations in the United States. Data Systems believes that its existing facilities and offices and additional space available to it are adequate to meet its requirements for its present and reasonably foreseeable needs. Legal Proceedings Data Systems filed suit on December 9, 1999 against Unified Network Services, Inc. (UNS) in the State of Michigan, Oakland County Circuit Court (Case No. 99-019541-CK.) Effective June 1, 1998, Data Systems sold its interest in the UNS subsidiary for $7,000 in cash and a note for $3,000,000, secured by the stock of UNS. The note called for interest only payments to commence July 1, 1998 for a period of twelve months followed by monthly payments of $50,000 plus interest on the unpaid balance until the note is fully repaid at June 1, 2004. Interest was to accrue on the unpaid balance at a per annum rate equal to the Bank One, Michigan prime rate. The suit alleges UNS breached its agreement with Data Systems by failing and refusing to make payments due on the note. The case was removed to U.S. District Court Eastern District of Michigan on April 13, 2000 (Case No. 00-71592.) On June 16, 1998, Data Systems filed suit in Oakland County Circuit Court (Case No. 98-006905-CZ), Michigan, against Softech, Inc. alleging that Softech wrongfully retained monies due Data Systems in accordance with an asset purchase agreement dated September 12, 1996. In addition, Data Systems stated that Softech owed Data Systems rent under a sublease agreement, and had not paid invoices for work completed by Data Systems. It also stated that software acquired by Data Systems in the acquisition of the Network Systems Group did not perform properly. The complaint alleged fraud, breach of contract, conversion and unjust enrichment (the "Data Allegations.") On November 3, 1998, Softech, Inc. filed a demand for arbitration against Data Systems. Data Systems' claim was dismissed in February 1999 without prejudice due to the arbitration provision in the asset purchase agreement. Softech alleged that Data Systems had breached the September 12, 1996 asset purchase agreement by failure to register shares of stock on a timely basis, failure to pay monies owed for inventory purchases and receivables, equipment and commissions paid by Softech on behalf of Data Systems, funds owed to employees, advances to former employees of Softech who became employees of Data Systems and rents. Data Systems filed a counterclaim with respect to the Data Allegations in connection with the arbitration. The arbitration hearing is scheduled for June 2000 and Data Systems intends to pursue its counterclaim and vigorously defend itself against Softech's claims. Other than the above, Data Systems is not party to any other legal proceedings other than routine litigation that is incidental to its business, none of which is material. In February 1998 Data Systems disclosed a possible overstatement of earnings in prior periods that it believed may have been due to inadequate internal controls following several acquisitions and rapid internal growth. The SEC subsequently contacted Data Systems and informed it that it was conducting an -69- informal investigation into the matter. Data Systems appointed a special committee to investigate the problem and has since restated its financial statements, made personnel changes, and instituted accounting systems and controls that it believes are adequate to handle the increased accounting burden. In October 1998, the SEC informed Data Systems it was conducting a private formal investigation into the matter. This inquiry is ongoing, and Data Systems is cooperating with the investigation. Submission of Matters to a Vote of Security Holders None. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis compares the financial results for the three-year period ending December 31, 1999 and should be read in conjunction with Data Systems financial statements and notes thereto. Results of Operations For the periods indicated, the following table sets forth selected items from Data Systems' Consolidated Statements of Operations included in this Report, expressed as a percentage of total revenues:
Year Ended December 31, ------------------------------------------- Revenues: 1999 1998 1997 ---- ---- ---- Product revenue 61.4% 74.5% 78.9% Service revenue 38.6% 25.5% 21.1% ------- ------ ------- Total revenues 100.0% 100.0% 100.0% Cost of revenues: Cost of products 50.4% 61.2% 68.9% Cost of services 30.7% 22.3% 16.6% ------- ------ ------ Total cost of revenues 81.1% 83.5% 85.5% Gross profit 18.9% 16.5% 14.5% Operating expense 20.4% 18.0% 18.8% Other income (expense) 1.9% (2.9%) (0.9%) ------- ------ ------ Income /(loss) before discontinued operations 0.4% (4.4%) (5.2%) Discontinued operations: Loss from operation of UNS - (2.0%) (0.6%) Gain on disposal of UNS - 0.8% - ------- ----- ------ Net Income / (Loss) 0.4% (5.6%) (5.8%) ======= ===== ======
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Revenues Data Systems' total revenues declined to $52.8 million in 1999, compared to $85.3 million in 1998. The decline (38.1%) is the cumulative effect of the termination of a specific product sales contract, non-recurring product project work and a change in sales strategy to an emphasis on service sales. -70- Data Systems' product sales component of the business declined to $32.4 million in 1999 from $63.5 million in 1998 due primarily to the completion and expiration on September 30, 1998, of Data Systems' master contractor purchase order with the State of Michigan. Product sales to the State of Michigan were made under that agreement and accounted for $17.1 million in sales in 1998. The State of Michigan continues to buy network services and service maintenance contracts from Data Systems. Non-recurring product project work completed in 1998 for Hooper Homes and the State of Louisiana accounted for $4.7 million and $3.1 million, respectively, of the decline in product revenues from 1998 to 1999. In prior periods, Data Systems would sell equipment and absorb the full burden of financing those sales. During 1999, Data Systems worked with key vendors to pass through hardware sales directly to the customer. This allows the vendor to absorb the risk and burden of financing the equipment component of the sale. As a result, Data Systems recognized a commission on the sale without the risk and cost associated with carrying a receivable for equipment sales. This change was implemented as part of Data Systems' strategic move towards service sales with less emphasis on the hardware component of its business. The change implemented by Data Systems of equipment sales pass through to the vendors accounted for approximately $10.9 million of the product revenue decline from 1998 to 1999. Data Systems' shift in emphasis to service sales from product sales is due to the expectation of higher margins generally associated with sales of technical services. Service revenues declined 6.4% to $20.4 million in 1999 from $21.8 million in 1998. The decline is due to the loss of the service revenue associated with the State of Michigan master product purchase order, which expired September 30, 1998, and the termination of unprofitable imaging services. Service sales accounted for 38.6% of total revenue in 1999 versus 25.5% in 1998. This percentage increase was due to the overall decline in product revenue as described above. Cost of Revenues The decline in cost of revenues in 1999 is consistent with the reduction in product sales due to the termination of the State of Michigan master contractor purchase order, non-recurring product project work and Data Systems' success with involving key vendors in the financing of large equipment sales. In addition, Data Systems continues to manage external labor costs, increase internal technical work force utilization and increase high-end network service work. Primarily as a result of this activity, cost of revenues decreased to 81.1% of total revenues in 1999 from 83.5% of total revenues in 1998. Cost of product revenue decreased as a percentage of total revenues to 50.4% in 1999 from 61.2% in 1998. The decline in product revenue and the ability to pass through product sales accounts for the reduction in the cost of product revenue. Product revenue gross margins increased to 18.0% in 1999 versus 17.8% in 1998. Cost of service revenue increased to 30.7% of total revenues in 1999 from 22.3% of total revenues in 1998 due to the decrease in overall sales. However, service revenue gross margins increased to 20.6% in 1999 versus 12.7% in 1998 due to management by Data Systems of external labor while increasing the utilization of the internal technical workforce. Overall, gross profit in 1999 decreased $4.1 million, or 29.0%, from 1998. However, gross margin as a percent of revenue increased in 1999 to 18.9%, versus 16.5% in 1998. The increase in margin is attributable to Data Systems' ability to negotiate vendor discounts for product purchases, vendor financing of large equipment transactions and increases in service margins as described above. -71- Operating Expenses Operating expenses increased to 20.4% of total revenues in 1999 from 18.0% of total revenues in 1998. Sales expenses remained constant at 11.6% of total revenues in 1999 and 1998 respectively. General and administrative expense increased to 8.8% of total revenues in 1999 from 6.4% of total revenues in 1998. The increase in operating expense margin is directly related to the decrease in total revenue. However, overall operating expenses declined 29.8% due to cost controls and overhead reductions put in place during 1999. Specifically, sales offices in Chicago, IL, Raleigh, NC, and Lexington, KY were closed and administrative positions were consolidated through attrition, without jeopardizing controls or procedures. Included in 1999, are non-recurring expenses for professional fees and unprofitable operations as a result of Data Systems operating under the terms of a merger agreement with Information Architects that was terminated on September 15, 1999. The differential between 1998 and 1999 was impacted by the fact that 1998 included some non-recurring costs required to complete Data Systems' year-end audits for 1997 and 1996 reporting, costs associated to Data Systems' shareholder class action lawsuit, and bank audit and examination expenses. Other Income (Expenses) Other income for 1999 increased $3,397,373 to $978,252 and was primarily attributable to the settlement of Data Systems' shareholder class action lawsuit. Data Systems established an accrual in 1998 of approximately $1.8 million for the estimated fair market value of the shares of Data Systems common stock that were to be contributed into the gross settlement fund for the suit. At the time of settlement (June 22, 1999), Data Systems recognized as income approximately $1.1 million of the accrual because the actual fair market value of the common stock issued was $630,500. The remaining change was due to Data Systems' reversal of some accrued costs offset by a loss on sale of non-revenue producing assets. The disposal of the assets was related to the closure of three sales offices. Interest expense decreased $.2 million due primarily to Data Systems' success at negotiating more advantageous payment terms with its key vendors and overall reductions in Data Systems' bank borrowings. Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Data Systems' total revenues declined slightly to $85.3 million in 1998, compared to $86.0 million in 1997. The decline (0.8%) was due to the net effect of the termination of a specific product sales contract offset by Data Systems' organic growth in service sales and in the eastern region of the United States. Data Systems' product sales component of the business declined to $63.5 million in 1998 from $67.8 million in 1997 was due primarily to the completion and expiration on September 30, 1998, of Data Systems master contractor purchase order with the State of Michigan. Product sales to the State were made under that agreement. The State continues to buy network services and service maintenance contracts from Data Systems. Of the $4.3 million decline in product sales, approximately $3.8 was attributed to the completion of the State of Michigan agreement. The remainder of the decline in product sales was due to management's continued focus on new account penetration through the offering of advanced services, including network management services. Data Systems' shift in emphasis to service sales from product sales was due to the expectation of high margins generally associated with sales of technical services. Service revenues increased 20.4% to $21.8 million in 1998 from $18.1 million in 1997. Service sales accounted for 25.5% of total revenue in 1998 versus 21.1% in 1997. This increase was primarily -72- due to the allocation of additional resources to further develop Data Systems' capabilities to deliver advanced services. Cost of Revenues The decline in cost of revenues in 1998 was consistent with the reduction in product sales due to the termination of the Sate of Michigan master contractor purchase order and the shift to service revenue. Management had refocused Data Systems' business in conjunction with these changes by shifting resources away from the lower margin direct product component of revenue, in favor of the higher returns generated from advanced service and network management offerings. Primarily as a result of this activity, cost of revenues decreased to 83.5% of total revenues in 1998 from 85.5% of total revenues in 1997. Cost of product revenue decreased as a percentage of total revenues to 61.2% in 1998 from 68.9% in 1997. Certain software purchases in support of maintenance contracts were reclassified as cost of services versus cost of products. This change, along with the decline in product revenue, accounts for the reduction in the cost of product revenue. Product revenue gross margins increased to 17.8% in 1998 versus 12.7% in 1997. Data Systems had been more selective in pricing large projects and believes that the increase in product gross margin is reflective of the strategic shift away from low margin sales. Cost of service revenue increased to 22.3% of total revenues in 1998 from 16.6% of total revenues in 1997 due to the significant increase in total service revenues and reclassification of software costs that are more closely related to service revenue. Additionally, due to Data Systems decision to move towards a higher mix of service sales, Data Systems increased its technical personnel to assist the sales effort with specialized internal resources. By providing in-house technical resources to support revenue growth, Data Systems increased expenditures in third party consultants and technicians to support existing contracts. Overall, gross profit increased $1.6 million or 12.9% over 1997. Gross margin in 1998 was 16.5% versus 14.5% in 1997. To maintain its strategic direction, emphasizing a shift towards higher margin service sales, Data Systems did invest resources in technical personnel, hardware, software and processes. Operating Expenses Operating expenses decreased to 18.0% of total revenues in 1998 from 18.8% of total revenues in 1997. Sales expenses decreased to 11.6% of total revenues in 1998 versus 12.0% of total revenues in 1997. General and administrative expense decreased to 6.4% of total revenues in 1998 from 6.8% of total revenues in 1997. Overall, operating expenses declined due to cost controls and overhead reductions put in place during 1998. Specifically, sales offices in Atlanta, GA, Charlotte, NC, Greensboro, NC, Pittsburgh, PA and Dallas, TX were closed or consolidated into other more strategically located offices. Administrative and other overhead reductions were completely offset by the additional expenditures necessary to address legal and auditing issues. The non-recurring legal, auditing, and professional fees exceeded just over $1.0 million during 1998. These expenses related to the extraordinary efforts required to complete Data Systems' year-end 1997 and 1996 reporting, the class action lawsuits, and bank audit and examination expenses. All totaled, these matters account for 1.2% of total revenue. Other Income (Expenses) The increase in other expense in 1998 was due primarily to the recognition of $1.8 million of liability associated with the proposed stipulation of settlement of Data -73- Systems' shareholder class action lawsuit. Data Systems established an accrual for the estimated fair market value of the shares of Data Systems' common stock that will be contributed into the gross settlement fund. Other expenses, net of the shareholder lawsuit accrual, declined to $.6 million from $.8 million in 1997. The decrease was due to a $.8 million decrease in interest expense due primarily to Data Systems' success at negotiating more advantageous payment terms with its key vendors and overall reductions in Data Systems' bank borrowings. Discontinued Operations Pursuant to the terms of the original 1996 purchase agreement by which Data Systems acquired Unified Network Services Inc., the minority shareholders of UNS elected to exercise a contract right to initiate re-purchase of the the stock of UNS owned by Data Systems. The board of directors of Data Systems accepted the proposal and adopted a plan to discontinue operations. Effective June 1, 1998, Data Systems sold its 70% interest in the UNS subsidiary for cash and notes and discontinued operations in its large account network management business. The terms of the sale included $7,000 in cash and a note for $3,000,000, secured by the stock of UNS. The buyers also assumed the existing liabilities of UNS. The gain upon disposal of the discontinued segment was $705,742 which is net of an allowance of $3,000,000 due to the uncertainty of the buyers ability to pay the note. Data Systems deferred the recognition of a gain on sale related to the note until payments on the note began. The gain is also net of additional allowances of $614,000 and $375,000, due to the uncertainty of the buyer's ability to reimburse Data Systems for working capital and payment of assumed liabilites. Data Systems has restated its prior financial statements to present the operating results of the UNS segment as a discontinued operation. On December 9, 1999, Data Systems filed suit against Unified Network Services, Inc (UNS) in the State of Michigan, Oakland County Circuit Court. The suit alleges UNS breached its agreement with Data Systems by failing and refusing to make payments due on the note. Financial Condition As of December 31, 1999, cash and investments totaled $1.5 million, a decrease of $1.1 million from 1998. Cash used in operating activities for 1999 was $3.1 million compared to cash provided by operations of $18.1 million in 1998. The cash used in operating activities was primarily due to a decrease in accounts payable of $3.3 million, reversal of the shareholder lawsuit accrual by $1.1 million and recognition of deferred maintenance revenues of $2.3 million. These uses were partially offset by income of $191,190 generated in 1999 and depreciation of $1.1 million and collection of accounts receivable of $2.2 million. Data Systems, in accordance with its bank financing agreement, applies all available cash to its outstanding line of credit balance. During the year, Data Systems borrowed $2.0 million against the line of credit. In accordance with Data Systems' credit agreement with Foothill Capital Corporation, all funds are applied to the outstanding loan balance. Daily working capital requirements are managed through daily borrowings. On September 30, 1998 Data Systems and Foothill Capital Corporation entered into a credit facility. The Foothill agreement provides for an initial revolving line of credit not to exceed $15 million. Data Systems may, at its option and subject to collateral requirements, increase the line to $20 million during the term of the Foothill agreement. Borrowing limits under the Foothill agreement are determined based on a collateral formula, which includes 85% of qualified trade receivables. Borrowings under the Foothill agreement bear interest at 1% over Norwest Bank's prime rate and have a term extending to September 30, 2001. As of December 31, 1999, the line of credit under the Foothill Agreement bore interest at 9.5%. As of December 31, 1999, the line of credit collateral formula permitted borrowings of up to $6.2 million, of which $5.2 million was outstanding. -74- The Foothill agreement contains financial covenants related to earnings before interest, taxes, depreciation and amortization (EBITDA), net worth and capital expenditures. There are other covenants that require Data Systems' receivables to be genuine and free of all other encumbrances and requires Data Systems' inventory to be kept only at specified locations and to be free of all other encumbrances. In addition, there are restrictions with respect to dividend distribution. At December 31, 1999, Data Systems was in compliance with all of the financial covenants referenced above. The Data Systems working capital deficiency as of December 31, 1999 was $2.2 million. Data Systems believes that the combination of present cash balances, future operating cash flows, and working capital provided by the Foothill agreement or alternate working capital financing secured by Data Systems will be adequate to fund Data Systems' current short and long term cash flow requirements. Included in cash of Data Systems is $1.5 million which is restricted in connection with various maintenance agreements. Upon completion of its proposed merger with TekInsight, Data Systems believes that additional financing resources will be available and some synergies relating to business opportunities will arise. However, the Agreement and Plan of Merger requires Data Systems to conduct business in the usual and ordinary course but under certain restrictions and limitations, these restrictions and limitations, in the aggregate, could have an effect on Data Systems' ability to quickly respond to changes in its business. Year 2000 Compliance Results The Year 2000 (Y2K) issue arose as a result of computer programs using a two-digit format, as opposed to four digits, to indicate the year. The concern was that computer systems would be unable to interpret dates beyond the year 1999, which could cause a system failure or other computer errors, leading to disruptions in operations. In 1997, Data Systems developed a three-phase program for Y2K information systems compliance. Phase I was to identify those systems with which Data Systems has exposure to Y2K issues. Phase I was completed in 1998. Phase II was the development and implementation of action plans to be Y2K compliant in all areas by mid 1999. Those plans were developed and implemented as scheduled. Phase III was the final testing of each major area of exposure to ensure compliance and was completed during the fourth quarter 1999. In implementing its three-phase program, the Company had identified three major areas determined to be critical for successful Y2K compliance: (1) financial and informational system applications, (2) customer relationships and equipment applications and (3) third-party consultant and vendor relationships. Data Systems, in accordance with Phase I of the program, conducted an internal review and inventory of all systems (including information technology and non-information technology systems), and contacted all critical suppliers to determine major areas of exposure to Y2K issues. In the financial and information system area, a number of applications were identified as Y2K compliant due to their recent implementation. Data Systems' core financial and reporting systems were completely replaced as of January 1, 1999, which brought this critical area into Y2K compliance. In the customer relationships and equipment applications area, Data Systems completed all remediation and testing efforts. As a result of its Phase I assessment of its non-information technology systems, Data Systems did not incur significant costs remediating those systems for Y2K compliance. In the third-party consultant and vendor relationships area, Data Systems contacted most of those parties and they stated they were to be Y2K compliant. Data Systems spent approximately $154,000 in 1998 to replace its core financial and reporting systems and had spent 1,100 man-hours through December 31, 1999 to bring the systems network, financial and informational applications into Y2K compliance at an estimated cost of $55,000. Because of Data Systems' expertise in this area, internal personnel undertook the majority of this work. -75- Data Systems believes it did not experience any Y2K disruptions due to the three-phase program it developed and implements. The foregoing disclosure contains information regarding Y2K readiness that constitutes a "Year 2000 Readiness Disclosure" as defined in the Year 2000 Readiness Disclosure Act. Quantitative and Qualitative Disclosure About Market Risk In the normal course of business, the financial position of Data Systems is routinely subjected to a variety of risks. In addition to the market risk associated with interest on outstanding debt, other examples of risk include collectibility of accounts receivable and recoverability of residual values of assets placed in service. Data Systems is subject to an element of market risk due to possible changes in interest rates. Data Systems regularly assesses these risks and has established collection policies and business practices to minimize the adverse effects of these and other potential exposures. Data Systems does not currently anticipate any material losses in these areas, due primarily to the lack of significant fluctuation in the prime-lending rate on which Data Systems' interest expenses are determined. The financial instruments included in the debt of Data Systems consists of all of Data Systems' cash and cash equivalents, bank financing, bank credit facilities and lines of credit, vendor credit lines, leases, and, if applicable, marketable securities, and any short and long-term investments. Data Systems assesses the risk of loss due to the impact of changes in interest rates on market sensitive instruments. Interest rates effecting Data Systems' debt are market based and will fluctuate as a result. Data Systems prepares forecasts and cost of funds analysis on significant purchases to anticipate the effect of market interest rate changes. Data Systems' earnings are affected by changes in short-term interest rates as a result of its use of bank (line of credit) financing for working capital. If market interest rates based on the prime lending rate average 2% more in 2000 than they did during 1999, Data Systems' interest expense, after considering the effects of interest income, would increase, and income before taxes would decrease by approximately $100,000 assuming comparable average borrowings. Comparatively, if market interest rates based on the prime lending rate averaged 2% more in 1999 than they did in 1998, Data Systems' interest expense, after considering the effects of any interest income, would have increased, and income before taxes would have decreased, by $200,000 assuming comparable average borrowings. These amounts are determined by considering the impact of the hypothetical change in the interest rates on Data Systems' borrowing cost and short-term investment balances, if any. These analyses do not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in Data Systems' financial structure. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure On October 15, 1998, Plante & Moran, LLP informed the board of directors of Data Systems that it would decline to stand for reappointment, if asked, as auditors for Data Systems. Plante also notified Data Systems at that time that, as of the date of such notification, the client-auditor relationship between the parties was terminated. Data Systems placed no limitations on Plante responding fully to inquiries of the successor accountant. The reports of Plante on the financial statement of Data Systems for each of the fiscal years ended December 31, 1997 and 1996 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle, except that, as -76- issued, Plante's report dated August 20, 1998 included a modification addressing Data Systems' going concern uncertainty. The plans of Data Systems concerning these matters are described in the footnotes attached to the financial statement referenced in that report. In connection with its audits for the fiscal years December 31, 1997 and 1996, and through October 15, 1998, (i) there were no disagreements between Data Systems and Plante on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Plante would have caused them to make reference thereto in their report on the financial statement for such fiscal years and (ii) there were no reportable events as defined in Regulation S-K Item 304(a)(1)(v) except that Plante advised the Audit Committee of Data Systems' board of directors, by letter dated May 21, 1998, of items it considered to be material weaknesses in internal controls in 1997 relating to Data Systems' general accounting practices then in place, including those relating to billing, accounts payable, and inventory. These items were discussed with the Audit Committee on September 15, 1998. Management has addressed and will continue to address the recommendations of Plante. Directors and Executive Officers of Data Systems The following is a list of the members of the board of directors and the executive officers of Data Systems and includes information regarding the individual's age, principal occupation, other business experience, directorships in other publicly held companies and term of service with Data Systems. Each director holds office until the next annual meeting of shareholders and until his successor has been elected and qualified. Name Age Position ---- --- -------- Michael W. Grieves 49 Chairman of the Board, President, Chief Executive Officer and Director Walter J. Aspatore 55 Director John O. Lychos, Jr. 44 Director Diane L. Grieves 50 Executive Vice President and Secretary Michael Jansen 42 Chief Financial Officer, Treasurer and Assistant Secretary Garrett L. Denniston 49 Vice President - Sales Mr. Grieves has served as Data Systems' President, Chief Executive Officer and Chairman of the Board since its inception in 1986. Prior to 1986, Mr. Grieves served in executive, managerial and technical capacities with Computer Alliance Corporation, a turnkey system house, Quanex Management Sciences, a computer services bureau, and Lear Siegler Corporation, and has more than 25 years of experience in the computer industry. Mr. Grieves is married to Diane L. Grieves, Data Systems' Executive Vice President and Secretary. Mr. Aspatore has been a director of Data Systems since November 1994, has been Managing Director of Amherst Capital Partners, which provides investment banking services to medium and small businesses, since its founding in 1994. Prior to the formation of Amherst Capital Partners, Mr. Aspatore was President of Onset BIDCO, which supplies financing and management services to companies with -77- strong growth potential, from 1991 to November 1994. Mr. Aspatore was the President of Cross & Trecker Corporation, a $500 million worldwide factory automation company, from 1988 to 1991 and served that company in various capacities for approximately 22 years. He has a total of more than 27 years of senior level management experience in operations and finance in the worldwide factory automation, automotive and aerospace industries. Mr. Lychos has been a director of Data Systems since August 1999, and had been the Chief Financial Officer of Data Systems from May 1998 through July 1999. Mr. Lychos is currently the Chief Financial Officer of Atlas Oil Company. Prior to joining Data Systems, he was a Vice President/Area Controller for Waste Management Inc., and held a variety of other responsible financial management positions with that company throughout his fifteen-year tenure. Ms. Grieves is Data Systems' Executive Vice President and Secretary. She has held executive positions in sales, operations, and administration at Data Systems since its inception. From 1984 to 1985, Ms. Grieves was Vice President of Sales at Executive Data Solutions, Inc., a computer sales organization. Prior to that, Ms. Grieves held numerous sales and sales management positions with American Telephone and Telegraph and the Bell operating companies. Mr. Jansen, Data Systems' Chief Financial Officer, Treasurer and Assistant Secretary has been with Data Systems since November 1998. Before becoming the Chief Financial Officer, Mr. Jansen had been the Vice President - Corporate Controller of Data Systems. Mr. Jansen is a CPA with over 15 years of finance, accounting and business experience. Prior to joining Data Systems, he spent 13 years in various financial management positions with a Fortune 500 Company. Mr. Denniston, Data Systems' Vice-President - Sales, has held various sales management and executive positions with Data Systems since 1996. Prior to 1996, Mr. Denniston was employed in sales and sales management capacities at Memorex-Telex, Inc. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires Data Systems' officers and directors, and persons who own more than 10% of a registered class of Data Systems' equity securities, to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than 10% shareholders are required by SEC regulation to furnish Data Systems with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it since January 1, 1999, or written representations from reporting persons that no Form 5's were required for those persons, Data Systems believes that its officers, directors, and greater than 10% beneficial owners filed all reports required under Section 16(a) of the Securities Exchange Act of 1934, as amended. Executive Compensation Summary The following table sets forth the compensation paid by Data Systems to the Chief Executive Officer and other executive officers who earned more than $100,000 in salary and bonus during 1999. -78- Summary Compensation Table
Long Term Compensation Annual Awards Compensation Securities Name and --------------------- ------------------ Principal Position Year Salary Bonus Underlying Options - ---------------------------------------------------------------------------------------------------------------- Michael W. Grieves 1999 $ 160,000 -- -- 1998 $ 160,000 -- -- Chairman, President and 1997 $ 160,000 $ 30,000 8,000 Chief Executive Officer Diane L. Grieves 1999 $ 120,000 $ 34,017 -- Executive Vice President 1998 $ 120,000 $ 30,000 -- And Secretary 1997 $ 120,000 $ 15,375 7,500 Michael Jansen 1999 $ 92,000 $ 16,000 -- Chief Financial Officer 1998 $ 15,000 -- 10,000 1997 -- -- -- Garret L. Denniston 1999 $ 150,000 $ 80,000 -- Vice-President - Sales 1998 $ 150,000 $ 60,000 -- 1997 $ 50,000 -- --
Employment Agreements As of May 12, 1998, Data Systems entered into an employment agreement with Diane L. Grieves. As of November 2, 1998, Data Systems entered into an employment agreement with Michael Jansen and as of December 20, 1999, Data Systems entered into an employment agreement with Garrett Denniston. Ms. Grieves' agreement has a term ending May 11, 2003, or, if earlier on the executive's sixty-second birthday, unless the agreement is terminated earlier in accordance with its terms. Messrs. Jansen's and Denniston's agreements each has a term ending November 1, 2003, or, if earlier, on the executive's sixty-second birthday, unless the agreement is terminated earlier in accordance with its terms. Each of the employment agreements provides that the executive will receive an annual base salary and incentive compensation as determined by the board of directors of Data Systems or the chief executive officer. Each of Ms. Grieves, Mr. Jansen and Mr. Denniston has agreed not to compete with Data Systems during the period of his/her employment and for up to one year following the termination of his/her employment. Upon termination of his/her employment without cause or in the event of specified unilateral changes in his/her employment resulting in termination of the executive, each of Ms. Grieves, Mr. Jansen and Mr. Denniston is entitled to continue to receive benefits for up to six months and severance payments equal to six month's salary plus his/her pro rata share of any earned annual incentive compensation. If a change in control occurs prior to such termination, the incentive compensation payable under each agreement will equal the entire annual award. -79- Option Holdings The following table provides information with respect to the unexercised options held as of the end of 1999 by the Named Officers. Aggregated Option/SAR Exercises in Last Fiscal Year-End Option/SAR Values
Number of Securities Unexercised Options/SARs at Value of Unexercised In-the- F-Y End (Number) Money/SARs at F-Y End ($) --------------------------- ---------------------------- Number of Date Shares Shares Value Name Acquired Exercised Realized ($) Exercisable Unexercisable Exercisable Unexercisable - ---- --------- --------- ------------ ----------- ------------- ----------- ------------- Michael W. Grieves - - - 18,000 - - - Diane L. Grieves - - - 26,251 3,794 - - Michael Jansen - - - - 10,000 - - Garrett L. Denniston 8/26/96 1,000 13,625 51,000 - - -
(a) Value was determined by multiplying the number of shares subject to the option by the difference between the last sale price of the Common Stock reported for December 31, 1999 on the Over-the-Counter Bulletin Board and the option exercise price. Director Compensation Customarily, Data Systems has paid non-employee directors an annual retainer of $1,000 and a fee of $500 for each board of directors or committee meeting attended. On the date of each annual shareholders meeting, each non-employee director elected or reelected as such will also receive an option under the 1994 stock option plan to purchase 1,000 shares of Data Systems common stock, exercisable beginning one year after the grant date, at an exercise price equal to the fair market value on the grant date. Data Systems also reimburses out-of-pocket expenses related to non-employee directors in attendance at such meetings. Data Systems did not hold an annual shareholders meeting in 1999. During 1999 Data Systems did not pay directors for their services. However, in order to compensate the board of directors for their services to Data Systems, it was resolved that the board of directors members would receive shares of Data Systems' stock in lieu of cash. The compensation is $2,000 per month in value of Data Systems common stock beginning with the fourth quarter of Quarter 1999. In 1999, Data Systems granted options pursuant to the 1994 stock option plan for 50,000 shares to a director of Data Systems exercisable at a price of $.66 per share when the fair market value at the date of the grant was $1.03. Fifty percent of such options vest on the second anniversary date of the grant, and the 25% vest each of the next two years. Certain Relationships and Related Party Transactions A $200,000 promissory note was issued for a portion of the consideration for some 13% subordinated promissory notes of Data Systems acquired by Mr. Grieves, Data Systems' Chairman, President and Chief Executive Officer, pursuant to Data Systems' Plan of Reorganization in 1992. The Grieves note was renegotiated effective January 1, 2000. Under the renegotiated Grieves Note, payments will be made at the end of each fiscal quarter with all outstanding principal and accrued interest paid by December 31, 2000. The renegotiated Grieves note bears interest on the unpaid principal at an annual rate of 9.5%. -80- MARKET PRICE INFORMATION Price Range Of Outstanding TekInsight Common Stock The following table sets forth the high and low sales prices for each fiscal quarter during the fiscal years ended June 30, 1999 through the third quarter of 2000, as reported on the Nasdaq SmallCap Market. Such quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and do not necessarily represent actual transactions. FISCAL YEAR ENDED JUNE 30, 1999 HIGH LOW ------------------------------- ----- --- First quarter ended September 30, 1998 $1.44 $1.38 Second quarter ended December 31, 1998 1.06 1.00 Third quarter ended March 31, 1999 1.13 1.00 Fourth quarter ended June 30, 1999 4.00 3.81 FISCAL YEAR ENDING JUNE 30, 2000 HIGH LOW -------------------------------- ---- --- First quarter ended September 30, 1999 $4.00 $2.50 Second quarter ended December 31, 1999 4.13 2.19 Third quarter ended March 31, 2000 6.69 2.38 TekInsight has never paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. We intend to retain future earnings for reinvestment in our business. Payment of dividends is restricted under TekInsight's credit and security agreements. -81- Price Range Of Outstanding Data Systems Common Stock As of December 31, 1999 Data Systems common stock was traded only in the over-the-counter market under the symbol "DSYS." During 1998, Data Systems common stock was also listed on the Nasdaq SmallCap Market under the symbol "DSYS" and on the Pacific Stock Exchange under the symbol "DSY." Due to late SEC filings, Data Systems was de-listed from Nasdaq and the PSE. The high and low sales prices for Data Systems common stock on the Nasdaq SmallCap Market and the over-the-counter market from January 1, 1998 through December 31, 1999 is as follows: FISCAL YEAR ENDED DECEMBER 31, 1998 HIGH LOW ----------------------------------- ---- --- First quarter ended March 31, 1998 $14.75 $5.50 Second quarter ended June 30, 1998 7.25 0.25 Third quarter ended September 30, 1998 3.88 0.75 Fourth quarter ended December 31, 1998 2.41 0.75 FISCAL YEAR ENDED DECEMBER 31, 1999 HIGH LOW ----------------------------------- ---- --- First quarter ended March 31, 1999 $3.13 $1.03 Second quarter ended June 30, 1999 1.31 0.81 Third quarter ended September 30, 1999 1.19 0.38 Fourth quarter ended December 31, 1999 1.19 0.53 Data Systems has never declared or paid any dividends on its capital stock. Data Systems does not anticipate paying any cash dividends in the foreseeable future. The primary lender of Data Systems, Foothill Capital Corporation, must also approve any dividends. -82- PROPOSAL 2--APPROVAL BY TEKINSIGHT STOCKHOLDERS OF ISSUANCE OF SHARES PURSUANT TO NASDAQ RULE 4310 Nasdaq Stock Market Rule 4310(25)(G) requires Nasdaq-listed companies to obtain stockholder approval before issuing 20% or more of their common stock or securities convertible into common stock in a transaction other than a public offering. The board of directors of TekInsight, therefore, must obtain your approval to issue Series A preferred stock which is convertible into 20% or more of the currently outstanding common stock of TekInsight in connection with the merger. Under Nasdaq Rule 4310, this proposal must be approved by a majority of votes cast on this proposal at the special meeting in person or by proxy. On April 27, 2000 TekInsight had approximately 15.9 million shares of common stock issued and outstanding. Because the merger consideration will not be determined until after the special meeting date, we do not currently know the exact number of Series A preferred stock shares that will be issued in the merger. Based upon Nasdaq Rule 4310, however, the issuance of more than 3.1 million shares would require stockholder approval. If the average market value of our common stock for the 10 days prior to the merger is $5.01 per share, the total value of the merger consideration will be $16 million. Assuming that there were 5,542,448 shares of Data Systems common stock outstanding, we would be issuing 3,193,029 shares [(based on an exchange ratio of .58:1], which exceeds 20% of our currently outstanding common stock. For the reasons discussed in "The Background of the Merger--TekInsight's Reasons for the Merger," TekInsight's board of directors unanimously believes that the merger is in the best interests of stockholders of TekInsight. The merger consideration was negotiated at arms' length and the board of directors believes it reflects the market value of Data Systems. Valuemetrics has given its opinion to TekInsight and its board of directors, and Valuation Counselors has given its opinion to the board of directors of Data Systems, that the merger consideration is fair from a financial perspective. Therefore, we believe that any dilution in your percentage of ownership is more than offset by the benefits of the merger. In the event that this proposal is not approved, we would consider other alternatives including resoliciting stockholders and smaller acquisitions to promote corporate growth. The board of directors of TekInsight unanimously recommends that stockholders vote "FOR" approval of the proposal pursuant to Nasdaq Rule 4310. -83- PROPOSAL 3--INCREASE IN AUTHORIZED COMMON STOCK RESERVED FOR ISSUANCE UNDER TEKINSIGHT'S 1992 STOCK OPTION PLAN The board of directors of TekInsight adopted the 1992 employee stock option plan to help TekInsight and its subsidiaries to attract and retain highly capable employees and selected key consultants, and to encourage them to promote the growth and profitability of TekInsight and its subsidiaries. 500,000 shares of common stock were initially reserved for issuance under the plan, all of which have already been issued in connection with options previously granted by the TekInsight board of directors. The purpose of the increase is to cover future option grants to attract and retain officers, employees and directors. If the number of shares of common stock available under the 1992 plan is not increased, there will be an insufficient number of shares to cover such future grants to officers, employees and directors. Options granted under the 1992 plan may be either incentive options within the meaning of Section 422 of the Internal Revenue Service Code of 1986, non-qualified options, or options not intended to be incentive options. The amendment does not alter the considerations of the compensation committee with respect to grants under the 1992 plan. The following is a summary description of the material features of the 1992 plan. Under the 1992 plan, TekInsight may grant options to purchase up to an aggregate of 500,000 shares of common stock, subject to adjustment under specified circumstances, to employees of TekInsight, or other individuals whose participation is determined to be in the best interests of TekInsight by the compensation committee. As of March 31, 1999, options to purchase 500,000 shares of common stock had been granted under the 1992 plan, at exercise prices ranging from $.93 to $5.50 per share. The 1992 plan provides for the grant of options that are intended to qualify as incentive stock options, or ISOs, under Section 422 of the Internal Revenue Code to employees of TekInsight, as well as the grant of non-qualifying options, or NSOs, to officers, directors or key employees of TekInsight or other individuals whose participation in the 1992 plan is determined to be in the best interest of TekInsight by the compensation committee. The 1992 plan is administered by the compensation committee. The compensation committee selects the optionees and determines the number of shares of common stock covered by each option and the terms of the option agreement to be executed by TekInsight and the optionee. The option exercise price for ISOs granted under the 1992 plan may not be less than 100% of the fair market value of the common stock on the date of grant, or 110% in the case of an ISO granted to an optionee beneficially owning more than 10% of the outstanding common stock. The option exercise price for NSOs granted under the 1992 plan may not be less than 85% of the fair market value of the common stock on the date of grant of the option. The maximum option term is thirty days after the fifth anniversary of the date of grant. The vesting schedule of options granted under the 1992 plan shall be determined by the compensation committee and provided in the particular option agreement issued to an optionee. There is a $100,000 limit on the value of common stock (determined at the time of grant) covered by ISOs that first become exercisable by an optionee in any calendar year. No option may be granted more than ten years after the effective date of the 1992 plan. Subject to the -84- terms of the optionee's stock option agreement, options may only be transferable by will or in accordance with the laws of descent and distribution. Payment for shares purchased under the 1992 plan may be made either in cash or, if permitted by the particular option agreement, by exchanging shares of common stock of TekInsight with a fair market value equal to the total option exercise price, plus cash for any difference. If an employee's employment with TekInsight terminates by reason of retirement, the employee's options, to the extent exercisable, may be exercised within three months after such termination of employment, but not later than the date the option would otherwise expire. If an employee's employment with TekInsight terminates by reason of death or disability, the employee's options, to the extent exercisable, shall terminate on the first anniversary of the optionee's date of termination, but not later than the date the option would otherwise expire. If the employee's employment terminates for any reason other than retirement or death or disability, options held by such optionee terminate on the date of such termination. The board of directors may terminate the 1992 plan at any time. Unless previously terminated, the 1992 plan will terminate automatically in June 2002, the tenth anniversary of the date of adoption of the 1992 plan by the board of directors. Approval of the 1992 plan amendment proposal will require the affirmative vote of holders of a majority of the shares of common stock present in person or represented by proxy at the special meeting. The board of directors of TekInsight unanimously recommends that the stockholders of TekInsight vote "FOR" the 1992 plan amendment proposal. -85- LEGAL MATTERS Nixon Peabody LLP, New York, New York passed on the validity of the shares, and as special tax counsel has provided an opinion on behalf of TekInsight concerning the federal tax consequences of the merger. Bodman Longley & Dahling LLP, special tax counsel to Data Systems, has provided an opinion on behalf of Data Systems concerning the federal tax consequences of the merger. EXPERTS The consolidated financial statements of TekInsight as of June 30, 1999 and 1998 and for each of the three years in the period ended June 30, 1999 have been audited by Feldman Sherb Horowitz & Co., P.C., independent accountants as stated in their reports appearing herein and elsewhere in the registration statement and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. The consolidated financial statements of Data Systems Network Corporation as of December 31, 1999 and 1998 and for each of the two years in the period ended December 31, 1999 have been audited by Grant Thornton LLP, independent certified public accountants, as stated in their reports appearing herein and elsewhere in the registration statement and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. The consolidated financial statements of Data Systems Network Corporation for the year ended December 31, 1997 have been audited by Plante & Moran, LLP, independent accountants as stated in their reports appearing herein and elsewhere in the registration statement and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION TekInsight and Data Systems file reports with the SEC on a regular basis. You may read or copy any document filed by either company at the SEC's Public Reference Room located at 450 5th Street, N.W., Washington, D.C. 20549. You may obtain information about the Public Reference Room by calling the SEC for further information at 1-800-SEC-0330. Filings by TekInsight and Data Systems are also available online at www.sec.gov. TekInsight filed a registration statement on Form S-4 with the SEC covering sale of the Series A preferred stock and describing the merger, of which this prospectus is a part. This prospectus does not contain all of the information contained in the registration statement, as permitted by SEC rules. Statements in this prospectus about documents filed as exhibits, while complete in material respects, are nonetheless summaries and are qualified by reference to the full text of documents filed as exhibits. The Form S-4 filed by TekInsight is available for inspection and copying at the SEC as described above. -86- TekInsight.Com, Inc. and Subsidiaries (formerly Tadeo Holdings, Inc.) Index To Consolidated Financial Statements June 30, 1999
