ALPHA BYTES INC
10-K, 1998-05-04
BLANK CHECKS
Previous: PIONEER AMERICA INCOME TRUST, 497J, 1998-05-04
Next: ATRIX INTERNATIONAL INC, SC 13D/A, 1998-05-04



<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                          __________________________


                                   FORM 10-K

               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
                      THE SECURITIES EXCHANGE ACT OF 1934


For fiscal year ended         Commission File Number 33-20783-D
January 31, 1998

                               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)

Registrant's telephone numbers, including area code:
(716)-284-2465 and 905-475-3249

Securities registered pursuant to Section 12 (b) of the Act: None.
Securities registered pursuant to Section 12 (g) of the Act: None.

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
for such shorter period that the registrant was required to file
such reports), and (2) had been subject to such filing requirements
for the past 90 days YES   XX
                         ------  -------

The aggregate market value of voting stock held by non-affiliates
of the Registrant was $3,500,252 based on trading reported in the NASD
pink sheets on or about JANUARY 31, 1998.

There were 7,468,002 shares of common stock outstanding having a
NO par value per share as of JANUARY 31, 1998.

                                       1
<PAGE>
 
                      DOCUMENTS INCORPORATED BY REFERENCE:
                      ------------------------------------

Current Report on Form 8-K, filed on January 6, 1995.

First Amendment to Report on Form 8-K filed on January 16, 1995.

Second Amendment to Report on Form-8K, filed on February 16, 1995.

Articles of incorporation of Registrant dated May 16, 1996

Bylaws of Registrant, Warrant Agreement, and Underwriter's

Warrant, previously filed as an exhibit to the Company's Form S-18 Registration
Statement, No. 33-20733-D, made effective August 3, 1988.  The underwriter's
warrants are no longer valid.


                                     PART I
                                     ------

ITEM 1    GENERAL DEVELOPMENT OF BUSINESS.
- ------    --------------------------------

     Alphabytes Computer Corporation (AB Canada), organized under the laws of
the Canadian Province of Ontario in 1983, is a software applications development
company to the health care industry in North America, the United Kingdom and
European Community.

     Alpha Bytes Computer Corporation (AB New York), organized under the law of
the State of New York in 1988, is engaged in marketing and supporting software
products developed by  Alphabytes Computer Corporation its Canadian affiliate.

     Both companies are owned by Alpha Bytes INC., a publicly held Colorado
Corporation.

     Alpha Bytes INC. currently has an installed base of over 5,500 sites with
over 1,800 sites contracted to be installed over the next 2 years (equivalent to
more than 37,500 users) in the vision care industry, which it provides an
integrated software product line.  It has generated operating profits during
fourteen of the last fifteen years.

     Neither corporation has ever been a party to any material reclassification,
merger, consolidated, or purchase or sale of a significant amount of assets not
in the ordinary course of business.

BACKGROUND INFORMATION
- ----------------------

     Alpha Bytes INC. began business in the Canadian City of Toronto, Ontario in
1983 with the objective of capitalizing on business opportunity provided by the
evolving personal computer market in the area of easy to learn and operate
applications software.

     Alpha Bytes INC. elected to specialize in the health care market because of
management's perception that it afforded substantial sales volume, and because
the health care business was (and is) a stable, essential, growing and
prospering industry.  After two years of producing specialized software, Alpha
Bytes INC. decided to further narrow its niche to the vision care industry.

     Alpha Bytes INC. has become a leading software applications vendor in the
international vision care business supporting its clients with offices in
Toronto, Ontario and Niagara Falls, New York.  Management believes that Alpha
Bytes INC. has  more contracts among the top 100 North American vision care
chains than any other vendor.  A partial list of its clients includes: Pearle
Vision (Texas); Cole Vision (Cleveland); Eye Care Centers of America (San
Antonio); LensCrafters (Cincinnati);  Standard Optical (Toronto); D.O.C.
(Detroit); Bensons (Minneapolis); Family Vision and Wal Mart (Fayetteville,
Arkansas); the Bay Group (Toronto); Optica Lee Borinquen (Puerto Rico); Scrivens
Optical (Great Britain) and, Macy's Group (New York).

     Management believes that Alpha Bytes INC. was the first vendor to offer a
full line of integrated software products for retail corporate chains and
independents.  (the Alpha POS 1 system); home office management (the Alpha H.O.
system); independent optometrists (the  Alpha PM system);  small labs &
superstores (the Alpha Lab 1 system); and, large wholesale labs (the Alpha Lab 1
system).
 

                                       2
<PAGE>
 
Alpha Bytes INC. has an informal corporate development understanding with
Merrill, Lynch, Pierce, Fenner & Smith, including a commitment to participate in
the funding of provider receivables.  Alpha Bytes INC. has enjoyed a long
standing successful working relationship with Unisys and IBM in the joint
marketing and technical support of vision care chain clients in North America
and the United Kingdom.  In addition, Bell Worldlinks (a leading network
transaction processing company in addition to its telephone operations), NDC (a
leading dental and pharmaceutical transaction processing company in North
America) and NPA (a leading privately held vision care plan administrator with a
provider base in the vision care industry) are parties to strategic alliances
(expected to commence operations in the last quarter of 1999) with Alpha Bytes
INC. for marketing of the H-NET Healthcare Network.

BUSINESS DEVELOPMENT
- --------------------

     In 1983, personal computer software technology was being introduced in
vision care industry laboratories to assist the mathematics of lens grinding and
job tracking.  Alpha Bytes INC. introduced what management believes was the
first commercially successful designed developments for personal computer based
practice management systems for optometrists.

     During the period from 1984 to 1986, Alpha Bytes INC. created the software
and trained the staff to operate 450 stores throughout Canada (using two
languages) for Standard Optical, the  retail division of Imperial Optical.
Between 1985 and 1986, Alpha Bytes developed medical billing applications
allowing health care providers to electronically process claims to government
agencies such as OHIP (the Ontario Govt. Health Care Ministry) & other Canadian
provinces.

     In 1986, IBM selected Alpha Bytes INC. as its vision care software vendor
for joint marketing of software, hardware and support, with the target market
being chains and independent health care providers in North America and the
United Kingdom. During the  1986 through 1987 period, Alpha Bytes INC. won chain
contracts with Detroit Optical, Sterling, Bensons and others.

     In 1989, Price Waterhouse, working for LensCrafters, chose Alpha Bytes INC.
to automate the chain's more than 700 locations.  Alpha Bytes INC. develop a
point of sale system to work on IBM's RISC 6000 computer.  Its Alpha Lab II
software program was the first to provide a software platform for use with the
IBM RISC 6000 in large wholesale laboratories.

     Because clients require and demanded technology connecting their retail,
laboratory and home office administrative operations in a compatible  electronic
environment, in 1990, Alpha Bytes INC. developed and became the first vendor to
offer an "off-the-shelf price" for full product lines.  They included the Alpha
POS (point of sale) program for retail operations; the Alpha PM program for
practice management; the Alpha Lab I & II programs for Laboratories; and, the
Alpha H.O. program for home office management.

     In 1993, Family Vision Centers of Fayetteville (which operates the optical
departments for Walmart and Sam Stores), retained Alpha Bytes to train its staff
in 172 locations on the Alpha POS program running on IBM personal computers with
prescriptions electronically transferred to the laboratory facilities.  Optica
Lee Borinquen, a leading vision care chain in Puerto Rico (with 42 stores)
retained Alpha Bytes INC. technology to set up and connect its retail,
laboratory, and home operations. Alpha Bytes INC. also began to automate one of
the world's largest chains by providing software services to the Carribean
operation of Pearle Vision Group.

     In addition to its vision care developments, in 1993, Alpha Bytes INC.
developed a full point of sale and home office system for the hearing aid
industry and won a contract with one of the largest chains in the U.S., HEARx,
and, Alpha Bytes INC. penetrated the British market by beginning automation of
Specialeyes, the third largest chain in the United Kingdom.

     In 1995, Alpha Bytes INC. began the initial investigations for the software
necessary to offer transaction network processing services in real-time or batch
mode to the United States vision care business, wherein no such services exists.
Alpha Bytes INC. has initiated product development for a service to be called H-
NET for order processing and claims processing between health care providers and
their suppliers including the government agencies.

     In 1996, development began of  the cross-platform, Windows (Registered
Trade Mark of Microsoft, INC.) compatible version of its Point of Sale Software
(POS/2/), Laboratory Management Software (LAB/2/), and its Home Office Software
System (HO/2/) was released. Additionally, the company completed development of
the Point of Sale Software for the Hearing Aid Retail Sales Industry (POSH).

