ALPHA BYTES INC
10-Q, 1998-09-15
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<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FROM 10-Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
     THE SECURITIES EXCHANGE ACT OF 1994.
     For the Quarterly period ended Jul 31, 1998

[_]  TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
     THE SECURITIES EXCHANGE ACT OF 1934.
     For the transition period from............to...........

Commission File Number: 33-20783-D

                               ALPHA BYTES, INC.
          ----------------------------------------------------------
            (Exact name of registrant as specified in its charter)

               COLORADO                            84-1064958
          -------------------------------------------------------------
          (State or other jurisdiction of      (I.R.S. Employer
          incorporation or organization)       Identification Number)

          521 BUFFALO AVENUE, NIAGARA FALLS, NEW YORK            14303
          -------------------------------------------         ----------   
          (Address of principal executive offices)            (Zip Code)

                                 716-284-2465
          -------------------------------------------------------
          (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or such reports), and (2) had been subject to
such filing requirements for the past 90 days.

                            [X]  YES        [_] NO


APPLICABLE ONLY TO ISSUERS  INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:


Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by sections 12, 13, or 15 (d) of the Securities
exchange Act of 1934.
                             [_] YES        [_] NO


                     APPLICABLE ONLY TO CORPORATE ISSUERS
There were 7,468,002 shares of common stock outstanding having a par value of
$.0002 per share as of July 31, 1998

                                       1
<PAGE>
 
                                     INDEX
                                     -----

<TABLE>
<CAPTION>
PART I       FINANCIAL INFORMATION                                       PAGE NUMBER
- ------       ---------------------                                       -----------
<S>          <C>                                                         <C>
  Item 1     Consolidated Balance Sheet,                                      3     
             July 31, 1998 (unaudited)                                             
                                                                                   
             Consolidated Statement of Stockholders' Equity,                  3     
             July 31, 1998 (unaudited)                                             
                                                                                   
             Consolidated Statement of Earnings for Quarter ended             4     
             July 31, 1998 (unaudited)                                             
                                                                                   
             Consolidated Statement of Cash Flow For the Quarter ended        6     
             July 31, 1998 (unaudited)
 
             Notes to Financial Statements                                    7 - 8
 
  Item 2     Management Discussion and Analysis of Financial Conditions       9
             and Results of Operations

PART II      OTHER INFORMATION                                               10
- -------      -----------------                                   
</TABLE> 

                                       2
<PAGE>
 
                               ALPHA BYTES, INC.

                          CONSOLIDATED BALANCE SHEET

                              AS AT JULY 31, 1998
                          (EXPRESSED IN U.S. DOLLARS)

<TABLE>
<CAPTION>
                                                          JULY 31       July 31
                                               Note         1998         1997
                                               ----     ------------  -----------
<S>                                            <C>      <C>           <C>
ASSETS
CURRENT:
Cash & equivalents                                       $1,131,599   $1,251,205
Accounts receivable & work in progress                      508,866      215,290     
prepaid expenses & sundry assets                             24,914       20,028     
                                                         ----------   ----------      
                                                          1,665,379    1,486,523
                                                         ----------   ----------
 
LONG TERM:
Accounts Receivable and Work in Progress                 $      -     $  352,334
Capital assets                                       2      101,301       78,490
                                                         ----------   ----------
                                                            101,301      430,824
                                                         ----------   ----------
 
TOTAL ASSETS                                              1,766,680    1,917,347
                                                         ==========   ==========
LIABILITIES
Current:
Accounts payable & accrued liabilities                   $   47,936   $  108,345             
Income taxes payable - net                                  117,384      110,438
Deferred Income Taxes                                        54,590      246,400              
Unearned revenue                                                  -       52,457
                                                         ----------   ----------
                                                            219,910      517,640
                                                         ----------   ----------
 
LONG TERM:
Loans payable to directors                               $      -     $   79,158
                                                                      ----------
                                                            219,910      596,798
                                                         ----------   ----------
 
STOCKHOLDERS' EQUITY
Capital stock                                        3   $  250,968   $  245,468
Less Treasury Stock at cost                                (123,160)           -
Share Purchase Warrants                                      17,000       16,000
Retained Earnings                                         1,575,038    1,087,029
Unrealized Gain of Investments                                    -       46,867
Foreign exchange adjustment                                (173,076)     (74,815)
                                                         ----------   ----------
                                                          1,546,770    1,320,549
                                                         ----------   ----------
 
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY                  1,766,680    1,917,347
                                                         ==========   ==========
</TABLE>

                                       3
<PAGE>
 
                               ALPHA BYTES, INC.