Page Number ----------- Independent Auditors' Report ........................................................ F-68 Consolidated Balance Sheets.......................................................... F-69 Consolidated Statements of Operations................................................ F-70 Consolidated Statement of Changes in Stockholders' Equity............................ F-71 Consolidated Statements of Cash Flow................................................. F-72-F-73 Notes to Consolidated Financial Statements .......................................... F-74
F-1 - -------------------------------------------------------------------------------- Independent Auditors' Report To the Stockholders and Board of Directors TekInsight.Com, Inc. We have audited the accompanying consolidated balance sheets of TekInsight.Com, Inc. (formerly Tadeo Holdings, Inc.) and Subsidiaries as of June 30, 1999 and 1998, and the related statements of operations, changes in stockholders' equity and cash flows for the years ended June 30, 1999, 1998 and 1997. These financial statements are the responsibility of TekInsight.Com, Inc.'s management. Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in all material respects, the financial position of TekInsight.Com, Inc. and Subsidiaries as of June 30,1999 and 1998 and the results of its operations and its cash flows for the years ended June 30, 1999, 1998 and 1997 in conformity with generally accepted accounting principles. /s/ FELDMAN SHERB HOROWITZ & CO., P.C. Feldman Sherb Horowitz & Co., P.C. Certified Public Accountants September 15, 1999 New York, New York F-2 - -------------------------------------------------------------------------------- TekInsight.Com, Inc. and Subsidiaries (formerly Tadeo Holdings, Inc.) Consolidated Balance Sheets
As of As of December 31, 1999 June 30, ------------------ ------------------------------------ Assets (unaudited) 1999 1998 ------------------ ---------------- ---------------- Current Assets: Cash and cash equivalents................................... $ 5,868,957 $ 7,618,259 $ 2,575,356 Interest receivable......................................... -- 25,521 276,005 Accounts receivable, net of allowance for doubtful accounts $111,500 and $0 and $0 respectively.......... 339,633 45,750 11,550 Prepaid expenses and other assets........................... 166,667 30,000 -- Note receivable - other .................................... 850,000 500,000 162,627 --------------- ---------------- ---------------- Total current assets.................................. 7,225,257 8,219,530 3,025,538 Long-term note receivable........................................ 1,490,766 1,528,167 6,000,000 Investments - marketable securities.............................. 4,333,049 5,533,177 -- Property and equipment, net...................................... 98,292 71,938 79,966 Capitalized software costs, net................................. 1,237,814 1,091,793 696,871 Deferred finance costs........................................... -- -- 67,079 Deposits and other assets........................................ 43,058 43,058 43,058 --------------- ---------------- ---------------- $ 14,428,236 $ 16,487,663 $ 9,912,512 =============== ================ ================ Liabilities and Stockholders' Equity Current Liabilities: Accounts payable............................................ $ 196,499 $ 421,179 $ 451,106 Accrued expenses............................................ 222,666 125,000 150,425 Income tax payable.......................................... 326,480 628,000 -- Notes payable - current portion............................. -- -- 163,260 State audit reserves........................................ 1,400,000 1,400,000 700,000 Accrued termination costs, short-term....................... 247,750 280,209 784,053 --------------- ---------------- ---------------- Total current liabilities............................. 2,393,395 2,854,388 2,248,844 --------------- ---------------- ---------------- Accrued termination costs, long-term............................. -- -- 280,209 --------------- ---------------- ---------------- Long-term notes payable, net of current portion.................. 17,675 17,675 663,853 --------------- ---------------- ---------------- Redeemable preferred stock, Series A............................. -- -- 1,219,141 --------------- ---------------- ---------------- Commitments and contingencies: Stockholders' equity: Preferred stock, Series B cumulative convertible, $.0001 par value, 10,000,000 shares authorized, 1,000,000 shares issued and outstanding...................... 505,000 505,000 Common stock, $.0001 par value, 100,000,000 shares authorized, 15,848,528 shares issued and outstanding as of December 31, 1999 and 15,348,528 shares issued and outstanding as of June 30, 1999 and 12,019,479 issued and outstanding as of June 30, 1998.......................................... 1,585 1,535 1,202 Additional paid-in capital....................................... 19,302,332 18,797,382 14,115,213 Unrealized gain on securities.................................... 1,033,049 2,446,509 -- Accumulated deficit.............................................. (8,319,800) (8,134,826) (9,120,950) --------------- ---------------- ---------------- Total stockholders' equity............................ 12,017,166 13,615,600 5,500,465 --------------- ---------------- ---------------- Total liabilities and stockholders' equity............ $ 14,428,236 $ 16,487,663 $ 9,912,512 =============== ================ ================
See notes to consolidated financial statements. F-3 TekInsight.Com, Inc. and Subsidiaries (formerly Tadeo Holdings, Inc.) Consolidated Statements of Operations
Six months ended December 31, ---------------------------- Year ended June 30, (unaudited) ------------------------------------------- 1999 1998 1999 1998 1997 ------------ ----------- ------------ ----------- ----------- Revenues $ 962,179 $ 967,228 $ 1,514,849 $ 997,433 $ 454,771 Cost of goods sold.................................. 459,516 285,749 700,254 248,261 73,188 ------------ ----------- ------------ ----------- ----------- Gross Profit................................... 502,663 681,479 814,595 749,172 381,583 Operating expenses: Selling, general and administrative............ 781,619 1,303,393 3,387,874 2,259,349 985,663 Research and development....................... 174,474 62,496 161,709 71,424 5,000 Depreciation and amortization.................. 25,946 10,408 23,279 23,716 1,709 Settlement of employment contracts (non-cash).. -- 327,501 -- -- -- ------------ ----------- ------------ ----------- ----------- Total operating expenses.................. 982,039 1,703,798 3,572,862 2,354,489 992,372 Loss from operations................................ (479,375) (1,022,319) (2,758,267) (1,605,317) (610,789) Gain on sale of marketable securities............... 93,439 -- 1,689,664 -- -- Interest Income..................................... 200,962 532,777 590,092 452,016 2,673 ------------ ----------- ------------ ----------- ----------- Loss from continuing operations..................... (184,974) (489,542) (478,511) (1,153,301) (608,116) Discontinued operations Loss from discontinued operations.............. -- -- -- (2,122,296) (1,816,337) Gain from disposal, including operating losses, through disposal date, of $1,489,272 (less applicable income taxes of $1,104,000).............. -- -- 1,491,923 5,140,885 -- ------------ ----------- ------------ ----------- ----------- Total income (loss) from discontinued operations............................... -- -- 1,491,923 3,018,589 (1,816,337) ------------ ----------- ------------ ----------- ----------- Net income (Loss)................................... (184,974) (489,542) 1,013,412 1,865,288 (2,424,453) Preferred stock dividends........................... -- (27,288) (27,288) (186,150) (211,780) ------------ ----------- ------------ ----------- ----------- Net income (loss) applicable to common Shareholders....................................... $ (184,974) (516,830) $ 986,124 $ 1,679,138 $(2,636,233) ============ =========== ============ =========== =========== Net income (loss) per share: Continuing operations.......................... (0.01) (0.04) (0.03) $ (0.11) $ (0.08) Discontinued operations........................ -- -- 0.10 0.25 (0.17) ------------ ----------- ------------ ----------- ----------- Net income (loss) per share - basic and diluted..... $ (0.01) (0.04) $ 0.07 $ 0.14 $ (0.25) ============ =========== ============ =========== =========== Weighted average number of shares used in computation......................................... 15,808,455 12,459,027 14,728,969 12,019,479 10,379,178 ============ =========== ============ =========== =========== Net income (loss)................................... $ (184,974) (516,830) $ 1,013,412 $ 1,865,288 $(2,424,453) Other comprehensive income (loss), net of tax Unrealized gains (loss) on available-for-sale securities ......................................... (1,413,460) -- 2,446,509 -- -- ------------ ----------- ------------ ----------- ----------- Comprehensive income (loss)......................... $ (1,598,434) (516,830) $ 3,459,921 $ 1,865,288 $(2,424,453) ============ =========== ============ =========== ===========
See notes to consolidated financial statements. F-4 TekInsight.Com, Inc. and Subsidiaries (formerly Tadeo Holdings, Inc.) Consolidated Statement of Changes in Stockholders' Equity
Preferred Stock Series B Common Stock Additional Unrealized Total --------------------- --------------------- Paid-In Gain on Accumulated Stockholders' Shares Amount Shares Amount Capital Securities Deficit Equity --------- --------- -------- --------- ---------- ---------- ----------- ------------ Balance - June 30, 1996....... 1,000,000 $505,000 10,182,906 $ 1,018 $10,693,171 $ -- $ (8,163,855) $ 3,035,334 Shares issued in connection with private offering........ -- -- 500,000 50 999,950 -- -- 1,000,000 Shares issued in connection with private offering........ -- -- 250,000 25 499,975 -- -- 500,000 Debt converted as consideration for exercise of options................... -- -- 1,009,415 101 2,018,729 -- -- 2,018,830 Dividends paid on redeemable preferred stock Series A..... -- -- -- -- -- -- (211,780) (211,780) Various expenses associated with private placement....... -- -- -- -- (100,004) -- -- (100,004) Various expenses associated with consulting services..... -- -- 1,700 -- 3,400 -- -- 3,400 Shares issued in connection with expenses associated with debt conversion ............. -- -- 75,458 8 (8) -- -- -- Net loss -- -- -- -- -- -- (2,424,453) (2,424,453) ---------- -------- ----------- ------- ----------- ---- ------------ ----------- Balance - June 30, 1997....... 1,000,000 505,000 12,019,479 1,202 14,115,213 -- (10,800,088) 3,821,327 Dividends paid on redeemable preferred stock Series A..... -- -- -- -- -- -- (186,150) (186,150) Net income.................... -- -- -- -- -- -- 1,865,288 1,865,288 ---------- -------- ----------- ------- ----------- ---- ------------ ----------- Balance - June 30, 1998....... 1,000,000 505,000 12,019,479 1,202 14,115,213 -- (9,120,950) 5,500,465 Shares issued upon converting redeemable preferred stock Series A..................... -- -- 1,363,163 136 1,149,609 -- -- 1,149,745 Shares issued in connection with private offering ....... -- -- 136,837 14 205,242 -- -- 205,256 Shares issued to employees in connection with termination of employment agreements..... -- -- 168,334 17 168,317 -- -- 168,334 Shares issued to an employee in connection with exercise of stock option.............. -- -- 84,167 8 84,159 -- -- 84,167 Shares issued in connection with stock purchase agreement.................... -- -- 30,523 3 74,997 -- -- 75,000 Shares of common stock exchanged with ViewCast...... -- -- 1,240,310 124 1,999,876 -- -- 2,000,000 Changes in unrealized gain on securities available-for-sale........... -- -- -- -- -- 2,446,509 -- 2,446,509 Shares issued in connection with repayment of promissory note......................... -- -- 20,000 2 (2) -- -- -- Shares of common stock exchanged with Diplomat...... -- -- 285,715 29 999,971 -- -- 1,000,000 Dividends paid on preferred stock Series A............... -- -- -- -- -- -- (27,288) (27,288) Net Income.................... -- -- -- -- -- -- 1,013,412 1,013,412 ---------- -------- ----------- ------- ----------- --------- ------------ ----------- Balance - June 30, 1999 ...... 1,000,000 505,000 15,348,528 1,535 18,797,382 2,446,509 (8,134,826) 13,615,600 Shares issued upon converting Redeemable Series "A" Preferred Stock.........(1,000,000) (505,000) 500,000 50 504,950 -- -- -- Changes in unrealized gain on securities available-for-sale........... -- -- -- -- -- (1,413,460) -- (1,413,460) Net loss...................... -- -- -- -- -- -- (184,974) (184,974) ---------- -------- ----------- ------- ----------- ---------- ------------ ----------- Balance - December 31, 1999 (unaudited).................. -- -- 15,848,528 $1,585 $19,302,332 $1,033,049 $ (8,319,800) $12,017,166 ========== ======== =========== ======= =========== ========== ============ ===========
See notes to consolidated financial statements. F-5 TekInsight.Com, Inc. and Subsidiaries (formerly Tadeo Holdings, Inc.) Consolidated Statements of Cash Flows
Six Months Ended December 31, (unaudited) Year Ended June 30, --------------------------- -------------------------------------------- 1999 1998 1999 1998 1997 ------------- ------------ ----------- ----------- ------------ Cash Flows From Operating Activities: Net income (loss)..................................... $ (184,974) $ (489,542) $1,013,412 $ 1,865,288 $(2,424,453) ---------- ----------- ---------- ----------- ----------- Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation ..................................... 25,946 10,408 23,279 244,443 652,860 Amortization of deferred finance costs and debt discount......................................... -- 37,853 105,993 84,507 -- Amortization of capitalized software costs........ 157,890 244,989 312,966 82,674 20,489 Settlement of employment contracts (non-cash)..... -- 327,501 327,501 -- -- Gain on sale of marketable securities............. -- -- (1,689,664) -- -- Gain on sale of operations........................ -- -- -- (5,140,885) -- Gain on collection of note........................ -- -- (3,300,000) -- -- Changes in operating assets and liabilities: (Increase) decrease in accounts receivable........ (293,883) (230,250) (34,200) 132,884 (144,434) Decrease (increase) in interest receivable........ 25,521 (5,992) 250,484 (276,005) -- Additions to capitalize software costs............ (303,911) (1,147,367) -- (654,660) -- Increase in prepaid expenses...................... (136,667) -- (30,000) -- -- Increase in deferred finance costs................ -- (108,000) (108,000) (105,000) -- Increase in other assets.......................... -- -- -- (18,224) (15,000) Increase in accounts payable...................... (224,679) (35,581) (29,927) 325,244 84,593 Increase in state audit reserve................... 97,665 (19,229) 700,000 -- -- (Decrease) increase in accrued expenses........... -- -- (25,425) 46,628 103,797 (Decrease) increase in income tax payable......... (301,520) -- 628,000 -- -- Changes in operating assets and liabilities of discontinued operations........................ -- -- -- 2,002,440 (2,221,612) (Decrease) in accrued termination costs........... (32,459) (503,232) (784,053) -- -- ---------- ----------- ---------- ----------- ----------- Total adjustments......................... (986,096) (1,428,900) (3,653,046) (3,275,954) (1,519,307) ---------- ----------- ---------- ----------- ----------- Net cash used in operating activities............. (1,171,072) (1,918,443) (2,639,634) (1,410,666) (3,943,760) ---------- ----------- ---------- ----------- ----------- Cash Flows From Investing Activities: Cash proceeds from the sale of operation.......... -- -- -- 8,065,336 -- Cash proceeds from the sale of securities......... (180,107) -- 2,739,996 -- -- Capital expenditures.............................. (40,624) (120,002) (718,425) (730,148) (420,749) Collection on note receivable..................... -- -- 9,300,000 -- -- Purchase of convertible preferred stock........... (1,000,000) -- (1,000,000) -- -- Amortization of warrants.......................... (12,499) -- -- -- -- Increase in note receivable....................... 250,000 -- (2,028,167) -- -- ---------- ----------- ---------- ----------- ----------- Net cash (used in) provided by investing activities....................................... (983,230) (120,002) 8,293,404 7,335,188 (420,749) Cash Flows From Financing Activities: (Decrease) increase in notes payable -- (67,533) (163,260) 488,149 -- Repayment/ (issuance) of related party loans (100,000) 162,627 (162,627) -- (60,000) Proceeds from debt financing -- 818,567 183,230 658,351 -- Borrowing of revolving credit line -- -- -- -- 4,365,410 Repayment of revolving credit line -- -- -- (4,365,410) -- Net proceeds from (repayment of) long-term debt -- (302,074) (646,178) (239,656) 96,927 Issuance of common stock, net of expenses 505,000 205,256 205,256 2,005 1,403,499 Dividends paid on Series A preferred stock -- (27,288) (27,288) (186,150) (211,780) Redemption of Series A preferred stock -- -- -- (610,517) (416,551) ---------- ----------- ---------- ----------- ----------- Net cash provided by (used in) financing activities....................................... 405,000 789,555 (610,867) (4,253,228) 5,177,505 ---------- ----------- ---------- ----------- ----------- Net increase (decrease) in cash....................... (1,749,302) (1,248,890) 5,042,903 1,671,294 812,996 Cash at beginning of period........................... 7,618,259 2,575,356 2,575,356 904,062 91,066 ---------- ----------- ---------- ----------- ----------- Cash at end of period ................................ $ 5,868,957 $ 1,326,467 $7,618,259 $ 2,575,356 $ 904,062 ========== =========== ========== =========== ===========
See notes to consolidated financial statements. F-6 TekInsight.Com, Inc. and Subsidiaries (formerly Tadeo Holdings, Inc.) Consolidated Statement of Cash Flows
Six months ended Six months ended Year ended June 30, December 31, 1999 December 31, 1998 --------------------------------- (unaudited) (unaudited) 1999 1998 1997 ----------------- ----------------- --------- --------- -------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest............................ $ -- $ -- $ 84,507 $550,201 $ 623,804 Cash paid for income taxes........................ $301,520 $ -- $ 476,269 $ -- $ -- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Convertible notes converted to common stock....... $ -- $ -- $ 20,000 $ -- $2,018,830 Redeemable series "A" preferred stock converted to common stock................................. $ -- $ -- $1,149,745 $ -- $ -- Private offering of common stock.................. $ -- $ -- $ 205,256 $ -- $ -- Issuance of common stock in conjunction with termination of employment contracts............. $ -- $ -- $ 168,334 $ -- $ -- Issuance of common stock in conjunction with exercise of stock option........................ $ -- $ -- $ 84,167 $ -- $ -- Issuance of common stock in conjunction with retirement of debt.............................. $ -- $ -- $ 75,000 $ -- $ -- Exchange of common stock with another company's common stock.................................... $ -- $ -- $2,000,000 $ -- $ -- Exchange of common stock with another company's common stock.................................... $ -- $ -- $1,000,000 $ -- $ --
See notes to consolidated financial statements. F-7 TekInsight.Com, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited with respect to the six months ended December 31, 1999 and 1998) TekInsight.Com, Inc. incorporated in Delaware on May 27, 1989 as Universal Self Care, Inc. and changed its name to Tadeo Holdings, Inc. on February 2, 1998. Tadeo changed its name to TekInsight.Com, Inc. in November 1999. Prior to TekInsight's acquisition of AstraTek and the creation of TekInsight Services, Inc. (formerly Tadeo-E Commerce Corp.), TekInsight supplied and distributed both prescription and non-prescription medications and durable medical equipment and supplies principally to persons suffering from diabetes. On October 27, 1998, TekInsight acquired AstraTek, Inc., a New York corporation, pursuant to a merger of a wholly-owned subsidiary of TekInsight into AstraTek, with AstraTek being the surviving corporation and becoming a wholly-owned subsidiary of TekInsight. The accompanying financial statements and footnotes are presented to reflect the acquisition under the pooling of interests method of accounting, which requires the restatement of prior years' financial statements as if the acquisition was consummated at the beginning of all periods presented. On May 25, 1999, TekInsight incorporated TekInsight Services in Delaware as a wholly-owned subsidiary of TekInsight to be active in the electronic commerce industry. TekInsight is the parent corporation for the following wholly-owned subsidiaries: Physicians Support Services, Inc., a California corporation; Clinishare Diabetes Centers, Inc., d/b/a SugarFree Centers, Inc., a California corporation; USC-Michigan, Inc., a Michigan corporation, and its wholly-owned subsidiary, PCS, Inc.-West, a Michigan Corporation. The above-named subsidiaries have discontinued operations. 1. Summary of Significant Accounting Policies A. Principles of Consolidation - The financial statements include the accounts of TekInsight and its wholly-owned subsidiaries. All significant inter-company transactions have been eliminated. B. Revenue Recognition - TekInsight licenses software to end users under license agreements. TekInsight has recognized revenues in accordance with Statement of Position 97-2 entitled "Software Revenue Recognition" (SOP 97-2), issued by the American Institute of Certified Public Accountants. C. Property and Equipment - Property and equipment is stated at cost and is depreciated on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized over the term of their respective leases or service lives of the improvements, whichever is shorter. D. Income (loss) per Common Share - Basic earnings per share has been calculated based upon the weighted average number of common shares outstanding. Convertible preferred stock has been excluded as common stock equivalents in the diluted earnings per share because they are either antidilutive, or their effect is not material. E. 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F. Cash and Cash Equivalents - TekInsight considers all highly liquid temporary cash investments with an original maturity of three months or less when purchased, to be cash equivalents. F-8 TekInsight.Com, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited with respect to the six months ended December 31, 1999 and 1998) (Continued) G. Stock Based Compensation - TekInsight accounts for employee stock transactions in accordance with APB Opinion No. 25, "Accounting For Stock Issued To Employees." TekInsight has adopted the pro forma disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting For Stock-Based Compensation." H. Fair Value of Financial Instruments - The carrying amounts reported in the balance sheet for cash, trade receivables, accounts payable and accrued expenses approximate fair value based on the short-term maturity of these instruments. I. Impairment of Long-Lived Assets - TekInsight reviews long-lived assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recovered. At December 31, 1999 and at June 30, 1999, TekInsight believes that there has been no impairment of its long-lived assets. J. Capitalized Software Costs - TekInsight accounts for costs of developing computer software for sale in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed", under which costs incurred prior to the establishment of a product's technological feasibility are expensed as research and development and costs incurred from the point of technological feasibility through the point that a product is ready for market are capitalized and amortized in the greater of the relations that revenues earned bear to total expected revenues over the life of the product or straight-line over the life of the product. Capitalized software costs are evaluated periodically and written down to net realizable value when necessary. Amortization of capitalized software costs for the periods ended June 30, 1999, 1998, and 1997 were $312,966, $82,674, and $20,489, respectively. K. Comprehensive Income - TekInsight has adopted Statement of Financial Accounting Standards No. 130 (SFAS 130) "Reporting Comprehensive Income." Comprehensive income is comprised of net income (loss) and all changes to the statements of stockholders' equity, except those due to investments by stockholders, changes in paid-in capital and distribution to stockholders. L. Interim Financial Statements. The consolidated financial statements as of December 31, 1999 and for the six months ended December 31, 1999 and 1998 are presented as unaudited. In the opinion of management, these financial statements include all adjustments necessary to present fairly the information set forth therein. These adjustments consist solely of normal recurring accruals. The interim results of operations for the six months ended December 31, 1999 and 1998 are not necessarily indicative of the results to be expected for the full year or for any other interim period. 2. Discontinued Operations On January 28, 1998, TekInsight sold its operating assets and the stock of its two principal operating subsidiaries, Diabetes Self Care, Inc. and USCI Healthcare Management Solutions, Inc., to Gainor Medical Management, LLC, a privately held Georgia company, for a gross purchase price of $34 million in cash, as reduced by $8,725,226 of specified liabilities of TekInsight, and $17 million by the delivery of a Gainor convertible subordinated promissory note . Out of the cash received at closing, TekInsight satisfied an aggregate of $4,451,136 in liabilities to permit the required transfer of assets to Gainor free and clear of encumbrances. The note bore interest at a simple rate of 7% per annum through December 31, 1998 and 8% thereafter until payment in full of the principal balance no later than January 28, 2003. Prior to its maturity, the note was convertible into equity securities of Gainor, at the election of TekInsight, upon the successful completion of a public offering of such equity securities by Gainor, subject to restrictions. TekInsight's stockholders F-9 TekInsight.Com, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited with respect to the six months ended December 31, 1999 and 1998) (Continued) approved the sale of its business at their annual meeting held on January 26, 1998 in Livonia, Michigan, at which time they also approved an amendment to TekInsight's certificate of incorporation, changing its name to TekInsight. In addition to offsets for customary indemnification under the asset purchase agreement among the parties, dated November 14, 1997, the principal amount of the note was subject to reduction in the event that (i) such principal amount did not equal at least 75% of Gainor's revenues from operation of Diabetes during calendar 1998, in which event the note would be reduced by the difference between 75% of such revenues and $17 million, (ii) Gainor would not able to collect at least $5.75 million from the accounts receivable sold to Gainor as part of the transaction during the one-year period succeeding the closing, in which event the note would be reduced by the difference between $5.75 million and the amount of receivables actually collected, and (iii) prior to July 28, 1998 fewer than 3,334 former customers of PCS, Inc. West will be customers of Gainor, in which event the note would be reduced by $600 for each former customer of PCS, Inc. West less than the minimum 3,334 who fails to transfer to Gainor, up to a maximum amount of $2 million. In September 1998, Gainor notified TekInsight that the assignment of benefits provision is currently at the maximum adjustment level of $2 million. Gainor made a $559,800 downward adjustment to the note principal, and granted an extension until November 21, 1998 of the time for a sufficient number of assignments of benefits to be received by Gainor in order to avoid further downward adjustment to the note principal. Gainor had previously reduced the note balance by approximately $145,000, for what were claimed to be unrecorded purchase date accruals, as an adjustment to the closing balance sheet under the asset purchase agreement. In addition, Gainor notified TekInsight that as of August 31, 1998, (i) its collection of receivables purchased from TekInsight pursuant to the asset purchase agreement were behind schedule that, an annualized basis, would result in collecting more than $5.75 million of such account, and (ii) its generation of revenues from operations of the purchased business was not as anticipated, either of which could result in additional downward adjustments to the note principal under the terms of the asset purchase agreement. As a result of the aforementioned, TekInsight reduced the carrying basis of the note to $6 million at June 30, 1998 based on what management believed would be the value of the note if it were to be sold to an unrelated third party in an arms-length transaction. Accordingly, TekInsight reduced the gain on the disposal of the discontinued business by $11 million. In April 1999, the note was prepaid by Gainor in the amount $9.3 million and TekInsight recognized a gain of $3.3 million on the collection of such Note. In connection with TekInsight's sale of Diabetes, the accompanying financial statements have been restated to present such businesses as discontinued operations. The revenue of the discontinued businesses was $19,136,465 and $34,001,626 for the fiscal years ended June 30, 1998 and 1997, respectively. 3. Business Acquisition On October 27, 1998, TekInsight completed the acquisition of AstraTek pursuant to a merger. TekInsight acquired AstraTek pursuant to a merger of AstraTek Acquisition Corp., a wholly-owned subsidiary of TekInsight, with and F-10 TekInsight.Com, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited with respect to the six months ended December 31, 1999 and 1998) (Continued) into AstraTek, with AstraTek becoming the wholly-owned subsidiary of TekInsight. The merger was effected in accordance with an agreement and plan of merger, dated as of October 23, 1998, among TekInsight, AstraTek Acquisition Corp., AstraTek and the stockholders of AstraTek. AstraTek develops software tools and related products for Internet and intranet technology and provides consulting and professional services for several major companies. As per the merger agreement delivered to AstraTek stockholders, TekInsight issued 2,294,900 shares of TekInsight's common stock in exchange for cancellation of all the issued and outstanding shares of the capital stock of AstraTek prior to the merger and the issuance of 100 shares of AstraTek common stock to TekInsight post-merger. The acquisition is accounted for as a pooling of interests business combination. Accordingly, TekInsight's prior years' financial statements are restated as if the acquisition had been consummated at the beginning of all periods presented. The revenue and net income for TekInsight and AstraTek from July 1, 1998 through October 27, 1998, and the fiscal years ended June 30, 1998 and 1997 are as follows:
July 1, 1998 through Year ended Year Ended October 27, 1998 June 30, 1998 1997 ------------------------ ------------------------ ------------------------ TekInsight AstraTek TekInsight AstraTek TekInsight AstraTek ---------- -------- ---------- -------- ---------- -------- Revenue $ 363,594 $ 996,473 $454,771 Net income (loss) $(461,879) $(211,116) $2,394,351 (529,063) $(2,653,231) 228,778
4. Marketable Securities On September 24, 1998, TekInsight completed a stock purchase agreement between ViewCast.com Inc. (VCST) and TekInsight. VCST purchased $2 million worth of restricted TekInsight common stock valued at $2 million for $2 million worth of VCST common stock. TekInsight issued 1,240,310 shares of TekInsight common stock at the sale price of $1.6125 per share and received one million shares of VCST's common stock for the purchase price of $2.00 per share. In the case of each corporation, the number of shares issued was less than 20% of the outstanding common stock of the issuer on September 24, 1998. On April 23, 1999, TekInsight sold approximately 460,000 shares of VCST for $6.00 a share in a private transaction. TekInsight realized a net gain of approximately $1,690,000 after brokerage commissions from this sale. In June 1999, TekInsight exchanged $1 million market value of its common stock, $.0001 par value, for $1 million market value of shares of common stock, $.0001 par value, of a direct marketing company, StyleSite Marketing, Inc. (formerly Diplomat Direct marketing Inc.) under the terms of a securities purchase agreement. In addition, TekInsight purchased 10,000 shares of Style convertible preferred stock at $100.00 per share from the same direct marketing company. Pursuant to an agreement with Business Talk Radio.Net, Inc. (See note 10) TekInsight owns 564,056 shares of Business Talk Series C preferred stock, par value $.0001 per share, convertible into 5% of the current outstanding capital stock of Business Talk. Each share of Class C preferred stock has a liquidation preference of $.4432 until January 1, 2000, at which time the Class C preferred stock preference becomes $.2217. On January 3, 2000, TekInsight Services exercised an option, which, for a payment of $250,000, TekInsight acquired an additional 564,056 shares of Business Talk Series C preferred stock for $.4432 per share. F-11 TekInsight.Com, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited with respect to the six months ended December 31, 1999 and 1998) (Continued) Style announced on January 21, 2000 that it had filed a Chapter 11 Petition in the New York Southern District for itself and its subsidiaries. TekInsight has set up an allowance for doubtful accounts on its receivables from Style in the amount of $111,500 as of December 31, 1999. TekInsight is currently carrying on its balance sheet at December 31, 1999 under "Investments - marketable securities", 1,066,098 shares of common stock of Style at 54% below cost, or at $.438 per share. TekInsight also has 10,000 shares of Series G preferred stock of Style at $100.00 per share. TekInsight holds a personal guarantee from Robert Rubin, an affiliate of Style, on obligations with respect to the preferred stock, and the value has been kept at cost. On September 1, 1999, AstraTek entered into a consulting and professional service agreement with 4th Peripheral Technologies, Inc., pursuant to which AstraTek is engaged to provide executive advisory consulting services, as requested, and on a fee schedule to be negotiated at the time an assignment is made, intended to increase 4th Peripheral's value and strategic position in connection with its business as a developer of cyber extension technology to provide remote access to data from handheld devices. In an effort to strengthen AstraTek's strategic relationships with 4th Peripheral, TekInsight purchased in private placement of securities 250,000 shares of 4th Peripheral common stock, par value $.0001 per share, for $250,000. The aforementioned marketable securities have been classified as available for sale securities at December 31, 1999 and June 30, 1999 and accordingly, the unrealized gain resulting from valuing such securities at market value is reflected as a component of stockholders' equity. 5. Asset Purchase Agreement In August 1997, TekInsight executed an agreement with Bankers Trust, under which TekInsight acquired the rights to some of its software, which was under development by principals of TekInsight in their capacity as employees of Bankers Trust. In connection with the agreement, Bankers Trust is owed $100,000 and an approximate quarterly revenue share amount of $25,000 (which are included in June 30, 1999 year end accruals.) The quarterly accrual is related to asset purchase agreement, in which Bankers Trust will receive 10% of all revenues associated with the VisualAudit for Excel product until such time as Bankers Trust has received $250,000 and 5% of all revenues associated with the VisualAudit for Excel product until such time as Bankers Trust has received $500,000. 6. Note Receivable TekInsight provided a cosmetic manufacturing and marketing company, Azurel Ltd, with $1,528,167 in loan financing through the issuance of one note bearing interest at 8% due in May 2001, and $500,000 through the issuance of a note bearing interest at 20.8% due in August 1999. The $500,000 note was later amended on August 12, 1999 to (i) extend the due date to June 2000, (ii) reduce the interest rate to 10%, and (iii) increase the principal of the note from $500,000 to $550,000 for accrued interest of $26,580 and a premium of $23,420 for extending the maturity date and lowering the interest rate. In addition, TekInsight received warrants to acquire 500,000 shares of common stock of such company at an exercise price of $1.50 per share. As of December 31, 1999, the cosmetics manufacturer and marketing company was behind in its interest and principal payments, but a default has not been declared. F-12 TekInsight.Com, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited with respect to the six months ended December 31, 1999 and 1998) (Continued) 7. Property and Equipment
December 31, June 30, 1999 1999 1998 ------------ ----------------------- Furniture and fixtures...................... $ 20,905 $ 20,906 $ 20,906 Computer software........................... 7,862 7,862 6,450 Computer equipment.......................... 132,226 92,424 75,360 Machinery and equipment..................... - -- 3,227 160,993 121,192 105,943 -------- --------- -------- Less: accumulated depreciation............ (62,701) (49,254) (25,977) -------- --------- -------- $ 98,292 $ 71,938 $ 79,966 ======== ======== ========
8. Notes Payable Notes payable at December 31, 1999, June 30, 1999 and June 30, 1998, respectively, consist of the following:
Creditor Maturity Date Interest Rate 1999 1999 1998 -------- ------------- ------------- ----------- ------- ---- Officer (B) None $17,675 $17,675 $ 77,500 Former Owner March 31, 1999(C) 10% 109,021 Trust(A) June 1, 2000 Floating Prime -- -- 640,592 ------- ------- -------- 17,675 827,113 Less: Short Term -- 163,260 ------- ------- -------- Long-Term Notes $17,675 $17,675 $663,853 ======= ======= ======== - ------------------- (A) Agreement dated June 1, 1997, subsequently assigned to a trust, the beneficiaries of which are relatives of an officer, stockholder and director, to provide maximum funding of $750,000, collateralized by substantially all of AstraTek, Inc.'s assets. The debt went into a default because of the non-payment of interest. On October 22, 1998, AstraTek, Inc. obtained a waiver from the holder to forebear any action through November 30, 1998. In exchange, TekInsight agreed to pay a fee of $10,000 and to convert $350,000 of the principal into 378,829 shares of common stock (B) To be repaid out of future profits, if any, at a maximum aggregate amount of $2,000 per month. (C) Due to a former owner of a subsidiary, unsecured, payable monthly.