                                       3
<PAGE>
 
Late 1997, the Windows based Point Of Sale/Practice Management System (POS/2/),
Home Office System (HO/2/) and Lab Management System (LAB/2/)  products were
completed and active marketing began. The company also began development of H-
NET in phases with and the introduction of on-line real-time third party claims
adjudication of claims by National Prescription Administrators (NPA).

     Phase I of H-NET, the fully integrated information transmission network for
the vision care industry, was market tested By National Prescription
Administrators for adjudicating on-line claims in a real-time mode, and is now
ready for the market. Other phases of H-NET will be developed on an on-going
basis and will be actively marketed as these phases become available. Portion of
the H-NET software is presently being imbedded in all the new software systems
currently being sold.

     The Company also plans to increase its share of the ophthalmic software
market by actively seeking the acquisition of, or strategic alliances with,  one
or more of its competitors over the next four quarters.

BUSINESS

PRINCIPAL PRODUCTS OR SERVICES AND THEIR MARKET
- -----------------------------------------------

     Using programs available through Alpha Bytes INC., health care providers
can easily check product availability or inquire as to the status of existing
orders.  Suppliers are able to transmit price list, product data, statements or
other provider specific information, facilitating direct communication between
the two parties.  E-Mail features available through Alpha Bytes INC. programs
provide a direct advertising medium for suppliers permitting instant reaction
to new trends, styles and promotions that are characteristic in the industry.
As the user base grows H-NET will support electronic catalogues used either
through access by modem or on discs or CD ROMS.

     Since the H-NET system can determine the value and validity of third party
claims, a service can be offered for immediate payment to the health care
provider of valid claims, at a discount, electronically.  The network and
applications software is also designed to transmit insurance claims to third
Party payers, to permit health care providers to authorize customers credit card
transactions and supports financial services such as paying bills, taxes and
debit accounts.

     The term "suppliers" (as used in this section) refers to retail and
wholesale laboratories and lens manufacturers.  The OCA (Optical Manufacturers
Association) has partially completed development of the general supplier
(manufacturer) interface.  Alpha Bytes INC., as part of the H-NET services, has
already developed the personal computer end of the interface which will allow
E.I. messaging over the Bell Worldlinks network, as well as over other networks.

     Currently, H-NET can communicate on a real time basis to NPA for
adjudication of claims.  Alpha Bytes INC. is working with other insurers,
including Medicaid , Medicare and various Blue Cross and Blue Shield plans, to
bring them on line as soon as practicable.

     A key challenge facing the Company is that virtually no insurance companies
are able to directly process vision care claims outside normal medical claim
parameters.  Management knows of no entities other than Alpha Bytes INC. that is
attempting to interface directly with insurance companies for the direct
transmission of vision care non-medical claims (e.g. claims involving frames,
lenses and accessories).

DEMAND FOR SERVICES
- -------------------

     The marketing of applications software is related to the benefits of real-
time network transaction processing. In the opinion of management, Alpha Bytes
INC. enjoys an advantage over R.I., EYE-COM & B.C., its major competitors, as a
result of its ability to offer prospective corporate chain clients a
complimentary service not available from such sources. The Group's chain clients
enjoy a significant financial advantage, since not only is their order
processing info automatically integrated into their applications software but
their product order service is paid for by  "suppliers".

     Health care providers risk fraudulent third party claims unless they are
willing to verify claims by telephone prior to dispensing products or services.
Claims processing in a hard copy environment is costly and time consuming,
requiring of a number of steps including: data entry, data transmission,
processing time, reconciliation, and depositing.  As a rule of thumb electronic
processing reduces health care provider costs in the order of 75%.  It is
therefore in health care providers interest to pay for electronic transaction
eligibility checking and processing.

                                       4
<PAGE>
 
     Health care providers do not generally pay transaction fees for placement
of product orders to frame, lens, medical good or laboratory suppliers.  Those
service fees are paid by the suppliers, not only because it is good customer
service, but because receiving an order electronically is less costly (by about
60%) than any other order entry process.

     Electronic claims processing appears to be perceived as more productive
than hard copy claims processing by governments at all levels, which are
requiring such procedures as exclusive methods for payment.  Some governments
contribute to the costs of transactions processing.  Management believes that
such trend will become pervasive by the end of the decade.

STRATEGIC ALLIANCES
- -------------------

     H-NET services are made possible through the joint efforts of industry
leaders in areas that make up the H-NET communications superhighway.  Strategic
alliance partners and their roles in H-NET are as follows:  Alpha Bytes Computer
Corporation, the H-NET coordinator, software development and support services;
National Data Corporation, responsible for third party processing communication
development and services, and for financial services communication; Bell
Worldlinks, responsible for general H-NET communication services and financial
services communications; NPA and NPA, responsible for data bank services such as
real-time eligibility and adjudication services; Merrill Lynch, Pierce Fenner &
Smith, responsible for financial services and receivables factoring.

     National Data Corporation, based in Atlanta, Georgia, is the largest
independent real-time claims processor in the world. With 25 years experience,
NDC annually processes over 200 million health claims and another 2 billion
transaction per year for credit cards, financial, and other commercial services.

     Bell Worldlinks, through its Worldwide communications capability, handles
all the communications needs of H-NET. Through Bell Worldlinks, H-NET offers a
"local network" that spans the globe, and offers H-NET customers full worldwide
E.I. communications without long distance charges.

     NPA and NPA, National Prescription Administrators, also based in New
Jersey, along with its subsidiary National Vision Administrators, is the fourth
largest administrator of vision prescription plans in the United States.  On a
consolidated basis, they presently handle in excess of 2 million "real-time"
claims annually and have a panel of over 5,600 vision care providers covering a
base of 6,000,000 plan participants.

     Merrill Lynch, Pierce Fenner & Smith, one of the major financial services
organizations in the world, through its offices in Washington, offers H-NET
clients a full range of factoring and financial services.

ANTICIPATED DEVELOPMENTS
- ------------------------

     In conjunction with Bell Worldlinks, NDC and NPA, Alpha Bytes INC. is
presenting products introducing the "Vision Care Superhighway," which management
believes will be actively marketed in 1999.

     Alpha Bytes INC. re-designed and re-programmed its entire line using what
management believes to be the most technologically advanced features the
industry.  The re-designed line was released in the last quarter of 1997. Alpha
Bytes INC. plans to aggressively market its application products worldwide and
to seek out other opportunities in the health care industry with the goal of
expanding its business into other market niches and expanding the limits of its
present niche.  In the immediate future Alpha Bytes INC. plans to aggressively
market third party processing packages and to market practice management
systems.

     Alpha Bytes INC. will continue marketing its applications software and
hardware services in traditional fashion by availing  itself of opportunities to
demonstrate products and their effect on a clients return on investment.  This
is accomplished through personal interview obtained through introductory
letters, telephone calls, referrals and trade shows. Sales will be under the
supervision of Alpha Bytes INC.'s current management working with a commissioned
sales staff. Presently, Alpha Bytes INC. plans to attend the seven major trade
shows in the United States.
 
     Alpha Bytes INC.'s expertise in the vision care industry is expected by
management to provide the credibility, experience and products under the H-NET
umbrella, to market a third part processing package and other non-vision care
specific services through H-NET to general health care providers, including
hospitals, clinics, homes for the aged, medical and dental practitioners.
Marketing of H-NET to the general health care marketplace is expected to be
through a brokerage system on straight commissioned salesmen.

                                       5
<PAGE>
 
     Alpha Bytes INC. is able to offer health care providers a package offering
seven distinct, money and time saving advantages, transaction prices, free
software as well as financing of receivables.  The typical existing transaction
price for services starts at $0.75.Billing companies typically charge between 4%
and 10% of a claims value for their services. The POS/2/ software is priced
between  $3,000 - $ 3500, the HO/2/ software is priced between $5,000 - $100,000
and the LAB/2/ software is priced between $ 5,000 - $25,000.

     Alpha Bytes INC.  Group is able to offer the health care providers claims
processing at a minimum baseline per transaction charge of less than $0.75 in
concert with a more competitive percentage charge based value levels of claim,
each of which is tracked in the  network administrative software.  Alpha Bytes
INC.'s strategy is to earn its revenue from transaction processing pre-billed to
the health care provider.  Thus Alpha Bytes INC. will provide the software (H-
NET only) at no cost other than minimum telephone support expenses and annual
update fees of approximately $50 - $100.  The software also offers extra
features such as a payment reconciliation module and patient recall service.
Thus, Alpha Bytes INC. technology deliver more competitive prices and greater
savings to health care providers.