                      CONSOLIDATED STATEMENT OF EARNINGS

                          QUARTER ENDED JULY 31, 1998
                          (EXPRESSED IN U.S. DOLLARS)

<TABLE>
<CAPTION>
                                       NOTES   JULY 31      July 31
                                                 1998        1997
                                                 ----        ----    
<S>                                    <C>     <C>        <C>
REVENUE                                         $502,974    $364,796
                                                --------  ----------
 
 
EXPENSES
 
Professional fees                                 32,080           -
Wages, management & consulting fees              161,336    $125,788
General and administrative                        42,043      93,344
Travel & promotion                                19,974      16,944
Amortization                                       4,887       7,015
Interest                                             175        (441)
Loss on investments                               24,283           -
R&D tax credits claimed                                -     (26,700)
                                                --------  ----------
                                                 284,778     215,950
                                                --------  ----------
 
 
 
EARNINGS (LOSS) BEFORE INCOME TAXES             $218,196    $148,846
 
Provision for income taxes:                       79,411      69,800
                                                --------  ----------
 
NET EARNINGS (LOSS)                             $138,785    $ 79,046
                                                ========  ==========
 
EARNINGS (LOSS) PER SHARE                  4       0.019       0.012
                                                ========  ==========
</TABLE>

                                       4
<PAGE>
 
                CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                        
                      AS AT JULY 31, 1998 - (SEE NOTE 7)
                          (EXPRESSED IN U.S. DOLLARS)

<TABLE>
<CAPTION>
                                Capital Stock                  Options            Treasury Stock                       Unrealized  
                             --------------------              -------            ------------------                   ----------- 
                               Number                     Number                   Number                  Retained      Gain on    
                             of Shares     Amount       of Shares     Amount     of Shares     Amount      Earnings     Investment  
                             ----------   --------      ---------     -------    ---------    ---------   ----------    ----------  
<S>                          <C>          <C>           <C>           <C>        <C>          <C>         <C>           <C>         
BALANCE AS AT
JANUARY 31, 1997             7,413,002    245,468       164,000       16,000                               872,125       343,267  
Net earnings 1998                                                                                          500,768                  

Foreign exchange
  adjustment for 1998                                                                                                            
Unrealized holding gain on
  restricted marketable 
  sec.                                                                                                                  (343,267)   

Employee Share Opt. Issued
 as
  comp, for services recd                              100,000         1,000                                                      
Shares issued as
 compensation
  for services received         55,000      5,500                                                                                 
Purchase of stock on open
 mkt.                                                                            145,000      (112,332)                            
Dividend paid                                                                                              (25,000)             
                             ---------------------------------------------------------------------------------------------------- 
 
BALANCE AS AT
JANUARY 31, 1998             7,468,002    250,968      264,000       17,000      145,000      (112,332)  1,347,893             0 
Net earnings for 3 month
 prd.                                                                                                       88,360      
Foreign exchange adjustment                                                                                                    
Purchase of Stock on open
 mkt                                                                              22,500       (10,828)
                             ----------------------------------------------------------------------------------------------------
 
BALANCE AS AT
APRIL 30, 1998               7,468,002    250,968      264,000       17,000      167,500      (123,160)  1,436,253             0 
 
Net earnings for 3 month
 prd.                                                                                          138,785                           
Foreign exchange adjustment  
                             ---------------------------------------------------------------------------------------------------- 
BALANCE AS AT
JULY 31, 1998                7,468,002    250,968      264,000       17,000      167,500      (123,160)  1,575,038             0 
                             ====================================================================================================
                              


<CAPTION>
                                   Foreign
                                 ----------
                                  Exchange
                                 Adjustment            TOTAL
                                -----------          ----------
<S>                            <C>                   <C>
BALANCE AS AT                
JANUARY 31, 1997               (64,418)              1,412,442
Net earnings 1998                                      500,768
Foreign exchange             
  adjustment for 1998          (63,389)                (63,389)
Unrealized holding gain on   
  restricted marketable      
  sec.                                                (343,267)
Employee Share Opt. Issued   
 as                          
  comp, for services recd                                1,000
Shares issued as             
 compensation                
  for services received                                  5,500
Purchase of stock on open    
 mkt.                                                 (112,332)
Dividend paid                                          (25,000)
                              ---------------------------------
 