9. Concentration of Credit Risk TekInsight maintains cash balances at a financial institution located in New York. Accounts at the institution are insured by Federal Deposit Insurance Corporation up to $100,000. TekInsight's cash balances exceeded such insured limits. 10. Commitments, Contingencies, and Other Agreements TekInsight is obligated under two leases for base annual rent of approximately $114,000 (Michigan) and $126,000 (New York City) through September 2002 and November 2002, respectively. A portion of the Michigan location has been subleased for rent of $47,592 annually, plus an allocation of 42.5% of common area expenses under the master lease. F-13 TekInsight.Com, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited with respect to the six months ended December 31, 1999 and 1998) (Continued) Department of Health Services - One of TekInsight's discontinued wholly-owned subsidiaries underwent an audit by the California State Controller's Office, Division of Audits, for the purpose of determining compliance with guidelines of the California Department of Health Services ("Medi-Cal") and the California State Board of Equalization. The controller's office issued a report to the effect that the subsidiary owed, and issued a letter of demand for, $1.3 million, contending that for the period July 1, 1990 to June 30, 1993, the subsidiary practiced unfair pricing to its customers. Additionally, accrued interest on the amount demanded is also sought by the controller's office. The subsidiary has appealed the ruling, which has been upheld. The California Court of Appeals has also upheld the ruling. TekInsight has provided a reserve of $1,400,000, $700,000 of which was accrued in the year ended June 30, 1999. There is no other material litigation against TekInsight or its subsidiaries. On May 28, 1999, as amended by agreements dated as of June 1, 1999, TekInsight Services entered into a Web design and consulting agreement with Azurel, Ltd., a public company engaged in the business of manufacturing and distributing cosmetics and other related products. Under the terms of the Azurel Web agreement, based upon the fee schedule to be included in that agreement, TekInsight Services agreed to provide all necessary consulting and development services to design, maintain and enhance Azurel's electronic commerce Internet sites and other related electronic commerce marketing vehicles. TekInsight services paid Azurel $500,000 for Azurel's provision of content and marketing consulting services in connection with assistance provided to TekInsight Services' electronic commerce development activities for Azurel and other clients. At the same time, to enhance the strategic relationship between Azurel, TekInsight and TekInsight Services, TekInsight Services lent to Azurel an aggregate of $1,528,167 under the terms of a credit agreement, as amended, dated as of June 1, 1999 (with part of the aggregate principal reflecting the restructuring of a March 31, 1999 short-term $500,000 promissory note), with interest payable at the rate of 8% per annum, payable monthly, and with all principal and accrued interest due on May 28, 2001. Repayment of amounts outstanding under the credit agreement is secured by a pledge of approximately 66.66% of the outstanding shares of Azurel operating subsidiaries, under the terms of a pledge security agreement, as amended, by and between Azurel, TekInsight and TekInsight Services. In further consideration for its advances to Azurel under the credit agreement, TekInsight Services received from Azurel warrants to acquire 500,000 shares of Azurel common stock, exercisable at $1.50 per share, with the shares acquired upon exercise of such warrants being subject to registration rights provided under the terms of registration rights agreement, as amended, dated as of June 1, 1999. On May 12, 1999, TekInsight extended a $500,000 loan to Azurel, due August 1999, bearing interest at 20.8%. The $500,000 note was later amended on August 12, 1999 to (i) extend the due date to June 2000, (ii) reduce the interest rate to 10%, and (iii) increase the principal of the note from $500,000 to $550,000 for accrued interest of $26,580 and a premium of $23,420 for extending the maturity date and lowering the interest rate. Under agreements dated as of June 30, 1999, TekInsight Services entered into both a Web design and consulting agreement and an online hosting agreement with Style, a public company engaged in the business of distributing women's and children's fashion apparel and related accessories through catalogue sales and over the Internet. Under the terms of the Style Web agreements, based upon the fee schedules provided in those agreements, TekInsight Services was to provide all necessary consulting and development services to design, maintain and enhance Style's electronic commerce Internet sites and other related electronic commerce marketing vehicles, as well as to host those sites on behalf of Style. TekInsight Services paid Style $500,000 for Style's provision of content and marketing consulting services in connection with assistance provided to TekInsight Services' electronic commerce development activities for Style and other clients. In addition to payments by Style for the services provided under the Style Web agreements, in further consideration for its services to Style under the Style Web agreements, TekInsight Services will receive royalties from Style based upon Style's ongoing electronic commerce businesses. F-14 TekInsight.Com, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited with respect to the six months ended December 31, 1999 and 1998) (Continued) The royalties are equal to 5% of Style's electronic commerce revenues, until $500,000 has been paid to TekInsight Services, and thereafter 20% of specified Style electronic commerce net income in perpetuity. Pursuant to Style's Chapter 11 filing in January 2000 it is uncertain as to whether TekInsight will be able to enforce Style's obligation to pay royalties under the Web agreement. TekInsight Services has entered into an agreement with Business Talk under which, for a payment of $250,000, TekInsight Services obtained an assignable credit for the purchase of advertising time on radio programs operated by Business Talk having a value of $1,200,000, and shares of Series C preferred stock convertible into 5% of the currently outstanding capital stock of Business Talk. As part of the transaction, TekInsight Services obtained an option to acquire an equivalent number of shares of Business Talk capital stock for an exercise price of $250,000 (which it exercised in February 2000), as well as the right to "stream" the content of Business Talk programming on its and its affiliates Web sites during the course of a three-year period without an additional payment to Business Talk. Business Talk creates and distributes the content of its business-oriented radio programming for broadcasting on third-party operated radio stations in a variety of markets throughout the United States. 11. Income Taxes TekInsight accounts for income taxes under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109.) SFAS No. 109 requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax loss and tax credit carryforwards. SFAS No. 109 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. The benefit for income taxes from continuing operations differs from the amount computed applying the statutory federal income tax rate to loss before income taxes as follows:
Year Ended June 30, 1999 1998 1997 ------------- --------------- ---------- Income tax benefits computed at statutory rate $(248,000) $(392,000) $(207,000) Income tax benefit not recognized 248,000 392,000 207,000 --------- --------- --------- Income tax benefit $ -- $ -- $ -- ========= ========= =========
During the year ended June 30, 1999, TekInsight utilized approximately $3,100,000 of available net operating loss carryforwards. AstraTek has approximately $1,200,000 of net operating loss carryforwards subject to limitations on annual utilization because there was "equity structure shifts" or "owner shifts" involving 5% Shareholders (as these terms are defined in Section 382 of the Internal Revenue Code), which have resulted in a more than 50% change in ownership. The resulted deferred tax asset from such net operating loss carryforwards has been fully reserved for. 12. Stockholders' Equity A. Preferred stock - The certificate of incorporation of TekInsight authorizes the issuance of a maximum of 10,000,000 shares of preferred stock. TekInsight's Board of Directors is vested with the authority to divide the class F-15 TekInsight.Com, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited with respect to the six months ended December 31, 1999 and 1998) (Continued) of preferred shares into series and to fix and determine the relative rights and preferences of shares of any such series to the extent permitted by the laws of the State of Delaware and the Articles of Incorporation. B. Series A redeemable preferred stock - In April 1995, in connection with the acquisition of PCS, Inc. -West, TekInsight issued 580,000 shares of Series A redeemable preferred stock. The shares contained a liquidation preference of $5 per share and paid no dividends. They are mandatorily redeemable at $5 per share, over a five-year period in equal monthly installments beginning in October 1995. TekInsight recorded the present value of the required future payments as a liability utilizing a discount rate of 9%. The portion of the monthly redemption installments which are attributed to this discounting factor are accounted for as preferred stock dividends. At June 30, 1998, there were 229,950 shares outstanding. In August 1998, TekInsight amended the certificate of designation to allow for the conversion of the Series A preferred stock and the remaining balance was converted into 1,363,163 shares of common stock in September 1998. C. In April 1995, in connection with the acquisition of PCS, TekInsight issued 1,000,000 shares of Series B cumulative convertible preferred stock. Each share contains a liquidation preference of $1.00 per share. Each share was convertible into common stock at the rate of two shares for one common share and paid a cumulative dividend at the rate of $.02 per share annually, beginning in September 1996, increasing to $.12 per share through June 30, 2000. However, such dividend only become payable if, in the immediate preceding fiscal year, TekInsight had pre-tax income of at least $500,000. In August 1999, all Series B preferred stock was converted into 500,000 shares of common stock in accordance with the corporate charter and at the request of the holders. D. In connection with its December 1992 public offering, TekInsight has 1,143,800 Class A warrants outstanding to purchase common stock at $3.30 per share which expire in December 1999. 13. Stock Option Plan A. TekInsight's 1992 employee stock option plan was approved by TekInsight's board of directors and stockholders in June 1992. On July 28, 1993, 210,000 stock options, exercisable at $1.50 per share, for a period of ten years, were issued under the 1992 plan. Options granted under the 1992 plan may include those qualified as incentive stock options under Section 422A of the Internal Revenue Code of 1986, as amended, as well as non-qualified options. Employees as well as other individuals, such as outside directors, who provide necessary services to TekInsight are eligible to participate in the 1992 plan. Non-employees and part-time employees may receive only non-qualified stock options. The maximum number of shares of common stock for which options may be granted under the 1992 plan is 500,000 shares. B. In November 1997, TekInsight established the 1997 stock option plan for non-employee directors, which authorizes the issuance of up to 300,000 options to purchase common stock at an exercise price of 100% of the common stock's market price. Subsequent to its adoption at the annual meeting in February 1998, 30,000 five-year options were granted under this plan at an exercise price of $1.81 per share. On each of July 1, 1999 and 1998, an additional 30,000 five-year options were granted at an exercise price of $3.78 and $.97 per share, respectively. F-16 TekInsight.Com, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited with respect to the six months ended December 31, 1999 and 1998) (Continued) 14. Accounting for Stock Options TekInsight accounts for stock options issued to employees under APB Opinion No. 25, "Accounting for Stock Issued to Employees", under which no compensation expense is recognized if the exercise price equals the stock market value on the measurement date (generally the grant date.) TekInsight has adopted the pro forma disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." For disclosure purposes, the fair value of each option is measured at the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions used for stock options granted during the years ended June 30, 1999, 1998 and 1997, respectively; annual dividends of $0.00 for all years; expected volatility of 50% for the year ended June 30, 1999, and 86.3% for the years ended June 30, 1998 and 1997; risk free interest rate of 5.7% for the year ended June 30, 1999, and 7.0% for the years ended June 30, 1998 and 1997, and expected life of five years for all years. If TekInsight had recognized compensation cost in accordance with SFAS No. 123, TekInsight's pro forma net loss and net loss per share would have been $3.1 million and $.30 for fiscal 1997. The effect for fiscal 1999 and 1998 would not be material. The following table summarizes the changes in options outstanding and the related price ranges:
Weighted Average Range of Shares Expected Price Exercise Price --------- -------------- -------------- Outstanding at June 30, 1996......... 1,081,667 $ 1.33 $1.00 - $1.50 Granted.............................. 275,999 1.72 .70 - 1.50 --------- ------ ------------- Balance June 30, 1997................ 1,357,666 1.41 1.00 - 2.25 Granted.............................. 55,000 2.15 1.81 - 2.50 --------- ------ ------------- Balance June 30, 1998................ 1,412,666 1.44 1.00 - 2.50 Granted.............................. 306,167 .99 94 - 1.00 Exercised............................ (84,167) 1.00 1.00 --------- ------ ------------- BALANCE JUNE 30, 1999................ 1,634,666 $ 1.27 $ .93 - 2.50 ========= ====== =============
The following table summarizes information about stock options outstanding at June 30, 1999: Weighted Average Range of Average Remaining Contractual Exercise Prices Outstanding Life in Years --------------- ---------------- --------------------- $.93 - $5.50 1,634,666 4.45 Options exercisable at June 30, 1999 and 1998 were 1,490,666 and 1,412,666 respectively. 15. Note Receivable - Officer On November 25, 1998, TekInsight advanced $70,000 to Brian Bookmeier, TekInsight's president, in exchange for a note receivable, which bore interest at the rate of 10% per annum. This note was paid in full during the fiscal year ended June 30, 1999. F-17 TekInsight.Com, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited with respect to the six months ended December 31, 1999 and 1998) (Continued) On November 22, 1999, TekInsight loaned Seven Sons, Inc., a golf and tennis equipment store, of which Brian Bookmeier, a director of TekInsight, is a principal, $100,000 for its operations. The $100,000 secured note bore interest at 10% (per annum) and its original December 30, 1999 maturity was extended to March 31, 2000 in consideration for an increase in interest rate to 11% per annum. The note was paid in full at maturity. 16. Termination Agreements TekInsight entered into the following contracts subsequent to the disposal of its business: A. TekInsight agreed to make severance payments aggregating $708,000 to a former operating officer. An initial payment of $250,000 was paid and the remaining $458,000 was to be paid in sixty equal monthly installments of $7,633 commencing March 1998 and continuing through March 2003. TekInsight recorded the present value of this contract at $359,265. The balance which was $280,209 at June 30, 1999 is currently payable since the note due from Gainor was prepaid (See Note 2). Additionally, TekInsight will continue to pay quarterly premiums on the officer's existing $350,000 life insurance policy through December 31, 1999. B. TekInsight entered into agreements with three former officers in July 1998, for an aggregate consideration of $862,498, with $385,000 paid in August 1998, $225,000 settled through the issuance of notes payable due in January 2000, bearing interest at 7% per annum and the $252,490 balance settled by exchanging cash severance payments for the direct issuance of 168,334 shares of common stock (at $1.00 value per share) and the exercise price of concurrently granted options to acquire 84,167 shares of common stock at $1.00 per share. TekInsight has retired these contracts as of June 30, 1999. 17. Subsequent Event On January 18, 2000, TekInsight signed a letter of intent with Data Systems. Pursuant to the letter of intent, Data Systems agreed to enter into a proposed acquisition transaction calling for Data Systems to be merged into TekInsight Services, Inc., a wholly owned and principal operating subsidiary of TekInsight. In consideration for the merger, shareholders of Data Systems will receive a number of shares of a new class of TekInsight convertible preferred stock (convertible into TekInsight common stock on a one to one basis) proposed to be listed on the Nasdaq SmallCap Market that will have a market value of between $12,500,000 and $18,000,000, with such value to be based upon the market price of TekInsight common stock at the time of closing. Although no assurances can be given, the parties intend to close the merger by June 30, 2000. On February 18, 2000, TekInsight and Data Systems entered into an agreement and plan of merger pursuant to which Data Systems will be merged into TekInsight Services, Inc., a wholly owned and operating subsidiary of TekInsight. In consideration for the merger, shareholders of Data Systems' will receive a varying purchase price which will equal $12,500,000 if the market price of TekInsight's common stock at the time of closing is less than $5.00 per share, $16,000,000 if the market price is between $5.00 and $7.00 per share, and $18,000,000 if the market price is over $7.00 per share. The merger price will be delivered to shareholders of Data Systems through a distribution of a number of shares of a new class of TekInsight convertible preferred stock proposed to be listed on the Nasdaq SmallCap Market, with the number of such shares to be found by dividing the applicable merger price by the market price. Completion of the merger is subject to a number of conditions, including receipt of TekInsight and Data Systems shareholder approval, acceptance by Nasdaq for the listing of the convertible preferred stock and other customary closing conditions. There can be no assurance the Nasdaq listing will be obtained for the newly issued convertible preferred stock, or that any of the closing conditions will be satisfied. Although no assurances can be given, the parties intend to close the merger no later than June 30, 2000. F-18 Data Systems Network Corporation Index To Consolidated Financial Statements Page Number ----------- Report of Independent Certified Public Accountants.......................100 Independent Auditor's Report.............................................101 Consolidated Balance Sheets as of December 31, 1999 and 1998.............102 Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997.....................................103 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1999, 1998 and 1997.....................................104 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997.....................................105 Notes to Consolidated Financial Statements for the Years Ended December 31, 1999, 1998 and 1997.....................................106 F-19 - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Data Systems Network Corporation We have audited the consolidated balance sheets of Data Systems Network Corporation and Subsidiaries (a Michigan corporation) as of December 31, 1999 and 1998, and the related statements of operations, stockholders' equity, and cash flows for the years then ended. 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 audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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, based on our audits, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Data Systems Network Corporation and Subsidiaries as of December 31, 1999 and December 31, 1998, and the results of operations and cash flows for the years then ended, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note B to the financial statements, the Company has suffered recurring losses from operations and has a deficit in working capital. These matters, among others, as discussed in Note B to the financial statements, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note B. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Grant Thornton LLP /s/ Grant Thornton LLP Southfield, Michigan February 14, 2000 F-20 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INDEPENDENT AUDITORS REPORT To the Directors and Shareholders Data Systems Network Corporation We have audited the accompanying consolidated statements of operations, stockholders' equity, and cash flows of Data Systems Network Corporation for the year ended December 31, 1997. 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 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 the 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 of Data Systems Network Corporation referred to above present fairly, in all material respects, the results of its operations and its cash flows for the year ended December 31, 1997 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has experienced significant recurring losses from operations, which raises substantial doubt about the Company's ability to continue as a going concern. Management's plans concerning these matters are also described in Note B. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Plante & Moran, LLP /s/ Plante & Moran, LLP Southfield, Michigan August 20, 1998 F-21 - -------------------------------------------------------------------------------- Data Systems Network Corporation Consolidated Balance Sheets
December 31, --------------------------------- 1999 1998 --------------------------------- Assets Current Assets: Cash and cash equivalents $ 1,516,709 $ 2,695,863 Accounts receivable (net of allowance of $290,000 and $561,600 at December 31, 1999 and December 31, 1998 respectively.) 9,132,585 11,339,484 Notes receivable 50,000 60,000 Inventories 907,207 1,296,145 Other current assets 1,132,070 347,983 ----------- ------------ Total current assets 12,738,571 15,739,475 Property and Equipment, net 1,385,498 2,522,978 Goodwill, (net of amortization of $557,938 and $388,438 at December 31, 1999 and December 31, 1998 respectively.) 2,832,070 3,001,570 Other assets 351,956 1,402,298 ----------- ------------ Total assets $17,308,095 $ 22,666,321 =========== ============ Liabilities and Shareholders' Equity Current Liabilities: Bank line of credit 5,217,794 3,231,287 Accounts payable 6,356,961 9,640,159 Accrued liabilities 1,742,977 2,590,906 Shareholder Settlement Liability -- 1,768,000 Deferred maintenance revenues 1,598,024 3,865,320 ----------- ------------ Total current liabilities 14,915,756 21,095,672 Commitments and Contingencies -- -- Shareholders' Equity Preferred stock, authorized 1,000,000 shares, none outstanding Common stock ($.01 par value; authorized 10,000,000 shares; issued and outstanding 5,509,224 and 4,859,224 at December 31, 1999 and December 31,1998 respectively.) 55,092 48,592 Additional paid-in capital 18,575,219 17,951,219 Accumulated deficit (16,237,972) (16,429,162) ----------- ------------ Total shareholders' equity 2,392,339 1,570,649 ----------- ------------ Total liabilities and shareholders' equity $17,308,095 $22,666,321 ----------- ------------
The accompanying notes are an integral part of these financial statements. F-22 Data Systems Network Corporation Consolidated Statements of Operations
Year ended December 31, --------------------------------------------------- 1999 1998 1997 --------------------------------------------------- REVENUES: Product revenue $32,451,828 $63,530,818 $67,845,466 Service revenue 20,373,707 21,792,682 18,151,674 ----------- ----------- ----------- Total revenues 52,825,535 85,323,500 85,997,140 COST OF REVENUES: Cost of products 26,608,898 52,213,508 59,227,854 Cost of services 16,216,325 19,024,585 14,287,978 ----------- ----------- ----------- Total cost of revenues 42,825,223 71,238,093 73,515,832 GROSS PROFIT 10,000,312 14,085,407 12,481,308 OPERATING EXPENSES: Selling expenses 6,105,959 9,896,255 10,334,103 General and administrative expenses 4,681,415 5,468,613 5,814,607 ----------- ----------- ----------- Total operating expenses 10,787,374 15,364,868 16,148,710 LOSS FROM OPERATIONS (787,062) (1,279,461) (3,667,402) OTHER INCOME (EXPENSE): Shareholder settlement 1,137,500 (1,768,000) -- Loss on sale of equipment (385,419) -- -- Interest income 109,957 109,592 371,716 Interest expense (564,859) (802,328) (1,612,583) Other income 681,073 41,615 491,638 ----------- ----------- ----------- 978,252 (2,419,121) (749,229) Earnings (loss) before discontinued operations 191,190 (3,698,582) (4,416,631) DISCONTINUED OPERATIONS Loss from operations of Unified Network Services -- (1,686,053) (557,469) Gain on Disposal of Unified Network Services -- 705,742 -- ----------- ----------- ----------- -- (980,311) (557,469) ----------- ----------- ----------- NET EARNINGS (LOSS) $ 191,190 $(4,678,893) $(4,974,100) =========== =========== =========== Earnings (loss) per common share - basic and diluted Continuing operations $ 0.04 $ (0.76) $ (1.02) Discontinued operations -- (0.20) (0.13) ----------- ----------- ----------- Net loss per common share $ 0.04 $ (0.96) $ (1.15) =========== =========== =========== Weighted average shares outstanding 5,204,703 4,859,224 4,324,229 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-23 Data Systems Network Corporation Consolidated Statements of Shareholders' Equity
COMMON ADDITIONAL PAID-IN STOCK CAPITAL (ACCUMULATED DEFICIT) TOTAL ------- ------------------ --------------------- ----------- Balance at December 31, 1996 $32,550 $ 9,139,153 $ (6,776,169) $ 2,395,534 Exercise of stock options and warrant redemptions 16,030 8,806,453 -- 8,822,453 Net loss -- -- (4,974,100) (4,974,100) ------- ---------- ----------- ---------- Balance at December 31, 1997 48,580 17,945,606 (11,750,269) 6,243,917 Exercise of stock options 12 5,613 -- 5,625 Net loss -- -- (4,678,893 (4,678,893) ------- ---------- ----------- ---------- Balance at December 31, 1998 48,592 17,951,219 (16,429,162) 1,570,649 Issuance of shares in connection with Shareholder Settlement 6,500 624,000 -- 630,500 Net Earnings -- -- 191,190 191,190 ------- ---------- ----------- ---------- Balance at December 31, 1999 $55,092 $18,575,219 $(16,237,972) $ 2,392,339 ======= =========== ============= ===========
The accompanying notes are an integral part of these financial statements. F-24 Data Systems Network Corporation Consolidated Statements of Cash Flows
Year Ended December 31, ----------------------------------------------- 1999 1998 1997 ----------------------------------------------- Cash Flows From Operating Activities: Net Earnings (loss) $ 191,190 $ (4,678,893) $ (4,974,100) Adjustments to reconcile net earnings (loss) to net cash used in operating activities: Depreciation and amortization 1,041,812 1,145,088 883,084 Loss on sale of equipment 385,419 -- -- Gain on disposal of UNS -- 866,335 -- Changes in assets and liabilities that provided (used) cash net of effects of discontinued operations: Investments -- 6,203,361 (6,203,361) Accounts receivable 2,206,899 15,004,496 (16,410,447) Notes receivable 10,000 137,133 (97,043) Inventories 388,938 (294,795) 244,812 Other current assets (784,087) 189,797 223,524 Other assets 1,050,342 3,349,668 (667,355) Accounts payable (3,283,198) (6,514,071) 8,798,041 Accrued liabilities (847,929) (322) 1,346,598 Shareholder Settlement (1,137,500) 1,768,000 -- Deferred maintenance revenues (2,267,296) 2,938,166 (13,473) Decrease in net liabilities of discontinued operations -- (2,021,070) (75,944) ----------- ------------ ------------ Net cash (used in) provided by operations (3,045,410) 18,092,891 (16,945,664) ----------- ------------ ------------ Cash Flows From Investing Activities: Acquisition of property and equipment, net (120,251) (1,104,305) (1,627,789) Issuance of common stock and exercise of stock options - 5,625 - ----------- ------------ ------------ Net cash provided by (used in) investing activities (120,251) (1,098,680) (1,627,789) ----------- ------------ ------------ Cash Flows From Financing Activities: Net current borrowings (repayment) under bank line of credit 1,986,507 (14,065,272) 8,071,347 Payment of principal on long-term debt -- -- (75,000) Proceeds from issuance of common stock (net offering costs) -- -- 8,822,483 Net proceeds (repayment) from capital lease obligation financing -- (237,539) 237,539 ----------- ------------ ------------ Net cash provided by (used in) financing activities 1,986,507 (14,302,811) 17,056,369 Net Increase (decrease) in cash and cash equivalents (1,179,154) 2,691,400 (1,517,084) Cash and cash equivalents at beginning of period 2,695,863 4,463 1,521,547 ----------- ------------ ------------ Cash and cash equivalents at end of period $ 1,516,709 $ 2,695,863 $ 4,463 =========== ============ ============ Supplemental Disclosure of Cash Flows Cash paid during the period for: Interest $ 565,000 $ 802,000 $ 1,612,000 =========== ============ ============ Income taxes -- -- $ 60,000 =========== ============ ============ During the year, Data Systems settled a shareholder lawsuit through the issuance of 650,000 shares of common stock. $ 630,500 ===========
The accompanying notes are an integral part of these financial statements. F-25 Data Systems Network Corporation Notes To Consolidated Financial Statements Note A - Nature of Business and Significant Accounting Policies Data Systems Network Corporation (Data Systems), incorporated in Michigan in 1986, provides computer network services and products that allow companies to control their complex distributed computing environments, allowing companies to capitalize on their investments in technology and people. Data Systems wide range of services includes applications development, network services, enterprise management, help desk and security services. Data Systems also provides a wide range of network integration services including installation, consultation, technical support and training to governmental and corporate accounts. Principles of Consolidation The consolidated financial statements include the accounts of Data Systems and its former subsidiary, Unified Network Service, Inc (UNS.) The operations of UNS were sold during 1998 and they are shown as discontinued operations (See Note C.) Cash Equivalents For purposes of the statement of cash flows, Data Systems considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Restricted Cash At December 31, 1999, cash of $1,513,000 was restricted in connection with maintenance agreements. It will become unrestricted as revenue is recognized according to the terms of the agreements. Inventories Inventories are stated at the lower of cost or market as determined by the weighted average method. Inventories consist of goods for resale and service parts which represent equipment spares utilized for service contracts. Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are computed principally using the straight-line method based upon estimated useful lives ranging from 5 to 7 years. Amortization of leasehold improvements is provided over the terms of the various leases. Goodwill and Long-Lived Assets The cost in excess of net assets acquired (goodwill) is amortized using the straight-line method over twenty years which is the estimate of future periods to be benefited. Data Systems performs a review for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Undiscounted estimated future cash flows of an asset are compared with its carrying value, if the cash flows are less than the carrying value, an impairment loss is recognized. F-26 Data Systems Network Corporation Notes To Consolidated Financial Statements (Continued) Income Taxes Income taxes are accounted for by using an asset and liability approach. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial basis and tax basis of assets and liabilities. 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 recovered or settled. Revenue Recognition Revenue recognition for consulting, network installation services, time and materials services, and training is recognized when the services are rendered. Revenue from the sale of merchandise is recognized when the customer receives the product. Revenue from the sales of after-installation service maintenance contracts is recognized on a straight-line basis over the lives of the respective contracts. Product Returns and Service Adjustments Product returns and service adjustments are estimated based upon historical data. Data Systems' customers have no contractual rights to return products. Data Systems determines whether to accept product returns on a case-by-case basis and will generally accept product returns only upon payment of a restocking fee and/or if the products may be returned to the manufacturer. Data Systems offers no warranty separate from the product manufacturers' warranties. Earnings or Loss Per Share In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share" (SFAS 128.) SFAS 128 specifies the computation and presentation and disclosure requirements for earnings per share (EPS) of entities with publicly held common stock or potential common stock. SFAS 128 defines two EPS calculations, basic and diluted. The objective of basic EPS is to measure the performance of an entity over the reporting period by dividing income available to common stock by the weighted average of shares outstanding. The objective of diluted EPS is consistent with that of basic EPS while giving effect to all dilutive potential common shares that were outstanding. For year ended December 31, 1999, there were no potentially dilutive common shares. For year ended December 31, 1998, all potential common shares were excluded from the computation of diluted earnings per share because the effect would have been anti-dilutive. Use of Estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair Value of Financial Instruments The carrying amounts of Data Systems' financial instruments consist primarily of cash and cash equivalents, bank lines of credit, accounts receivables, accounts payable and short-term and long-term debt, approximate their fair values. F-27 Data Systems Network Corporation Notes To Consolidated Financial Statements (Continued) Financial Statement Presentation Certain amounts in the 1998 and 1997 financial statements have been reclassified to conform to the 1999 presentation. Note B - Going Concern The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the financial statements, the year ended December 31, 1999 reflected net earnings of approximately $191,000, however, Data Systems had a loss from operations of approximately $787,000. During the years ended December 31, 1998 and 1997, Data Systems incurred losses of $4,678,893 and $4,974,100, respectively. These losses have contributed to Data Systems' deficit in working capital of $2,177,185 at December 31, 1999. These factors, among others, could raise doubt about Data Systems' ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. Management's plans with respect to this matter include a continued focus on reducing operational and overhead costs and the implementation of a change in strategy to emphasize service sales rather than product sales, which is expected to increase margins. Management believes the consolidation of its business operations and the stabilization of strategic business relationships will enable Data Systems to meet its obligations and attain a level of operations that are profitable. In addition, upon completion of the merger with TekInsight (See Note P), Data Systems believes that additional financial resources will be available and synergies relating to business opportunities will be realized to help return Data Systems to profitability. Note C - Discontinued Operations - Sale of Unified Network Services Inc. During 1998, Data Systems decided to sell its 70% interest in its large account network management services operation, Unified Network Services Inc. Under the terms of the original purchase agreement, the minority shareholders of UNS elected to exercise a contract option to purchase the UNS subsidiary. The terms of the sale included $7,000 in cash and a note for $3,000,000, which is secured by the stock of UNS. The buyers also assumed the existing liabilities of UNS. The gain upon disposal of the discontinued operations is net of allowances of $3,000,000 due to the uncertainty of the buyer's ability to repay the note and $989,400 in advances made by Data Systems for working capital, and payment of assumed liabilities. The results of operations of the discontinued operations for the years ended December 31, 1998 and 1997 are summarized below: For the years ended December 31, 1998 1997 ----------- ---------- Revenues $ 278,060 $2,013,309 Loss from discontinued operations $(1,686,054) $ (557,469) F-28 Data Systems Network Corporation Notes To Consolidated Financial Statements (Continued) Note D - Property and Equipment Property and equipment are summarized as follows at December 31: 1999 1998 ---- ---- Computer equipment and software $ 2,992,909 $ 3,889,597 Furniture and Fixtures 650,824 856,720 Leasehold improvements 257,831 257,831 ----------- ----------- 3,901,564 5,004,148 Less accumulated depreciation and amortization (2,516,066) (2,481,170) ----------- ----------- $ 1,385,498 $ 2,522,978 =========== =========== Depreciation and amortization expense was approximately $874,000, $914,000 and $574,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Note E - Other Assets Other assets consist of the following at December 31, 1999 1998 ---- ---- Prepaid expenses $351,956 $ 606,662 Accounts receivable - other 0 795,636 -------- ---------- $351,956 $1,402,298 ======== ========== Note F - Accrued Liabilities Accrued liabilities consist of the following at December 31, 1999 1998 ---- ---- Compensation benefits and taxes $ 889,334 $1,229,821 Customer advances 42,106 140,181 State sales and other taxes 41,163 74,208 Other 770,374 1,146,696 ---------- ---------- $1,742,977 $2,590,906 ========== ========== Note G - Lines of Credit On September 30, 1998 Data Systems and Foothill Capital Corporation entered into a credit facility. The Foothill Agreement provides for an revolving line of credit not to exceed $15 million. The available line of credit at December 31,1999 was $644,003. Data Systems may, at its option and subject to specified collateral requirements, increase the line to $20 million during the term of the Foothill Agreement. Borrowing limits under the Foothill Agreement are determined based on a collateral formula, which includes 85% of qualified trade receivables. Borrowings under the Foothill Agreement bear interest at 1% over Norwest Bank prime (9.5 % at December 31, 1999) and have a term extending to September 30, 2001. F-29 Data Systems Network Corporation Notes To Consolidated Financial Statements (Continued) Data Systems is required to maintain financial ratios. At December 31, 1999, Data Systems was in compliance with all of the ratios required by Foothill Capital Corporation. In addition, there are restrictions with respect to dividend distribution. In connection with the Foothill agreement, Data Systems issued a warrant for 50,000 shares of common stock with an exercise price not greater than $2.20 per share. This warrant will expire September 30, 2003. Note H - Lease Commitments Data Systems has entered into several non-cancelable operating leases for office space, computer equipment, and furniture and fixtures that expire at various dates through 2004. The approximate future minimum annual rentals under non-cancelable operating leases are as follows: Years Ended December 31, ------------------------ 2000 $ 824,987 2001 725,299 2002 499,651 2003 187,045 2004 42,530 ---------- Total minimum lease obligations $2,279,512 ========== Total rent expense for the years ended December 31, 1999, 1998, and 1997 was approximately $1,028,000, $1,558,000 and $1,130,000, respectively. Note I - Income Taxes Deferred tax assets and liabilities at December 31, consist of the following: 1999 1998 ----- ---- Deferred tax assets: Net operating loss carry forwards $ 4,285,000 $ 3,336,000 Deferred maintenance revenue 17,000 17,000 Allowance for doubtful accounts 383,000 273,000 Shareholder lawsuit settlement - 601,000 Inventory - - Depreciation - - Accrued vacation 92,000 102,000 ----------- ----------- 4,777,000 4,329,000 Deferred tax liabilities Depreciation (66,000) (138,000) Amortization (126,000) (114,000) Other -- -- ----------- ------------ (192,000) (252,000) Less valuation allowance (4,585,000) (4,077,000) ----------- ------------ $ -- $ -- =========== ============ The net operating loss carry forwards expire in 2007 - 2018. F-30 Data Systems Network Corporation Notes To Consolidated Financial Statements (Continued) The income tax provision reconciled to the tax computed at the statutory federal rate for continuing operations was as follows:
Year Ended December 31, ------------------------------------------- 1999 1998 1997 --------- ----------- ----------- Tax (benefit) at statutory rates applied to income before federal income tax from continuing operations $ 65,000 $(1,260,000) $(1,502,000) Effect of nondeductible items 28,000 41,000 52,000 Other (144,000) Changes in treatment on income tax return (601,000) 939,000 0 Valuation allowance 508,000 280,000 1,594,000 --------- ----------- ----------- $ - $ - $ - ========= =========== ===========
Note J - Redemption of Warrants During February 1997, Data Systems called all of its outstanding redeemable common stock purchase warrants for redemption as of March 10, 1997 pursuant to the warrant agreement, dated October 28, 1994, setting forth the terms of the purchase warrants. Approximately 99% of the warrants were exercised on or prior to the date of redemption at a price of $6.25 per warrant, resulting in net proceeds to Data Systems of approximately $7,400,000. In connection with the receipt of consent to the redemption, Data Systems agreed to file a registration statement with the Securities and Exchange Commission with respect to 60,000 units, issued to the underwriters' representatives in Data Systems' initial public offering, consisting of two common shares and two warrants to purchase an additional two common shares which may be purchased upon exercise of a warrant. The exercise price of these warrants was reduced from $16.50 to $12.50 per unit and the exercise price of the purchase warrants was reduced from $10.3125 to $6.25 per unit. The registration was completed in July 1997 and during the third quarter of 1997, all related warrants were exercised, resulting in net proceeds to Data Systems of approximately $1,400,000. Note K - Stock Option Plans In April 1994 Data Systems adopted the 1994 stock option plan. A total of 200,000 shares were reserved for issuance under the 1994 plan. The options vest over a two-year period at the rate of 50% per year, beginning on the first anniversary of the grant date. In April 1997, Data Systems amended the 1994 plan to increase the reserved shares to 600,000. The vesting period in Data Systems' form option grant agreement was also changed to 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversaries of the grant date. Data Systems' Compensation Committee retains the ability to change the vesting schedule at any time. F-31 Data Systems Network Corporation Notes To Consolidated Financial Statements (Continued) In 1999 Data Systems granted options for 50,000 shares to a director of Data Systems excercisable at a price of $.66 per share when the fair market value at the date of the grant was $1.03. Such options vest 50% on the second anniversary date, and the 25% vest each of the next two years. In 1998 and 1997, Data Systems granted options for 40,000 and 3,000, shares, respectively, excercisable at a price of $.88 and $9.83 per share, respectively, which was the fair market value at the date of grant, to Directors of Data Systems. Such options vest one year from the grant date. The per share weighted-average fair value of stock options granted during 1999, 1998 and 1997 was $1.03, $3.86 and $9.83 per share, respectively. Average Shares per Share Under Options Exercise Price ------------- -------------- Balance at December 31, 1996 191,703 $ 4.55 Issued 215,350 $ 9.82 Forfeited (9,062) $ 6.19 Exercised (21,768) $ 4.57 -------- Balance at December 31, 1997 376,223 $ 7.54 Issued 138,750 $ 3.86 Forfeited (137,900) $10.10 Exercised (1,250) $ 3.88 --------- Balance at December 31, 1998 375,823 $ 5.15 Issued 50,000 $ .66 Forfeited (73,212) $ 6.59 Exercised $ --------- Balance at December 31, 1999 352,611 $ 4.21 ======== ====== The range of exercise prices on outstanding options at December 31, 1999 is as follows: Weighted Average Average Remaining Price Range Shares Exercise Price Life ------------ ------ -------------- --------- .66 - 2.50 158,125 $0.96 8.9 2.51 - 5.00 90,186 4.25 5.9 5.01 - 7.50 55,400 6.84 7.2 7.51 - 10.00 15,700 8.90 7.3 10.01 - 13.75 33,200 12.98 7.9 ------- 352,611 As of December 31, 1999, 1998 and 1997 the number of options exercisable was 169,512, 193,123 and 62,461, respectively and the weighted average exercise price of those options was $5.89, $5.29 and $4.53, respectively. The Financial Accounting Standard Board has issued Statement No. 123, "Accounting for Stock Based Compensation" (SFAS No. 123.) The Statement established a fair value method of accounting for employee stock options and similar equity instruments such as warrants, and encourages all companies to adopt that method of accounting for all of their stock compensation plans. However, the statement allows companies to continue measuring compensation for such plans using accounting guidance in place prior to SFAS No. 123. Companies that elect to remain with the former method of accounting must make pro-forma disclosures of net earnings and earnings per share as if the fair value method provided for in SFAS No. 123 had been adopted. F-32 Data Systems Network Corporation Notes To Consolidated Financial Statements (Continued) The fair value of each grant is estimated on the date of grant using the Black-Scholes option - pricing model with the following weighted average assumptions for grants in 1999: dividend yield of 0%, expected volatility of 136.820%, risk-free interest rate of 6.751% and expected life of ten years. Data Systems has not adopted the fair value accounting provisions of SFAS No. 123. Accordingly, SFAS No. 123 has no impact on Data Systems' financial position or results of operations. Data Systems accounts for the stock option plan under APB Opinion No. 25, "Accounting for Stock Issued to Employees." No compensation costs have been recognized. Had compensation cost for the plan been determined based on the fair value of the options at the grant dates consistent with the method of SFAS No. 123, Data Systems' net earnings (loss) and earnings (loss) per share would have been as follows (in thousands, except for per share data):
1999 1998 1997 ---- ---- ---- Net Earnings (Loss) as reported $191 $(4,678) $(4,974) Pro Forma 7 (4,985) (5,418) Earnings (Loss) per share as reported $.03 $ (.96) $ (1.15) Pro Forma - (1.03) (1.25)
Note L - Employee Benefit Plans Data Systems maintains a defined contribution 401(k) plan that covers substantially all employees. Contributions to the Plan may be made by Data Systems (which are discretionary) or by plan participants through elective salary reductions. No contributions were made to the plan by Data Systems during the years ended December 31, 1999, 1998, and 1997. Note M - Major Customers In 1998 and 1997, the State of Michigan accounted for approximately 29% of revenue in each year. Additionally, the State of New York represented 25% and 12% of total revenues for 1999 and 1998 respectively. Note N -Commitments and Contingencies Data Systems is involved in routine legal proceedings which are incidental to its business. All of these proceedings arose in the ordinary course of Data Systems' business and, in the opinion of Data Systems, any potential liability of Data Systems with respect to these legal actions will not, in the aggregate, be material to Data Systems' financial condition or operations. Note O - Settlement of Lawsuit On February 17, 1999, Data Systems announced that it had agreed to a stipulation of settlement of the consolidated complaint in the shareholder class action lawsuit captioned, In Re: Data Systems Securities Litigation, Case No. 98-70854. The stipulation of settlement has been filed in federal court in Detroit, Michigan and the court determined the settlement to be fair on May 24, 1999. Under the terms of the settlement, and subject to various conditions, Data Systems created a gross settlement fund. The fund benefits a settlement class of purchasers who bought Data Systems' stock during the period from May 16, 1996 through February 24, 1998. The fund was comprised of $900,000 provided by Data Systems insurer, and, 650,000 shares of Data Systems' common stock which were issued June 22, 1999. In agreeing to the settlement, Data Systems and individual defendants made no admission of any wrongdoing. As of December 31, 1998, Data Systems recorded a liability for this settlement in the amount of $1,768,000. The amount of the liability was calculated assuming that a proposed merger with Information Architects had taken place and that the shares to be issued were those of Information Architects. When the plan of merger with Information Architects did not take place as planned the shares issued in the settlement were those of Data Systems rather than Information Architects. As a result, the amount of the settlement of the lawsuit was less than anticipated at December 31, 1998 and Data Systems recognized $1,137,500 as income in 1999. F-33 VOTING SECURITIES AND PRINCIPAL HOLDERS Security Ownership of Certain Beneficial Owners and Management of TekInsight The following table identifies as of March 31, 1999 each person known to TekInsight to be the beneficial owner of more than five percent of its common stock, each executive officer, each director of TekInsight, each nominee for director, and all the directors and executive officers of TekInsight as a group. The table sets forth the number of shares of TekInsight's common stock beneficially owned by each such person and such group and the percentage of the shares of TekInsight's outstanding common stock owned by each such person and such group. In all cases, the named person has sole voting power and sole investment power of the securities, unless otherwise specified.