     Alpha Bytes INC. also offers health care providers a program for financing
their electronic claims receivables to assist in their cash flow management.
Claims processing on a real time basis is possible to NPA/NPA, and standard
transmission of claims is being expanded to include major carriers such as Blue
Cross and Blue Shield. Medical claims can currently be transmitted to all major
insurance carriers.  Management anticipates that insurance carriers will be
added throughout 1998/9 as the required interfaces are developed for vision
care, non-medical claims.

     However, to accomplish its plans in completing the development of marketing
H-NET over the next fiscal year, management feels that Alpha Bytes INC. will
require about $3,000,000 in debt or equity financing.

FACTORING SERVICES
- ------------------

     Many health care providers are interested in selling their accounts
receivable in order to alleviate their monthly cash flow requirements.  This
practice has grown because health care providers such as physicians, clinics,
hospitals, etc., rely on compensation from third party sources which in result
in administrative costs and slow payment.  Vision care providers are expected to
be slower to avail themselves of receivable financing opportunities because
financing receivables involves a new concept.

     Management believes that Alpha Bytes INC.'s ability to assist in arranging
for receivables financing provides it with a competitive edge over other
electronic service providers in the health care business.  In addition, it
generates significant profits with minimum risks since Alpha Bytes INC. controls
the material transactional aspect (e.g., eligibility verification and payment),
including payment guarantees from whose ability and willingness to pay claims
are the chief risk element.

DISTRIBUTION METHODS OF THE PRODUCTS OR SERVICES
- ------------------------------------------------

MARKETING PLANS AND DISTRIBUTION
- --------------------------------

     Management believes that there are intrinsically linked opportunities in
North America, the United Kingdom and European Community.  They involve the
possible increase of Alpha Bytes INC.'s share of applications software business
among corporate chains; the possible establishment within the vision care
industry of real-time transaction processing services; and, the establishment of
an interactive real-time processing and ordering system for the medical
community, coupled with general third party claims processing. The following
software products connecting retail, laboratory, and home office are available
from Alpha Bytes INC., and each can be customized to meet a customer's unique
ways of doing business, while interfaced into Alpha Bytes INC.'s real-time
transaction network:

     "Alpha POS/2/" a cross-platform, Windows (Registered Trade Mark of
Microsoft, INC.) compatible version of its Point of Sale Software for the
ophthalmic industry, and is used in operating a retail location. It keeps track
of patient data, Rx information and inventory; automatically pricing
prescriptions; manages all financial information; and, keeps track of staff
performance. It also includes special features for optometrists, such as an exam
recording module & a ledger system.

     "Alpha HO/2/" is a cross-platform, Windows (Trade Mark of Microsoft, INC.)
compatible version of its administrative package for home office use.  It keeps
track of and consolidates information from all stores, most notably the "day
sheet" data on financials and inventory, providing management with a complete
and accurate business picture on a daily basis. HO/2/ is a flexible package,
capable of  handling the administration of small chains and large multi-national
chains.

                                       6
<PAGE>
 
     "Alpha LAB/2/" is a cross-platform, Windows (Registered Trade Mark of
Microsoft, INC.) compatible version of its Laboratory Management Software
System, and is designed to accept electronic orders coming in from the Alpha
POS/2/ system.  The software automatically makes the calculations required for
grinding prescription lenses, keeps track of inventory, manages financials, and
has a job tracking features as prescriptions are processed through the
laboratory.  Alpha LAB/2/ is designed for either small laboratories, superstore
retail laboratories, or for very large wholesale laboratories.

     "H-NET Transaction Network" is software product that allows the user to
process payment claims and order goods and services with access to National Data
Corp.'s electronic communications network.  H-NET feature 12 services that will
be market introduced over a 3 phase period over the next few years. The first
phase involves spectacle insurance and government claims; healthcare provider
claims; prescription ordering from laboratories; lens ordering from laboratories
and suppliers; and, contact lens ordering to laboratories.  The second phase
involves eligibility checking;  claims processing; frame ordering; contact lens
ordering; and, factoring services on receivables.  The final phase involves
third party eligibility e-mail promotions; and, electronic banking. In addition
to software sales, many clients prefer a single source purchase wherein Alpha
Bytes INC. supplies hardware requirements and all service support (e.g.,
training, telephone support, and updates).

NEW CLIENT SOURCES
- ------------------
 
Alpha Bytes INC. has targeted 100 of the top chains in North America, the United
Kingdom and the European Community as qualified prospects for applications
software, hardware, and services. Management believes that the business
potential for H-NET Transaction Network billable transactions is a very large
and untapped market as is evident from the following estimates.

<TABLE>
<CAPTION>
 
                                                             TOTAL ANNUAL     GROSS
SERVICE TYPE                                                 TRANSACTIONS     PROFIT
- ----------------------------------------------               ------------     ------
<S>                                                          <C>              <C>
 1.  Spectacle Insurance and Government Claims                  27,200,000    $ 0.10
 2.  Health care provider Claims                             9,000,000,000    $ 0.10
 3.  Prescription Orders to Laboratories                        80,000,000    $ 0.10
 4.  Lens Orders to Supplier                                     6,200,000    $ 0.10
 5.  Frame Ordering                                             54,700,000    $ 0.10
 6.  Contact Lens Ordering                                       4,200,000    $ 0.10
 7.  Third Party Eligibility Checking                           27,200,000    $ 0.12
 8.  Credit Card Authorization                                  56,200,000    $0.005
 9.  Electronic Product Catalogues                              22,000,000    $0.005
10.  E-Mail Promotions                                           8,000,000    $ 1.18
11.  Factoring Services on Receivables                          27,200,000  (Note 10)
12.  Electronic Banking                                         27,200,000    $0.005
</TABLE>

- --------------------------------------------------------------------------------
- -Notes and Sources of Data:
1.   35% of spectacle sales are estimated to be third party. Source, Survey of
     Alpha Bytes INC. chain clients. This estimate came from Towers Corp., the
     United States' largest health care insurance billing agency .

2.   Every spectacle order goes to a laboratory and there were 80 million
     customers in 1997.  Source: 20 and 20.
3.   The typical laboratory places 125 orders to suppliers per month. 2,500
     laboratories x 125 orders x 12 months (assuming the market to be 80% of all
     labs) .
4.   Chain bulk buying accounts for 33% of the 80 million customers and the
     result is divided by 10% since chains order a frame in lots of 10.
     (80,000,000 x 33% x 10%)
5.   The total number of transactions are reduced by 60% of 10.6 million
     customers in 1996 since most patients are served from health care providers
     inventory. Source, survey of Alpha Bytes INC.'s clients .
6.   As in 1., every third party claim could be electronically checked for
     eligibility.
7.   About 60% of the total 80 million customers in 1997 paid by credit card.
     This also includes balances not included in third party claims. Source: 
     NDC.
8.   The 600 suppliers issue a product catalogue once a year to the 75,000
     professionals who work in an estimated 40,000 locations or (550 x 40,000).
     Estimates by Alpha Bytes INC. from data from OOA and AOA.
9.   The typical supplier runs 4 promotions per year. 550 x 40,000.
10.  The potential is 1.8% of the total dollar volume of 4.63 $billion (35% of
     13.22 $Billion total sales) or 800 $million.
11.  All third party customers are treated as potential banking transactions.
12   The cost of an average transaction is between $0.25 and 0.30 and the
     average selling price is $0.40. The average cost of a financial transaction
     is between $0.02 to $0.04 and the average selling price is between $0.03
     and $0.05

Alpha Bytes INC. intends to introduce the first 4 services immediately as phase
I, followed by introduction of more value
added services over a one year period as warranted by market responses and the
number of health care providers using the service.

                                       7
<PAGE>
 
MARKETING PERSONNEL
- -------------------

     Marketing will be primarily in-house and through distributors, with the
primary objective of selling to suppliers and laboratories which will re-sell to
the health care providers.  Health care providers will be primarily approached
through mail shots, etc., to  produce a classic push-pull marketing thrust.
Supervision will initially be provided from existing Alpha Bytes INC staff
members, including Anton Stephens Jerry Roberts, Doug Winter and Edwin Ham.

     Mr. Stephens, president of Alpha Bytes INC., whose background includes
management and development of the nationwide MIS system used by Morguard
Investments and development of the CBS Records financial computer systems. Mr.
Stephens has also been involved with the co-ordination and development of the
first computer software system for complete control of a large auto-dealership
(for General Motors).

     Mr. Roberts, Alpha Bytes INC.'s Director of marketing, has extensive
experience in the ophthalmic industry, including having worked as a consultant
to Pearle, Lenscrafters, Cohen's and Sterling Optical.