BALANCE AS AT
JANUARY 31, 1998              (127,807)              1,375,722
 
Net earnings for 3 month
 prd.                                                   88,360               
Foreign exchange adjustment      5,362                   5,362
Purchase of Stock on open
 mkt  
                              ---------------------------------
 
BALANCE AS AT
APRIL 30, 1998                (122,445)              1,458,616
 
Net earnings for 3 month
 prd.                                                  138,785     
Foreign exchange adjustment    (50,631)                (50,631)
                              ---------------------------------
BALANCE AS AT
JULY 31, 1998                 (173,076)              1,546,770
                              =================================
</TABLE>

                            See accompanying notes

                                       5
<PAGE>
 
                               ALPHA BYTES, INC.

                      CONSOLIDATED STATEMENT OF CASH FLOW

                          QUARTER ENDED JULY 31, 1998
                          (EXPRESSED IN U.S. DOLLARS)

<TABLE>
<CAPTION>
                                                   JULY 31        July 31
                                                     1998           1997
                                                     ----           ----
<S>                                              <C>             <C>
CASH WAS PROVIDED BY (USED FOR):
 
OPERATING ACTIVITIES
 
Net earnings (loss)                              $  138,785      $  79,046
Amortization                                          4,887          7,015
Deferred income taxes                                  -              -
                                                 ----------      ---------
                                                    143,672         86,061
Changes in non-cash working capital items:
Accounts receivable & work in progress             (169,964)        12,750
Income & investment tax credits received               -              -
Income taxes payable                                (10,019)         2,347
Prepaid expenses & sundry assets                     (3,449)         6,247
Accounts payable & accrued liability                (11,523)        43,844
Unearned revenue                                       -            49,800
                                                 ----------      ---------
                                                    (51,283)       201,049
                                                 ----------      ---------
 
 
FINANCING ACTIVITIES
Issue of shares                                        -              - 
Issue of employee share options                        -              - 
Purchase of stock for treasury                         -              - 
Foreign exchange adjustment                         (50,631)         5,535 
Dividends paid                                         -              - 
Loans payable to directors                             -           (15,831)
Vehicle loan                                           -              - 
Loan Payable                                           -              -  
                                                 ----------      ---------
                                                    (50,631)       (10,296)
                                                 ----------      --------- 
 
INVESTING ACTIVITIES
Long term accounts receivable                          -              -
Net purchases of capital assets                     (29,723)       (24,020)
Sundry investments - net                               -           (84,284)
Marketable securities - restricted                     -              - 
                                                 ----------      --------- 
                                                    (29,723)      (108,304) 
                                                 ----------      ---------  

INCREASE (DECREASE) IN CASH                        (131,637)        82,449
 
CASH & EQUIVALENTS BEGINNING OF THE PERIOD        1,263,236        508,339
                                                 ----------      ---------  
 
CASH & EQUIVALENTS AT THE END OF PERIOD           1,131,599        590,788
                                                 ==========      =========
</TABLE>

                                       6
<PAGE>
 
                               ALPHA BYTES, INC.
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                          QUARTER ENDED JULY 31, 1998
                          (EXPRESSED IN U.S. DOLLARS)

1.   ACCOUNTING POLICIES

(a)  PRINCIPLES OF CONSOLIDATION

     All subsidiaries have been included in the consolidated financial
     statements.  The consolidated wholly-owned subsidiaries at July 31, 1998
     were as follows:

     Alphabytes Computer Corporation (Canada) - ("Alphabytes Canada")
     Alpha Bytes Computer Corporation (USA) - ("Alpha Bytes US")

(b)  CAPITAL ASSETS

     Capital assets are stated at cost less accumulated amortization.
     Amortization is calculated at the following annual rates:

     Furniture and equipment    -     20% declining balance
     Vehicles                   -     30% declining balance
     Computer hardware          -     30% declining balance
     Computer software          -    100% declining balance

(c)  FOREIGN CURRENCY

     The financial statements are expressed in U.S. dollars. Current assets and
     liabilities denominated in Canadian dollars at quarter end are translated
     into U.S. dollars at the rates of exchange prevailing on that date.
     Transactions in foreign currencies are recorded in U.S. dollars at the
     rates of exchange prevailing on the date of transactions.  Exchange gains
     and losses are reflected in the  income.