Number of Shares of Percentage of Outstanding Name and Address Common Stock Shares of Common Beneficial Owner Beneficially Owned (1) Stock Owned ---------------- --------------------- ----------- Estate of Fred Kassner 2,809,455 17.6% Spring Street Ramsey, NJ 07446 (4) ViewCast.Com, Inc. 1,240,310 7.8 Villa Creek Drive, Suite 200 Dallas, TX 75234 Alexander Kalpaxis (2) (5) 788,583 4.9 Arion Kalpaxis (2) (5) 292,500 1.8 Michael W. Grieves 0 0 34705 W. 12 Mile Road Suite 300 Farmington Hills, MI 48331 Damon D. Testaverde (2) (4)(6) 659,189 4.1 Walter J. Aspatore 0 0 255 East Brown Street Center Suite 120 Birmingham, MI 48009 Brian D. Bookmeier (2) (3) 327,867 2.0 James Linesch 166,823 1.0 Walnut Avenue Manhattan Beach, CA 90266 (6) Steven J. Ross (2) (7) 200,000 1.2 All officers and directors as a group (4 persons) (3) (5) (6) (7) 2,142,462 15.0%
---------- (1) The term beneficial ownership with respect to a security is defined by Rule 13d-3 under the Securities Exchange Act of 1934 as consists of sole or shared voting power and/or sole or shared investment power with respect to the security through any contract, arrangement, understanding, relationship or otherwise, including a right to acquire such power(s) during the next 60 days. Unless otherwise noted, beneficial ownership consists of sole ownership, voting and investment rights. F-34 (2) The principal business address for such person is 5 Hanover Square, 24th Floor, New York, New York 10004 (3) Includes 182,867 shares of common stock held by Mr. Bookmeier. Also includes options to purchase 125,000 shares of common stock at $1.35 per share, granted in connection with the waiver of some cash compensation in 1996, options to acquire 10,000 shares of common stock granted under the 1992 Employee's Stock Option Plan at $.9375 per share and options to purchase 10,000 shares of common stock granted under TekInsight's 1997 Non-Employee Director's Stock Option Plan at $3.78 per share. 39,179 of the shares of common stock issued to Mr. Bookmeier have been pledged to Barbara Milinko to secure a $325,000 note payable to Ms. Milinko by Alan Korby, Mr. Bookmeier and Mr. Gietzen. (4) The Estate of Mr. Kassner, includes 40 shares of common stock underlying TekInsight's publicly traded Class A Warrants and 100,000 shares of common stock underlying warrants granted in connection with financial accommodations granted by Mr. Kassner related to the release of security interests in TekInsight assets. For Mr. Testaverde, includes the shares underlying 50,000 warrants granted in connection with the waiver of defaults under then existing indebtedness exercisable at $1.00 per share and 100,000 options granted under the 1992 Employee Stock Option Plan exercisable at $1.50 per share. (5) Does not include an aggregate of 161,166 shares of common stock transferred by Alexander Kalpaxis to three employees of AstraTek, Inc. which shares are held in escrow for varying periods of time and returned to Mr. Kalpaxis under specified circumstances. The number of shares listed for Mr. Arion Kalpaxis includes 97,500 shares of Common Stock which are held in escrow and may be returned to Alexander Kalpaxis. (6) Includes 30,000 options granted to each of Messrs. Linesch and Testaverde (10,000 exercisable at $1.81 per share of common stock, 10,000 exercisable at $.9375 per share of common stock and 10,000 exercisable at $3.78 per share of common stock) under TekInsight's 1997 Non-Employee Director's Stock Option Plan. Includes 20,000 options granted to Mr. Bookmeier (10,000 exercisable at $3.78 per share of common stock and 10,000 exercisable at $.9375 per share of common stock) under TekInsight's 1997 Non-Employee Director's Stock Option Plan and 1992 Employee Stock Option Plan, respectively. (7) Includes options to purchase 200,000 shares of common stock at $3.00 per granted to Mr. Ross in connection with Mr. Ross's duties as a consultant and as President and Chief Executive Officer of TekInsight. F-35 Security Ownership of Certain Beneficial Owners and Management of Data Systems The following table sets forth, as of March 8, 2000, beneficial ownership information with respect to common stock ownership by each director and each named executive officer of Data Systems, all current directors and current executive officers as a group and all other persons known by Data Systems to beneficially own more than 5% of the outstanding shares of common stock. Unless otherwise noted below, each person has sole voting and investment power over the shares beneficially owned.
Number of Shares of Percentage of Outstanding Name and Address Common Stock Shares of Common Beneficial Owner(1) Beneficially Owned (2) Stock Owned(3) ---------------- ---------------------- ------------- Michael W. Grieves(5) 711,306 12.6% Greg Cocke (4)(5) 361,250 6.5% Garret L. Denniston 51,000 .9% Diane L. Grieves 26,251 .5% John O. Lychos 8,306 .1% Walter J. Aspatore 13,306 .2% Michael Jansen -- -- All executive officers and directors as a group (6 persons) 1,171,419 20.7%
------------------- (1) The address for each beneficial owner named in the table is 34705 12 Mile Road, Suite 300, Farmington Hills, Michigan 48331. (2) The term beneficial ownership with respect to a security is defined by Rule 13d-3 under the Securities Exchange Act of 1934 consists of sole or shared voting power and/or sole or shared investment power with respect to the security through any contract, arrangement, understanding, relationship or otherwise, including a right to acquire such power(s) during the next 60 days. Unless otherwise noted, beneficial ownership consists of sole ownership, voting and investment rights. This column includes the following number of option shares of common stock that may be acquired upon the exercise of stock options that are presently exercisable or become exercisable within 60 days: Mr. Grieves 18,000; Mr. Cocke none; Mr. Denniston 51,000; Ms. Grieves 26,251; Mr. Lychos none; Mr. Aspatore 1,000; Mr. Jansen none. (3) For purposes of calculating the percentage of common stock beneficially owned, the shares issuable to such person under stock options or warrants exercisable within 60 days are considered outstanding and are added to the shares of common stock actually outstanding. Shares attributable to one person, however, are not cross-attributed to any other person. (4) Mr. Cocke is a former vice-president of Data Systems. (5) In connection with the proposed merger, Mr. Grieves and Mr. Cocke entered into a voting agreement, dated as of February 18, 2000 with TekInsight, TekInsight Services and Data Systems pursuant to which Mr. Grieves and Mr. Cocke each granted irrevocable proxies in favor of TekInsight, and each of Damon Testaverde and Brian D. Bookmeier, directors of TekInsight. The irrevocable proxies grant each of the proxyholders the right to vote the shares of Data Systems common stock held by Mr. Grieves and Mr. Cocke at any meeting of shareholders of Data Systems called for purposes of approving the merger. The voting agreement will terminate upon the earliest to occur of the conclusion of the meeting held to vote on the TekInsight merger or the termination of the agreement and plan of merger, dated as of February 18, 2000, as amended April 4, 2000, among TekInsight, TekInsight Services and Data Systems. F-36 Appendix A CHAPTER 7B CONTROL SHARE ACQUISITIONS (Added by P.A. 58, L. '88, eff. 4-1-88.) 450.1790 [CONTROL SHARES]. - (1) This chapter shall be known and may be cited as the "Stacey, Bennett, and Randall shareholder equity act." (2) As used in this chapter, "control shares" means shares that, except for this chapter, would have voting power with respect to shares or an issuing public corporation that, when added to all other shares of the issuing public corporation owned by a person or in respect to which that person may exercise or direct the exercise of voting power, would entitle that person, immediately after acquisition of the shares, directly or indirectly, alone or as pan of a group, to exercise or direct the exercise of the voting power of the issuing public corporation in the election of directors within any of the following ranges of voting power: (a) 1/5 or more but less than K/3 of all voting power. (b) 1/3 or more but less than a majority of all voting power. (c) A majority of all voting power. 450.1791 [CONTROL SHARE ACQUISITION]. - (1) As used in this chapter, "control share acquisition" means the acquisition, directly or indirectly, by any person of ownership of, or the power to direct the exercise of voting power with respect to, issued and outstanding control shares. (2) For purposes of this section, shares or the power to direct the exercise of voting power acquired within a 90-day period, or shares or the power to direct the exercise of voting power acquired pursuant to a plan to make a control share acquisition, are considered to have been acquired in the same acquisition. (3) For purposes of this section, a person who acquires shares in the ordinary course of business for the benefit of others in good faith and not for the purpose of circumventing this chapter has voting power only of shares in respect of which that person would be able to exercise or direct the exercise of votes without further instruction from others. (4) For purposes of this section, the acquisition of any shares of an issuing public corporation does not constitute a control share acquisition if the acquisition is consummated in any of the following circumstances: (a) Before January 1, 1988. (b) Pursuant to a contract existing before January 1, 1988. (c) By gift, testamentary disposition, marital settlement, descent and distribution, or otherwise without consideration. (d) Pursuant to the satisfaction of a pledge or other security interest created in good faith and not for the purpose of circumventing this chapter. (e) Pursuant to a merger or share exchange effected in compliance with sections 701 to z 735 if the issuing public corporation is a party to the agreement of merger or share exchange. (f) By a governmental official acting in an official or fiduciary capacity. (5) For purposes of this section, the acquisition of shares of an issuing public corporation in good faith and not for the purposes of circumventing this chapter by any person whose voting rights previously had been authorized by shareholders in compliance with this chapter, or whose previous acquisition of shares of an issuing public corporation would have constituted a control share acquisition but for subsection (4), does not constitute a control share acquisition, unless the acquisition entitles a person, directly or indirectly, alone or as part of a group, to exercise or direct the exercise of voting power of the corporation in the election of directors in excess of the range of the voting power which the acquiring person was entitled to exercise or direct prior to such acquisition. (Last amended by P.A. 91, L. '93, eff. 10-1-93.) 450.1792 [INTERESTED SHARES]. - As used in this chapter, "interested shares" means the shares of an issuing public corporation entitled to vote pursuant to section 798(2) in respect of which any of the following persons may exercise or direct the exercise of the voting power of the corporation: (a) An acquiring person or member of a group with respect to a control share acquisition. (b) Any officer of the issuing public corporation. (c) Any employee of the issuing public corporation who is also a director of the corporation. (d) If the corporation is a bank holding company, as defined by section 1841 of the bank holding company act of 1958, 12 U.S.C. 1841, the chairperson of the board, president, executive vice president, or other director, officer, or employee as may be designated by the board of directors prior to the filing of an acquiring person statement. 450.1793 [ISSUING PUBLIC CORPORATION]. - (1) As used in this chapter, "issuing public corporation" means a corporation that has all of the following: (a) 100 or more shareholders of record. (b) Its principal place of business, its principal office, or substantial assets within Michigan. -2- (c) 1 more of the following: (i) More than 10% of its shareholders of record resident in Michigan. (ii) More than 10% of its shares owned of record by Michigan residents. (iii) 10,000 shareholders of record resident in Michigan. (2) The residence of a shareholder is presumed to be the address appearing in the records of the corporation. (3) Shares held by banks, except as trustee, guardian, conservator, personal representative, executor, or other fiduciary; brokers; or nominees shall be disregarded for purposes of calculating the percentages or numbers under this section. 450.1794 [CONTROL SHARES' VOTING RIGHTS ONLY AS CONFERRED BY SECTION 798, UNLESS OTHERWISE PROVIDED]. - Unless the corporation's articles of incorporation or bylaws provide that this chapter does not apply to control share acquisitions of shares of the corporation before the control share acquisition, control shares of an issuing public corporation acquired in a control share acquisition have only such voting rights as are conferred by section 798. 450.1795 [ACQUIRING PERSON STATEMENT]. - Any person who proposes to make or has made a control share acquisition may at the person's election deliver an acquiring person statement to the issuing public corporation at the issuing public corporation is principal office. The acquiring person's statement, if submitted, is for informational purposes only. If the acquiring person statement is delivered to the corporation, the person shall also file a copy of the statement with the administrator. The acquiring person statement shall set forth all of the following: (a) The identity of the acquiring person and each other member of the group of which the person is a part for purposes of determining control shares. (b) A statement that the acquiring person statement is given pursuant to this chapter. (c) The number of shares of the issuing public corporation owned, directly or indirectly, by he acquiring person and each other member of the group and the number of shares not owned by such person, but with respect to which each person has the power, directly or indirectly, to direct the exercise of voting power. (d) The range of voting power under which the control share acquisition falls or, if consummated, would fall. (e) If the control share acquisition has not taken place: (i) A description in reasonable detail of the terms of the proposed control share acquisition. -3- (ii) Representations of the acquiring person, together with a statement in reasonable detail of the facts upon which they are based, that the proposed control share acquisition, if consummated, will not be contrary to law. (iii) A statement that the acquiring person has the Financial ability to consummate the proposed control share acquisition from its own internal funds, or the acquiring person has entered into a definitive financing agreement, with 1 or more responsible financial institutions or other entities having the necessary financial capacity, for any financing of the proposed control share acquisition not to be provided by funds of the acquiring person. A copy of the definitive financing agreement and evidence of the acquiring person's financial capability to consummate the proposed control share acquisition shall be provided to the corporation with the acquiring person statement. (iv) A statement as to the purpose of the acquisition, including if the purpose is to acquire control of the business of the issuer of the securities, any plans or proposals which such persons may have to liquidate such issuer, to sell its assets to or merge it with any other persons, or to make any other major change in its business or corporate structure. 450.1796 [REQUEST FOR SPECIAL MEETING OF SHAREHOLDERS FOR PURPOSE OF CONSIDERING VOTING RIGHTS]. - (1) If the acquiring person so requests at the time of delivery of an acquiring person statement and gives an undertaking to pay the corporation's expenses of a special meeting, within 10 days after the delivery, the directors of the issuing public corporation shall call a special meeting of shareholders of the issuing public corporation for the purpose of considering the voting rights to be accorded the shares acquired or to be acquired in the control share acquisition. The corporation may require the acquiring person in advance of the meeting to pay or provide for payment of the amount reasonably estimated by the corporation as its expenses of a special meeting. (2) Unless the acquiring person agrees in writing to another date, the special meeting of shareholders shall be held within 50 days after receipt by the issuing public corporation of the request. (3) If no request is made, but an acquiring person statement has been filed with the corporation, the voting rights to be accorded the shares acquired in the control share acquisition shall be presented at the next special or annual meeting of shareholders. (4) If the acquiring person so requests in writing at the time of delivery of the acquiring person statement, the special meeting shall not be held sooner than 30 days after receipt by the issuing public corporation of the acquiring person statement. 450.1797 [NOTICE OF SPECIAL MEETING AND ACCOMPANYING STATEMENTS]. - (1) If a special meeting is requested, notice of the special meeting of shareholders shall be given as promptly as reasonably practicable by the issuing public corporation to all shareholders of record as of the record date set for the meeting, whether or not entitled to vote at the meeting. -4- (2) Notice of the special or annual shareholder meeting at which the voting rights are to be considered shall include or be accompanied by both of the following: (a) A copy of the acquiring person statement delivered to the issuing public corporation pursuant to this chapter. (b) A statement by the board of directors of the corporation, authorized by its directors, of its position or recommendation, or that it is taking no position or making no recommendation with respect to the control share acquisition. 450.1798 [CONTROL SHARES, VOTING RIGHTS OF, RESOLUTIONS FOR]. - (1) Control shares acquired in a control share acquisition have the same voting rights as were accorded the shares before the control share acquisition only to the extent granted by resolution approved by the shareholders of the issuing public corporation. (2) To be approved under this section, the resolution shall be approved by both of the following: (a) A majority of the votes cast by the holders of shares entitled to vote thereon, and if the proposed control share acquisition would, if fully carried out, result in any action which would require a vote as class or series, by a majority of the votes cast by the holders of shares of each such class or series entitled to vote thereon. (b) A majority of the votes cast by the holders of shares entitled to vote and a majority of the votes cast by the holders of shares of each class or series entitled to vote as a class or series, excluding all interested shares. 450.1799 [REDEMPTION; DISSENTERS' RIGHTS, NOTICE OF; FAIR VALUE]. - (1) If authorized in an issuing public corporation's articles of incorporation or bylaws before a control share acquisition has occurred, control shares acquired in a control share acquisition, with respect to which no acquiring person statement has been filed with the issuing public corporation, may, at any time during the period ending 60 days after the last acquisition of control shares or the power to direct the exercise of voting power of control shares by the acquiring person, be subject to redemption by the corporation at the fair value of the shares pursuant to the procedures adopted by the corporation. (2) If authorized in a corporation's articles' or bylaws before a control share acquisition has occurred, after an acquiring person statement has been filed and after the meeting at which the voting rights of the control shares acquired in a control share acquisition are submitted to the shareholders, the shares are subject to redemption by the corporation at the fair value of the shares pursuant to the procedures adopted by the corporation unless the shares are accorded full voting rights by the shareholders as provided in section 798. -5- (3) Unless otherwise provided in a corporation's articles of incorporation or bylaws before a control share acquisition has occurred, in the event control shares acquired in a control share acquisition are accorded full voting rights and the acquiring person has acquired a majority of all voting power of the corporation, shareholders of the issuing public corporation, other than the acquiring person, have dissenters' rights as provided in this section. (4) As soon as practicable after such events have occurred, the board of directors shall cause a notice to be sent to all shareholders of the corporation advising them that they have dissenters' rights to receive the fair value of their shares and making an offer to pay for the shares at a specified price deemed by the corporation to be the fair value. The issuing public corporation and the shareholders shall have 2 all further rights as are provided in this act. (5) As used in this section, "fair value" means a value not less than the highest price paid per share by the acquiring person in the control share acquisition. (Last amended by P.A. 121, L. '89, eff. 10-1-89.) -6- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS ARTICLE SEVENTH of the certificate of incorporation of the registrant eliminates the personal liability of directors to the registrant or its shareholders for monetary damages for breach of fiduciary duty as a director; provided, however, that such elimination of the personal liability of a director of the registrant does not apply to (i) any breach of the director's duty of loyalty to the registrant or its shareholders, including, but not limited to, any appropriation, in violation of his duties, of any business opportunity of the registrant, (ii) acts or omissions which involve intentional misconduct or a knowing violation of law, (iii) actions prohibited under Section 174 of the Delaware General Corporation Law (i.e., liabilities imposed upon directors who vote for or assent to the unlawful payment of dividends, unlawful repurchases or redemption of stock, unlawful distribution of assets of the registrant to the Shareholders without the prior payment or discharge of the registrant's debts or obligations, or unlawful making or guaranteeing of loans to directors), or (iv) any transaction from which the director derived an improper personal benefit. In addition, Article Ninth of the registrant's certificate of incorporation, as amended, provides that the registrant shall indemnify its corporate personnel, directors and officers to the fullest extent permitted by the Delaware General Corporation Law, as amended. Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. Section 145 further provides that a corporation may indemnify a person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to above, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. -123- ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES The following is a list of all exhibits filed as part of this registration statement:
Exhibit Number Exhibit Description -------------- ------------------- 2.1 Agreement and plan of merger, as amended, dated February 18, 2000 between TekInsight, TekInsight Services and Data Systems (incorporated by reference from Form 8-K filed February 29, 2000, SEC File No. 1-11568) 3.1 Amended certificate of incorporation (incorporated by reference from Form 8-K filed December 6, 1999) 3.2 Amended and restated bylaws of TekInsight 4.1 Form of certificate of designations for Series A preferred stock 5.1 Opinion of Nixon Peabody LLP regarding legality of shares issued (including consent) 8.1 Form of joint opinion of Nixon Peabody LLP and Bodman, Langley & Dahling LLP regarding tax matters (including consent) 9 Voting agreement between shareholders of Data Systems, TekInsight Services and TekInsight dated as of February 18, 2000 10.1 Form of indemnity agreement between TekInsight and its officers and directors 10.2 Affiliate agreement dated as of February 18, 2000 between Michael W. Grieves and Gregory Cocke, as principal shareholders, and Data Systems, TekInsight Services and TekInsight, as parties to the merger 10.3 Consulting Agreement between Steven J. Ross and BugSolver.Com, Inc. dated as of December 10, 1999 23.1 Consent of Nixon Peabody LLP (contained in Exhibit 5.1 and Exhibit 8.1) 23.2 Consent of Bodman, Longley & Dahling LLP (contained in Exhibit 8.1) 23.3 Consent of Feldman Sherb Horowitz & Co., P.C. 23.4 Consent of Grant Thornton LLP 23.5 Consent of Plante & Moran, LLP 23.6 Consent of Valuemetrics, Inc. 23.7 Consent of Valuation Counselors Group, Inc. 24 Power of Attorney (included on signature page) 99.1 Consent of Steven J. Ross to being named a director 99.2 Consent of Michael W. Grieves to being named a director 99.3 Consent of Walter J. Aspatore to being named a director 99.4 Form of amendment to 1992 employee stock option plan 99.5 Opinion of Financial Advisor, Valuation Counselors Group, Inc. 99.6 Opinion of Financial Advisor, Valuemetrics, Inc.
-124- ITEM 22. UNDERTAKINGS (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) of this section do not apply if the registration statement is on Form S-3, Form S-8 or Form F-3, and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the SEC by the registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. (2) That, for the purpose 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. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) If the registrant is a foreign private issuer, to file a post-effective amendment to the registration statement to include any financial statements required by ss. 210.3-19 of this chapter at the start of any delayed offering or throughout a continuous offering. Financial statements and information otherwise required by Section 10(a)(3) of the Act need not be furnished, provided that the registrant includes in the prospectus, by means of a post-effective amendment, financial statements required pursuant to this paragraph (a)(4) and other information necessary to ensure that all other information in the prospectus is at least as current as the date of those financial statements. Notwithstanding the foregoing, with respect to registration statements on Form F-3, a post-effective amendment need not be filed to include financial statements and information required by Section 10(a)(3) of the Act or ss.210.3-19 of this chapter if such financial statements and information are contained in periodic reports filed with or furnished to the SEC by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference on Form F-3. -125- (b) The undersigned registrant hereby undertakes that insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, 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. (c) The undersigned registrant hereby undertakes: (1) For purposes of determining any liability under the Securities Act of 1933, 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 Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, 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 the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (d) 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. -126- SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-4 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of New York, New York on May 1, 2000. TekInsight.Com, Inc. By: /s/ Arion Kalpaxis --------------------------------------- Arion Kalpaxis, Chief Operating Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Steven J. Ross and Arion Kalpaxis and each or any of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any amendment to this registration statement, and to file same, with all exhibits thereto and other documents in connection therewith, with the Commission, granting unto each said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or either of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------- ----- ---- /s/ Steven J. Ross President and Chief Executive - ----------------------------------- Officer May 1, 2000 Steven J. Ross /s/ Alexander Kalpaxis Chairman of the Board and Chief - ----------------------------------- Technology Officer May 1, 2000 Alexander Kalpaxis Chief Operating Officer, Acting Chief /s/ Arion Kalpaxis Financial Officer and Principal - ----------------------------------- Accounting Officer May 1, 2000 Arion Kalpaxis /s/ Brian D. Bookmeier Director May 1, 2000 - ----------------------------------- Brian D. Bookmeier /s/ Damon Testaverde Director May 1, 2000 - ----------------------------------- Damon Testaverde /s/ James Linesch Director May 1, 2000 - ----------------------------------- James Linesch
-127- INDEX TO EXHIBITS
Exhibit Number Exhibit Description -------------- ------------------- 3.2 Amended and restated bylaws of TekInsight 4.1 Form of certificate of designations for Series A preferred stock 5.1 Opinion of Nixon Peabody LLP regarding legality of shares issued (including consent) 8.1 Form of joint opinion of Nixon Peabody LLP and Bodman, Longley & Dahling LLP regarding tax matters (including consent) 9 Voting agreement between shareholders of Data Systems, TekInsight Services and TekInsight dated as of February 18, 2000 10.1 Form of indemnity agreement between TekInsight and its officers and directors 10.2 Affiliate agreement dated as of February 18, 2000 between Michael W. Grieves and Gregory Cocke, as principal shareholders, and Data Systems, TekInsight Services and TekInsight, as parties to the merger 10.3 Consulting Agreement between Steven J. Ross and BugSolver.Com, Inc. dated as of December 10, 1999 23.1 Consent of Nixon Peabody LLP (contained in Exhibit 5.1 and Exhibit 8.1) 23.2 Consent of Bodman, Longley & Dahling LLP (contained in Exhibit 8.1) 23.3 Consent of Feldman Sherb Horowitz & Co., P.C. 23.4 Consent of Grant Thornton LLP 23.5 Consent of Plante & Moran, LLP 23.6 Consent of Valuemetrics, Inc. 23.7 Consent of Valuation Counselors Group, Inc. 24 Power of Attorney (included on signature page) 99.1 Consent of Steven J. Ross to being named a director 99.2 Consent of Michael W. Grieves to being named a director 99.3 Consent of Walter J. Aspatore to being named a director 99.4 Form of amendment to 1992 employee stock option plan 99.5 Opinion of Financial Advisor, Valuation Counselors Group, Inc. 99.6 Opinion of Financial Advisor, Valuemetrics, Inc.