     Mr. Winter, Alpha Bytes INC.'s Systems Manager has over 10 years experience
with Alpha Bytes INC. and is an expert in the management of computer systems and
development projects. Mr. Winter also provides marketing support.

     Mr. Edwin Ham, Alpha Bytes INC.'s Programming Manager has over 8 years
experience with Alpha Bytes INC. and is an expert in the management of computer
systems and development projects. Mr. Ham also provides marketing support.

STATUS OF ANY PUBLICLY ANNOUNCED NEW PRODUCT OR SERVICES
- --------------------------------------------------------

H-NET HEALTHCARE NETWORK
- ------------------------

     Anticipating that regulatory authorities would move towards requiring
health care providers to submit health care claims electronically in order to
save money and control costs, during the past two years Alpha Bytes INC.
developed software product technology allowing health care providers and related
customers to  communicate electronically with suppliers, to process private
insurance and government third party claims and to order goods and services over
a real-time network.  The program is called H-NET Healthcare Network and it will
allow a health care provider to select any one of the following transaction
services from a single menu; eligibility checks for third party claims; payment
processing for insurance and government claims; order processing frames, lens
accessories, contact lenses; prescription laboratory orders; electronic product
catalogues; e-mail service (promotions from suppliers); factoring services for
verified receivables; financial services and electronic banking; and, debit card
transactions.

     Alpha Bytes INC. is unaware of any competitor offering similar programming
for the vision care business and anticipates that success will depend on its
ability to establish the first and largest user base among health care
providers. Since every health care provider spectacle sale needs a laboratory,
laboratories will be targeted as a sales force to distribute H-NET software in
by the health care provider.  A similar co-operative program will be offered to
frame suppliers.  A direct mail, trade journal advertising, trade show promotion
program will also target health care providers.

     Alpha Bytes INC.'s marketing plans for H-NET have been enhanced by the
active marketing support available from Bell Worldlinks, NDC and NPA, which have
recently agreed to actively market H-NET to their customers and to use it as an
enticement to increase the growth of their own businesses. Management expects
that its strategic partner, NPA, will target its 500 participating health care
providers by bringing them "on-line". Alpha Bytes INC. will also directly
approach its own user base and bring as many as possible on line in the first
year.  The currently available user base is expected to cause suppliers to
either join the network or be left behind by their competitors.

     H-NET will be sold and serviced by a group of strategically located agents
who will buy transaction services from Alpha Bytes INC., typically $0.40 per
transaction.  Working with a spread  of $0.35, they re-sell the service to the
health care provider at a price up to the competitive level of $0.75 as well as
a percentage rate keyed to set claim dollar-value levels.

The key candidates as Agents are the many local billing services.  Two sales and
service executives will be assigned the tasks of locating, training, and
supporting the network of agents.  Sales development materials will principally
rely upon direct mailings, trade shows, advertising in professional trade
publications and seminars.

                                       8
<PAGE>
 
SECOND GENERATION POINT OF SALE, HOME OFFICE, AND LABORATORY MANAGEMENT SOFTWARE
- --------------------------------------------------------------------------------

     Alpha Bytes INC. has completed development of, and is actively marketing,
its cross-platform, Windows (Registered Trade Mark of Microsoft, INC.)
compatible versions of its previous line of products for the ophthalmic
industry.  The main objective in the development, incorporating a state of the
art Graphical User Interface, was to enhance the usability of the software, and
to develop an industry standard database that would allow users more complete
access to the wealth of information that could be accumulated in Alpha System
environment.

     In addition, as more users of the existing Alpha Bytes software were
expressing an interest in taking a more active role in the development of unique
features for the software, it was necessary to develop software packages that
could be enhanced directly by users with the desire and ability to do so.

     A third consideration was the desire of most users to take a more "visual"
approach to the data analysis process as a means to facilitate the extraction of
useful information from the large amounts of data accumulated at a POS site.
This desire was expressed most frequently as a concern that existing software
solutions had a tendency to generate a great deal of paper output from which the
user was expected to determine, on their own, which information would prove most
useful. The objective of the project in this area was to prove the user with
information at the level of detail desired by the user, with the ability to
"drill down" to details where required.  This was to be presented in the form of
easily accessible visual displays, with hard copy provided only at the user's
request.

     There has been an increase in pressure from users to provide a solution
optimized for their own business practices, without having to suffer the
increased cost in both time and money, that arise from the development of custom
software solutions.  A major objective of this project was to allow as much
built-in customization of the package as possible, without overwhelming the user
with a package that was too complicated and cumbersome to be used in the
environment for which it was intended.

     Finally, there has been an increased desire on the part of users to have
options as to the particular hardware/operating system platform on which they
can implement the solution of choice.  The objective of the project was to
create an environment in which the same software and database could be operated
on a number of platforms, with the opportunity for the user to "mix and match"
as desired, to meet aesthetic and financial considerations.

     In response to these market pressures, Alpha Bytes INC. developed POS/2/,
 HO/2/ and LAB/2/, each of which has generated a tremendous amount of market
enthusiasm. The products were introduced to the marketed, commencing in the last
quarter of 1997, and the impact in fiscal 1998 was significant. It is
anticipated by management, that as this product is better known throughout the
ophthalmic community, its impact on income in fiscal 1999 will be even greater
than in fiscal 1998.

COMPETITIVE BUSINESS CONDITIONS AND COMPETITIVE POSITION IN THE INDUSTRY AND
- ----------------------------------------------------------------------------
METHODS OF COMPETITION
- ----------------------

     Alpha Bytes INC.'s business has traditionally been targeted to the top 100
corporate chains in North America and the United Kingdom and to approximately
2,500 laboratories.  Competition comes from two sources, in house systems
operated by large accounts and other providers of services to retail chains.

     In-house systems appear to be dwindling as a result of the maintenance
costs, lack of efficiency (personal and resources must be maintained on a full
time basis, whether or not used), and an inability to keep pace both technically
and in product development.

     As a result of such decline, Price Waterhouse recommended that LensCrafters
replace its in house system with a specialized third party solution by Alpha
Bytes INC., now encompassing over 700 sites.

     Material competition for corporate chain business is, to the best of
management's knowledge, limited to Alpha Bytes INC. and two other companies.  It
is most significantly impacted by product efficacy, the availability of a full
product line capable of connecting operations, price and terms information, on-
going support and updates capabilities, and prior operating history.   The Alpha
Bytes Group's major competitor is R.I., a company based in Peoria, Illinois,
with a limited base chain clients.

     Competition for laboratory business centers on the ability to modernize old
systems. There are three major competitors, B.C., DVI and CC Systems, which have
a combined customer base of approximately 500 clients.  Alpha Bytes INC. is not
aware of any material competitors offering single source comprehensive vision
care claims and product order processing service.

                                       9
<PAGE>
 
The concept is well understood and discussed in a futuristic sense in trade
journals but no other enterprise has, to management's knowledge, yet been able
to assemble the software technology and resources necessary to successful
compete with Alpha Bytes INC.

     Current transaction processing operates on a proprietary and fragmented
basis. For example: Lens manufacturers such as Sola or  American Optical have
provided a proprietary order entry software package to their largest customers.
Some laboratories have offered similar services.  There are no frame ordering
services and if there were, they would probably be proprietary.  Some vendors
give health care providers the ability to capture the government claims (HCFA
form) electronically and send it to the payer via modem.

     Alpha Bytes INC.'s competitors in the third party medical processing
industry offer similar services but at higher prices and generally do not have
the ability to transmit orders to supplier.

     Management believes that Alpha Bytes INC. has certain competitive
advantages that will permit it to retain a leadership  position in its industry
niche.  The retail arena poses difficult  start-up challenges because
profitability is tied to success in retail sales, an area in which Alpha Bytes
INC. has a two to three year lead over competitors.  Alpha Bytes INC. was the
first vendor to offer corporate chains compatible products connecting retail
establishments, laboratory and home offices.  Management believes that this
combination delivers the most productive return on investment and no competitors
have reported a comparable level of performance.

     Management is not aware of any other vendor in its niche market that have
entered into strategic alliances with major companies (such as Bell Worldlinks
or NDC) offering single source services comparable to Alpha Bytes INC.'s H-NET,
that have as many software products performing at either end of the network,
that have as many retail chain and independent market customers; or that
operates in North America, the United Kingdom, the European Community, Latin
American and the Caribbean.