     Exchange gains and losses resulting from the consolidation of the Canadian
     subsidiary are reflected as an adjustment to the stockholders equity.

(d)  INVESTMENT TAX CREDITS

     Investment tax credits are accounted for as a reduction of research and
     development costs in the year the credits become available, provided there
     is reasonable assurance that they will be realized. Otherwise they are
     reflected in the year claimed as a reduction of other expresses.

2.   CAPITAL ASSETS

<TABLE> 
<CAPTION> 
                                                  Accumulated              Balance
                                     Cost         Depreciation    31 JUL, 98     31 Jul 97
     <S>                           <C>            <C>            <C>             <C> 
     Furniture & equipment         $ 59,372         $ 34,087        $ 25,285       $18,198
     Vehicles                        38,315           34,089           4,226         7,102
     Computer hardware              103,668           33,589          70,079        37,721
     Computer software               16,083           14,372           1,711           279
                                   --------         --------        --------       -------
                                   $217,438         $116,137        $101,301       $63,300
                                   --------         --------        --------       -------
</TABLE> 

3.   CAPITAL STOCK

     The company is authorized to issue 30,000,000 common shares. The company
     had outstanding options to purchase shares as follows:

<TABLE> 
<CAPTION> 
     <S>                 <C>             <C>                <C>                 <C> 
     DATE ISSUED         # OF SHARES     EXERCISE PRICE     EFFECTIVE DATE      EXPIRY DATE
     Oct 31, 1995           54,500           $ 0.01         May 01, 1996        Oct 31, 2000
     May 31, 1996           54,500           $ 0.01         Oct 31, 1996        May 31, 2001
     Nov 01, 1996           54,500           $ 0.01         Apr 30, 1997        Nov 01, 2001
     Oct 01, 1997          100,000           $ 0.01         Oct 01, 1997        Oct 01, 2002
</TABLE>

                                       7
<PAGE>
 
4.   EARNINGS (LOSS) PER SHARE

     Earnings per share is calculated using the weighted average number of
     common shares outstanding and common share equivalents. The average number
     of shares outstanding under this assumption would be as follows:

     Quarter Ended Jul. 31, 1998   - $ 7,468,002

5.   COMMENTS - LEASES OF PREMISES

     The company is committed under existing leases to the following minimum
     annual rents:

     Year ending January 31, 1998  -  $ 38,000
                 January 31, 1999  -  $ 38,000
                 January 31, 2000  -  $ 39,000
                 January 31, 2001  -  $ 40,000
                 January 31, 2002  -  $ 41,000

                                       8
<PAGE>
 
                                    PART I
                                    ------

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------  -----------------------------------------------------------------------
         OF OPERATIONS
         -------------

         Alpha Bytes Computer Corporation and Alphabytes Computer Corporation
         (together called the Alpha Bytes Inc.) work in conjunction with each
         other in producing, marketing, installing, and supporting the software
         produced by these companies. The financial information regarding the
         parent company and its two subsidiaries are presented on a consolidated
         basis.

         For the quarter ending July 31, 1998 revenues were $502,974 compared to
         $364,796 for the similar period ending July 31, 1997. Expenses were
         284,778 quarter ended July 31, 1998 versus $ 215,950 for the quarter
         ended July 31, 1997. The gross profit for the quarter ending on July
         31, 1998 were $218,196 compared to $148,846 for the period ending July
         31, 1997.

         The cash and Investment certificates position of the company was
         $1,131,599 on July 31, 1998, compared to $590,788 on July 31, 1997.
         Retained earnings at the end of July 31, 1998 were $1,575,038 compared
         to $1,087,029 on July 31, 1997.

         In this quarter, the company continued to invest its own funds in an
         effort to expedite the development of H-NET(R) rater than wait for the
         capital investment to be raised. The company's expanded its H-NET(R)
         operations by adding one more technical analyst to this team headed by
         Ray Coty, Vice President of H-NET Operations.

         Management believes that Alpha Bytes, Inc. ("the Company") has the cash
         funds and necessary liquidity to meet the needs of the company over the
         next year, assuming sales and development efforts conform to the
         standards historically set.