-128- EX-3.2 2 EXHIBIT 3.2 EXHIBIT 3.2 AMENDED AND RESTATED BY-LAWS OF TEKINSIGHT.COM, INC. (A Delaware Corporation) ARTICLE I. Offices SECTION 1. Principal Office. The principal office of the Corporation shall be located in New York, New York. SECTION 2. Registered Offices and Agent. The registered office of the Corporation in the State of Delaware is 15 North Street, Dover Delaware 19901. The registered agent shall be National Corporate Research, Ltd. SECTION 3. Other Offices. The Corporation may also have an office or offices other then said principal office a such place or places, either within or without the State of Delaware, as the Board of Directors shall from time to time determine or the business of the Corporation may require. ARTICLE II. Meetings of Stockholders SECTION 1. Place of Meetings. All meetings of the stockholders or the election of directors or for any other purpose shall be held at such place as may he fixed from time to time by the Board of Directors, or at such other place, either within or without the state of Delaware; as shall be designated from time to time by the Board of Directors. SECTION 2. Annual Meeting. The annual meeting of the stockholders of the Corporation for election of directors and for the transaction of such other business as may properly come before the meeting, shall be designated from time to time by the Board of Directors. SECTION 3. Special Meetings. Special meetings of the stockholders, unless otherwise prescribed by statute, maybe called at any time by the Board of Directors or the Chairman of the Board, if one shall have been elected, or the Vice-Chairman of the Board, if one shall have been elected, or the President and shall not be called by the stockholders of the Corporation. SECTION 4. Notice of Meetings. Notice of the place, date and hour of holding of each annual and special meeting of the stockholders and, unless it is the annual meeting, the purpose or purpose, thereof, shall be given personally or by mail in a postage prepaid envelope, not less than ten (10) nor more than sixty (60) days before the date of such meeting, to each Shareholder entitled to vote at such meeting, and, if mailed, it shall be directed to such shareholder at his address as it appears on she record of stockholders, unless he shall have filed with the Secretary of the Corporation a written request that notices to him be mailed at some other address, in which case it shall be directed to him at such other address. Any such notice for any meeting other then the annual meeting shall indicate that it is being issued at the direction of the Board of Directors, the Chairman of the Board, the Vice-Chairman of the Board, the President or the Secretary, whichever shall have called the meeting. Notice of any meeting of stockholders shall not be required to be given to any shareholder who shall attend such meeting in person or by proxy and shall not, prior to the conclusion of such meeting, protest the lack of notice thereof, or who shall, either before or after the meeting, submit a signed waiver of notice, in person or by proxy. Unless the Board of Directors shall fix a new record date for an adjourned meeting, notice of such adjourned meeting need nos be given if the time and place to which the meeting shall be adjourned were announced at the meeting at which the adjournment is taken. SECTION 5. Quorum. At all meetings of the stockholders the holders of a majority of the shares of the Corporation issued and outstanding and entitled to vote thereat shall be present in person or by proxy to constitute a quorum for the transaction of business, except as otherwise provided by statute. In the absence of a quorum, the holders on a majority of the shares present in person or by proxy and entitled to vote may adjourn the meeting from time to time. At any such adjourned meeting at which a quorum may be present any business may be transacted which might have been transacted at the meeting as originally called. SECTION 6. Organization. At each meeting of the stockholders, the Chairman of the Board, ii one shall have been elected, shall act as chairman of the meeting. In the absence of the Chairman of the Board or if one shall not have been elected, the Vice-Chairman of the Board, or in his absence or if one shall not have been elected, the President shall act as chairman of the meeting. The Secretary, or in his absence or inability to act, the person whom the chairman of the meeting shall appoint secretary of the meeting, shall act as secretary of the meeting and keep the minutes thereof. SECTION 7. Order of Business. The order of business at all meetings of the stockholders shall be determined by the chairman of the meeting SECTION 8. Voting. Except as otherwise provided by statutes or the Certificate of Incorporation, each holder of record of shares of the corporation having voting power shall be entitled at each meeting of the stockholders to one vote for each share standing in his name on the record of stockholders of the Corporation. (a) on the date fixed pursuant to the provisions of Section 6 of Article V of these By-Laws as the record date for the determination of the stockholders who shall be entitled to notice of and to vote at such meeting; or (b) if no such record date shall have been so fixed, then at the close of business on the day next preceding the day on which notice thereof shall be given. -2- Each shareholder entitled to vote at any meeting of the shareholders may authorize another person or persons to act for him by a proxy signed by such shareholder or his attorney-in-fact. Any such proxy shall be delivered to the secretary of such meeting at or peter to the time designated in the order of business for so delivering such proxies, except as otherwise provided by statute or the Certificate of Incorporation or these By-Laws, any corporate action to be taken by vote of the stockholders shall be authorized by a majority of the votes cast at a meeting of stockholders by the holders of shares present in person or represented by proxy and entitled to vote on such action. Unless required by statute, or determined by the chairman of the meeting to be advisable, the vote on any question need not be by ballot. On a vote by ballot, each ballot shall be signed by the shareholder acting, or by his proxy, if there be such proxy, and shall state the number of shares voted. SECTION 9. List of Stockholders. A list of stockholders as of the record date, certified by the Secretary of the Corporation or by the transfer agent for the Corporation, shall be produced at any meeting of the stockholders upon the request of any shareholder made at or prior to such meeting. SECTION 10. Inspectors. The Board of Directors may, in advance of any meeting of stockholders, appoint one or more inspectors to act at such meeting or any adjournment thereof. If any of the inspectors so appointed shall fail to appear or act on the request of any shareholder entitled to vote at such meeting, the chairman of the meeting shall, or if inspectors shall not have been appointed, the chairman of the meeting may, appoint one or more inspectors. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspector shall determine the number of shares outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the results and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the chairman of the meeting or any shareholder entitled to vote thereat, the inspector shall make a report in writing of any challenge, request or matter determined by them and shall execute a certificate of any fact found by him. No director or candidate for the office of director shall act as an inspector of an election of directors. Inspectors need not be stockholders. SECTION 11. Action by consent. Whenever stockholders are required or permitted to take any action by vote, such action may be taken without a meeting on written consent, setting forth the action so taken signed by the holders of a majority of the outstanding shares of the Corporation entitled to vote thereon. ARTICLE III. Board of Directors SECTION 1. General Powers. The business and affairs of the Corporation shall be managed under the direction of the Board of Directors. The Board of Directors may exercise all such authority and powers of the Corporation and do all such lawful act and things as are not by statute or the Certificate of Incorporation directed or required to be exercised or done by the stockholders. -3- SECTION 2. Number, Qualifications, Election and Term of Office. The number of directors constituting the Board of Directors shall be determined by the Board of Directors. Any decrease in the number of directors shall be effective at the time of the next succeeding annual meeting of the stockholders unless there shall be vacancies in the Board of Directors, in which case such decrease may become effective at any time prior to the next succeeding annual meeting to the extent of the number of such vacancies. All the directors shall be at least eighteen years of age. Directors need not be stockholders. Except as otherwise provided by statute or these By-Laws, the directors shall be elected at the annual meeting of the stockholders. At each meeting of the stockholders for the election of directors at which a quorum is present the persons receiving a plurality of the votes cast at such election shall be elected. Each director shall hold office until the next annual meeting of the stockholders and until his successor shall have been elected and qualified, or until his death, or until he shall have resigned, or have been removed, as hereinafter provided in these By-Laws. SECTION 3. Place of Meetings. Meeting of the Board of Directors shall be held at the principal office of the Corporation in the State of Delaware or at such other place, within or without such state, as the Board of Directors may from time to time determine or as shall be specified in the notice of any such meeting. SECTION 4. Regular Meetings. Regular meetings of the Board of Directors shall be held at such time and place as the Board of Directors may fix. If any day fixed for a regular meeting shall be a legal holiday at the place where the meeting is to be held, then the meeting which would otherwise be held on that day shall be held at the same hour on the next succeeding business day. Notice of regular meetings of the Board of Directors need not be given except as otherwise required by statute or these By-Laws. SECTION 5. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman or by a majority of the directors. SECTION 6. Notice of Meeting. Notice of each special meeting of the Board of Directors (and of each regular meeting for which notice shall be required) shall be given by the Secretary as hereinafter provided in this Section 6, in which notice shall be stated the time and place of meeting. Except as otherwise required by these By-Laws, such notice need not state the purposes of such meeting. Notice of each such meeting shall be mailed, postage prepaid, to each director, addressed to him at his residents or usual place of business, by first-class mail, at least five days before the day on which such meeting is to be held, or shall be sent addressed to him at such place by telegraph, cable, telex, telecopier or other similar means, or be delivered to him personally or be given to him by telephone, or ocher similar moans, at least forty-eight hours before the time at which such meeting is co be held. Notice of any such meeting need not be given to any director who shall, either before or after the meeting, submit a signed waiver of notice or who shall attend such meeting without professing, prior to or at its commencement, the lack of notice to him. -4- SECTION 7. Quorum and Mannner of Acting. A majority of the entire Board of Directors shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, and, except as otherwise expressly required by statute or the Certificate of Incorporation or these By-Laws, the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. In the absence of a quorum at any meeting of the Board of Directors, a majority of the directors present thereat may adjourn such meeting to another time and place. Notice of the time and place of any such adjourned meeting shall be given to the directors unless such time and place were announced at the meeting at which the adjournment was taken. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called. The directors shall act only as a Board and the individual directors shall have no power as such. SECTION 8. Organization. At each meeting of the Board of Directors, the Chairman of the Board, if one shall have been elected, shall act as the chairman of the meeting, or in his absence or if one shall not have been elected, the Vice-Chairman of the Board, or in his absence, or if one shall not have been elected, the President, if he or she is a director (or, in his absence, another director chosen by a majority of the directors present) shall act as chairman of the meeting and preside thereat. The Secretary (or, in his absence, any person - -- who shall be an Assistant Secretary, if any of them shall be present at such meeting --. appointed by the chairman) shall act as secretary of the meeting and keep the minutes thereof. SECTION 9. Resignations. Any director of the Corporation may resign at any time by giving written notice of his resignation to the Board of Directors or the Chairman of the Board or the Vice-Chairman of the Board or the President or the Secretary. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, immediately upon ins receipt. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 10. Vacancies. Subject to any expressed provision of the Certificate of Incorporation, any vacancy in the Board of Directors, whether arising from death, resignation, removal (with or whether cause), an increase in the number of directors or any other cause, may be filled by the vote of a majority of the directors then in office, though less then a quorum, or by the stockholders at the next annual meeting thereof or at a special meeting thereof. Stockholders of the Company may not apply to request that the Delaware Court of Chancery summarily order an election to be held to fill vacancies in the Board of Directors. Each director so elected shall hold office until the next meeting of the stockholders in which the election of directors is in the regular order of business and until his successor shall have been elected and qualified. SECTION 11. Removal of Directors. Except as otherwise provided by statute, any director may be removed, either with or without cause, at any time, by the stockholders at a special meeting thereof. Except as otherwise provided by statute, any director may be removed for cause by the Board of Directors at a special meeting thereof. -5- SECTION 12. Compensation. The Board of Directors shall have authority to fix the compensation, including fees and reimbursement of expenses, of directors for services to the Corporation in any capacity. SECTION 13. Committees. The Board of Directors may, by resolution passed by a majority of the entire Board of Directors, designate one or more committees, including an executive committee, each committee to consist of two or more of the directors of the Corporation. The Board of Directors may designate one or more directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. Except to the extent restricted by statute or the Certificate of Incorporation, each such committee, to the extent provided in the resolution creating it, shall have and may exercise all the authority of the Board of Directors. Each such committee shall serve at the pleasure of the Board of Directors and have such name as may be determined from time to time by resolution adopted by the Board of Directors. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors. SECTION 14. Action by Consent. Unless restricted by the Certificate of Incorporation, any action required or permitted to be taken by the Board of Directors or any committee thereof may participate in a meeting of the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board of Directors or such committee consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents thereto by the members of the Board of Directors or such committee shall be filed with the minutes of the proceedings of the Board of Directors or such committee. SECTION 15. Telephonic Meeting. Unless restricted by the Certificate of Incorporation or by statute, any one or more members of the Board of Directors any committee thereof may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each ocher an the same time. Participation by such means shall constitute presence in person at a meeting. ARTICLE IV. Officers SECTION 1. Number and Qualifications. The officers of the Corporation shall be elected by the Board of Directors and shall include the Chairman of the Board, elected from among the directors, and shall include a President and a Secretary, who need not be directors. If the Board of Directors wishes, it may also elect such other officers of the Corporation, including Vice-Chairman of the Board (including a chief operating officer, a chief financial officer, a chief technology officer, one or more Vice Presidents, a Treasurer, one or more Assistant Treasurers and one or more Assistant Secretaries), as may be necessary or desirable for the business of the Corporation. Any two or more offices may be held by the same person. Each officer shall hold office until the first meeting of the Board of Directors following the next annual meeting of stockholders, and until his successor shall have been elected and shall have qualified, or until his death, or until he shall have resigned or have been removed, as hereinafter provided in these By-Laws. -6- SECTION 2. Resignations. Any officer of the Corporation may resign at any time by giving written notice of his resignation to the Board of Directors or the Chairman the Board or the Vice-Chairman of the Board, if one shall be elected, or the President or the Secretary. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, immediately upon its receipt. Unless otherwise specified therein, the acceptance of any such resignation shall not be necessary to make it effective. SECTION 3. Removal. Any officer of the Corporation may be removed, either with or without cause, at any time, by the Board of Directors at any meeting thereof. SECTION 4. Chairman of the Board. The Chairman of the Board shall be an officer of the Corporation and shall be a member of the Board and, if present, shall preside at each meeting of the Board of Directors or the stockholders. He shall perform all duties incident to the office of Chairman, and shall perform such other duties as may from time to time be assigned to him by the Board of Directors. SECTION 5. Vice-Chairman of the Board. The Vice-Chairman of the Board, if one shall have been elected, shall be a member of the Board, an officer of the Corporation and, if present, shall preside at each meeting of the Board of Directors if no Chairman of the Board has been elected or if the Chairman of the Board is absent, or is unable or refuses to act. He shall advise and counsel the Chairman of the Board, and in the Chairman's absence, the President, and, in the President's absence, other executives of the corporation, and shall perform such ocher duties as may from time to time be assignee to him by the Board of Directors. SECTION 6. President. The President shall be the chief executive officer of the Corporation and shall have general and active control of its affairs and business and general supervision of its officers, agents and employees. He shall, in the absence of the Chairman of the Board and the Vice-Chairman of the Board or if neither has been elected, preside at each meeting of the Board of Directors (if he/she is a director) or the stockholders. He shall perform all duties incident to the office of the Chief Executive Officer and President and chief executive officer and such other duties as may from time to time be assigned to him by the Board of Directors. SECTION 7. Chief Operating Officer. The Chief Operating Officer shall perform all duties incident to the office of chief operating officer and such other duties as may from time to time be assigned to him/her by the Board of Directors. SECTION 8. Chief Financial Officer. The Chief Operating Officer shall perform all duties incident to the office of chief financial officer and such other duties as may from time to time be assigned to him/her by the Board of Directors. -7- SECTION 9. Chief Technology Officer. The Chief Technology Officer shall perform all duties incident to the office of chief technology officer and such other duties as may from time to time be assigned to him/her by the Board of Directors. SECTION 10. Vice President. Each Vice-President shall perform all such duties as from time to time may be assigned to him by the Board of Directors or the President. At the request of the President, or in his absence or in the event of his inability or refusal to act, the Vice-President, or if there shall be more that one, the Vice-Presidents in the order determined by the Board of Directors (or if there be no such determination, then the Vice-Presidents in the order of their election), shall perform the duties of the President, and, when so called, shall have the power of and be subject to the restrictions placed upon the President in respect of the performance of such duties. SECTION 11. Treasurer. The Treasurer shall (a) have charge and custody of, and be responsible for, all the funds and securities of the Corporation; (b) keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation; (c) deposit all moneys and other valuables to the credit of the Corporation in such depositaries as may he designated by the Board of Directors or pursuant to its direction; (d) receive, and give receipts for, moneys due and payable to the Corporation from any source whatsoever; (e) disburse the funds of the Corporation and supervise the investments of its funds, taking proper vouchers therefor; (f) render to the Board of Directors, whenever the Board of Directors may require, an account of the financial condition of the Corporation; and (g) in general, perform all duties incident to the office of the Treasurer and such other duties as from time to time may be assigned co him by the Board of Directors. SECTION 12. Secretary. The Secretary shall (a) keep or cause to be kept in one or more books provided for the purpose, the minutes of all meetings of the Board of Directors, the committees of the Board of Directors and the stockholders; (b) see that all notices are duly given in accordance with the provisions of these By-Laws and as required by law; -8- (c) be custodian of the records of the corporation and affix and attest the seal to all certificates for shares of the Corporation (unless the seal of the Corporation on such certificates shall be a facsimile, as hereinafter provided) and affix and attest the seal to all other documents to be executed on behalf of the Corporation under its seal; (d) see that the books, reports, statements, certificates and other documents and records required by law to be kept and filed are properly kept and filed; and (e) in general, perform all duties incident to the office of the secretary and such other duties as from time to time may be assigned to him by the Board of Directors. SECTION 13. The Assistant Treasurer. The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election), shall, in the absence of the Treasurer or in the event of his inability or refusal to act, perform the duties and exercise she powers of the Treasurer and shall perform such other duties as from time to time may be assigned by the Board of Directors. SECTION 14. The Assistant Secretary. The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election), shall, in the absence of the Secretary in the event of his inability or refusal to act, perform the duties and exercise the powers of the Secretary and shall perform such other duties as from time to time may be assigned by the Board of Directors. SECTION 15. Officers' Bonds or Other Security Assistant. If required by the Board of Directors, any officer of the Corporation shall give a bond or other security for the faithful performance of his duties, in such amount and with such surety or sureties as the Board of Directors may require. SECTION 16. Compensation. The compensation of the officers of the Corporation for their services as such officers shall be fixed from time to time by the Board of Directors. An officer of the Corporation shall not be prevented from receiving compensation by reason of the fact that he is also a director of the corporation. -9- ARTICLE V. Shares, etc. SECTION 1. Share Certificates. Each owner of shares of the Corporation shall be entitled to have a certificate, in such form as shall be approved by the Board of Directors, certifying the number of shares of the Corporation owned by him. The certificates representing shares shall be signed in the name of the Corporation by the Chairman of the Board or the Vice-Chairman of the Board or the President or a Vice-President and by the Secretary, an Assistant Secretary, the Treasurer or an Assistant Treasurer, and sealed with the seal of the Corporation (which seal may be a facsimile, engraved or printed); provided, however, that where any such certificate is countersigned by a transfer agent, or is registered by a registrar (other than the Corporation or one of its employees), the signatures of the Chairman of the Board, Vice-Chairman of the Board, President, Vice-President, Secretary, Assistant Secretary, Treasurer or Assistant Treasurer upon such certificates may be facsimiles, engraved or printed. In case any officer who shall have signed any such certificate shall have ceased to be such officer before such certificate shall be issued, it may nevertheless be issued by the Corporation with the same effect as if such officer were still in office at the date of their issue. When the Corporation is authorized to issue shares of more than one class, there shall be set forth upon the face or back of the certificate, (or the certificate shall have a statement that the Corporation will furnish to any shareholder upon request and without charge) a full statement of the designation, relative rights, preferences, and limitations of the shares of each separate class, or of the different shares within each class, authorized to be issued and, if the Corporation is authorized to issue any class of preferred shares in series, the designation, relative rights, preferences and limitations of each such series so far as the same have been fixed and the authority of the Board of Directors to designate and fix the relative rights, preferences and limitations of other series. SECTION 2. Books of Account and Record of Stockholders There shall be kept correct and complete books and records of account of all the business and transactions of the Corporation. There shall also kept, at the office of the Corporation, or at the office of its transfer agent, a record containing the names and addresses of all stockholders of the Corporation, the number of shares held by each, and the dates when they became the holders of record thereof. SECTION 3. Transfer of Shares Transfers of shares of the Corporation shall be made on the records of the Corporation only upon authorization by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or with a transfer agent, and on surrender of the certificate or certificates for such shares properly endorsed or accompanied by a duly executed stock transfer power and the payment of all taxes thereon. The person in whose name shares shall stand on the record of stockholders of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation. Whenever any transfer of shares shall be made for collateral security and not absolutely and written notice thereof shall be given to the Secretary or to a transfer agent, such fact shall be noted on the records of the Corporation. SECTION 4. Transfer Agents and Registrars. The Board of Directors may appoint, or authorize any officer or officers to appoint, one or more transfer agents and one or more registrars and may require all certificates for shares of stock to bear the signature of any of them. SECTION 5. Regulations. The Board of Directors may make such additional rules and regulations, not inconsistent with these By-Laws, as it may deem expedient concerning the issue, transfer and registration of certificates for shares of the Corporation. -10- SECTION 6. Fixing of Record Date. The Board of Directors may fix, in advance, a date not more than fifty (50) nor less than ten (10) days before the date when fixed for the holding of any meeting of the stockholders or before the last day on which the consent or dissent of the stockholders may be effectively expressed for any purpose whether a meeting, as the time as of which the stockholders entitled to notice of and to vote at such meeting or whose consent or dissent is required or may be expressed for any purpose, as the case may be, shall be determined, and all persons who were stockholders of record of voting shares at such time and no others, shall be entitled to notice of and to vote at such meeting or to express their consent or dissent, as the case may be. The Board of Directors may fix, in advance, a date not more than fifty nor less than ten days preceding the date fixed for the payment of any dividend or the making of any distribution or the allotment of rights to subscribe for securities of the Corporation, or for the delivery of evidence of rights or evidences of interests arising out of any change, conversion or exchange of shares or other securities, as the record date for the determination of the stockholders entitled to receive any such dividend, distribution, allotment, rights or interests, and in such case only the stockholders of record at the time so fixed shall be entitled to receive such dividend, distribution, allotment, rights or interests. SECTION 7. Lost, Destroyed or Mutilated Certificates. The holder of any certificate representing shares of the Corporation shall immediately notify the Corporation of any loss, destruction or mutilation of such certificate, and the Corporation may issue a new certificate in the place of any certificate theretofore issued by it which the owner thereof shall allege to have been lost or destroyed or which shall have been mutilated. The Board of Directors may, in its discretion, require such owner or his legal representatives to give to the Corporation a bond in such sum, limited or unlimited, and in such form and with such surety to sureties as the Board of Directors in its absolute discretion shall determine, to indemnify the corporation against any claim that may be made against it on account of the alleged loss or destruction of any such certificate, or the issuance of such new certificate. ARTICLE VI. Indemnification Except as may otherwise be specifically provided in the Certificate of Incorporation, no provision of the Certificate of Incorporation is intended by the Corporation to be construed as limiting, prohibiting, denying or abrogating any of the general or specific powers or rights conferred under the Delaware General Corporation Law upon the Corporation, upon its stockholders, bondholders and security holders, and upon its directors, officers and other corporate personnel, including, in particular, the power of the Corporation to furnish indemnification to directors and officers in the capacities defined and prescribed by the Delaware General Corporation Law and the defined and prescribed rights of said persons to indemnification as the same are conferred under the Delaware General Corporate Law. The Corporation shall, to the fullest extent permitted by the laws of the State of Delaware, including, but not limited to Section 145 of the Delaware General Corporation Law, as the case may be amended and supplemented, indemnify any and all persons whom it shall have power to indemnify under said Section or otherwise under Delaware law from and against any and all of the expenses, liabilities or other matters referred to or covered by said Section. The indemnification provisions contained in the Delaware General Corporation Law shall not be deemed exclusive of any other rights to which these indemnified may be entitled under any By-Law, agreement, resolution of stockholders or disinterested directors, or otherwise, and shall continue as to a person who has ceased to be a director, officer, employee or agent, both as to action in his official capacity and as to action in another capacity while holding such office, and shall inure to the benefit of the heirs, executors and administrators of such person. -11- ARTICLE VII. General Provisions SECTION 1. Dividends. Subject to the statute or and the Certificate of Incorporation, dividends upon the shares of the Corporation may be declared by the Board of Directors at any regular or special meeting. Dividends may be paid in cash, in property or in shares of the Corporation, unless otherwise provided by statute or the Certificate of Incorporation. SECTION 2. Reserves. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors may, from time to time, in its absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation or for such other purpose as the Board of Directors may think conducive to the interests of the Corporation. The Board of Directors may modify or abolish any such reserves in the manner in which it was created. SECTION 3. Fiscal Year. The fiscal year of the Corporation shall be fixed, and once fixed, may thereafter be changed, by resolution of the Directors. SECTION 4. Checks, Notes, Drafts Etc.. All checks, notes, drafts or other orders for the payment of money of the Corporation shall be signed, endorsed or accepted in the name of the Corporation by such officer, officers, person or persons as from time to time may be designated by the Board of Directors or by an officer or officers authorized by the Board of Directors to make such designation. SECTION 5. Execution of Contracts, Deeds, Etc.. The Board of Directors may authorize any officer or officers, agent or agents, in the name and on behalf of the Corporation to enter into or execute and deliver any and all deeds, bonds, mortgages, contracts and other obligations or instruments, and such authority may be general or confined to specific instances. SECTION 6. Voting of Stocks in Other Corporations. Unless otherwise provided by the resolution of the Board of Directors, the Chairman of the Board, the Vice-Chairman of the Board, the President or any Vice-President, from time to time may (or may appoint one or more attorneys or agents to) cast the vote which the Corporation may be entitled to cast as a shareholder or otherwise in any other corporation, any of whose shares or securities may be held by the Corporation, at meetings of the holders of the shares or other securities of such other corporations, or to consent in writing to any action by any such other corporation. In the event one or more attorneys or agents are appointed, the Chairman of the Board, the Vice-Chairman of the Board, the President or any Vice-President may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent. The Chairman of the Board, the Vice-Chairman of the Board, the President or any Vice-President may, or may instruct the attorneys or agents appointed to, execute or cause to be executed in the name and on behalf of the Corporation and under its seal or otherwise, such written proxies, consents, waivers or other instruments as may be necessary or proper in the premises. -12- ARTICLE VIII. Force and Effect of By-Laws These By-Laws ars subject to the provisions of the Delaware General Corporation Law and the Corporation's Certificate of Incorporation, as it may be amended from time to time. If any provision in these By-Laws is inconsistent with a provision in that Act or the Certificate of Incorporation, the provision of that Act or the certificate of incorporation shall govern. Wherever in these By-Laws references are made to more than one incorporator, director, or shareholder, they shall, if this is a sole incorporator, director, shareholder corporation, be construed to mean the solitary person; an all provision dealing with the quantum of majorities or quorums shall be deemed to mean the action by the one person constituting the Corporation. ARTICLE IX. Amendments These By-Laws may be amended or repealed or new By-Laws may be adopted at an annual or special meeting of stockholders at which a quorum is present or represented, by the vote of the holders of shares entitled to vote thereon; provided that notice of the proposed amendment or repeal or adoption of new By-Laws is contained in the notice of such meeting. These By-Laws may also be amended or repealed or new By-Laws may be adopted by the Board of Directors. By-Laws adopted by the Board of Directors may be amended or repealed by the stockholders. -13- EX-4.1 3 EXHIBIT 4.1 EXHIBIT 4.1 CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF SERIES A CONVERTIBLE PREFERRED STOCK AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF OF TEKINSIGHT.COM, INC. (Under Section 151 of the Delaware General Corporation Law) CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF SERIES A CONVERTIBLE PREFERRED STOCK AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF OF TEKINSIGHT.COM, INC. (Under Section 151 of the Delaware General Corporation Law) TekInsight.Com, Inc. (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware and formerly known as Tadeo Holdings, Inc. and as Universal Self Care, Inc., in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: That, pursuant to authority conferred upon the Board of Directors by the Certificate of Incorporation of said Corporation, said Board of Directors duly adopted a resolution providing for the authorization of a series of preferred stock consisting of 7,500,000 shares designated Series A Convertible Preferred Stock, which resolution is as follows: RESOLVED: That, pursuant to Article FOURTH of the Certificate of Incorporation of the Corporation, there be and hereby is authorized and created a series of Preferred Stock, hereby designated as the Series A Convertible Preferred Stock, to consist of 7,500,000, par value of $.0001 per share, having the designations, preferences, relative participating, optional and other special rights, qualifications, limitations and restrictions as hereinafter set forth (the "Certificate of Designations"): ARTICLE 1. DEFINITIONS SECTION 1.1. Definitions. The terms defined in this Article whenever used in this Amendment have the following respective meanings: (a) [Reserved] (b) "Affiliate" has the meaning ascribed to such term in Rule 12b-2 under the Securities Exchange Act of 1934, as amended. -2- (c) "Average Price" means the average of the closing sale prices per share of Common Stock as reported on the Nasdaq SmallCap Market for the ten (10) consecutive trading days ending on the trading day that immediately precedes the Closing Date. (d) "Business Day" means a day other than Saturday, Sunday or any day on which banks located in the State of New York are authorized or obligated to close. (e) "Capital Shares" means the Common Shares and any other shares of any other class or series of Common Stock, whether now or hereafter authorized and however designated, which have the right to participate in the distribution of earnings and assets (upon dissolution, liquidation or winding-up) of the Corporation. (f) "Closing Date" means the Closing Date as defined in the Merger Agreement. (g) "Common Shares" or "Common Stock" means shares of Common Stock, $.0001 par value, of the Corporation. (h) "Common Stock Issued at Conversion" when used with reference to the securities issuable upon conversion of the Series A Preferred Stock, means all Common Shares now or hereafter Outstanding and securities of any other class or series into which the Series A Preferred Stock hereafter shall have been changed or substituted, whether now or hereafter created and however designated. (i) "Conversion Date" means any day on which all or any portion of shares of the Series A Preferred Stock is converted in accordance with the provisions hereof. (j) "Conversion Notice" has the meaning set forth in Section 6.2. (k) "Conversion Rate" means on any date of determination the applicable rate (e.g., one-for-one) for the conversion of shares of Series A Preferred Stock into Common Shares on such day as set forth in Section 6.1. (l) "Corporation" means TekInsight.Com, Inc., a Delaware corporation, and any successor or resulting corporation by way of merger, consolidation, sale or exchange of all or substantially all of the Surviving Corporation's assets, or otherwise. (m) "Current Conversion Date" means the first anniversary of the Closing Date. (n) "Holders" means any Persons who become the registered owners of shares of Series A Preferred Stock pursuant to the terms and conditions of the Merger Agreement, or any Persons to whom the Series A Preferred Stock is subsequently transferred in accordance with the provisions hereof. (o) "Merger Agreement" means that certain Agreement and Plan of Merger, dated February 18, 2000, between the Corporation, Astratek, Inc. and Data Systems Network Corporation. -3- (p) "Outstanding" when used with reference to Common Shares or Capital Shares (collectively, "Shares"), means, on any date of determination, all issued and outstanding Shares, and includes all such Shares issuable in respect of outstanding scrip or any certificates representing fractional interests in such Shares; provided, however, that any such Shares directly or indirectly owned or held by or for the account of the Corporation or any Subsidiary of the Corporation shall not be deemed "Outstanding" for purposes hereof. (q) "Person" means an individual, a corporation, a partnership, an association, a limited liability company, a unincorporated business organization, a trust or other entity or organization, and any government or political subdivision or any agency or instrumentality thereof. (r) "SEC" means the United States Securities and Exchange Commission. (s) "SEC Investigation" means the formal private investigation by the SEC of accounting irregularities experienced by Data Systems Network Corporation ("DSN") in DSN's 1996 and 1997 fiscal years, and of which DSN was informed by the SEC on October 29, 1998. (t) "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the SEC thereunder, all as in effect at the time. (u) "Subsidiary" means any entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are owned directly or indirectly by the Corporation. (v) "Surviving Corporation" means Astratek, Inc., a New York corporation, and any successor or resulting corporation by way of merger, consolidation, sale or exchange of all or substantially all of the Corporation's asset, or otherwise. All references to "cash" or "$" herein means currency of the United States of America. ARTICLE 2. RESERVED ARTICLE 3. RANK The Series A Preferred Stock shall rank (i) prior to the Common Stock, except as specifically provided for herein; (ii) prior to any -4- class or series of capital stock of the Corporation hereafter created other than "Pari Passu Securities" (collectively, with the Common Stock, "Junior Securities"); and (iii) pari passu with any class or series of capital stock of the Corporation hereafter created specifically ranking on parity with the Series A Preferred Stock ("Pari Passu Securities"). ARTICLE 4. DIVIDENDS SECTION 4.1. Dividends. (a) The Holders shall be entitled to receive, out of funds legally available therefor, dividends in the same amount per share as dividends are paid with respect to the Common Stock (treating each share of Series A Preferred Stock as being equal to the number of shares of Common Stock into which each such share of Series A Preferred Stock could be converted pursuant to the provisions of Article 6 hereof, with such number determined as of the record date for the determination of Holders of Common Stock entitled to receive such dividend). (b) As long as any shares of the Series A Preferred Stock are Outstanding, no dividends shall be declared or paid or set apart for payment on Pari Passu Securities for any period unless dividends in the same amount per share as dividends are paid with respect to the Series A Preferred Stock and Common Stock (with the Series A Preferred Stock being treated along with the Common Stock in accordance with the requirements of Section 4.1(a)) have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment on the Series A Preferred Stock. (c) As long as any shares of the Series A Preferred Stock are outstanding, no dividends shall be declared or paid or set apart for payment or other distribution declared or made upon Junior Securities (other than the Common Stock) nor shall any Junior Securities be redeemed, purchased or otherwise acquired [other than a redemption, purchase or other acquisition of shares of Common Stock made for purposes of an employee agreement, or incentive or benefit plan (including a stock option plan), of the Corporation or any subsidiary (all such dividends, distributions, redemptions or purchases being hereinafter referred to as a "Junior Securities Distribution")] for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Corporation, directly or indirectly, unless in each case an equal amount of Junior Securities Distribution per share as dividends, distributions, redemptions or purchase amounts are paid with respect to the Series A Preferred Stock, any Pari Passu Securities and the Common Stock (with the Series A Preferred Stock being treated along with the Common Stock in accordance with the requirements of Section 4.1(a)). -5- ARTICLE 5. LIQUIDATION PREFERENCE SECTION 5.1. Liquidation. (a) If the Corporation shall commence the winding up, dissolution or liquidation of its affairs, and the Corporation shall liquidate, dissolve or wind up (each such event being considered a "Liquidation Event"), no distribution shall be made to the Holders of any shares of capital stock of the Corporation upon liquidation, dissolution or winding up unless prior thereto, the holders of shares of Series A Preferred Stock, subject to Article 5, shall have received the Liquidation Preference (as defined in Section 5.1(b)) with respect to each share. If upon the occurrence of a Liquidation Event, the assets and funds available for distribution among the Holders of the Series A Preferred Stock and Holders of Pari Passu Securities shall be insufficient to permit the payment to such Holders of the preferential amounts payable thereon, then the entire assets and funds of the Corporation legally available for distribution to the Series A Preferred Stock and the Pari Passu Securities shall be distributed ratably among such shares in proportion to the ratio that the Liquidation Preference payable on each such share bears to the aggregate Liquidation Preferences payable on all such shares. (b) For purposes hereof, the "Liquidation Preference" with respect to a share of the Series A Preferred Stock shall mean an amount equal to the Average Price (adjusted appropriately for stock splits). ARTICLE 6. CONVERSION OF SERIES A PREFERRED STOCK SECTION 6.1. Conversion. A Holder of any share or shares of Series A Preferred Stock shall be entitled, at any time and from time to time after the Current Conversion Date (unless a Liquidation Event has