     Management believes that Alpha Bytes INC.'s leadership in the introduction
of software systems and products has made its customers reliant thereon, with
little material likelihood that they will change product and service sources
unless a competitor provided dramatic price and performance superiority.  Such
opinion is based on the observations that the average health care provider
deals with between 15 to 25 suppliers and would not normally change multiple
supplier proprietary directories requiring payment for and maintain of the hard
drive space required for order processing. In management's opinion, Alpha Bytes
INC.'s customers require a single directory system like H-NET for all services,
and to the best of management's knowledge, no other such services are reasonably
available.

SOURCES AND AVAILABILITY OF RAW MATERIALS AND THE NAMES OF PRINCIPAL SUPPLIERS
- ------------------------------------------------------------------------------

     The Company's services are not reliant on the availability of raw materials
but rather, involve development of software computer applications, advice on
selection of computer hardware and operation of interactive data networks.
Sources from all materials required in conjunction with the foregoing are
readily available from a large number of suppliers, none of which would be
difficult to replace.

DEPENDENCE ON ONE OR FEW MAJOR CUSTOMERS
- ----------------------------------------

     No customer, except Cole Vision of Cleveland , Ohio and Eyecare Centers of
America of San Antonio, Texas, account for more than 5% of its continuing
business.

PATENTS, TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS, ROYALTY AGREEMENTS OR
- -----------------------------------------------------------------------------
LABOR CONTRACTS, INCLUDING DURATION
- -----------------------------------

     None.

SERVICE MARK AND COPYRIGHTS
- ---------------------------

     Alpha Bytes INC. (subsidiaries of the Company) use the service mark "H-NET"
registered with the United States Patent Office (Number 185884) on October 18,
1994.  The service mark has a term of six years, and is renewable for an
additional five year period.  All of Alpha Bytes INC.'s software is believed
subject to common law but unregistered copyrights.

                                       10
<PAGE>
 
LICENSES
- --------

     Alpha Bytes INC. grants its customers licenses to use its software program
on a non-transferable but permanent basis.  Licenses granted by Alpha Bytes INC.
provide for a limited 90 day warranty period, after which Alpha Bytes INC. has
no further liability, unless the license has entered into a separate maintenance
agreement.

     There are no outstanding claims under any license or maintenance
agreements, or, to the best of Alpha Bytes INC.'s management's knowledge, any
likely claims.

     Copies of Alpha Bytes INC.'s material license and maintenance agreements
are included as exhibits to the report on Form 8-K filed on January 6, 1995.
OTHER INTELLECTUAL RIGHTS
- -------------------------

     No other patents, trademarks, licenses, franchises, concessions, royalty
agreements or labor contracts are used by the Company.

NEED FOR ANY GOVERNMENT APPROVAL OF PRINCIPAL PRODUCTS OR SERVICES
- ------------------------------------------------------------------

     To the best of the Company's knowledge, there are no special requirements
for government approval of its principal products or services, not generally
applicable to normal business operations.

EFFECT OF EXISTING OR PROBABLE GOVERNMENTAL REGULATIONS ON THE BUSINESS
- -----------------------------------------------------------------------

     The Company is unaware of any probable regulation of its business, other
than as will apply to business in general.

ESTIMATE OF THE AMOUNT SPENT DURING EACH OF THE LAST TWO FISCAL YEARS ON
- ------------------------------------------------------------------------
RESEARCH AND DEVELOPMENT ACTIVITIES, AND IF APPLICABLE THE EXTENT TO WHICH THE
- ------------------------------------------------------------------------------
COST OF SUCH ACTIVITIES ARE BORNE DIRECTLY BY CUSTOMERS
- -------------------------------------------------------

     Alpha Bytes INC. has revamped its product line and made inroads into the
British vision care software applications industry.  Management believes that
the keys to Alpha Bytes INC's success are a focused effort in our niche market;
a superior product line that is constantly upgraded; hands on sales and support
by Alpha Bytes INC.'s top executives, so they are never far from the
marketplace; a positive return on investment by its clients; and, financial
stability to develop new products and strategies to meet market challenges.

     During the past two years, management believes that Alpha Bytes INC. has
spent approximately $750,000 on research and development activities, none of
which has been borne directly by its customers, although all of it will be
amortized as a portion of the goods and services sold as a result of
developments derived from such research.

COSTS AND EFFECTS OF COMPLIANCE WITH FEDERAL, STATE AND LOCAL ENVIRONMENTAL LAWS
- --------------------------------------------------------------------------------

     The Company, a service business, is not aware of any expenses directly
attributable to compliance with federal, state or local environment laws or
regulations.

NUMBER OF TOTAL EMPLOYEES AND NUMBER OF FULL TIME EMPLOYEE
- ----------------------------------------------------------

     The Company has twenty full time employees, all of whom are employed
through its subsidiaries. The Company and its subsidiaries use part time
employees and consultants, on occasion, as required; however, no fix number can
be provided except that no part time employees are being currently used and
generally, the range of part time personnel is between three and four persons.

EQUIPMENT
- ---------

     The fixed assets of the Company as valued for accounting purposes have a
depreciated book value of $71,979. Furniture consists of two sets of board room
furniture, two set of waiting room furniture, six sets of executive office
furniture, and desks, filing cabinets, bookcases and occasional furniture for
the staff.

     The key equipment consist of an IBM RISC 6000 computer; 24 Pentium
computers, 2 486/DX4/166 computers, 8 dot matrix printers, 2 color ink-jet
printers, and 7 laser printers; three photocopiers, three fax machines;
communications equipment and modems; tape storage equipment; Novell 4.0,
LANTASTIC, Windows NT, CITRIX networks; and, both a 24 station phone system
(Toronto), and a 6 station phone system (Niagara Falls).

                                       11
<PAGE>
 
INVESTMENT POLICIES
- -------------------

     The Company has no investment policies with respect to investments.


ITEM 2.   PROPERTIES
- -------   ----------

     The Company shares office space with Alpha Bytes Computer Corporation, its
wholly owned New York subsidiary. Its address is 521 Buffalo Avenue; Niagara
Falls, New York 14303.  Its phone number is (716) 284-2465 and its fax number is
(716) 284-2478.  The Company's other subsidiary, Alphabytes Computer Corporation
(Ontario) is headquartered at 205-7050 Woodbine Avenue; Markham, Ontario L3R
4G8.  Its phone number is (905) 475-3249 and its fax number is (905) 475-8629.

     The Niagara falls facility is a two and one half story brick building
compressed of approximately 2,000 square feet.  The annual rental, on a triple
net basis, is approximately $7,500. The lease expires on December 01, 1999.  The
building is leased from THE SCS Group.

     The Ontario facility has been leased from V & A Properties Limited since
October of 1982 under a five year lease. The annual base rental was $23,500 for
the year ending in January 31 1998 and the rent is expected to be the same for
fiscal 1999.  The premises comprises of 4500 sq feet.

     Management is of the opinion that its current facilities are adequate for
its immediate needs.  As the Company's business increases, additional facilities
will be required, however the current facilities are expected to suffice until
after December 31, 1998.

ITEM 3.   LEGAL PROCEEDINGS
- -------   -----------------

     Alpha Bytes INC. is not a party to any material litigation.

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

     NONE

                                    PART II
                                    -------

ITEM 5.   MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- ------    -----------------------------------------------------------------
     MATTERS.
     --------

PRICE RANGE OF COMMON STOCK AND DIVIDENDS
- -----------------------------------------

     The Common Stock of the Company commenced trading in the May 1994. The
following table sets forth for the periods indicated the range of high and low
representative bid quotations for the Company's Common Stock which were obtained
form market makers and are between dealers, do not include retail mark-ups mark-
downs- or other fees or commissions, and represent the lack of any material
transactions.
<TABLE>
<CAPTION>
                               ASK    Bid
                              -----  -----
<S>                           <C>    <C>
 
          Quarter Ended       High   Low
- ----------------------------  -----  -----
 
          April 30, 1997      $0.56  $0.50
 
          July 31, 1997       $0.87  $0.68
 
          October 31, 1997    $0.53  $0.40
 
          January 31,1998     $0.46  $0.37
</TABLE>

     The number of record holders of Common Stock of the Company as of January
31, 1998, was 176.  Additional holders of the Company's Common Stock hold such
stock in street name with various brokerage firms.  The Company has reason to
believe that such additional shareholders total approximately 85.

                                       12
<PAGE>
 
     Holders of Common Stock are entitled to receive dividends as may be
declared by the Board of Directors out of funds legally  available therefore.  A
dividend was declared on October 14, 1997 to its common stockholders of record
as of April 18, 1997. This dividend came in the form of one TRB Systems (TRBSI
trading in Niphix) for roughly 29 shares of Alpha Bytes INC.

     This dividend was as a result of  a software consulting agreement with TRB
systems.