         However, to fully maximize the potential presented by the key events
         presented below, management believes that approximately $3,000,000 will
         need to be raised. The funds will be primarily used to increase
         marketing efforts and for the production of marketing material, as well
         as the continued development of H-NET(R). Marketing efforts would be
         increased by hiring an appropriate number of sales staff, and by
         increasing the number of national and regional industry trade shows and
         conferences attended. It is anticipated that the funds will be raised
         through private placement or a secondary offering in the current fiscal
         year.

         CURRENT PLANS
         -------------

         The key events that occurred over the quarter end July 31, 1998 were
         the marketing of the cross-platform, windows (Registered Trade Mark of
         Microsoft, Inc.) compatible version of its Home Office Management
         (HO/2/) system, the Point Of Sale(POS/2/) system and the Lab Management
         (LAB/2/) systems. This integrated product line is currently being
         installed in some of the largest Ophthalmic chain in the world.

         The company was accepted by Microsoft as a "Certified Solution Provider
         Partner". This allows the company to;

            - use the Microsoft name against its products
            - join in Microsoft advertising and trade shows
            - utilize Microsoft services in all aspects of product development
            - use Microsoft's systems labs to test against existing and to-be-
              released products
            - accept referral business from Microsoft

         The company completed development of its 32 bit version of the HO/2/
         system and began development of the 32 bit version of the POS/2/
         system. Upon completion of this project the company expects to start
         development of its 32 bit version of the LAB/2/.

         The company will also continue its development of the H-NET(R).
         Additional capital commitments made by the company during the first and
         second quarters, will assist in expediting the release of Phase I of
         the H-NET(R) transaction driven network for the vision care industry.

                                       9
<PAGE>
 
                                    PART II
                                    -------

ITEM 1.  LEGAL PROCEEDINGS
- -------  -----------------

         The Company is not a party to any material litigation.

ITEM 2.  CHANGES IN SECURITIES
- -------  ---------------------

         There were no changes in the Security position of the Company during
         the current quarter.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
- -------  -------------------------------

         NONE

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------  ---------------------------------------------------

         NONE

ITEM 5.  OTHER INFORMATION
- -------  -----------------

         NONE

ITEM 6.  EXHIBITS AND REPORTS ON FROM 8-K
- -------  --------------------------------

         NONE.

                                       10
<PAGE>
 
                                  SIGNATURES
                                  ----------

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act 1934, the Registrant duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

Alpha Bytes INC.

By      _________________________________________
        Anton Stephens
        President and Director
        (Principal Executive Officer)

Date    Sep 15, 1998


By      _________________________________________
        Christine Stephens
        Secretary and Director

Date:   Sep 15, 1998

Pursuant to the requirements of the Securities Exchange Act of 1934,  This
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

By      _________________________________________
        Anton Stephens
        President and Director
        (Principal Executive Officer)

Date:   Sep 15, 1998


By      _________________________________________
        Christine Stephens
        Secretary and Director

Date:   Sep 15, 1998

                                       11

<TABLE> <S> <C>

<PAGE>
 
<ARTICLE> 5
       
<S>                             <C>
<PERIOD-TYPE>                   3-MOS
<FISCAL-YEAR-END>                          JAN-31-1998
<PERIOD-START>                             MAY-31-1998
<PERIOD-END>                               JUL-31-1998
<CASH>                                          98,911
<SECURITIES>                                 1,032,686
<RECEIVABLES>                                  508,866
<ALLOWANCES>                                         0
<INVENTORY>                                          0
<CURRENT-ASSETS>                             1,665,379
<PP&E>                                         217,438
<DEPRECIATION>                                 116,137
<TOTAL-ASSETS>                               1,766,680
<CURRENT-LIABILITIES>                          219,910
<BONDS>                                              0
                                0
                                          0
<COMMON>                                       250,968
<OTHER-SE>                                   1,295,802
<TOTAL-LIABILITY-AND-EQUITY>                 1,766,680
<SALES>                                        502,974
<TOTAL-REVENUES>                               502,974
<CGS>                                                0
<TOTAL-COSTS>                                        0
<OTHER-EXPENSES>                               284,778
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                   0
<INCOME-PRETAX>                                218,196
<INCOME-TAX>                                    79,411
<INCOME-CONTINUING>                            138,785
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                   138,785
<EPS-PRIMARY>                                    0.019
<EPS-DILUTED>                                    0.019
        

</TABLE>


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