occurred prior to that date) to cause any or all of such shares to be converted into shares of Common Stock. The initial Conversion Rate for each share of Series A Preferred Stock shall be equal to one share of Series A Preferred Stock for one share of Common Stock, which Conversion Rate shall be adjusted as hereinafter provided. If a Holder elects to convert Series A Preferred Stock at a time when there are any declared and unpaid dividends or other amounts due on such shares, to the extent permitted by applicable law (which the Corporation shall use its best efforts to comply with in order to permit such payment of declared and unpaid dividends or other amounts), such dividends and other amounts shall be paid in full by the Corporation in connection with such conversion. SECTION 6.2. Exercise of Conversion Privilege. Conversion of the Series A Preferred Stock may be exercised, in whole or in part, by the Holder by telecopying an executed and completed notice of conversion in the form annexed hereto as Annex I (the "Conversion Notice") to the Corporation. Each date on which a Conversion Notice is telecopied to and received by the Corporation in accordance with the provisions of this Section 6.2 shall constitute a Conversion Date. The Corporation shall convert the Series A -6- Preferred Stock and issue the Common Stock Issued at Conversion effective as of the Conversion Date. The Conversion Notice also shall state the name or names (with addresses) of the persons who are to become the Holders of the Common Stock Issued at Conversion in connection with such conversion. The Holder shall deliver the shares of Series A Preferred Stock to the Corporation by express courier within five (5) days following the date on which the telecopied Conversion Notice has been transmitted to the Corporation. Upon surrender for conversion, the Series A Preferred Stock shall be accompanied by a proper assignment hereof to the Corporation or be endorsed in blank. As promptly as practicable after the receipt of the Conversion Notice and the surrender of the Series A Preferred Stock being converted as aforesaid, the Corporation shall (i) issue the Common Stock Issued at Conversion in accordance with the provisions of this Article 6, and (ii) cause to be mailed for delivery to the Holder (X) a certificate or certificate(s) representing the number of Common Shares to which the Holder is entitled by virtue of such conversion, (Y) cash, as provided in Section 6.3, in respect of any fraction of a Share issuable upon such conversion and (Z) cash in the amount of unpaid dividends as of the Conversion Date. Such conversion shall be deemed to have been effected at the time at which the Conversion Notice indicates so long as the Series A Preferred Stock shall have been surrendered as aforesaid at such time, and at such time the rights of the Holder of the Series A Preferred Stock, as such, shall cease and the Person and Persons in whose name or names the Common Stock Issued at Conversion shall be issuable shall be deemed to have become the Holder or Holders of record of the Common Shares represented thereby. The Conversion Notice shall constitute a contract between the Holder and the Corporation, whereby the Holder shall be deemed to subscribe for the number of Common Shares which it will be entitled to receive upon such conversion and, in payment and satisfaction of such subscription (and for any cash adjustment to which it is entitled pursuant to Section 6.4), to surrender the Series A Preferred Stock and to release the Corporation from all liability thereon. No cash payment aggregating less than $1.50 shall be required to be given to any Holder unless specifically requested by the Holder. SECTION 6.3. Fractional Shares. No fractional Common Shares or scrip representing fractional Common Shares shall be issued upon conversion of the Series A Preferred Stock. Instead of any fractional Common Shares which otherwise would be issuable upon conversion of the Series A Preferred Stock, the Corporation shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the Average Price (as adjusted for stock splits). No cash payment of less than $1.50 shall be required to be given unless specifically requested by the Holder. SECTION 6.4. Reclassification, Consolidation, Merger or Mandatory Share Exchange. At any time while the Series A Preferred Stock remains outstanding and any shares thereof have not been converted, in case of any reclassification or change of Outstanding Common Shares issuable upon conversion of the Series A Preferred Stock (other than a change in par value, or from par value to no par value per share, or from no par value per share to par value or as a result of a subdivision or combination of outstanding securities issuable upon conversion of the Series A Preferred Stock) or in case of any consolidation, merger or mandatory share exchange of the Corporation with or into another corporation (other than a merger or mandatory share exchange with another corporation in which the Corporation is a continuing corporation and which does not result in any reclassification or change, other than a change in par value, or from par value to no par value per share, or from no par value per share to par value, or as a result of a subdivision or combination of Outstanding Common Shares upon conversion of the Series A Preferred Stock), or in the case of any sale or transfer to another corporation of the property of the Corporation as an entirety or substantially as an entirety (any of which -7- shall be identified as a "Major Corporate Event"), the Corporation, or such successor, resulting or purchasing corporation, as the case may be, shall, without payment of any additional consideration therefor, execute a new Series A Preferred Stock providing that the Holder shall have the right to convert such new Series A Preferred Stock (upon terms and conditions not less favorable to the Holder than those in effect pursuant to the Series A Preferred Stock) and to receive upon such exercise, in lieu of each Common Share theretofore issuable upon conversion of the Series A Preferred Stock, the kind and amount of shares of stock, other securities, money or property receivable upon such reclassification, change, consolidation, merger, mandatory share exchange, sale or transfer by the Holder of one Common Share issuable upon conversion of the Series A Preferred Stock had the Series A Preferred Stock been converted immediately prior to such reclassification, change, consolidation, merger, mandatory share exchange or sale or transfer. The provisions of this Section 6.4 shall similarly apply to successive reclassifications, changes, consolidations, mergers, mandatory share exchanges and sales and transfers. SECTION 6.5. Reservation of Common Stock. The Corporation shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for issuance upon the conversion of Series A Preferred Stock as herein provided, free from any preemptive rights or other obligations, such number of shares of Common Stock as shall from time to time be issuable upon the conversion of all the Series A Preferred Stock then outstanding. The Corporation shall prepare and shall use its best efforts to obtain and keep in force such governmental or regulatory permits or other authorizations as may be required by law, and shall comply with all requirements as to registration, qualification or listing of the Common Stock, in order to enable the Corporation lawfully to issue and deliver to each Holder of record of Series A Preferred Stock such number of shares of its Common Stock as shall from time to time be sufficient to effect the conversion of all Series A Preferred Stock then outstanding and convertible into shares of Common Stock. SECTION 6.6. Adjustments. The Conversion Rate in effect, or the number of shares of Common Stock into which the Series A Preferred Stock is convertible, from time to time shall be subject to adjustment as follows: (a) Stock Dividends, Subdivisions and Combinations. Upon the issuance of additional shares of Common Stock as a dividend or other distribution on outstanding Common Stock (unless also distributed to Holders of Series A Preferred Stock in accordance with Section 4.1(a)), the subdivision of outstanding shares of Common Stock into a greater number of shares of Common Stock, or the combination of outstanding shares of Common Stock into a smaller number of shares of Common Stock, the Conversion Rate shall, simultaneously with the happening of such dividend, distribution, subdivision or combination be adjusted by multiplying the then effective Conversion Rate by a fraction, the numerator of which shall be the number of shares of Common Stock Outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock Outstanding immediately after such event. An adjustment made pursuant to this Section 6.6(a) shall be given effect, in the -9- case of payment of such a dividend or distribution, as of the record date for the determination of stockholders entitled to receive such dividend or distribution (on a retroactive basis) and in the case of a subdivision or combination shall become effective immediately as of the effective date thereof. (b) Other Adjustments. (i) In event the Corporation shall make or issue, or fix a record date for the determination of Holders of Common Stock entitled to receive a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, then and in each such event lawful and adequate provision shall be made so that the Holders shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the number of securities of the Corporation which they would have received had their Series A Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the respective Conversion Date, retained such securities receivable by them as aforesaid during such period, giving application to all adjustments called for during such period under this Section 6.6 as applied to such distributed securities. (ii) If the Common Stock issuable upon the conversion of the Series A Preferred Stock shall be changed into the same or different number of shares of any class or classes of stock, whether by reclassification or otherwise (other than a subdivision or combination of shares or stock dividend, subdivision or combination provided for above, or a reorganization, merger, consolidation or sale of assets provided for in Section 6.4), then and in each such event the Holder shall have the right thereafter to convert such share into the kind and amount of shares of stock and other securities and property receivable upon such reclassification or other change, by Holders of the number of shares of Common Stock into which such shares of Series A Preferred Stock might have been converted immediately prior to such reclassification or change, all subject to further adjustment as provided herein. (iii) In the event that as a result of the SEC Investigation the Corporation or the Surviving Corporation is notified that the SEC Investigation will result in any form of monetary penalty or other assessment to be assessed against the Corporation or the Surviving Corporation for payment by either such company (the "Penalty"), the quotient found by dividing the dollar amount of the assessed Penalty by the number of shares of Series A Preferred Stock that became issuable to the Holders on the Closing Date shall be used as the numerator, and the Average Price shall be used as the denominator, of a ratio which when multiplied by the then applicable Conversion Rate shall result in an adjusted Conversion Rate which will be applicable to all outstanding shares of Series A Preferred Stock; provided, that to the extent that after further negotiation the announced Penalty is reduced, the Conversion Rate shall be further adjusted for all then outstanding shares of Series A Preferred Stock to reflect the actual amount of the Penalty paid at the time that the SEC Investigation results in a final order issued by the SEC. SECTION 6.7. Notices. In each case of an adjustment or readjustment of the Conversion Rate, the Corporation will furnish each registered Holder with a certificate, prepared by the President or Chief Financial Officer of the Corporation, showing such adjustment or readjustment, -9- and stating in reasonable detail the facts upon which such adjustment or readjustment is based. SECTION 6.8. No Impairment. The Corporation will not, by amendment of its Certificate of Incorporation, this Certificate of Designations, or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Article 6 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the Holders of the Series A Preferred Stock against unreasonable impairment. SECTION 6.9. Automatic Conversion. In the event that on the fifth anniversary of the Closing Date there are shares of Series A Preferred Stock outstanding (the "Mandatory Conversion Date"), all Series A Preferred Stock outstanding shall be converted to Common Stock at the then applicable Conversion Rate ("Automatic Conversion"). SECTION 6.10. Notice of Automatic Conversion. Notice of Automatic Conversion pursuant to Section 6.9 shall be provided by the Corporation to the Holder in writing (by registered mail or overnight courier at the Holder's last address appearing in the Corporation's security registry) not fewer than ten (10) nor more than thirty (30) days prior to the Mandatory Conversion Date. SECTION 6.11. Surrender of Series A Preferred Stock. Upon conversion of the Series A Preferred Stock pursuant to Sections 6.9, the Holder shall either deliver the Series A Preferred Stock by hand to the Corporation at its principal executive offices or surrender the same to the Corporation at such address by express courier. Issuance of the Common Stock upon Automatic Conversion of the Series A Preferred Stock shall be made by the Corporation to the Holder against receipt of the Series A Preferred Stock. SECTION 6.12. Reacquired Shares. Any shares of the Series A Preferred Stock acquired by the Corporation by reason of purchase, conversion or otherwise shall (upon compliance with any applicable provisions of the laws of the State of Delaware) have the status of authorized and unissued shares of Preferred Stock, unclassified as to series, and may be reissued as part of any series of Preferred Stock; provided, however, that no such shares shall be reissued or sold as Series A Preferred Stock. ARTICLE 7. VOTING RIGHTS SECTION 7.1. Voting Rights. (a) Except as otherwise expressly provided herein or as required by law, the Holder of each share of Series A Preferred Stock shall be entitled to vote on all matters for which Holders of Common Stock are entitled -10- to vote. Each share of Series A Preferred Stock shall entitle the Holder thereof to such number of votes per share as shall equal the number of shares of Common Stock into which each share of Series A Preferred Stock is convertible, determined as of the date for determination of holders of Common Stock entitled to vote with respect to such matter. Except as otherwise expressly provided herein (including, without limitation, the provisions of Article 8 hereof) or as required by law, the Holders of shares of Series A Preferred Stock and Common Stock shall vote together as a single class on all matters. (b) The Corporation shall provide each Holder of Series A Preferred Stock with prior notification of any meeting of the stockholders (and copies of proxy materials and other information sent to stockholders), which notice would be provided pursuant to the Corporation's by laws and the Delaware General Corporation Law ("GCL"). In the event of any taking by the Corporation of a record of its stockholders for the purpose of determining stockholders who are entitled to receive payment of any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire (including by way of merger, consolidation or recapitalization) any share of any class or any other securities or property, or to receive any other right, or for the purpose of determining stockholders who are entitled to vote in connection with any proposed liquidation, dissolution or winding up of the Corporation, the Corporation shall mail a notice to each Holder, at least ten (10) days prior to the consummation of the transaction or event, whichever is earlier), of the date on which any such action is to be taken for the purpose of such dividend, distribution, right or other event, and a brief statement regarding the amount and character of such dividend, distribution, right or other event to the extent known at such time. (c) To the extent that under the GCL the vote of the Holders of the Series A Preferred Stock, voting separately as a class or series as applicable, is required to authorize a given action of the Corporation, the affirmative vote or consent of the Holders of at least a majority of the shares of the Series A Preferred Stock represented at a duly held meeting at which a quorum is present or by written consent of a majority of the shares of Series A Preferred Stock (except as otherwise may be required under the GCL) shall constitute the approval of such action by the class. To the extent that under the terms of the Company's Certificate of Incorporation and/or the GCL Holders of the Series A Preferred Stock are entitled to vote on a matter with Holders of Common Stock, voting together as one class, each share of Series A Preferred Stock shall be entitled to a number of votes equal to the number of shares of Common Stock into which it is then convertible using the record date for the taking of such vote of stockholders as the date as of which the Conversion Rate is calculated. Holders of the Series A Preferred Stock shall be entitled to notice of all stockholder meetings or written consents (and copies of proxy materials and other information sent to stockholders) with respect to which they would be entitled to vote, which notice would be provided pursuant to the Corporation's bylaws and the GCL. -11- ARTICLE 8. PROTECTIVE PROVISIONS So long as shares of Series A Preferred Stock are outstanding, the Corporation shall not, without first obtaining the approval (by vote or written consent, as provided by the GCL) of the Holders of at least a majority of the then outstanding shares of Series A Preferred Stock: (a) alter or change the rights, preferences or privileges of the Series A Preferred Stock; (b) create any new class or series of capital stock having a preference over the Series A Preferred Stock as to distribution of assets upon liquidation, dissolution or winding up of the Corporation ("Senior Securities") or alter or change the rights, preferences or privileges of any Senior Securities so as to affect adversely the Series A Preferred Stock; (c) increase the authorized number of shares of Series A Preferred Stock; or (d) do any act or thing not authorized or contemplated by this Amendment which would result in taxation of the Holders of shares of the Series A Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as amended (or any comparable provision of the Internal Revenue Code as hereafter from time to time amended). In the event Holders of at least a majority of the then outstanding shares of Series A Preferred Stock agree to allow the Corporation to alter or change the rights, preferences or privileges of the shares of Series A Preferred Stock, pursuant to subsection (a) above, so as to affect the Series A Preferred Stock, then the Corporation will deliver notice of such approved change to the Holders of the Series A Preferred Stock that did not agree to such alteration or change (the "Dissenting Holders") and Dissenting Holders shall have the right for a period of thirty (30) days to convert pursuant to the terms of this Amendment as they exist prior to such alteration or change or continue to hold their shares of Series A Preferred Stock. ARTICLE 9. MISCELLANEOUS SECTION 9.1. Loss, Theft, Destruction of Series A Preferred Stock. Upon receipt of evidence satisfactory to the Corporation of the loss, theft, destruction or mutilation of shares of Series A Preferred Stock and, in the case of any such loss, theft or destruction, upon receipt of indemnity or security reasonably satisfactory to the Corporation, or, in the case of any such mutilation, upon surrender and cancellation of the Series A Preferred Stock, the Corporation shall make, issue and deliver, in lieu of such lost, stolen, destroyed or mutilated shares of Series A Preferred Stock, new shares of Series A Preferred Stock of like tenor. The Series A Preferred Stock shall be held and owned upon the express condition that the provisions of this Section 9.1 are exclusive with respect to the replacement of mutilated, destroyed, lost or stolen shares of Series A Preferred Stock and shall preclude any and all other -12- rights and remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement of negotiable instruments or other securities without the surrender thereof. SECTION 9.2. Who Deemed Absolute Owner. The Corporation may deem the Person in whose name the Series A Preferred Stock shall be registered upon the registry books of the Corporation to be, and may treat it as, the absolute owner of the Series A Preferred Stock for the purpose of receiving payment of dividends on the Series A Preferred Stock, for the conversion of the Series A Preferred Stock and for all other purposes, and the Corporation shall not be affected by any notice to the contrary. All such payments and such conversion shall be valid and effectual to satisfy and discharge the liability upon the Series A Preferred Stock to the extent of the sum or sums so paid or the conversion so made. SECTION 9.3. Notice of Certain Events. In the case of the occurrence of any event described in Sections 6.1, 6.4, 6.6 and 6.9 of this Certificate of Designations, the Corporation shall cause to be mailed to the Holder of the Series A Preferred Stock at its last address as it appears in the Corporation's security registry, at least twenty (20) days prior to the applicable record, effective or expiration date hereinafter specified (or, if such twenty (20) days notice is not practicable, at the earliest practicable date prior to any such record, effective or expiration date), a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, issuance or granting of rights, options or warrants, or if a record is not to be taken, the date as of which the Holders of record of Series A Preferred Stock to be entitled to such dividend, distribution, issuance or granting of rights, options or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up is expected to become effective, and the date as of which it is expected that Holders of record of Series A Preferred Stock will be entitled to exchange their shares for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale transfer, dissolution, liquidation or winding-up. SECTION 9.4. Register. The Corporation shall keep at its principal office a register in which the Corporation shall provide for the registration of the Series A Preferred Stock. Upon any transfer of the Series A Preferred Stock in accordance with the provisions hereof, the Corporation shall register such transfer on the Series A Preferred Stock register. The Corporation may deem the person in whose name the Series A Preferred Stock shall be registered upon the registry books of the Corporation to be, and may treat it as, the absolute owner of the Series A Preferred Stock for the purpose of receiving payment of dividends on the Series A Preferred Stock, for the conversion of the Series A Preferred Stock and for all other purposes, and the Corporation shall not be affected by any notice to the contrary. All such payments and such conversions shall be valid and effective to satisfy and discharge the liability upon the Series A Preferred Stock to the extent of the sum or sums so paid or the conversion or conversions so made. SECTION 9.5. Withholding. To the extent required by applicable law, the Corporation may withhold amounts for or on account of any taxes imposed -13- or levied by or on behalf of any taxing authority in the United States having jurisdiction over the Corporation from any payments made pursuant to the Series A Preferred Stock. SECTION 9.6. Headings. The headings of the Articles and Sections of this Amendment are inserted for convenience only and do not constitute a part of this Certificate of Designations. IN WITNESS WHEREOF, the undersigned has executed this Certificate of Designations this ___ day of __________, 2000. TEKINSIGHT.COM, INC. By:___________________________ Attest: ____________________________ Secretary ANNEX I [FORM OF CONVERSION NOTICE] TO: The undersigned owner of this Series A Convertible Preferred Stock (the "Series A Preferred Stock") issued by TekInsight.Com, Inc. (the "Corporation") hereby irrevocably exercises its option to convert __________ shares of the Series A Preferred Stock into shares of the common stock, $.0001 par value, of the Corporation ("Common Stock"), in accordance with the terms of the Certificate of Designations to the Corporation's Certificate of Incorporation for Series A Preferred Stock (the "Certificate"). The undersigned hereby instructs the Corporation to convert the number of shares of the Series A Preferred Stock specified above into Shares of Common Stock Issued at Conversion in accordance with the provisions of Article 6 of the Certificate. The undersigned directs that the Common Stock issuable and certificates therefor deliverable upon conversion, the Series A Preferred Stock recertificated, if any, not being surrendered for conversion hereby, together with any check in payment for fractional Common Stock, be issued in the name of and delivered to the undersigned unless a different name has been indicated below. All capitalized terms used and not defined herein have the respective meanings assigned to them in the Certificate. Dated:____________ _____________________________________ Signature Fill in for registration of Series A Preferred Stock: Please print name and address (including zip code number): - -------------------------------------------------------------------------------- -1- EX-5.1 4 EXHIBIT 5.1 Exhibit 5.1 437 Madison Avenue New York, New York 10022-7001 (212) 940-3000 Fax: (212) 940-3111 April 28, 2000 TekInsight.Com, Inc. 5 Hanover Square, 24th Floor New York, NY 10004 Ladies and Gentlemen: We have acted as counsel to TekInsight.Com, Inc., a Delaware corporation (the "Company"), in connection with the Registration Statement on Form S-4 (the "Registration Statement") filed by the Company with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"), relating to the offering of shares of Series A convertible preferred stock of the Company, par value $.0001 per share (the "Series A Preferred Stock"), to be issued in connection with the merger of Data Systems Network Corporation, a Michigan corporation ("DSNC"), into the Company's wholly-owned subsidiary, TekInsight Services,Inc., a Delaware corporation ("TSI"), pursuant to the Agreement and Plan of Merger by and among the Company, DSNC and TSI, dated as of February 18, 2000, as amended (the "Merger Agreement"), filed as Appendix 1 to the Prospectus/Proxy Statement (the "Prospectus/Proxy Statement") which forms a part of the Registration Statement. The Series A Preferred Stock is convertible into shares of the Company's common stock, par value $.0001 per share (the "Conversion Common Stock", and, together with the Series A Preferred Stock, the "Securities"). This opinion is being delivered to you in connection with the Registration Statement. In connection with the foregoing, we have examined the Registration Statement, including the Prospectus/Proxy Statement, the Merger Agreement and the Certificate of Designations for the Series A Preferred Stock (the "Certificate of Designations"). We also have examined originals or copies, certified or otherwise identified to our satisfaction, of such corporate records, certificates and other documents and have made such investigations of law as we have deemed necessary or appropriate as a basis for the opinions expressed below. As to questions of fact material to our opinions expressed herein, we have, when relevant facts were not independently established, relied upon certificates of, and information received from, the Company and/or representatives of the Company. We have made no independent investigation of the facts stated in such certificates or as to any information received from the Company and/or representatives of the Company and do not opine as to the accuracy of such factual matters. We also have relied, without investigation, upon certificates and other documents from, and conversations with, public officials. In rendering the following opinions, we have assumed, without investigation, the authenticity of any document or other instrument submitted to us as an original, the conformity TekInsight.Com, Inc. April 28, 2000 Page 2 to the originals of any document or other instrument submitted to us as a copy, the genuineness of all signatures on such originals or copies, and the legal capacity of natural persons who executed any such document or instrument at the time of execution thereof. Members of our firm involved in the preparation of this opinion are licensed to practice law in the State of New York and we do not purport to be experts on, or to express any opinion herein concerning, the laws of any other jurisdiction other than the laws of the State of New York. Based upon and subject to the foregoing, and the other qualifications and limitations contained herein, and after (a) the Commission shall have entered an appropriate order declaring effective the above-referenced Registration Statement, and (b) the shares of the Series A Preferred Stock shall have been and the Conversion Common Stock, upon conversion of the Series A Preferred Stock, shall be, if required, duly qualified or registered, as the case may be, for sale under applicable state securities laws, we are of the opinion that: 1. The Series A Preferred Stock, when issued in accordance with the Merger Agreement, will be duly authorized, validly issued, fully paid and non-assessable. 2. The Company has reserved for issuance upon conversion of the Series A Preferred Stock a sufficient number of shares of Conversion Common Stock. The Conversion Common Stock, when duly authorized and issued upon conversion of the Series A Preferred Stock, in accordance with the Certificate of Designations, at a conversion price of not less than the par value per share of the Conversion Common Stock, will have been duly authorized and, when executed, countersigned and delivered against the delivery of the shares of the Series A Preferred Stock therefor in accordance with the Certificate of Designations, will be validly issued, fully paid and non-assessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of our name as it appears under the caption "Legal Matters" in the Registration Statement. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission thereunder. We further consent to the filing of this opinion as an exhibit to applications to the securities commissioners of the various states of the United States, to the extent so required, in connection with the registration of the Securities. This opinion is intended solely for your benefit in connection with the transactions described above and, except as provided in the two immediately preceding paragraphs, may not be otherwise communicated to, reproduced, filed publicly or relied upon by, any other person or entity for any other purpose without our express prior written consent. This opinion is limited to the matters stated herein, and no opinion or belief is implied or may be inferred beyond the matters expressly stated herein. TekInsight.Com, Inc. April 28, 2000 Page 3 We wish to advise you that certain attorneys who are partners or employees of Nixon Peabody LLP own shares of the Company's common stock. Very truly yours, /s/ Nixon Peabody LLP -------------------------------- EX-8.1 5 EXHIBIT 8.1 EXHIBIT 8.1 NIXON PEABODY LLP 437 Madison Avenue, 25th Floor New York, New York 10004 Telephone: (212) 940-3000 Facsimile: (212) 940-3111 BODMAN, LONGLEY & DAHLING LLP 100 Renaissance Center, 34th Floor Detroit, Michigan 48243 Telephone: (313) 259-7777 Facsimile: (313) 393-7579 April __, 2000 Board of Directors TekInsight.Com, Inc 5 Hanover Square, 24th Floor New York, New York 10004 Board of Directors Data Systems Network Corporation 34705 W. 12 Mile Road, Suite 300 Farmington Hills, Michigan 48331 Gentlemen: Nixon Peabody LLP is acting as special tax counsel to TekInsight.Com, Inc., a Delaware corporation ("TekInsight"), and TekInsight Services, Inc, a Delaware corporation and a wholly-owned subsidiary of TekInsight ("TekInsight Services"), in connection with the merger ("Merger") of Data Systems Network Corporation, Inc., a Michigan corporation ("Data Systems"), with and into TekInsight or with and into TekInsight Services pursuant to an Agreement and Plan of Merger, dated as of February 18, 2000, as amended April 4, 2000 ("Merger Agreement"), by and among TekInsight, TekInsight Services, and Data Systems. Bodman, Longley & Dahling LLP is acting as special tax counsel to Data Systems in the same transaction. This is our joint federal income tax opinion. TekInsight proposes to file a registration statement on Form S-4 ("Registration Statement") with the Securities and Exchange Commission under the Securities Act of 1933, as amended ("1933 Act"), SEC File Number 333- ______, with respect to the Series A preferred stock $0.01 par value of TekInsight to be issued to holders of shares of common stock, par value $0.01 per share, of Data Systems ("Data Systems Common Stock") in connection with the Merger. In addition, Data Systems has prepared, and we have reviewed, a proxy statement that is contained in and made a part of the Registration Statement ("Proxy Statement/Prospectus"). In rendering the opinion set forth below we have relied upon the facts stated in the Proxy Statement/Prospectus, upon such other documents as we have deemed appropriate, and representations of TekInsight and Data Systems in the Merger Agreement and otherwise referred to in the Proxy Statement/Prospectus. We confirm that our opinion as to the material federal income tax consequences of the Merger is as expressed in that section of the TekInsight.Com, Inc. Data Systems Network Corporation April 24, 2000 Page -2- Proxy/Statement Prospectus captioned "MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER." Our opinion is subject to all of the assumptions, qualifications and limitations stated in the Proxy Statement/Prospectus (and including certain management representations that are assumed to be complete and accurate in all material respects to be provided by TekInsight and Data Systems to us prior to the effective time of the Merger). Each of our opinions is furnished to the board of directors of our respective clients solely for use in connection with the Registration Statement. Our opinion may not be used for any other purpose without our prior written consent. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firms under the caption "Legal Matters" in the Registration Statement. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the 1933 Act. Very truly yours, NIXON PEABODY LLP Very truly yours, BODMAN, LONGLEY & DAHLING LLP EX-9 6 EXHIBIT 9 EXHIBIT 9 VOTING AGREEMENT This VOTING AGREEMENT (the "Agreement"), dated as of February 18, 2000, among the undersigned stockholders (the "Stockholders") of Data Systems Network Corporation, a Michigan corporation ("DSNC"), Astratek, Inc., a New York corporation ("Astratek"), and TekInsight.Com, Inc., a Delaware corporation ("Tek"). STATEMENT OF PURPOSE A. Concurrently with the execution of this Agreement, DSNC, Astratek and Tek have entered into an Agreement and Plan of Merger (as the same may be amended from time to time, the "Merger Agreement"); B. Each Stockholder is the record and beneficial owner of the number of shares of DSNC's Common Stock set forth opposite its name on Schedule 1 attached hereto (the "Shares") C. The approval of the Merger Agreement by the shareholders of DSNC is a condition to the consummation of the Merger; D. In order to induce Astratek and Tek to enter into the Merger Agreement, the Stockholders wish to agree (i) to vote the Shares and any other such shares of capital stock of DSNC owned by them so as to facilitate consummation of the transactions contemplated by the Merger Agreement, (ii) not to transfer or otherwise dispose of any of the Shares, or any other shares of capital stock of DSNC acquired hereafter and prior to the Expiration Date (as defined below) and (iii) to deliver an irrevocable proxy to vote the Shares to Tek. NOW, THEREFORE, for good and valuable consideration, the receipt, sufficiency and adequacy of which is hereby acknowledged, the parties hereto agree as follows: 1. Representations of Stockholders. Each of the Stockholders represents and warrants (each as to himself or itself) to Astratek and Tek that (a) except for shares pledged to lending institutions in connection with bona fide loan transactions, in which case all voting rights relating to such shares are retained by the Stockholder, such Stockholder lawfully owns the Shares set forth opposite such Stockholder's name on Schedule 1 free and clear of all liens, claims, charges, security interests or other encumbrances and, except for this Agreement, there are no options, warrants or other rights, agreements, arrangements or commitments of any character to which such Stockholder is a party relating to the pledge, disposition or voting of any shares of capital stock of DSNC and there are no voting trusts or voting agreements with respect to such Shares, (b) such Stockholder does not own any shares of Common Stock other than such Shares and does not have any options (other than employee stock options), warrants or other rights to acquire any additional shares of capital stock of DSNC or any security exercisable for or convertible into shares of capitol stock of DSNC, and (c) such Stockholder has full power and authority to enter into, execute and deliver this Agreement and to perform fully such Stockholder's obligations hereunder. This Agreement has been duly executed and delivered and constitutes the legal, valid and binding obligation of such Stockholder, enforceable in accordance with its terms. 2. Agreement To Vote Shares. Each of the Stockholders agrees during the term of this Agreement to vote such Stockholder's Shares and any New Shares (as defined in Section 6 hereof), and to cause any holder of record of such Shares or New Shares to vote (a) in favor of adoption and approval of the Merger Agreement, all agreements related to the Merger Agreement and any actions related thereto at any meeting of the stockholders of DSNC at which such matters are considered and at every adjournment thereof, (b) against any action or agreement that would compete with, impede, interfere with or attempt (i) to discourage the Merger Agreement, all agreements related to the Merger Agreement and any actions related thereto or (ii) inhibit the timely consummation of the Merger Agreement, all agreements related to the Merger Agreement and any actions related thereto, and (c) against any other merger, consolidation, business combination, reorganization, recapitalization, liquidation or sale or transfer of any material assets of DSNC or its subsidiaries; provided, that the foregoing clauses (b) and (c) shall not restrict any director of DSNC from taking any action as a director that such director reasonably believes after consultation with outside counsel is required to satisfy such director's fiduciary duty to stockholders of DSNC. Each Stockholder agrees to deliver to Tek upon request a proxy substantially in the form attached hereto as Schedule 2, which proxy shall be irrevocable during the term of this Agreement to the extent permitted under applicable law. 3. No Voting Trusts. During the term of this Agreement, each of the Stockholders agrees that such Stockholder will not, nor will such Stockholder permit any entity under such Stockholder's control, to deposit any of such Stockholder's Shares in a voting trust or subject any of their Shares to any arrangement with respect to the voting of such Shares other than agreements entered into with Tek. 4. No Proxy Solicitations. During the term of this Agreement, each of the Stockholders agrees that such Stockholder will not, nor will such Stockholder permit any entity under such Stockholder's control to, (a) solicit proxies or become a "participant" in a "solicitation," (as such terms are defined in Regulation 14A under the Securities Exchange Act of 1934 (the "1934 Act") in opposition to or competition with the Merger Agreement, all agreements related to the Merger Agreement and any actions related thereto, (b) otherwise encourage or assist any party in taking or planning any action which would compete with, impede, interfere with or attempt to discourage the Merger Agreement, all agreements related to the Merger Agreement and any actions related thereto or inhibit the timely consummation of the Merger Agreement, all agreements related to the Merger Agreement and any actions related thereto, (c) directly or indirectly encourage, initiate or cooperate in a stockholders' vote or action by consent of DSNC's stockholders in opposition to or in competition with the Merger Agreement, all agreements related to the Merger Agreement and any actions related thereto, or (d) become a member of a "group" (as such term is used in Section 13(d) of the 1934 Act) with respect to any voting securities of DSNC for the purpose of opposing, competing with or impeding the consummation of the Merger Agreement, all agreements related to the Merger Agreement and any actions related thereto; provided, that the foregoing shall not restrict any -2- director of DSNC from taking any action as a director that such director reasonably believed after consultation with outside counsel is required to satisfy such director's fiduciary duty to stockholders of DSNC. 5. Transfer And Encumbrance. On or after the date hereof and during the term of this Agreement, each of the Stockholders agrees not to transfer, sell, offer, exchange, pledge or otherwise dispose of or encumber any of such Stockholder's Shares or New Shares (other than the disposition in market transactions of New Shares acquired upon exercise of any employee stock options, on notice to Tek, as necessary to pay the tax liabilities incurred upon exercise of any such options). 6. Additional Purchases. Each of the Stockholders agrees that such Stockholder will not purchase or otherwise acquire beneficial ownership of any shares of DSNC Common Stock after the execution of this Agreement ("New Shares"), nor will any Stockholder voluntarily acquire the right to vote or share in the voting of any shares of DSNC Common Stock other than the Shares, unless such Stockholder agrees to deliver to Tek immediately after such purchase or acquisition an irrevocable proxy substantially in the form attached hereto as Schedule 2 with respect to such New Shares. Each of the Stockholders also severally agrees that any New Shares acquired or purchased by him or her shall be subject to the terms of this Agreement to the same extent as if they constituted Shares. 7. Securities Act Covenants and Representations. (a) Each Stockholder has been advised that the offering, sale and delivery of the Common Stock pursuant to the Merger Agreement will be registered under the Securities Act on a Registration Statement on Form S-4. Each Stockholder has also been advised, however, that to the extent such Stockholder is considered an "affiliate" of DSNC at the time the Merger Agreement is submitted to a vote of the stockholders of DSNC, any public offering or sale by such Stockholder of any shares of the Tek Preferred Stock received by Stockholder in the Merger will, under current law, require either (i) the further registration under the Securities Act of any shares of the Common Stock to be sold by Stockholder, (ii) compliance with Rule 145 promulgated by the SEC under the Securities Act or (iii) the availability of another exemption from such registration under the Securities Act. (b) Each Stockholder has read this Agreement and the Merger Agreement and has discussed their requirements and other applicable limitations upon such Stockholder's ability to sell, transfer or otherwise dispose of shares of the Tek Preferred Stock with such Stockholder's counsel or counsel for DSNC, to the extent such Stockholder believed necessary. (c) Each Stockholder also understands that stop transfer instructions will be given to DSNC's transfer agent with respect to the Tek Preferred Stock and that a legend will be placed on the certificates for the Tek Preferred Stock issued to such Stockholder, or any substitutions therefor, to the extent such Stockholder is considered an "Affiliate" of DSNC at the time the Merger Agreement is submitted to a vote of the shareholders of DSNC -3- 8. Specific Performance. Each party hereto acknowledges that it will be impossible to measure in money the damage to the other party if a party hereto fails to comply with any of the obligations imposed by this Agreement, that every such obligation is material and that, in the event of any such failure, the other party will not have an adequate remedy at law or damages. Accordingly, each party hereto agrees that injunctive relief or other equitable remedy, in addition to remedies at law or damages, is the appropriate remedy for any such failure and will not oppose the granting of such relief on the basis that the other party has an adequate remedy at law. Each party hereto agrees that it will not seek, and agrees to waive any requirement for, the securing or posting of a bond in connection with any other party's seeking or obtaining such equitable relief. 9. Entire Agreement. This Agreement supersedes all prior agreements, written or oral, among the parties hereto with respect to the subject matter hereof and contains the entire agreement among the parties with respect to the subject matter hereof. This Agreement may not be amended, supplemented or modified, and no provisions hereof may be modified or waived, except by an instrument in writing signed by all the parties hereto. No waiver of any provisions hereof by any party shall be deemed a waiver of any other provisions hereof by any such party, nor shall any such waiver be deemed a continuing waiver of any provision hereof by such party. 