ITEM 6.   SELECTED FINANCIAL DATA.
- -------   ------------------------

          The following table summarized selected historical financial
information of Alpha Bytes, INC. as of January 31,1997,  and 1998, and for the
fiscal years ended January 31, 1996,1997, and 1998.
<TABLE>
<CAPTION>
 
 
CONDENSED BALANCE SHEET INFORMATION:
- ------------------------------------------------
                                                  Years Ended January 31,
                                                      1998         1997
- ------------------------------------------------   ----------   ----------
<S>                                               <C>          <C>          <C>
Current Assets                                     $1,606,042   $1,451,601
Capital Assets                                         71,979       63,300
Marketable Securities-restricted                            0      164,666
Accounts Receivable & Work In Proce                         0      352,334
TOTAL ASSETS                                        1,678,021    1,867,235
- ------------------------------------------------   ----------   ----------
 
TOTAL LIABILITIES                                     302,299      454,793
- ------------------------------------------------   ----------   ----------
 
Stockholders' Equity                                1,375,722    1,412,442
- ------------------------------------------------   ----------   ----------
 
CONDENSED STATEMENT OF OPERATIONS INFORMATION:        
- ------------------------------------------------
                                                      1998         1997       1996
                                                   ----------   ----------  ----------
Sales                                              $1,761,402   $1,373,697  $  969,584
Expenses                                              786,016      786,016     775,049
Gross Profit                                          805,719      595,084     138,806
Net Gain (Loss)                                       500,768      342,284      80,313
Net Earnings (Loss) Per Share                           0.067        0.048       0.012
- ------------------------------------------------   ----------   ----------  ----------
</TABLE>

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------   ---------------------------------------------------------------
RESULTS OF OPERATIONS.
- ----------------------

The following discussion and analysis relate to factors which have affected the
financial condition and results of operations of the Company for its years ended
January 31, 1997 and January 31, 1998.

ALPHA BYTES INC. DISCUSSION OF FINANCIAL INFORMATION
- ----------------------------------------------------

Alpha Bytes Computer Corporation and Alphabytes Computer Corporation (together
called 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.

Revenues were $1,761,402 for the fiscal year ended Jan 31, 1998 generating a
gross profit of $805,789 as compared to revenues of $1,373,697 for the fiscal
year ended Jan 31, 1997 which generated a gross profit of $595,084.

Expenses were $955,683 for the fiscal year ended Jan 31,1998 as compared to
$778,613 for the period ending on Jan 31, 1997.

Earnings were $500,768 for the fiscal year ended Jan 31,1998 as compared to
$342,284 for the period ending Jan 31, 1997.

Overall, the major costs were wages and commissions, management fees, office and
general, and rents for both periods, and through careful cost tracking and
expense control were kept virtually constant in the current fiscal year as
compared to the last fiscal year.

The company realized significant margin improvement over the last fiscal year.
Operating margin for the year ended January 31, 1998 increased to 45.7%,
compared to 43.3 for fiscal 1997. Profit margin increased from 24.9% for the
year ended January 31, 1997 to 28.8% in fiscal 1998.

                                       13
<PAGE>
 
The company posted an increase of 40% in earnings per share.

The cash position of the company increased to $ 921,191 from $610,142 in the
previous fiscal year, providing a  healthy cash  reserve.  Retained earnings
rose from $872,125 on Jan 31, 1997 to $1,347,893 reflecting a very successful
year for the company. Current assets as a whole changed from $1,451,601 to
$1,606,042.

During fiscal 1998, the company settled its action against HEARx INC. The
company received 197,600 free trading shares in exchange for the 263,466
restricted shares that it had previously received and agreed to write off the
$352,334 it had previously reflected as a long term receivable. This extra
ordinary event reduced the Long term asset value of the company, and cleared out
a potentially uncollectible work in progress amount. The value of this
unrestricted stock as at Jan 31, 1998 was approximately $ 350,000.

Despite taking this write-down, the overall increases in revenue and earnings
were greater than expected due to wider acceptance of the new products marketed
in the 1998 fiscal year. It is expected that as these products  are aggressively
marked through fiscal 1999, the impact will be even greater.

MATERIAL EVENTS
- ---------------

ACQUISITION OF ALPHA BYTES INC
- ------------------------------
We adopt all previous disclosures from prior filings.

LIQUIDITY
- ---------

     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 the marketing
effort and for the production of marketing material, as well as the continued
development of H-NET.  Marketing effort would be increased by hiring a sales
staff of six salesmen, and 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 of funds.

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

     The key events that are anticipated by management to occur over the next
year are the aggressive marketing of the cross-platform, Windows (Windows is a
trademark of Microsoft, INC.) compatible version of its Point of Sale Software
(POS/2/), Laboratory Software (LAB/2/), and Home Office Software (HO/2/), the
aggressive marketing of H-NET software, the aggressive marketing of the Point of
Sale Software for the Hearing Aid Retail Sales Industry (POSH), and the
introduction of on-line real-time third party claim adjudication.

     The Company also plans to increase its share of the ophthalmic software
market by actively seeking the acquisition of one or more of its competitors.
Additionally, the Company plans to utilize its technology to expand into Medical
information processing field through possible acquisition or merger.

     During fiscal 1998, as well as adding new sites through the expansion of
the current chains carrying Alpha Software, three new chains adopted Alpha
Software technology in their strategy of updating their management and
information systems, namely Cole Vision, Scrivens, and Eye Centers of America.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -------   -------------------------------------------

          Included at Pages F-1 through F-12 hereof.

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- -------   ------------------------------------------------
          ACCOUNTING AND FINANCIAL DISCLOSURE.
          ------------------------------------

              The Company has not had any reported or material disagreement with
its accountants on any matter of accounting principals, practices, or financial
statement disclosure.

                                       14
<PAGE>
 
                                    PART III
                                    --------

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- --------  ---------------------------------------------------

     The following sets forth the names and ages of all the Directors and
Executive Officers of the Company, positions held by such person, length of
service, when first elected or appointed and term of office.
<TABLE>
<CAPTION>
                                  FIRST ELECTED
NAME                         AGE  OR APPOINTED/TERM           POSITION
- ---------------------------  ---  -----------------  --------------------------------------------
<S>                          <C>  <C>                <C>                         
Anton Stephens                46        *            Chairman of the Board of Directors, 
                                                     Director, President, Chief Executive Officer 
                                                     and Treasurer, Chief Financial Officer.
                                           
Christine Stephens            43        **           Secretary and Director.
- -------------------------------------------------------------------------------------------------
</TABLE>

Notes to table:

*    Re-elected on December 3, 1997, by the board of directors of the Company,
to serve as a director until the next annual meeting of the Company's
stockholders, and until his successors are elected, qualified and assume their
offices. Service as an officer is at the pleasure of the board of directors.

**   Re-elected on December 3, 1997, by the board of directors at the
recommendation of the Company's stockholders, to serve as a director until the
next annual meeting of the Company's stockholders, and until her successors are
elected, qualified and assume their offices.  Service as an officer is at the
pleasure of the board of directors.

BIOGRAPHIES OF DIRECTORS, OFFICERS AND DIRECTOR NOMINEES
- --------------------------------------------------------

ANTON STEPHENS
- --------------

     Mr. Stephens, age 46, has been president of Alphabytes Computer
Corporation, a corporation organized under the laws of the Canadian Province of
Ontario, since 1983, and has been the president of Alpha Bytes Computer
Corporation, a New York Corporation, since its organization in 1988.  Both
corporations are engaged in business of software development and marketing,
specializing in the dental, medical and vision care industries.  Alpha Bytes INC
has been accepted as business partners by IBM, Unisys and NCR, and are believed
by management to be the world's largest supplier of POS related applications to
the vision care industry.  Both companies develop, market, service and enhance
software for the health care industry, with a high degree of specialization and
expertise in the vision care industry. Mr. Stephens is responsible for the
overall management of both entities, and along with the management team, all key
decisions with respect to strategic planning, product development, marketing,
and finances.

     Mr. Stephens graduated from Brunel University (United Kingdom) in 1974 with
a bachelor of science degree in computer sciences.  Prior to 1984, Mr. Stephens
was employed as a systems analyst at the Kent County Council (United Kingdom)
and at Molins Manufacturing; he served as a computer industry consultant in
Canada, where his clients included the Ontario Provincial Government (part of
the design and implementation team which developed the Ontario health care
system), General Motors (developed leasing and sales systems) and CBS
(development of royalty payment system).  He thereafter served as the director
of data processing for Morguard Property Investments (Canada's second largest
property management company).