10. Notices. All notices, requests, claims, demands or other communications hereunder shall be in writing and shall be deemed given when delivered personally, upon receipt of a transmission confirmation if sent by telecopy or like transmission and on the next business day when sent by Federal Express, Express Mail or other reputable overnight comer service to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) If to Astratek and Tek: TekInsight.Com, Inc. 5 Hanover Square, 24th Floor New York, NY 10004 Telephone: (212) 271-8511 Telecopy: (212) 271-8083 Attention: Alexander Kalpaxis, Chief Technology Officer With a copy to: Nixon Peabody, LLP 437 Madison Avenue New York, NY 10022 Telephone: (212) 940-3106 Telecopy: (212) 940-3111 Attention: Peter W. Rothberg, Esq. (b) If to a Stockholder, to the address or telecopy number set forth for such Stockholder on the signature page hereof: -4- (c) If to DSNC: Data Systems Network Corporation 34705 W. 12 Mile Road, Suite 300 Farmington Hills, MI 48331 Telephone: (248) 489-7117 Telecopy: (248) 489-1007 Attention: Michael W. Grieves With a copy to: Bodmau, Longley & Dahling LLP 100 Renaissance Center, 34th Floor Detroit, MI 48243 Telephone: (313) 393-7597 Telecopy: (313) 393-7579 Attention: Robert I. Diehl, Jr. 11. Miscellaneous. (a) Governing Law. This Agreement shall be deemed a contract made under, and for all purposes shall be construed in accordance with, the laws of the State of New York, without reference to principles of conflicts of law. (b) Severability. It any provision of this Agreement or the application of such provision to any person or circumstances shall be held invalid or unenforceable by a court of competent jurisdiction, such provision or application shall be unenforceable only to the extent of such invalidity or unenforceability and the remainder of the provision held invalid or unenforceable and the application of such provision to persons or circumstances, other than the party as to which it is held invalid, and the remainder of this Agreement, shall not be affected. (c) Counterparts. This Agreement may be executed by facsimile in one or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. (d) Termination. This Agreement shall terminate upon the earliest to occur of (i) the conclusion of DSNC's meeting of shareholders held for the purpose of voting on the Merger Agreement (or, if adjourned, the conclusion of any subsequent reconvened meeting held for such purpose), and (ii) the date on which the Merger Agreement is terminated in accordance with its terms. (e) Additional Documentation. Each party hereto shall execute and deliver such additional documents as may be necessary or desirable to effect the transactions contemplated by this Agreement. -5- (f) Headings. All Section heading hereto are for convenience of reference any and are not part of this Agreement, and no construction or reference shall be derived therefrom. (g) Binding Effect. The obligations of the Stockholders set forth in this Agreement shall not be effective or binding upon any Stockholder until after such time as the Merger Agreement is executed and delivered by DSNC, Astratek and Tek, and the parties agree that there is not and has not been any other agreement, arrangement or understanding between the parties hereto with respect to the matters set forth herein. The obligations of each Stockholder who executes and delivers this Agreement shall be effective and binding regardless of the failure of other Stockholders to execute and deliver this Agreement. This Agreement shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns. (h) Expenses. The parties hereto shall each bear its own expenses incurred in connection with this Agreement and the transactions contemplated hereby, except that in the event of a dispute concerning the terms or enforcement of this Agreement, the prevailing party in any such dispute shall be entitled to reimbursement of reasonable legal fees and disbursements from the other party or parties to such dispute. (i) Capitalized Terms. All capitalized terms that are not otherwise defined in this Agreement shall have the meanings ascribed thereto in the Merger Agreement. [The remainder of this page is intentionally left blank.] -6- IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date first written above. DATA SYSTEMS NETWORK CORPORATION ATTEST: /s/ Michael Niles By: /s/ Michael W. Grieves --------------------------------- ---------------------------- Michael Niles, Secretary Name: Michael W. Grieves [Corporate Seal] Title: President TEKINSIGHT.COM, INC. ATTEST: /s/ Michael Niles By: /s/ Alexander Kalpaxis --------------------------------- ---------------------------- Michael Niles, Secretary Name: Alexander Kalpaxis [Corporate Seal] Title: Chief Technology Officer ASTRATEK, INC. ATTEST: /s/ Michael Niles By: /s/ Alexander Kalpaxis --------------------------------- ---------------------------- Michael Niles, Secretary Name: Alexander Kalpaxis [Corporate Seal] Title: President STOCKHOLDERS: /s/ Michael W. Grieves -------------------------------- Name: Michael W. Grieves -------------------------------- Name: Richard R. Burkhart /s/ Gregory D. Cocke -------------------------------- Name: Gregory D. Cocke -7- Schedule 1 Shares of DSNC Common Stock ------------ Michael W. Grieves 707,500 Richard R. Burkhart 140,625 Gregory D. Cocke 361,250 -8- Schedule 2 Irrevocable Proxy -9- EX-10.1 7 EXHIBIT 10.1 EXHIBIT 10.1 INDEMNITY AGREEMENT THIS INDEMNITY AGREEMENT, dated as of April 3, 2000 is made by and between TekInsight.Com, Inc., a Delaware corporation having an address at 5 Hanover Square, New York, NY 10004 (the "Company"), and [ ], an individual residing at [ ] (the "Indemnitee"). R E C I T A L S : A. The Company recognizes that competent and experienced persons are increasingly reluctant to serve as directors and officers of corporation unless they are protected by comprehensive liability insurance or indemnification, or both, due to increased exposure to litigation costs and risks resulting from their service to such corporations, and due to the fact that the exposure frequently bears no reasonable relationship to the compensation of such directors and officers; B. The statutes and judicial decisions regarding the duties of directors and officers are often difficult to apply, ambiguous or conflicting, and therefore fail to provide such directors and officers with adequate, reliable knowledge of legal risks to which they are exposed or information regarding the proper course of action to take; C. The Company and Indemnitee recognize that plaintiffs often seek damages in such large amounts and the costs of litigation may be so enormous (whether or not the case is meritorious), that the defense and/or settlement of such litigation is often beyond the personal resources of officers and directors; D. The Company believes that it is unfair for its directors and officers and those serving other entities at the request of the Company to assume the risk of huge judgments and other expenses which may occur in cases in which the director or officer received no personal profit and in cases where the director or officer acted in good faith; E. The Delaware General Corporation Law (the "DGCL"), under which the Company is organized, empowers the Company to indemnify its officers, directors, employees and agents by agreement and to indemnify persons who serve, at the request of the Company, as the directors, officers, employees or agents of other corporations or enterprises, and expressly provides that the indemnification provisions of the DGCL are not exclusive; F. The Board of Directors has determined that contractual indemnification as set forth herein is not only reasonable and prudent but necessary to promote the best interests of the Company and its stockholders; G. The Company has requested the Indemnitee to serve or continue to serve the Company free from undue concern for claims for damages arising out of or related to such services to the Company; NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth below, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Definitions. (a) Affiliate(s). Means any affiliate, subsidiary or other entity similarly related to Company. (b) Company. For purposes of this Agreement, "Company" shall include TekInsight.Com, Inc., as well as all of its Affiliates. (c) Expenses. For purposes of this Agreement. "Expenses" includes all direct and indirect costs of any type or nature whatsoever (including, without limitation, attorneys' fees and related disbursements, other out-of-pocket costs and compensation for time spent by the Indemnitee for which he or she is not otherwise compensated by the Company or any third party), incurred by the Indemnitee in connection with either (i) the investigation, defense or appeal of or being a witness or otherwise participating or preparing for a Proceeding or (ii) the establishment or enforcement of Indemnitee's right to indemnification under this Agreement, the DGCL or otherwise, including judgments, fines and amounts paid in settlement by or on behalf of Indemnitee. (d) Proceedings. For the purposes of this Agreement, "Proceeding" means any investigation or any threatened, pending or completed action, suit or other proceeding, whether civil, criminal, administrative, investigative or any other type whatsoever, whether instituted by, or in the right of, the Company or by any other person or entity to which the Indemnitee was or is a party or a witness or is otherwise involved or is threatened to be made a party or a witness or to be otherwise involved, by reason of the fact that he is or was a director, officer, employee, fiduciary or other agent of the Company, or who is or was serving at the request of the Company as a director, officer, employee, fiduciary, or agent of another corporation, partnership, joint venture, trust or other enterprise of the Company. (e) Reviewing Party. For purposes of this Agreement, "Reviewing Party" shall be the Special Independent Counsel. (f) Special Independent Counsel. For purposes of this Agreement, "Special Independent Counsel" shall mean counsel selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld) and who has not, unless waived by the Company and Indemnitee, otherwise performed services for the Company or Indemnitee, within the last three (3) years. The Company agrees to pay the reasonable fees of the Special Independent Counsel referred to above and to fully indemnify such counsel against, any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. 2 (g) Voting Securities. For purposes of this Agreement, "Voting Securities" shall mean any securities of the Company which vote generally in the election of directors. 2. Agreement to Serve. The Indemnitee has served and agrees to continue to serve as a member of the board of directors, an officer, employee and/or consultant, at his will and will serve in such capacities, so long as he is duly appointed or elected and qualified as such or until such time as he tenders his resignation in writing. 3. Basic Indemnity. (a) The Company shall indemnify the Indemnitee if the Indemnitee is or was a witness or a party to or is threatened to be made a party to or is otherwise involved in any Proceeding brought by any person or entity to the fullest extent permitted by law as soon as practicable, but in any event no later than ten (10) days after written demand is presented to the Company, against any and all Expenses, judgments, fines, penalties and amounts paid or owing in settlement (including all interest assessments and other charges paid or payable in connection with or in respect of such Expenses, judgments, fines, penalties or amounts paid in settlement) of such Proceeding. (b) Notwithstanding anything in this Agreement to the contrary, (i) the obligations of the Company under Section 3(a) shall be subject to the condition that the Reviewing Party shall not have determined in a writing stating the reasons therefor that Indemnitee would not be permitted to be indemnified under applicable law and (ii) the obligation of the Company to make an Expense Advance pursuant to Section 6 shall be subject to the condition that, if, when and to the extent that the Reviewing Party determines that Indemnitee would not be permitted to be so indemnified under applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expense Advance until such a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). (c) If the Reviewing Party determines that Indemnitee would not be permitted to be indemnified in whole or in part under applicable law (such determination to be made by the Reviewing Party independent of any position of the Company on any aspect of the indemnification including but not limited to the appropriateness of the amount of any settlement), Indemnitee shall have the right to commence litigation in any court, having subject matter jurisdiction thereof, and in which venue is proper, seeking an initial determination by the court or challenging any such determination by the Reviewing Party or any aspect thereof, and the Company hereby consents to service of any process and to appear in any such proceeding. Any determination by the Reviewing Party otherwise shall be conclusive and binding on the Company and Indemnitee. 3 4. Exceptions. Notwithstanding any other provision of this Agreement, the Company shall not be obligated pursuant to the terms of this Agreement to indemnify or make Expense Advances to Indemnitee with respect to any Proceeding arising out of acts, omissions or transactions for which Indemnitee is prohibited from receiving indemnification under applicable law. 5. Partial Indemnity Etc. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the Expenses, judgments, fines, penalties and amounts paid in settlement of a Proceeding but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. Moreover, notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any Proceeding or in defense of any issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. In connection with any determination by the Reviewing Party as to whether Indemnitee is entitled to be indemnified hereunder, the burden of proof shall be on the Company to establish that Indemnitee is not so entitled. 6. Advancement of Expenses. The Company shall advance all Expenses incurred by the Indemnitee in connection with the investigation, defense, settlement or appeal of any Proceeding for which the Indemnitee is entitled to such advances, and any such advances to be made hereunder shall be paid by the Company to or on behalf of the Indemnitee within ten (10) days following delivery of a written demand therefor by the Indemnitee to the Company. 7. Notice and Other Indemnification Procedures. (a) Promptly after receipt by the Indemnitee of notice of the commencement, or the threat of commencement, of any Proceeding, the Indemnitee shall, if the Indemnitee believes that indemnification with respect thereto may be sought from the Company under this Agreement, notify the Company of the commencement or threat of commencement thereof. The failure to notify the Company shall not affect the Company's obligations to indemnify otherwise than under this Agreement. (b) In the event the Company shall be obligated hereunder to provide indemnification for or make any Expense Advances with respect to the Expenses of any Claim, the Company, if appropriate, shall be entitled to assume the defense of such Claim upon the delivery to Indemnitee of written notice of the Company's election to do so. The Company shall keep the Indemnitee and his counsel (which shall be retained at the Company's expense) reasonably and currently apprised throughout such negotiations and/or defense of the status thereof and shall promptly pay the amount of all final judgments and agreed settlements, including attorneys' fees and costs. The Indemnitee shall cooperate with the Company in all reasonable ways in such negotiations and/or defense, but at the sole expense of the Company, and without incurring or being deemed to have incurred any obligation or liability of any kind, nature or description by reason thereof. 4 (c) The Company shall indemnify Indemnitee against any and all expenses (including attorneys' fees) and, if requested by Indemnitee, shall, within ten (10) days of such request, advance such expenses to Indemnitee which are incurred by Indemnitee in connection with any claim asserted against or action brought by Indemnitee for (i) indemnification hereunder or advance payment of Expenses by the Company under this Agreement (or any other agreement or the Company's Certificate of Incorporation or By-Laws now or hereafter in effect) relating to Proceedings and/or (ii) recovery under any director and officer liability insurance policies maintained by the Company, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advance, expense payment or insurance recovery, as the case may be. (d) For purposes of this Agreement, the termination of any claim, action, suit or proceeding by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. 8. Insurance. The Company may, but is not obligated to, obtain directors' and officers' liability insurance ("D&O Insurance") as may be or become available with respect to which the Indemnitee is named as an insured. Notwithstanding any other provision of this Agreement, the Company shall not be obligated to indemnify the Indemnitee for expenses, judgments, fines or penalties which have been paid directly to the Indemnitee by D&O Insurance. If the Company has D&O Insurance in effect at the time the Company receives from the Indemnitee any notice of the commencement of a Proceeding, the Company shall give prompt notice of the commencement of such Proceeding to the insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such Proceeding in accordance with the terms of such policy. 9. Settlement. The Company shall have no obligation under this Agreement to indemnify the Indemnitee for any amounts paid in settlement of any Proceeding effected without the Company's prior written consent. The Company shall not settle any claim in which it takes the position that the Indemnitee is not entitled to indemnification in connection with such settlement without the prior written consent of the Indemnitee, nor shall the Company settle any Proceeding in any manner which would impose any fine or any obligation on the Indemnitee, without the Indemnitee's prior written consent. Neither the Company nor the Indemnitee shall unreasonably withhold such consent to any proposed settlement; provided, however, that the Indemnitee shall not be obligated to consent to any proposed settlement unless in connection with such settlement the Indemnitee shall be fully released from all liability with respect to the relevant Proceeding either because such Proceeding was settled without liability to the Indemnitee or, if the Indemnitee shall have any liability with respect to such Proceeding, the Indemnitee shall be fully Indemnified hereunder from all Expenses resulting from such Proceeding and/or shall receive payment in the amount of such Expenses pursuant to D&O Insurance. 5 10. Nonexclusivity. The provisions for indemnification and advance of Expenses set forth in this Agreement shall not be deemed exclusive of any other rights which the Indemnitee may have pursuant to (i) any provision of law, the Company's Certificate of Incorporation (as amended or restated from time to time) or Bylaws, (ii) the order or judgment of any court in which a Proceeding is brought, (iii) the vote of the Company's stockholders or disinterested directors, or (iv) any other agreements or otherwise, both as to action in his or her official capacity and to action in another capacity while an Agent of the Company. The Indemnitee's rights hereunder shall continue after the Indemnitee has ceased acting as an Agent of the Company and shall inure to the benefit of the heirs, executors and administrators of the Indemnitee. To the extent that a change in applicable law (whether by statute or judicial decision) permits greater indemnification by agreement than would be afforded currently, it is the intent of the parties hereto that the Indemnitee shall enjoy by this Agreement the greater benefits afforded by such change. 11. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights. 12. Termination. No termination of this Agreement shall nullify any of the rights and obligations of either Indemnitee or the Company hereunder in respect of any matter occurring prior to the effective date of termination. 13. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever, the validity, legality and enforceability of the remaining provisions of the Agreement (including without limitation, all portions of any paragraphs of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby. 14. Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 15. Successors and Assigns. The terms of this Agreement shall bind, and shall inure to the benefit of, the heirs, administrators, successors (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Company) and assigns of the parties hereto. 6 16. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and receipted for by the party addressee, (ii) if delivered to a recognized overnight carrier, such as Federal Express; or (iii) if by facsimile transmission, upon receipt of a clear transmission report. Addresses for notice to either party are as shown on the first page of this Agreement, or as subsequently modified by written notice. At the same time any notice is given to the Company, copies shall be sent to: Nixon Peabody LLP 437 Madison Avenue New York, NY 10022 Attn: Peter W. Rothberg, Esq. 17. Governing Law. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of New York without giving effect to the principles of conflicts of laws. 18. Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same Agreement. 19. Exclusive Agreement. Except as expressly set forth herein, this Agreement shall supersede and replace in its entirety any prior written or oral agreement between the Company and the Indemnitee with regard to the subject matter hereof. 7 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. TEKINSIGHT.COM, INC. By:_______________________ _______________________ 8 EX-10.2 8 EXHIBIT 10.2 EXHIBIT 10.2 AFFILIATE AGREEMENT THIS AFFILIATE AGREEMENT (the "Agreement") is entered into as of this 18th day of February, 2000 by and between TekInsight.Com, Inc. a Delaware corporation ("Tek"), and the undersigned stockholder ("Stockholder") of DATA SYSTEMS NETWORK CORPORATION, a Michigan corporation ("DSNC"). This Agreement is entered into in connection with that certain Agreement and Plan of Merger, dated as of February 18, 2000 (the "Merger Agreement"), among Tek, Astratek, Inc., a New York corporation and a wholly-owned subsidiary of Tek ("Merger Sub"), and DSNC. The Merger Agreement provides for the merger (the "Merger") of DSNC with and into Merger Sub in a transaction in which issued and outstanding shares of common stock, $.01 par value per share, of DSNC (the "DSNC Common Stock") will be converted into shares of preferred stock, $.0001 par value per share, of Tek (the "Tek Preferred Stock") on the terms and conditions set forth in the Merger Agreement. Capitalized terms used herein and not defined herein shall have their defined meanings as set forth in the Merger Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual representations, warranties and covenants set forth herein, the parties agree as follows: 1. Tax and Accounting Treatment. Each Stockholder understands and agrees that it is intended that the Merger will be treated as a "reorganization" for federal income tax purposes. Stockholder further understands and agrees that Stockholder may be deemed to be an "Affiliate" of DSNC within the meaning of Rule 145 ("Rule 145") promulgated under the Securities Act of 1933, as amended (the "Securities Act"), although nothing contained herein should be construed as an admission of either such fact. 2. Reliance upon Representations, Warranties and Covenant. Stockholder has been informed that a reorganization for federal income tax purposes requires that a sufficient number of former stockholders of DSNC maintain a meaningful continuing equity ownership interest in Tek after the Merger. Each Stockholder understands that the representations and warranties and covenants set forth herein will be relied upon by Tek, DSNC, their respective counsel and accounting firms and other stockholders of DSNC. 3. Representations, Warranties and Covenants of each Stockholder. Each Stockholder represents, warrants and covenants as follows: (a) Such Stockholder has full power and authority to execute this Agreement, to make the representations, warranties and covenants herein contained and to perform such Stockholder's obligations hereunder. (b) Appendix A attached hereto sets forth all shares of DSNC Common Stock owned by such Stockholder, including all DSNC Common Stock as to which such Stockholder bas sole or shared voting or investment power and all rights and options to acquire DSNC Common Stock. (c) Such Stockholder will not sell, transfer, exchange, pledge, or otherwise dispose of, or make any offer or agreement relating to any of the foregoing with respect to, any shares of Tek Preferred Stock that such Stockholder may acquire in connection with the Merger or acquire upon exercise of any option or right to acquire Tek Preferred Stock, which option or right is acquired in connection with the Merger, or any securities that may be paid as a dividend or otherwise distributed thereon or with respect thereto or issued or delivered in exchange or substitution therefor (all such shares and other securities of Tek being herein sometimes collectively referred to as "Restricted Securities"), or any option, right or other interest with respect to any Restricted Securities, unless (i) such transaction is permitted pursuant to Rule 145(c) and 145(d) under the Securities Act (as described in Section 6 below), or (ii) counsel representing such Stockholder shall have advised Tek in a written opinion letter satisfactory to Tek and Tek's legal counsel, and upon which Tek and its legal counsel may rely, that no registration under the Securities Act would be required in connection with the proposed sale, transfer or other disposition, or (iii) a registration statement under the Securities Act covering the Tek Preferred Stock proposed to be sold, transferred or otherwise disposed of, describing the manner and terms of the proposed sale, transfer or other disposition, and containing a current prospectus, shall have been filed with the SEC and made effective under the Securities Act, or (iv) an authorized representative of the SEC shall have rendered written advice to such Stockholder (sought by such Stockholder or counsel to such Stockholder, with a copy thereof and all other related communications delivered to Tek) to the effect that the SEC would take no action, or that the staff' of the SEC would not recommend that the SEC take action, with respect to the proposed disposition if consummated. (d) Notwithstanding any other provision of this Agreement to the contrary, such Stockholder will not sell, transfer, exchange, pledge or otherwise dispose of, or in any other way reduce such Stockholder's risk of ownership or investment in, or make any offer or agreement relating to any of the foregoing with respect to any DSNC Common Stock or any rights, options or warrants to purchase DSNC Common Stock, or any Restricted Securities or other securities of Tek (i) during the 30-day period immediately preceding the Effective Time of the Merger and (ii) until such time after the Effective Time of the Merger as Tek has publicly released a report including the combined financial results of Tek and DSNC for a period of at least 30 days of combined operations of Tek and DSNC within the meaning of Accounting Series Release No. 130, as amended, of the SEC. Tek agrees to publish such financial results expeditiously in a manner consistent with its prior practices; provided, that nothing contained herein shall obligate Tek to publish its financial results other than on a quarterly basis. (e) Each Stockholder has, and as of the Effective Time of the Merger will have, no present plan or intention (a "Plan") to sell, transfer, exchange, pledge (other than in a pre-existing bona fide margin account) or otherwise dispose of, including a distribution by a partnership to its partners, or a corporation to its stockholders, or any other transaction which results in a reduction in the risk of ownership (any of the foregoing, a "Sale") of more than 50% of the shares of Tek Preferred Stock that Stockholder may acquire in connection with the Merger, or any securities that may be paid as a dividend or otherwise distributed thereof or with respect thereto or issued or delivered in exchange or substitution therefor. For purposes of the preceding sentence, shares of DSNC Common Stock (or the portion thereof, (i) with respect to which any applicable dissenters' rights are exercised, (ii) which are exchanged for cash in lieu of fractional shares of Tek Preferred Stock, or (iii) with respect to which a Sale (A) in a Related Transaction (as defined below) or (B) will occur prior to the Merger, shall be considered to be shares of DSNC Common Stock that are exchanged for Tek stock in the Merger and then disposed of pursuant to - 2 - a Plan. Stockholder is not aware of, or participating in, any Plan on the part of DSNC stockholders to engage in Sales of the shares of Tek Preferred Stock to be issued in the Merger such that the aggregate fair market value, as of the Effective Time of the Merger, of the shares subject to such Sales would exceed 50% of the aggregate fair market value of all shares of outstanding DSNC Common Stock immediately prior to the Merger. For purposes of the preceding sentence, shares of DSNC Common Stock (i) with respect to which any applicable dissenters' rights are exercised, (ii) which are exchanged for cash in lieu of fractional shares of Tek Preferred Stock or (iii) with respect to which a pre-Merger Sale occurs in a Related Transaction, shall be considered to be shares of DSNC Preferred Stock that are exchanged for Tek Preferred Stock in the Merger and then disposed of pursuant to a Plan. A Sale of Tek Preferred Stock shall be considered to have occurred pursuant to a Plan if, among other things, such Sale occurs in a Related Transaction. For purposes of this Section 3(e), a "Related Transaction" shall mean a transaction that is in contemplation of, or related or pursuant to, the Merger or the Merger Agreement. If any of such Stockholder's representations in this Section 3(e) ceases to be true at any time prior to the Effective Time of the Merger, such Stockholder shall deliver to each of DSNC and Tek, prior to the Effective Time of the Merger, a written statement to that effect, signed by such Stockholder. 4. Rule 144 and 145. From and after the Effective Time of the Merger and for so long as is necessary in order to permit Stockholder to sell the Tek Preferred Stock held by and pursuant to Rule 145 and, to the extent applicable, Rule 144 under the Securities Act, Tek will use its reasonable best efforts to file on a timely basis all reports required to be filed by it pursuant to Section 13 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), referred to in paragraph (c)(1) of Rule 144 under the Securities Act, in order to permit Stockholder to sell the Tek Preferred Stock held by it pursuant to the terms and conditions of Rule 145 and the applicable provisions of Rule 144. Any future disposition by Stockholder of Tek Preferred Stock will be accomplished in compliance with all applicable securities laws. Stockholder understands that Tek is under no obligation to register the sale, transfer or other disposition of any Restricted Securities by or on behalf of such Stockholder or to take any other action necessary in order to make compliance with an exemption from registration available. 5. Legend. Each Stockholder agrees that the following legend be placed upon the certificate evidencing ownership of Tek Preferred Stock: THESE SHARES ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AS SET FORTH IN RULES 144 AND 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, HYPOTHECATED, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO THE PROCEDURES DESCRIBED THEREIN. - 3 - 6. Limited Resales. Each Stockholder understands that, in addition to the restrictions imposed under Section 3 of this Agreement, the provisions of Rule 145 limit such Stockholder's public resales of Restricted Securities, in the manner set forth in subsections (a), (b) and (c) below, until such time as such Stockholder has beneficially owned, within the meaning of Rule 144(d), the Restricted Securities for a period of at least one year (or in some cases two years) after the date of the Merger, and thereafter if and for so long as such Stockholder remains an Tek affiliate: (a) Unless and until the restriction "cut-off" provisions of Rule 145(d)(2) or Rule 145(d)(3) set forth below become available, public resales of Restricted Securities may only be made by such Stockholder in compliance with the requirements of Rule 145(d)(1). Rule 145(d)(1) permits such resales only (i) while Tek meets the public information requirements of Rule 144(c), (ii) in "brokers' transactions" or in transactions with a "market maker" in accordance with Rule 144(f) and Rule 144(g) and (iii) where the aggregate number of Restricted Securities sold at any time together with all sales of Tek Preferred Stock sold for such Stockholder's account during the preceding three-month period does not exceed the greater of (x) 1% of the Tek Preferred Stock outstanding, (y) the average weekly volume of trading in Tek Preferred Stock on all national securities exchanges and/or reported through the automated quotation system of a registered securities association during the four calendar weeks preceding the date of receipt of the order to execute the sale or (z) the average weekly volume of trading in Tek Preferred Stock reported through the consolidated transaction reporting system contemplated by Rule llAa3-1 under the Exchange Act during the four-week period specified in subsection (y) above. (b) Each Stockholder may make unrestricted resales of Restricted Securities pursuant to Rule 145(d)(2) if (i) such Stockholder has beneficially owned (within the meaning of Rule 144(d) under the Securities Act) the Restricted Securities for at least one year after the Effective Time of the Merger, (ii) such Stockholder is not an affiliate of Tek and (iii) Tek meets the public information requirements of Rule 144(c). (c) Each Stockholder may make unrestricted resales of Restricted Securities pursuant to Rule 145(d)(3) if such Stockholder (i) has beneficially owned (within the meaning of Rule 144(d) under the Securities Act) the Restricted Securities for at least two years and (ii) is not and has not been for at least three months, an affiliate of Tek. (d) Tek acknowledges that the provisions of Section 3(c) of this Agreement will be satisfied as to any sale by the undersigned of the Restricted Securities pursuant to Rule 145(d) by delivery to Tek of a broker's letter and a letter from the undersigned with respect to that sale stating that each of the above-described requirements of Rule 145(d)(1) has been met or is inapplicable by virtue of Rule 145(d)(2) or Rule 145(d)(3); provided, that Tek has no reasonable basis to believe such sales were not made in compliance with such provisions of Rule 145(d). - 4 - 7. Notices. All notices, requests, demands or other communications which are required or may be given pursuant to the terms of this Agreement shall be in writing and shall be deemed to have been duly given upon receipt, if delivered by hand, by telecopy or telegram, or three days after deposit in the United States mail, postage prepaid, addressed to a party as follows: If to Tek: TekInsight.Com, Inc. 5 Hanover Square, 24th Floor New York, New York 10004 Telecopy: (212) 271-8083 Attention: Alexander Kalpaxis, Chief Technology Officer With a copy to: Nixon Peabody LLP 437 Madison Avenue New York, New York 10022 Telecopy: (212) 940-3111 Attention: Peter W. Rothberg, Esq. If to Stockholder: At the address set forth beneath such Stockholder's signature; or to such other address as any party may designate for itself by notice given as provided in this Agreement. 8. Termination. This Agreement shall be terminated and shall be of no further force and effect upon the termination of the Merger Agreement pursuant to Article VII thereof. 9. Binding Agreement. This Agreement will inure to the benefit of and be binding upon and enforceable against the parties and their successors and assigns, including administrators, executors, representatives, heirs, legatees and devises of each Stockholder and any pledgee holding Restricted Securities as collateral. 10. Waiver. No waiver by any party hereto of any condition or of any breach of any provision of this Agreement shall be effective unless in writing and signed by each party hereto. each party hereto. 11. Governing Law. This Agreement shall be governed by and construed, interpreted and enforced in accordance with the laws of the State of New York without giving effect to principles of conflicts of laws. 12. Attorneys' Fees. In the event of any legal action or proceeding to enforce or interpret the provisions hereof, the prevailing party shall be entitled to reasonable attorneys' fees, whether or not the proceeding results in a final judgment. - 5 - 13. Effect of Headings. The section headings herein are for convenience only and shall not affect the construction or interpretation of its Agreement. 14. Third Party Reliance. Counsel to and accountants for the parties shall be entitled to rely upon the representations, warranties and covenants contained in this Agreement. 15. Counterparts. This Agreement shall be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one instrument [The remainder of this page is intentionally left blank.] - 6 - IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. TEKINSIGHT.COM, INC. By: /s/ Alexander Kalpaxis ---------------------------------- Name: Alexander Kalpaxis Title: Chief Technology Officer STOCKHOLDERS: /s/ Michael W. Grieves ------------------------------------- Name: Michael W. Grieves ------------------------------------- Name: Richard R. Burkhart /s/ Gregory D. Cocke ------------------------------------- Name: Gregory D. Cocke DIRECTORS: ------------------------------------- ------------------------------------- ------------------------------------- OFFICERS: ------------------------------------- ------------------------------------- ------------------------------------- - 7 - APPENDIX A DSNC SECURITIES Shareholder: Number of Shares ---------------- Michael W. Grieves 707,500 DSNC Common Stock 707,500 Options to Purchase DSNC Common Stock June 1997 $8.75 8,000 October 1994 $4.75 10,000 Total Options to Purchase DSNC Common Stock - 18,000 - 8 - DSNC SECURITIES Shareholder Number of Shares ---------------- Richard R. Burkhart 140,625 DSNC Common Stock 140,625 Options to Purchase DSNC Common Stock May 1997 $9.38 1,000 May 1996 $4.00 1,000 May 1995 $3.00 1,000 Total Options to Purchase DSNC Common Stock - 3,000 - 9 - DSNC SECURITIES Shareholder Number of Shares ---------------- Gregory D. Cooke 361,250 DSNC Common Stock 361,250 Options to Purchase DSNC Common Stock October 1997 $13.25 6,250 July 1997 $12.00 5,000 September 1996 $4.00 15,000 October 1994 $4.75 7,500 Total Options to Purchase DSNC Common Stock- 33,750 - 10 - EX-10.3 9 EXHIBIT 10.3 EXHIBIT 10.3 CONSULTING AGREEMENT This CONSULTING AGREEMENT (this "Agreement"), made and entered into as of the 10th day of December, 1999, is by and between Steven Ross ("Consultant"), and BugSolver.Com, Inc., a Delaware Corporation (the "Company"). WITNESSETH THAT: WHEREAS, the Company desires to engage the Consultant in the capacity hereinafter stated, and the Consultant desires to enter into an engagement with the Company in such capacity for the period and on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth below, it is hereby covenanted and agreed by the Company and the Consultant as follows: 1. Consulting Period. The Company hereby agrees to employ the Consultant as its Chief Executive Officer, and the Consultant, in such capacity, agrees to provide services to the Company for the period (the "Consulting Period") beginning on the date first above written and ending, subject to Section 5, on March 31, 2000, which is the date 110 days after the date hereof (the "Termination Date"). This Agreement will automatically renew for successive ninety-day periods unless either party gives the other written notice of termination as described in Section 5 hereof, with each such renewal period being considered an extension of the Consulting Period. 2. Board of Directors. The Consultant hereby agrees to serve as a member of the Board of Directors of the Company. The Company agrees that, without limiting any rights of Consultant under the Company's certificate of incorporation, (a) Consultant's liability as a director shall be limited to the maximum extent permitted by law, (b) Consultant shall be indemnified and held harmless by the Company from and against any and all losses, liabilities, claims, expenses and the like incurred by or asserted against Consultant as a director, to the maximum extent permitted by law and (c) prior to the Company's filing of a registration statement with respect to an initial public offering, the Company shall have obtained Directors and Officers liability insurance providing insurance for the Consultant against liability as a director of the Company, and the maintenance of that insurance shall be a condition to Consultant so serving during the process of filing and having declared effective such registration statement. 3. Performance of Duties. The Consultant agrees that, during the Consulting Period, as requested by the Board of Directors of the Company, the Consultant will provide his best efforts, professional energy and talent to serving as Consultant and a board member in the best interests of the Company. Consultant will perform, among other duties consistent with the position of Chief Executive Officer, those tasks and duties listed on Exhibit A attached hereto. 4. Compensation. Subject to the terms and conditions of this Agreement, during the Consulting Period, the Consultant shall be compensated by the Company for his services as follows: (a) The Consultant shall receive a consulting fee of $20,000 for each month he is engaged as a Consultant by the Company under this Agreement (the "Consulting Fee"), payable on the first day of each month during the Consulting Period. (b) The Consultant shall receive, as a "signing bonus" in consideration for (i) his agreement to enter into this Agreement and (ii) his payment to the Company of $300 (which shall be credited against his first month's payment of the Consulting Fee), 30,000 shares of the Company's Common Stock, $.01 par value (the "Common Stock"), which shares shall constitute 1% of the number of shares of Common Stock initially to be issued to TekInsight.Com, Inc. (c) Following both (i) the first renewal of this Consulting Agreement for an additional Consulting Period and (ii) the successful completion of a private placement of securities by the Company the gross proceeds of which to the Company shall equal at least $10,000,000 (the "Private Placement"), the Company shall grant to the Consultant five-year options (the "Options") to purchase that number of shares of the Company's Common Stock as shall equal 4% of the outstanding shares of Company Common Stock immediately following completion of the Private Placement (the "Options"), which Options shall be exercisable at the price at which shares of the Common Stock are issued by the Company in the Private Placement. The Options shall vest one year from the closing date of the Private Placement (the "Vsting Date"); provided, that in the -------- event that the Company completes an initial public offering of its securities prior to the Vesting Date. the Options shall vest on the closing date of such initial public offering. Upon the termination of the Consulting Agreement by either party hereto, the Options which have not vested at such time shall automatically become null and void (d) The Consultant shall promptly be reimbursed for reasonable expenses incurred in the performance of his duties hereunder; provided, that he shall furnish an itemized account satisfactory to the Board of Directors in substantiation of such expenditures. (e) In connection with the issuance of shares of Common Stock and the granting of the Options to the Consultant, the Consultant agrees that he shall execute sand deliver to the Company such agreements and instruments as counsel to the Company shall deem necessary in order for the Company to comply with applicable federal and state securities laws. 5. Termination. This Agreement shall terminate upon the occurrence of any of the following: (a) Without Cause. Either party may terminate this Agreement upon thirty (30) days' written notice. (b) Discharge for Cause. The Board of Directors of the Company may terminate this Agreement if: (i) The Consultant is or becomes habitually addicted to drugs or alcohol. (ii) The Consultant discloses confidential information in violation of Section 6. (iii) The Consultant, voluntarily or involuntarily, steps down from the Board of Directors of the Company. (iv) The Company is directed by regulatory or governmental authorities to terminate the engagement of the Consultant or the Consultant engages in activities that result in actions to be taken by regulatory or governmental -2- authorities that have a material adverse effect on the Company. (v) The Consultant is convicted of or pleads nolo contendere to any felony involving moral turpitude or to any crime in connection with his duties hereunder which causes substantial detriment to the Company, but specifically shall not include traffic offenses. (vi) The Consultant breaches his duties under this Agreement in any material respect, and that breach is not cured within ten (10) days of notice thereof from the Company to the Consultant. Such notice will only be required for the first said breach. (vii) The Consultant engages in any misconduct that has a material adverse effect on the Company. (viii) The Consultant commits an act of fraud against the Company or any client of the Company. 6. Confidential Information. Except as may be required by the law or to enforce the provisions of this Agreement, the Consultant agrees (a) to keep secret and confidential indefinitely all non-public information concerning the Company and its affiliates which was acquired by or disclosed to the Consultant during the course of his engagement by the Company, including information relating to customers (including, without limitation, credit history, repayment history, financial information and financial statements), costs, operations, financial data and plans (whether past, current or planned) and (b) not to disclose the same, either directly or indirectly, to any other person, firm or business entity, or use it in any way other than to perform its obligations hereunder; provided, however, that the provisions of this Section 6 shall not apply to information (a) which is in the public domain, (b) which was disclosed to the Consultant by independent third parties who, to Consultant's knowledge, were not bound by an obligation of confidentiality or (c) which the Consultant is required to disclose in order to respond to a summons or subpoena or in connection with any litigation; and provided further, that the Company recognizes that the Consultant shall, during the course of his engagement with the Company, acquire certain general information regarding the financial condition, borrowing trends and business operations of the Company's customers and agrees that the provisions of this Section 6 shall not apply to the use of such general information; provided that the use of such information does not violate applicable Federal or state laws. The Consultant further agrees that he will not make any statement or disclosure of information gained by him in connection with the performance of duties under this Agreement which would be prohibited by applicable Federal or state laws. 7. Successors. This agreement shall be binding on, and inure to the benefit of, the Company and its successors and assigns and any person acquiring all or substantially all of the Company's assets and business, whether by merger, consolidation, purchase of assets or otherwise. 