CHRISTINE STEPHENS
- ------------------

     Mrs. Stephens has during the past 6 years, consecutively and without
interruption, performed internal accounting for Alpha Bytes Computer Corporation
and  Computer Corporation, and has served as President of Alpha Bytes Management
INC. since 1994.

     From 1980 to 1984 Mrs. Stephens was a customer service representative at
the Bank of Montreal in Toronto, Canada, prior to which, from 1971 to 1978 she
was an assistant accountant at Barclays Bank (Stock Exchange Branch) in London,
England.  Mrs. Stephens' educational background consists of both an "O" and "A"
level G.C.E. obtained at Bognor Regis Grammar School in Sussex, England (1971).
Mrs. Stephens has also successfully passed the British Banking Exams in
Economics, English, Business and accounting.

                                       15
<PAGE>
 
ITEM 11.  EXECUTIVE COMPENSATION.
- --------  -----------------------

GENERAL
- -------
                          SUMMARY, COMPENSATION TABLE
                          ---------------------------
<TABLE>
<CAPTION>
 
ANNUAL COMPENSATION                   AWARDS                            PAYOUTS
- ------------------------------------  ------                          ------------
                              OTHER   REST-
                             ANNUAL               RICTED
                             COMPEN-  STOCK     AW-
NAME AND                     SATION                     ARDS   SUOP   SARS   LTIP   OTHER
Position               Year  Salary     (     )$Bonus    ($)    ($)    ($)    (#)    ($)    ($)
- ---------------------  ----  -------  ------  --------  -----  -----  -----  -----  ------  ----
<S>                    <C>   <C>      <C>     <C>       <C>    <C>    <C>    <C>    <C>     <C>
Anton Stephens         1997    ***      **      ***      ***    ***    ***    ***    ***    ***
Christine Stephens+    1997    ***      **      ***      ***    ***    ***    ***    ***    ***
Doug Winter (1)        1997  $60,000  ***          (4)    (4)  ***    ***    ***    ***     ***
Edwin Ham (2)          1997  $50,000  ***          (4)    (4)  ***    ***    ***    ***     ***
- ------------------------------------------------------------------------------------------------
</TABLE>
LEGEND:   SOUP is Securities Underlying Options/Payouts; Other is all other
          Compensation
Notes:
*    Chief Executive Officer, President and Chairman of the Board of Directors.
+    Secretary and Director

**   Alpha Bytes INC. paid an annual management fee of $77,000 ($145,000 in
1997) and is owed $41,000 as at January 31, 1998, to Alpha Bytes Management,
INC.., a corporation organized under the laws of the Canadian Province of
Ontario.  Alpha Bytes Management, INC., one of the Company's principal
stockholders, is wholly owned by the Stephens family.

     Mr. Stephens is provided with use of a vehicle on which Alpha Bytes INC.
spent $4,000.

     Mr. Stephens received payments of $10,500 as triple net rental payments for
use of the Niagara Falls building by Alpha Bytes Computer Corporation.

***  None.

(1)  Mr. Winter is Alpha Bytes INC.'s Systems Manager.
(2)  Mr. Ham is a program manager with Alpha Bytes INC..
(3)  Expected to be among the persons to whom from a 500,000 share reserved
     block will be awarded, when criteria for award is developed by the Board of
     Directors.
________________________________________________________________________________

LONG-TERM INCENTIVE PLAN ("LTIP)
- --------------------------------

     Neither the Company nor any subsidiary thereof has any long term incentive
plans.  However, the Company's Board of Directors has authorized the reservation
of 500,000 shares of its common stock for use in compensating professional
advisors, consultants and employees of Alpha Bytes INC..  To date, 264,000 such
shares have been reserved and options thereto issued to employees.  The options
are valid from May 1, 1996 to October 31, 2002 at a price of $.01 per share.

COMPENSATION OF DIRECTORS
- -------------------------

STANDARD ARRANGEMENTS
- ---------------------

     All members of the Company's board of directors are paid a per diem fee of
$300 for attendance at meetings of the board of directors and committees
thereof.  In addition, if required, they are reimbursed for travel expenses and
lodging is arranged for them, at the Company's expense.  At such time as
adequate funds are available, all director (and officers) of the Company will be
covered by liability insurance.  Outside directors (those who are not officers
or employees of the Company) will generally be issued 10,000 shares of the
Company's common stock (post reverse split) as an inducement to become
directors;  however, the stock is subject to total forfeiture in the event that
the director does not serve in such role for a least 365 days.  Directors are
reimbursed for all out of pocket expenses incurred in the performance of their
roles, subject to provision of receipts in form and substance adequate to
satisfy Internal Revenue Service audit requirements (e.g., long distance
telephone, postage, etc.).

                                       16
<PAGE>
 
OTHER ARRANGEMENTS
- ------------------

     Neither the Company nor any of its subsidiaries have any other arrangements
to compensate its directors, other than the management agreement pursuant to
which Alpha Bytes INC. paid an annual management fee during the 1997 fiscal year
of $77,000 to Alpha Bytes Management INC., a corporation organized under the
laws of the Canadian Province of Ontario. Alpha Bytes Management, INC., one of
the Company's principal stockholders, is wholly owned by the Stephens family.

ITEM 12   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

PARENTS OF THE COMPANY
- ----------------------

     The following table discloses all persons who are parent of the Company (as
such term is defined in Securities and Exchange Commission Regulation C),
showing the basis of control and as to each parent, the percentage of voting
securities owned or other basis  of control by its immediate parent if any.
<TABLE>
<CAPTION>
                                       PERCENTAGE    OTHER
                                       OF VOTING    BASIS
                      BASIS FOR        SECURITIES   FOR
NAME                  CONTROL          OWNED        CONTROL
- --------------------  ---------------  ----------   -------
<S>                   <C>              <C>          <C>
Pinewood Resources    Stock Ownership       72%      None
</TABLE>

TRANSACTION WITH PROMOTERS, IF ORGANIZED WITHIN THE PAST FIVE YEARS
- -------------------------------------------------------------------
     Neither the Company nor its subsidiaries were organized within the past
five years.

PRINCIPAL STOCKHOLDERS

     The following sets forth the security ownership of Management of the
Company and any holders of the Company's common stock known to own 5% or more of
the Company's issued and outstanding common stock, as of January 31, 1998.

     As of the date of this Current Report, the following persons (including any
"group" are, based on information available to the Company, beneficial owners of
more than five percent of the Company's common stock (its only class of voting
securities):
<TABLE>
<CAPTION>
                                   NAME AND             AMOUNT AND
                               TITLE ADDRESS OF          NATURE OF        PERCENT
                                 OF BENEFICIAL          BENEFICIAL           OF
CLASS                                OWNER                 OWNER           CLASS
- ---------------------------  ---------------------  -------------------  ----------
<S>                          <C>                    <C>                  <C>
Common                       Pinewood Resources     Record &                    72%
Stock                        c/o Merrill Lynch      Beneficial
                             c/o Merrill Lynch      5,500,000 shares
                             1850 K Street, N.W
                             Suite 700, Washington
                             D.C. 20006
- -----------------------------------------------------------------------------------
</TABLE> 
SECURITY OWNERSHIP OF MANAGEMENT
- --------------------------------
 
      As of the date of this Current Report, the following table discloses, as
to each class of equity securities of the registrant or any of its parents or
subsidiaries other than directors' qualifying shares, beneficially owned by all
directors and nominees, the names of each executive officer (as defined in Item
402[a] [2] of Securities and Exchange Commission regulation S-B), and directors
and executive officers of the registrant as a group, the total number of shares
beneficially owned and the percent of class so owned. Of the number of shares
shown, the associated footnotes indicate the amount of shares with respect to
which such persons have the right to acquire beneficial ownership as specified
as specified in Securities and Exchange Commission Rule (13) (d) (1).