8. Nonalienation. The interests of the Consultant under this Agreement are not subject to the claims of his creditors, and may not otherwise be voluntarily or involuntarily assigned, alienated or encumbered. 9. Remedies. The Consultant acknowledges that the Company may be irreparably injured by a violation of Section 6, and agrees that the Company shall be entitled to an injunction restraining the -3- Consultant from any actual or threatened breach of Section 6, or to any other appropriate equitable remedy without bond or other security being required. 10. Waiver of Breach. The waiver by either the Company or the Consultant of a breach of any provision of this Agreement shall not operate as or be deemed a waiver of any subsequent breach by either the Company or the Consultant. 11. Notice. Any notice to be given hereunder by a party hereto shall be in writing and shall be deemed to have been given when delivered by hand or by facsimile with confirmation back, one day after delivery to an overnight courier of national reputation (for next day delivery) or three days after being deposited in the U.S. mail, certified or registered mail, postage prepaid: (a) to the Consultant addressed as follows: Steven Ross 2 Leesbury Court Newport Beach, CA 92660 (b) to the Company addressed as follows: BugSolver.Com, Inc. C/o TekInsight.Com, Inc. 5 Hanover Square New York, NY 10004 12. Amendment. This Agreement may be amended or cancelled by mutual agreement of the parties in writing without the consent of any other person and no person, other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof. 13. Applicable Law. The provisions of this Agreement shall be construed in accordance with the internal laws of the State of New York, without regard to its principles of conflict of laws. 14. Termination. All of the provisions of this Agreement shall terminate upon the expiration of the Consulting Period, as it may be extended, except that the obligations of Section 6 shall not terminate and shall remain in effect indefinitely. -4- IN WITNESS WHEROF, the Consultant and the Company have executed this Consulting Agreement on the ______ day of December, 1999. STEVEN ROSS BUGSOLVER.COM, INC. By:___________________________ By:_____________________________ Steven Ross -5- EXHIBIT A Steven Ross's duties, as a Consultant to BugSolver.Com, Inc, shall include the following: He shall devise and write a comprehensive business plan. He shall help arrange and supervise beta testing. He shall solicit and enter into vendor relationships. He shall supervise the marketing of the BugSolver Web site and develop a strategy to promote the BugSolver Web site. He shall actively participate in BugSolver's efforts to raise capital through a private placement. -6- EX-23.3 10 EXHIBIT 23.3 EXHIBIT 23.3 CONSENT OF INDEPENDENT AUDITORS We consent to the use in this Registration Statement of TekInsight.Com, Inc. on Form S-4 of our report dated September 15, 1999 relating to the consolidated balance sheets of TekInsight.Com, Inc.(formerly Tadeo Holdings, Inc. and Subsidiaries) as of June 30, 1999 and 1998 and the related statements of operations, changes in stockholders' equity and cash flows for the years ended June 30, 1999, 1998 and 1997. We also consent to the reference to us under the heading "Experts" in such Prospectus. /s/ FELDMAN SHERB HOROWITZ & CO., P.C. -------------------------------------- FELDMAN SHERB HOROWITZ & CO., P.C. Certified Public Accountants April 28, 2000 New York, New York EX-23.4 11 EXHIBIT 23.4 Exhibit 23.4 Consent of Independent Certified Public Accountants We have issued our report dated February 14, 2000, accompanying the financial statements of Data Systems Network Corporation contained in the Registration Statement on Form S-4 of TekInsight.Com, Inc. We consent to the use of the aformentioned report in the Registration Statement and to the use of our name as it appears under the caption "Experts." Grant Thornton LLP /s/ Grant Thornton Southfield, Michigan April 28, 2000 EX-23.5 12 EXHIBIT 23.5 EXHIBIT 23.5 CONSENT OF INDEPENDENT AUDITORS We consent to the use in this Registration Statement of TekInsight.Com, Inc. on Form S-4 of our report dated August 20, 1998, appearing in the Prospectus, which is part of this Registration Statement, and of our report dated August 20, 1998 relating to the financial statements schedules appearing elsewhere in this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. PLANTE & MORAN, LLP April 14, 2000 Southfield, Michigan EX-23.6 13 EXHIBIT 23.6 EXHIBIT 23.6 Consent of Expert We consent to the use of our firm's name, and the reference to our opinion, in the registration statement on Form S-4 to be filed with the Securities and Exchange Commission relating to the public offering by TekInsight of shares of its Series A convertible preferred stock in connection with the proposed merger of Data Systems Network Corporation with and into TekInsight Services, Inc., a wholly-owned subsidiary of TekInsight. VALUEMETRICS, INC. /s/ John L. Miscione ------------------------- Name: John L. Miscione Title: Managing Director Dated this ___ day of April, 2000 EX-23.7 14 EXHIBIT 23.7 EXHIBIT 23.7 Consent of Expert We consent to the use of our firm's name, and the reference to our opinion, in the registration statement on Form S-4 to be filed with the Securities and Exchange Commission relating to the public offering by TekInsight of shares of its Series A convertible preferred stock in connection with the proposed merger of Data Systems Network Corporation with and into TekInsight Services, Inc., a wholly-owned subsidiary of TekInsight. VALUATION COUNSELORS GROUP, INC. /s/ Raymond Ghelardi -------------------- Name: Raymond Ghelardi Title: Managing Director Dated this ___ day of April, 2000 EX-99.1 15 EXHIBIT 99.1 EXHIBIT 99.1 Consent to be Named as a Director I hereby consent to be named as a person who will become a director of TekInsight.Com, Inc. ("TekInsight") in the registration statement on Form S-4 to be filed with the Securities and Exchange Commission relating to the public offering by TekInsight of shares of its Series A convertible preferred stock in connection with the proposed merger of Data Systems Network Corporation with and into TekInsight Services, Inc., a wholly-owned subsidiary of TekInsight. /s/ Steven J. Ross ------------------ Name: Steven J. Ross Dated this ___ day of April, 2000 EX-99.2 16 EXHIBIT 99.2 EXHIBIT 99.2 Consent to be Named as a Director I hereby consent to be named as a person who will become a director of TekInsight.Com, Inc. ("TekInsight") in the registration statement on Form S-4 to be filed with the Securities and Exchange Commission relating to the public offering by TekInsight of shares of its Series A convertible preferred stock in connection with the proposed merger of Data Systems Network Corporation with and into TekInsight Services, Inc., a wholly-owned subsidiary of TekInsight. /s/ Michael W. Grieves ------------------------ Name: Michael W. Grieves Dated this ___ day of April, 2000 EX-99.3 17 EXHIBIT 99.3 EXHIBIT 99.3 Consent to be Named as a Director I hereby consent to be named as a person who will become a director of TekInsight.Com, Inc. ("TekInsight") in the registration statement on Form S-4 to be filed with the Securities and Exchange Commission relating to the public offering by TekInsight of shares of its Series A convertible preferred stock in connection with the proposed merger of Data Systems Network Corporation with and into TekInsight Services, Inc., a wholly-owned subsidiary of TekInsight. /s/ Walter J. Aspatore ------------------------- Name: Walter J. Aspatore Dated this ___ day of April, 2000 EX-99.4 18 EXHIBIT 99.4 EXHIBIT 99.4 UNIVERSAL SELF CARE, INC. 1992 EMPLOYEE STOCK OPTION PLAN Amendment No. I Pursuant to Article XI, the Plan is hereby amended, effective June 28, 2000, as follows: 1. The Plan is amended by deleting all references to the "Universal Self Care, Inc. 1992 Employee Stock Option Plan" and substituting in its place the "TekInsight.Com, Inc. 1992 Employee Stock Option Plan". The Plan is further amended by deleting all references to "Universal Self Care, Inc." and substituting in its place "TekInsight.Com, Inc". 2. Section 5(a) is amended by deleting the first sentence and substituting in its place the following: "The aggregate number of shares with respect to which Options may be granted under this Plan shall not exceed in the aggregate 2,000,000 shares." 3. Section 9 is amended by deleting the second sentence and substituting in its place the following: "The terms, provisions and benefits to Optionees of such substitute Options shall in all respects be identical to the terms, provisions and benefits to Optionees of the options of the other corporation on the date of substitution, except that such substitute Options shall provide for the purchase of shares of Company Stock, instead of shares of such other corporation; provided, however, that such substitute Options may have different terms, provisions or benefits than the options previously held by such Optionees in the other corporation as may be contained in any merger, consolidation or acquisition agreement or other similar agreement contractually binding the Company to assume such options in the other corporation." IN WITNESS WHEREOF, TekInsight.Com, Inc. has caused its duly authorized officer to execute this amendment on its behalf this ____ day of June 28, 2000. TekInsight.COM, Inc. By:____________________________ Title:_________________________ EX-99.5 19 EXHIBIT 99.5 February 8, 2000 Board of Directors Data Systems Network Corporation 34705 West Twelve Mile Road, Suite 300 Farmington Hills, MI 48331 Gentlemen: You have asked us to render an opinion (the "Opinion") regarding the fairness, from a financial point of view, of consideration to be paid to shareholders of Data Systems Network Corporation ("DSNC" or the "Company"), a Michigan corporation, in connection with the merger of the Company with and into Astratek, Inc. ("Merger Sub"), a wholly-owed subsidiary of TekInsight.Com, Inc., a Delaware corporation ("Tek"). We understand the structure of the proposed merger (the "Merger") to be as follows: 1. At the Effective Time, as defined below, and subject to and upon the terms and conditions of the Agreement and Plan of Merger among Tek, Astratek, and DSNC (the "Agreement") dated January ____, 2000, and subject to the applicable provisions of the New York Business Corporation Law ("New York Law") and the Michigan Business Corporation Act ("Michigan Law"), DSNC shall be merged with and into Merger Sub, the separate corporate existence of DSNC shall cease and Merger Sub shall continue as the surviving corporation. Merger Sub, as the surviving corporation after the Merger, is hereinafter sometimes referred to as the "Surviving Corporation." It is intended that the Merger shall qualify as a reorganization within the meaning of Section 368(a)(2)(D) of the Internal Revenue Code of 1986, as amended. 2. Subject to the revisions of the Agreement, the parties shall cause the Merger to be consummated by filing a Certificate of Merger with the Secretary of State of the State of New York in accordance with the relevant provisions of New York Law ("Certificate of Merger") and the filing of a Certificate of Merger with the Michigan Department of Consumer and Industry Services - Corporation; Securities and Land Development Bureau in accordance with the relevant provisions of Michigan Law ("Effective Time") as soon as practical on or after the Closing (as herein defined). The closing of the Merger (the "Closing") shall take place at the offices of Nixon Peabody LLP, 437 Madison Avenue, New York, New York 10022, at a time and date to be specified by the parties, which shall be no later than the second business day after the satisfaction or waiver of the conditions set forth in Article VI of the Agreement, or at such other time, date, and location as the parties agree in writing. Board of Directors Data Systems Network Corporation 34705 West Twelve Mile Road, Suite 300 Farmington Hills, MI 48331 Page 2 3. At the Effective Time, all the property, rights, privileges, powers, and franchises of DSNC and Merger Sub shall vest in the Surviving Corporation, and all the debts, liabilities and duties of DSNC and Merger Sub shall become the debts, liabilities, and duties of the Surviving Corporation. At the Effective Time, the separate existence of DSNC will cease and DSNC will be merged with and into Merger Sub. 4. Except as otherwise provided in the Agreement, each share of common stock, $.01 par value per share, of DSNC issued and outstanding three (3) days prior to the Effective Time (the "Outstanding DSNC Common Stock"), will be cancelled and extinguished and automatically converted into the number of shares (the "Exchange Ratio") of Series A Convertible Preferred Stock, $.0001 par value, of Tek (the "Tek Preferred Stock") equal to the quotient obtained by dividing $12,500,000 (the "Purchase Price") by the market value of Tek common stock, $.0001 par value (the "Tek Common Stock"). Notwithstanding the above, in the event that the market value of Tek Common Stock is equal to a price that is $5.00 or more but less than $7.00, the Purchase Price shall be adjusted to equal $16,000,000 with the result of such increase in the market value being an adjustment in the number of Tek Preferred Stock shares issuable to DSNC shareholders. In the event that the market value of Tek Common Stock is equal to $7.00 or more the Purchase Price shall be adjusted to equal $18,000,000 with the result of such increase in the market value being an adjustment in the number of Tek Preferred Stock shares issuable to DSNC shareholders. In the event that the market value of Tek Common Stock is less than $2.00 per share the Agreement can be terminated by either Tek or DSNC. The Merger is also subject to termination upon the mutual written consent by the Board of Directors of Tek and DSNC. 5. Holders of Tek Preferred Stock shall be entitled, as detailed in the Certificate of Designations, Preferences and Relative, Participating, Optional, or Other Special Rights of Series A Convertible Preferred Stock and Qualifications, Limitations, and Restrictions Thereof of TekInsight.Com, Inc. ("Preferred Agreement"), to receive dividends in the same amount per share as dividends paid to the holders of Tek Common Stock. As long as any shares of Tek Preferred Stock are outstanding, no dividends shall be declared or paid or set apart for payment of Tek Common Stock for any period unless dividends in the same amount per share are paid to the holders of Tek Preferred Stock. If Tek or Merger Sub shall commence the winding up, dissolution, or liquidation of its affairs, no distributions shall be made to the holders of any shares of capital stock of Tek unless holders of Tek Preferred Stock shall have received the Liquidation Preference, as defined in the Preferred Agreement. As defined in the Preferred Agreement, Tek Preferred Stock will commence being convertible into Tek Common Stock on the first (1st) anniversary of the Closing. Any shares of Tek Preferred Stock that have not been converted to Tek Common Stock prior to the fifth (5th) anniversary of the Closing will be mandatorily converted to Tek Common Stock, or redeemed for a cash payment equal to the market value per share. 6. The market value will equal the average closing sale price for one share of Tek Common Stock, as reported by the NASDAQ Smallcap Market, for the ten (10) consecutive trading days ending on the trading day that immediately precedes Board of Directors Data Systems Network Corporation 34705 West Twelve Mile Road, Suite 300 Farmington Hills, MI 48331 Page 3 the Closing; provided, that between the date of execution of the Agreement and the Closing, all outstanding options and warrants to acquire DSNC Common Stock that are exercisable prior to the Closing and which are not required to be assumed by Tek as a result of the Merger, will either be exercised or will be terminated on the Closing. To the extent that any such options or warrants are exercised no less than three (3) days prior to the Closing, for purposes of calculating the number of shares of Tek Preferred Stock to be issued to DSNC stockholders, the aggregate exercise price will be added to the Purchase Price (the "Adjusted Purchase Price") which now will be used in the Exchange Ratio quotient. The Exchange Ratio of DSNC Common Stock to Tek Preferred Stock will be adjusted by including the number of shares of DSNC Common Stock acquired upon such exercise in the outstanding DSNC Common Stock. 7. Each share of DSNC Common Stock held by DSNC or owned by Merger Sub, Tek, or any direct or indirect wholly owned subsidiary of DSNC or of Tek immediately prior to the Effective Time shall be canceled and extinguished without any conversion. No fraction of a share of Tek Preferred Stock will be issued by virtue of the Merger, but in lieu each holder of shares of DSNC Common Stock who would otherwise be entitled to a fraction of a share of Tek Preferred Stock shall receive from Tek an amount of cash equal to the product of (i) such fraction, multiplied by (ii) the market value. 8. At the Effective Time, each outstanding stock option under the Option Plan, as defined in the Agreement, shall be assumed by Tek. Each outstanding DSNC option shall be converted into an option, which shall be deemed to be vested as of the Effective Time, to purchase the same number of shares of Tek Preferred Stock. The exercise price for each such converted outstanding DSNC option shall be the quotient obtained by dividing the number of shares of DSNC Common Stock that are issued and outstanding three (3) days prior to the Closing which are converted at the Effective Time into one share of Tek Preferred Stock in accordance with the Exchange Ratio. Shares issued pursuant to options to purchase DSNC Common Stock under the Option Plan that are exercised prior to the date that is three business days prior to the Closing shall be converted into shares of Tek Preferred Stock in accordance to the Exchange Ratio. We were provided with copies of certain financial information, merger documents, and other agreements by the managements or representatives of the Company, Tek, and Merger Sub. We relied upon and assumed without independent verification, the accuracy and completeness of financial and other information provided to us. We have further assumed that all information furnished to us by the Company, Tek, and Merger Sub, and their representatives represented good faith efforts to describe the current and prospective status of the Company, Tek, and Merger Sub from an operational and financial point of view. A non-exhaustive list of these documents includes: 1. the Agreement and Plan of Merger by and among TekInsight.Com, Inc., Astratek, Inc., and Data Systems Network Corporation dated January ____, 2000; 2. the Certificate of Designations, Preferences and Relative, Participating, Optional or Other Special Rights of Series A Convertible Preferred Stock and Board of Directors Data Systems Network Corporation 34705 West Twelve Mile Road, Suite 300 Farmington Hills, MI 48331 Page 4 Qualifications, Limitations, and Restrictions Thereof of TekInsight.Com, Inc.; 3. the amended and restated DSNC bylaws; 4. the Company's restated articles of incorporation filed April 2, 1986, second restated articles of incorporation filed February 5, 1990, third restated articles of incorporation filed November 4, 1993, and fourth amended and restated articles of incorporation filed May 17, 1994; 5. minutes of the Board of Directors of the Company from April 4, 1989 to December 16, 1999; 6. the Company's Form 10-K SEC filings for the periods December 31, 1996 through December 31, 1998, Form 8-K SEC filing dated January 18, 2000, Form 8-K SEC filing dated September 15, 1999, Form S-1 SEC filing dated December 16, 1996, Form 10-Q SEC filing for the period ended September 30, 1999, Form 10-Q SEC filing for the period ended June 30, 1999, and Form 10-Q SEC filing for the period ended March 31, 1999; 7. Tek's Form 10-K SEC filing for the period ended June 30, 1999, Form 10-Q SEC filing for the period ended September 30, 1999, and Form 8-K filing dated January 26, 2000; 8. Loan Security Agreement by and between Data Systems Network Corporation and Foothill Capital Corporation dated September 30, 1998; 9. DSNC year 2000 operating and capital budget; 10. State of Michigan, Oakland County Circuit Court complaint between Data Systems Network Corporation (plaintiff) and Unified Network Services, Inc.; 11. United States District Court for the Eastern District of Michigan, Southern Division stipulation of settlement between Data Systems Network Corporation and Charles Altman, Dolores E. Andersen, Sezgey Bzyhhosnevsky, Joren Carlson, Debra Carlson, James M. Cerretani, Tony DiFatta, Jeffrey P. Emrich, David A. Goldberg, P.C., F.P. Krumenacher, C. Krumenacher, J. Krumenacher, Radha K. Kuchirhotla, Michael Mao, William J. Nelson, R. Pritzker, S. Pritzker, Sreenivasulu Raja, David L. Ronick, Michael Steele, and Elaine Weismann; and 12. DSNC Employee Inventions, Nondisclosure, and Nonsolicitation Agreement for Garrett L. Denniston, Joel C. Koch, Deborah Hartman, Michael Jansen, James Losinski, Ron Ben-Yishay, John Hawes, George D. Enete, James O. Reynolds, and John O. Lychos, Jr. Board of Directors Data Systems Network Corporation 34705 West Twelve Mile Road, Suite 300 Farmington Hills, MI 48331 Page 5 During the course of our investigation, which included site visit to DSNC in Farmington Hills, Michigan, we conducted interviews with management and other personnel of the Company and Merger Sub and with representatives from Foothill Capital Corporation, Bodman, Longley & Dahling LLP, Dykema Gossett LLP, AmTech Associates, and Nixon Peabody LLP. With the exception of access to Tek's board minutes, we were given access to all materials and personnel requested for our work, and no limitations were imposed by the Company, Tek, or Merger Sub in the scope of our investigation. In connection with this Opinion, we have made such reviews, studies, and analyses as we deemed necessary and pertinent under the circumstances. We have, among other things: 1. reviewed the information and documents listed above; 2. reviewed the historical financial performance of the Company and Tek; 3. reviewed management-provided forecasts for the Company; 4. analyzed the condition of the capital and securities markets; 5. participated in discussions with the managements of the Company and Tek concerning the operations, business strategy, financial performance, and prospects for the Company, Tek, and Merger Sub; 6. discussed with the managements of the Company and Tek their views of the strategic rationale for the Merger; 7. analyzed the factors included in Revenue Ruling 59-60, including: (a) the nature of the businesses and the history of the enterprises from inception; (b) the economic outlook in general and the condition of and outlook for the specific industry; (c) the book values of the stocks and the financial condition of the businesses; (d) the earning capacity of the Company and Tek; (e) the dividend-paying capacity of the Company and Tek; (f) whether or not the enterprises have goodwill or other intangible value; (g) prior sales of ownership interests or offers to purchase the Company or Tek; and (h) the market prices of stocks of corporations engaged in the same or a similar line of business and having their stocks actively traded in a free and open market. Board of Directors Data Systems Network Corporation 34705 West Twelve Mile Road, Suite 300 Farmington Hills, MI 48331 Page 6 8. compared the financial ratios of the Company and Tek with those of a portfolio of publicly traded guideline companies operating within similar lines of business as the Company and Tek; 9. reviewed public filings and other information to gain insight into the outlook for the industry and for the companies which operate within the industry; 10. reviewed historical trading prices and volume levels for DSNC and Tek common stock; 11. reviewed premiums paid over the public stock prices of companies acquired in the computer networking and information technology industries since 1995; 12. reviewed the marketing process undertaken by the Company and its broker and analyzed previous offers to purchase the Company; 13. analyzed the anticipated effect of the Merger on the future financial performance of the consolidated entity; and 14. conducted other financial studies, analysis, and investigations as we deemed appropriate for the purpose of this Opinion. In preparing its opinion, Valuation Counselors performed a variety of financial and comparative analyses, including those described below. The summary of such analyses does not purport to be a complete description of the analyses underlying Valuation Counselors' opinion. The preparation of a fairness opinion is a complex analytic process involving various determinations as to the most appropriate and relevant methods of financial analyses and the application of those methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to summary description. Accordingly, Valuation Counselors believes that its analyses must be considered as a whole and that selecting portions of its analyses and factors, without considering all analyses and factors, could create a misleading or incomplete view of the processes underlying such analyses and opinion. In its analyses, Valuation Counselors made numerous assumptions with respect to DSNC, Tek, industry performance, general business, economic, market, and financial conditions and other matters, many of which are beyond the control of DSNC and Tek. The estimates contained in such analyses and the valuation ranges resulting from any particular analysis are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by such analyses. In addition, analyses relating to the value of businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold. Accordingly, such analyses and estimates are inherently subject to substantial uncertainty. Valuation Counselors' opinion and analyses were only one of the many factors considered by the Board of Directors of DSNC in its evaluation of the Merger and should not be Board of Directors Data Systems Network Corporation 34705 West Twelve Mile Road, Suite 300 Farmington Hills, MI 48331 Page 7 viewed as determinative of the views of the Board of Directors or management of DSNC with respect to the Exchange Ratio or the proposed Merger. Contribution Analysis: Valuation Counselors analyzed the respective current contributions of DSNC and Tek to the estimated revenue, EBITDA, and net income of the combined company. This analysis indicated that (i) in fiscal 1999, DSNC would contribute approximately 94.0% of revenue, 170.0% of EBDIT, and 50.4% of net income, and (ii) Tek would contribute approximately 6.0% of revenue, -70.0% of EBDIT, and 49.6% of net income of the combined company. Pro Forma Merger Analysis: Valuation Counselors analyzed certain pro forma effects resulting from the Merger, including, among other things, the impact of the Merger on Tek's projected earnings per share ("EPS") for fiscal years 2000 through 2004 based, in the case of DSNC, on internal estimates of the management of DSNC for fiscal year 2000 and extrapolated for subsequent years based on management's growth rate estimates and, in the case of Tek, on estimates of selected investment banking firms for fiscal years 2000 through 2004 and extrapolated for subsequent fiscal years based on analysts' growth estimates for Tek. The results of the pro forma merger analysis suggested that the Merger could be accretive to Tek's EPS in each of the fiscal years analyzed. The actual results achieved by the combined company may vary from projected results and the variations may be material. Discounted Cash Flow Analysis: Valuation Counselors performed a discounted cash flow analysis of the projected debt-free net cash flow of DSNC for the fiscal years ending September 30, 2000 through 2004, partially based on internal estimates of the Company's management. The indicated enterprise value was determined by adding the present value of the projected debt-free net cash flows over the fiscal years 2000 through 2004 and the present value of DSNC's estimated terminal value in 2004. The projected cash flows and terminal value were discounted to present value using a discount rate of 19%. This analysis yielded an enterprise value below the Purchase Price. Publicly Traded Guideline Company Analysis: Using publicly available information, Valuation Counselors analyzed the market values and trading multiples of the following publicly traded guideline companies: Tier Technologies, Inc., Microstrategy, Inc., Peregrine Systems, Inc., Eltrax Systems, Inc., Socrates Technologies Corporation, Micros to Mainframes, Inc., Osage Systems Group, Inc., and Government Technology Services, Inc. As shown below, the indicated multiples based on the Purchase Price offered for DSNC fall within the ranges of the guideline companies' market multiples but below the median levels. Such a placement is warranted due to DSNC's smaller Board of Directors Data Systems Network Corporation 34705 West Twelve Mile Road, Suite 300 Farmington Hills, MI 48331 Page 8 size, higher leverage, and inferior historical and projected growth rates in comparison to the guideline companies.
- ----------------------------------------------------------------------------------------------------------- Guideline Companies DSNC Calculated Multiples by Purchase Price -------------------------------------------------------------------------------------- Market Multiple: High Low Median $12,500,000 $16,000,000 $18,000,000 - ----------------------------------------------------------------------------------------------------------- MVIC(1)/Revenue 84.49 0.12 1.74 0.35 0.41 0.45 MVIC/EBDIT(2) 577.79 11.31 76.64 17.61 20.99 22.93 (1) MVIC: Market Value of Invested Capital (2) EBDIT: Earnings Before Depreciation, Interest, and Taxes - -----------------------------------------------------------------------------------------------------------
Merger and Acquisition Transaction Analysis: Valuation Counselors, using publicly available information, reviewed the purchase prices and implied transaction multiples paid or proposed to be paid for 69 companies engaged in the computer networking and information technology industries. As detailed below, DSNC's multiples derived from the Purchase Price fall within the range of the transacted companies' market multiples.
- ----------------------------------------------------------------------------------------------------------- Market Transaction Companies DSNC Calculated Multiples by Purchase Price - ----------------------------------------------------------------------------------------------------------- Market Multiple: High Low Median $12,500,000 $16,000,000 $18,000,000 - ----------------------------------------------------------------------------------------------------------- MVIC(1)/Revenue 19.33 0.02 0.90 0.35 0.41 0.45 MVIC/EBDIT(2) 38.96 0.02 9.86 17.61 20.99 22.93 (1) MVIC: Market Value of Invested Capital (2) EBDIT: Earnings Before Depreciation, Interest, and Taxes - -----------------------------------------------------------------------------------------------------------
Other Factors and Analysis: In rendering the Opinion, Valuation Counselors also considered other factors relevant to a valuation of DSNC. These factors included (i) the premiums paid in acquisitions of companies in the computer networking and information technology industries and (ii) other offers to purchase the Company's securities. The Purchase Price equates to a 113.5% to 207.5% premium over the Company's pre January 20, 2000 common stock share price. By comparison, between 1995 and 1999, the premium paid for transacted companies within the computer networking and information technology industries ranged between 13.0% and 81.4% with a median of 57.0%. Given this as well as the Company's market presence the premium to DSNC stockholders appears fair. Competing offers of expressions of interest were received from Micros to Mainframes, Inc., Dyn Corporation, American United Global, Inc., and Alydaar Software Corporation. With the exception of the Board of Directors Data Systems Network Corporation 34705 West Twelve Mile Road, Suite 300 Farmington Hills, MI 48331 Page 9 Alydaar Software Corporation offer, all the competing offers were relayed verbally to the Company's business broker. The Micros to Mainframes, Inc. offer indicated to the Company's representative a value between $12 million and $13 million. The offer was declined due to business logistics and the fact that Micros to Mainframes, Inc. was undergoing an assimilation of a recent acquisition. The Dyn Corporation offer, also presented verbally, had a value between $12 million to $13 million and was declined due to the use of privately held stock as a portion of the purchase price. American United Global, Inc. offered $12 million for the Company but the offer was declined since American United Global, Inc. would have had to liquidate a subsidiary in order to finance the acquisition. These offers compare to the Purchase Price range between $12,500,000 and $18,000,000. In formulating our conclusions from the above valuation approaches, we have assumed: 1. continued operation of the Company, Tek, and Merger Sub at their present facilities unless identified to us for disposal; 2. the properties will be competently managed and maintained by financially sound owners over the period of projected cash flows; and 3. no additional financings, distributions, or acquisitions, other than those specifically addressed in the Opinion, will occur during the projection period. Based upon our study and subject to the assumptions and limitations included herein and in our engagement letter dated January 12, 2000, it is our opinion, as of the date of this letter, that the Exchange Ratio as outlined above is fair, from a financial point of view, to the shareholders of Data Systems Network Corporation. The Opinion, as set forth herein, relates to the relative values of DSNC and Merger Sub. Valuation Counselors did not express any opinion as to what the value of Tek Common Stock actually will be when issued to DSNC stockholders pursuant to the Merger or the price at which the Tek Common Stock will trade subsequent to the Merger. Although Valuation Counselors evaluated the Exchange Ratio from a financial point of view, Valuation Counselors was not asked to and did not recommend the specific consideration payable in the Merger, which was determined through negotiation between DSNC and Tek. The Opinion is for the confidential use of the Board of Directors of Data Systems Network Corporation and is applicable only for the purpose stated herein; any use or reliance for any other purpose, by you or third parties, is invalid. We hereby consent to: (1) the filing and disclosure of the Opinion with the Securities and Exchange Commission and any state securities commission or blue sky authority, if such filing or disclosure is required pursuant to the rules and regulations thereof, or required by applicable law in the opinion of Data Systems Network Corporation counsel; and disclosure of the Opinion upon the demand, order or request of any court, administrative or governmental agency or regulatory body or as may be required or appropriate in response to any summons, subpoena, or discovery requests. No other use or reference to the Opinion may be made without the prior written consent of Valuation Counselors, which consent shall not be unreasonably withheld. Board of Directors Data Systems Network Corporation 34705 West Twelve Mile Road, Suite 300 Farmington Hills, MI 48331 Page 10 All the terms and conditions as contained in our engagement letter dated January 12, 2000, are incorporated and apply herein. Board of Directors Data Systems Network Corporation 34705 West Twelve Mile Road, Suite 300 Farmington Hills, MI 48331 Page 11 Valuation Counselors is principally and continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, divestitures, leveraged buyouts, private placements, and other situations. Prior to this engagement, Valuation Counselors has had no relationship with either Data Systems Network Corporation or TekInsight.Com, Inc. Respectfully Submitted, VALUATION COUNSELORS Beth A. Smoots Managing Director 89-6234/dj EX-99.6 20 EXHIBIT 99.6 February 18, 2000 Board of Directors TekInsight.com, Inc. 5 Hanover Square - 24th Floor New York, NY 10004 Attention: Mr. Damon Testaverde Dear Sirs: We understand that TekInsight.Com, Inc. (the "Company" or "TEKS"), Astratek, Inc. ("Merger Co.") and Data Systems Network Corporation ("DSNC") have entered into an Agreement and Plan of Merger, (the "Agreement"), whereby, among other things, TEKS will acquire 100% of the capital stock of DSNC by the merger of DSNC with Merger Co., a wholly-owned subsidiary of TEKS incorporated under New York law. It is contemplated that DSNC will merge with MergerCo in a statutory merger under New York law (the "Merger"), with MergerCo as the surviving corporation of the Merger. The Merger will become effective at the date and time of the filing by the parties to the Agreement filing a Certificate of Merger with the Secretary of State of the State of New York and the filing of a Certificate of Merger with the Michigan Department of Consumer and Industry Services - Corporation; Securities and Land Development Bureau (the "Effective Time"). At the Effective Time and subject to the terms and conditions of the Agreement and the applicable provisions of New York Law and Michigan Law, DSNC shall be merged with and into Merger Co., the separate corporate existence of DSNC shall cease and MergerCo shall continue as the surviving corporation. As consideration for the Merger (the "Merger Consideration"), subject to the provisions contained in the Agreement, all outstanding shares of DSNC capital stock will be exchanged for that number of shares of a newly-created series of TEKS preferred stock (the "Series A Preferred Stock") that is equal to that number of shares of TEKS common stock having a market value at Merger closing of $12,500,000 (the "Purchase Price"). The market value of TEKS common stock at Merger closing will be equal to the average closing price for TEKS common stock, as reported by the Nasdaq Smallcap Market, for the ten (10) consecutive trading days ending on the trading day that immediately precedes the closing date of the Merger (the "Average Price"). In the event that the Average Price is equal to a price that is $5.00 or more but less than $7.00, the Purchase Price shall be adjusted to equal $16,000,000 (the "First Increased Purchase Price"); and in the event that the Average Price is equal to $7.00 or more, the Purchase Price shall be adjusted to equal $18,000,000 (the "Second Increased Price"). As a result of any such increase in the Average Price, the number of Series A Preferred Stock shares issuable to DSNC shareholders shall be proportionately increased per the terms of the Agreement. You have requested our opinion, as financial advisors, as to the fairness of the Merger Consideration, from a financial point of view, to the Company. In conducting our analysis of DSNC and arriving at our opinion as expressed herein, we have reviewed and analyzed certain financial and other information of DSNC that was publicly available, including filings made with the Securities and Exchange Commission (the "SEC"). The documents reviewed by Valuemetrics include, but are not limited to: (i) Audited financial statements (filed with the U.S. Securities and Exchange Commission) for the fiscal years ended December 31, 1996 through December 31, 1998; (ii) Unaudited financial statements (filed with the U.S. Securities and Exchange Commission) for the quarters ended March 31, 1999, June 30, 1999 and September 30, 1999; (iii) Unaudited management prepared forecasted income statements for the fiscal years ending December 31, 1999 and 2000; (iv) Unaudited management prepared forecasted balance sheet for the year ending December 31, 2000; (v) Management prepared schedule of Net Operating Losses; (vi) List of the ten largest customers of Data Systems Network for each fiscal year 1998 and 1999; (vii) List of the ten largest vendors of Data Systems Network for each fiscal year 1998 and 1999; (viii) Schedule of share ownership prepared by American Stock Transfer & Trust Company as of 12/31/1999; (ix) Schedule of options ownership prepared by management dated January 24, 2000; (x) The stock price trading history of the Company's shares as traded in the over-the-counter market currently under the OTC Bulletin Board under the symbol DSYS; (xi) Letter to the Audit Committee and Board of Directors of Data Systems Network Corporation from the Company's Auditor, Plante & Moran, LLP dated May 21, 1998; (xii) Letter to the Board of Directors of Data Systems Network Corporation from the Company's Auditor, Grant Thornton, LLP dated September 14, 1999; (xiii) Draft Agreement and Plan of Merger dated February 18, 2000 by and among TekInsight.Com, Inc., Astratek, Inc. and Data Systems Network Corporation; and (xiv) Letter of Intention of the merger between Data Systems Network Corporation and TekInsight. Corn, Inc, dated January 18, 2000. In addition, Valuemetrics has reviewed available industry and market research and publicly available financial and stock performance data of companies that we deemed comparable to DSNC. In conducting our analysis and arriving at our opinion as expressed herein, we have reviewed and analyzed certain financial and other information of the Company. The documents reviewed by Valuemetrics include, but are not limited to: (i) Audited financial statements (filed with the U.S. Securities and Exchange Commission) for the fiscal years ended June 30, 1997 through June 30, 1999; (ii) Unaudited financial statements (filed with the U.S. Securities and Exchange Commission) for the quarters ended September 30, 1999; (iii) Unaudited internally prepared financial statements for the quarter ending December 31, 1999; (iv) Detailed breakdown of marketable securities holdings as of fiscal year ended June 30, 1999 and fiscal quarter ended September 30, 1999; (v) Detailed breakdown of accounts of the audited income statement for the fiscal year ending June 30, 1999; (vi) Detailed breakdown of accounts of the unaudited income statement for the fiscal quarters ending September 30, 1999 and December 31, 1999; (vii) Unaudited management prepared forecasted income statements for the calendar years ending December 31, 2000, 2001 and 2002; and (viii) U.S. Securities and Exchange Commission Form 8-K filing dated July 30, 1999. In addition, we have reviewed available industry and market research pertaining to TEKS' operations and various assets. In rendering our opinion, we have conducted on site due diligence and held discussions with certain officers, employees and representatives (including counsel) of the Company and DSNC, respectively, concerning the business and operations, assets, present condition and future prospects of the Company and DSNC and undertook such other studies, analyses and investigations as we have deemed appropriate. In arriving at our opinion, we have assumed and relied upon the accuracy and completeness of the financial and other information supplied to or otherwise used by us in arriving at our opinion and have not attempted independently to verify such information. We have not assumed any responsibility for the independent verification of any such information or projections provided to us and we have further relied upon the assurance of the management of the Company and DSNC that they are unaware of any facts that would make the information or projections provided to us incomplete or misleading. In arriving at our opinion, we have not performed or obtained any independent appraisal of the Company's or DSNC's assets or liabilities. We have also assumed that the transactions described in the Agreement, and related Letter Agreement, would be consummated on the terms set forth therein, without waiver of any such terms. We have assumed, with the consent of the Company and DSNC, that the Merger will comply with applicable federal and state laws, including, without limitation laws relating to bankruptcy, insolvency, reorganization, fraudulent conveyance, fraudulent transfer or other similar laws now or hereafter in effect affecting creditors' rights generally. As part of our professional services, we are regularly engaged in the valuation of businesses and securities in connection with mergers, acquisitions, leveraged buyouts, sales of unlisted securities, and valuations for estate, corporate and other purposes. We have also taken into account our assessment of general economic, market and financial conditions and our experience in similar transactions, as well as our experience in securities valuation in general. Our opinion necessarily is based upon conditions as they exist and can be evaluated on the date hereof. Subsequent developments may affect this opinion, and we disclaim any obligation to update, revise or reaffirm this opinion. This letter and our opinion as expressed herein are for the benefit and use of the Board of Directors of the Company in its consideration of the Merger. The Board of Directors of the Company may rely upon this opinion with respect to the Merger. This letter does not constitute a recommendation of the Merger over any other alternative transactions which may be available to the Company and does not address the underlying business decision of the Board of Directors of the Company to proceed with or effect the Merger. In addition, in rendering this opinion, we do not express any view as to the prices at which the Company's securities may trade prior to or following the Merger. This letter does not constitute a recommendation by our firm to any particular member of the Board of Directors or to any stockholder as to how such member or stockholder should vote in connection with the Merger. We understand that this Opinion will be filed with the SEC and distributed to DSNC stockholders as part of a Proxy Statement relating to the Merger. We hereby consent to the foregoing use of this letter. Otherwise, this letter and the contents hereof may not be published, disseminated, referred to, summarized, described or otherwise used, nor shall any public reference to Valuemetrics, Inc. be made, without our prior written consent (except in documents or communications filed with the SEC and NASDAQ, including any proxy statements). As you are aware, we will receive a fee for our services to the Board of Directors in connection with rendering this opinion, and the Company has indemnified Valuemetrics for certain liabilities arising out of this engagement including those which result, under certain circumstances, from the rendering of this opinion. Based upon and subject to the foregoing, it is our opinion that, as of the date hereof, the Merger Consideration to be paid under the terms of the Agreement and in connection with the Merger is fair, from a financial point of view, to the Company. Very truly yours, VALUEMETRICS, INC. -----END PRIVACY-ENHANCED MESSAGE-----