<TABLE> 
<CAPTION> 
 
TITLE OF       NAME AND ADDRESS OF               AMOUNT AND NATURE    RECENT OF
CLASS          BENEFICIAL OWNER                  OF BENEFICIAL OWNER  CLASS
<S>            <C>                               <C>                  <C> 
Common         Pinewood Resources                Record &                72%
Stock          c/o Merrill Lynch                 Beneficial
               1850 K Street, N.W                5,500,000 shares
               Suite 700, Washington. DC 20006
</TABLE>

                                       17
<PAGE>
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- --------  -----------------------------------------------

          The following information pertains to all transaction during the last
two years, or proposed transactions, to which the Company was or is to be a
part, in which any of the following persons had or is to have a direct or
indirect material interest:  any director or executive officer of the Company:
any nominee for election as a director; any principal security holder listed
above; and, any member of the immediate family (including spouse, parents,
children, siblings, and in-laws) of any of the foregoing persons.
<TABLE>
<CAPTION>
                   RELATIONSHIP                            NATURE OF INTEREST  AMOUNT OF  FISCAL
NAME               TO COMPANY                               IN THE COMPANY    INTEREST    YEAR
- -----------------  ---------------------------------------  ------------------  ---------  ------
<S>                <C>                                      <C>                 <C>        <C>
Anton Stephens     Officer, Director                               *, **        $10,500     1998
                                                                   +            $ 4,000     1988
                                                                   *, **        $18,000     1997
                                                                   +            $ 4,332     1997
</TABLE> 
Notes:  *       Mr. Stephens received these funds as triple net rental payment
for use of the Niagara Falls building by Alpha Bytes Computer Corporation.
Management is of the opinion that despite the non-arms length nature of the
transaction, the payments are in line with those otherwise available, although
no assurances can be provided that better terms could not have been obtained
from an independent party.
**      Alpha Bytes INC. paid an annual management fee of $77,000, of which
$41,000 remains unpaid in the Fiscal year ending January 31, 1998 to Alpha Bytes
Management, INC., a corporation organized under the laws of the Canadian
Province of Ontario. Alpha Bytes Management, INC., one of the Company's
principal stockholders, is owned by the Stephens family.
+       Mr. Stephens is provided with use of a vehicle for which Alpha Bytes
 INC. pays.
                                    PART IV
                                    -------

        Item 14.Exhibits, Financial Statement Schedules, and Reports on
        ---------------------------------------------------------------
                                   Form 8-K.
                                   ---------
         (a)The following documents are filed as a part of this Report:
(1)Financial Statement.  The following Financial Statements are filed as part of
   --------------------                                                         
this Report:

<TABLE>
<CAPTION>
                                                                      Page
                                                                      ----
<S>                                                                   <C>
Report of Independent Public Accountants.............................  F-3
Balance Sheets, January 31, 1998  and January 31, 1997...............  F-4
Statements of Operations, Year Ended January 31, 1998................  F-5
Year Ended January 31, 1998 and                           
Year Ended January 31, 1997.                              
Statement of Cash Flows, Year Ended                       
January 31, 1998.....................................................  F-7
Year Ended January 31, 1997 and Year Ended                
January 31, 1996.                                         
Statement of Stockholders' equity....................................  F-6
Notes to Financial Statements........................................  F-8
</TABLE> 
       (2)       Exhibits.   The following exhibits are filed as part of this
                             Report:
 Exhibit No.             Item
- -------------  ----------------------------------------------------
     2.0       + Current Report on Form 8-K
     2.1       ++ First Amendment to Report on Form 8-K
     2.2       +++ Second Amendment to Report on Form 8-K
     3.1       *Articles of Incorporation of Registrant dated
               May 16, 1986
     4.0       + Resolution of the Shareholders of Alpha Bytes, INC.
     3.2       **Bylaws of Registrant.
     4.1       *Warrant Agreement
     4.2       *Underwriter's Warrant
Notes:
+    Filed on January 6, 1995, and incorporated by reference
++   Filed on January 16, 1995, and incorporated by reference.
+++  Filed on February 16, 1995, and incorporated by reference.
*    Previously filed as an exhibit to the Company's Form S-18
     Registration Statement, No.33-20733-D, made effective August 3, 1988.
     The underwriter's warrants are no longer valid.
**   Filed on May 15, 1995, in the Report on Form 10-K at page 38, and
     incorporated by

                                       18
<PAGE>
 
                               ALPHA BYTES, INC.


                       CONSOLIDATED FINANCIAL STATEMENTS


                          YEAR ENDED JANUARY 31, 1998
                          (Expressed in U.S. Dollars)

                                       19
<PAGE>
 
                               ALPHA BYTES, INC.

                                JANUARY 31, 1998



                                     INDEX



         1      AUDITORS' REPORT


         2      CONSOLIDATED BALANCE SHEET


         3      CONSOLIDATED STATEMENT OF EARNINGS


         4      CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY


         5      CONSOLIDATED STATEMENT OF CASH FLOW


         6-11   NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                       20
<PAGE>
 
                                AUDITORS' REPORT


TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
ALPHA BYTES, INC.:


We have audited the accompanying consolidated balance sheet of Alpha Bytes, INC.
as at January 31, 1998 and January 31, 1997, and the consolidated statements of
earnings, stockholders' equity and cash flow 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 United States generally accepted
auditing standards.  Those standards require that we plan and perform an 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, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at January 31, 1998
and January 31, 1997 and the results of its operations and its cash flow for the
years then ended in conformity with United States generally accepted accounting
principles.



Shimmerman Penn Burns Becker

Chartered Accountants

Toronto, Canada

February 24, 1998

                                       21
<PAGE>
 
                               ALPHA BYTES, INC.

                           CONSOLIDATED BALANCE SHEET

                             AS AT JANUARY 31, 1998
                          (Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
 
                                                   Note         1998       1997
                                                -----------  -----------  -------
<S>                                             <C>          <C>          <C>
ASSETS
 
CURRENT:
Cash and equivalents                                         $  921,191   $  610,142
Marketable securities - restricted                       3            -      707,933
Accounts receivable and work in process                         666,234       79,072
Income and investment tax credits receivable                          -       31,684
Prepaid expenses and sundry assets                               18,617       22,770
                                                             ----------   ----------
                                                              1,606,042    1,451,601
                                                             ----------   ----------
 
LONG TERM:
Accounts receivable and work in process                               -      352,334
Capital assets                                           4       71,979       63,300
                                                             ----------   ----------
 
                                                                 71,979      415,634
                                                             ----------   ----------
 
TOTAL ASSETS                                                 $1,678,021   $1,867,235
                                                             ==========   ==========
 
LIABILITIES
 
CURRENT:
Accounts payable and accrued liabilities                     $   92,424   $  183,686
Income taxes payable                                            155,285            -
Unearned revenue                                                      -       24,707
Deferred income taxes payable                                    54,590      246,400
                                                             ----------   ----------
                                                     
TOTAL LIABILITIES                                               302,299      454,793
                                                             ----------   ----------
 
STOCKHOLDERS' EQUITY
 
Capital stock                                            5      250,968      245,468
Employee share options                                           17,000       16,000
Retained earnings                                             1,347,893      872,125
Unrealized gain on investment                                         -      343,267
Foreign exchange adjustment                                    (127,807)     (64,418)
                                                             ----------   ----------
Less treasury stock at cost                              6     (112,332)           -
                                                             ----------   ----------
                                                              1,375,722    1,412,442
                                                             ----------   ----------
 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                   $1,678,021   $1,867,235
                                                             ==========   ==========
 
</TABLE>

ON BEHALF OF THE BOARD:                  DIRECTOR                 DIRECTOR

                             See accompanying notes

                                       22
<PAGE>
 
                               ALPHA BYTES, INC.

                       CONSOLIDATED STATEMENT OF EARNINGS

                          YEAR ENDED JANUARY 31, 1998
                          (Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
 
                                                     Note         1998         1997      1996
                                                  -----------  -----------  ----------  -------
<S>                                               <C>          <C>          <C>         <C>
 
REVENUE                                                       $1,761,402   $1,373,697    $969,584
                                                              ----------   ----------    --------
EXPENSES                                               
Professional fees                                                230,900       52,437      18,121
Wages, management and consulting fees                            521,545      508,770     419,213
General and administrative                                       138,111      215,427     224,435
Travel and promotion                                             144,013       95,862     150,071
Amortization                                                      21,205       21,043      14,943
Interest                                                           2,352        5,438       1,759
Loss on note receivable and sundry investments                         -            -      44,265
Research and development tax credits claimed                    (102,443)    (120,364)    (42,029)
                                                              ----------   ----------    --------
                                                       
                                                                 955,683      778,613     830,778
                                                              ----------   ----------  ----------
                                                       
EARNINGS BEFORE INCOME TAXES                                     805,719      595,084     138,806
                                                              ----------   ----------    --------
                                                       
Provision for income taxes:                            
                                                       
Current                                                          293,121      206,400      58,493
Deferred                                                          11,830       46,400           -
                                                              ----------   ----------    --------
                                                       
                                                                 304,951      252,800      58,493
                                                              ----------   ----------    --------
                                                       
NET EARNINGS                                                  $  500,768   $  342,284    $ 80,313
                                                              ==========   ==========    ========
 
EARNINGS PER SHARE                                         7      $0.067       $0.048      $0.012
                                                              ==========   ==========    ========
</TABLE>

                             See accompanying notes

                                       23
<PAGE>
 
                               ALPHA BYTES, INC.

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                  YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
                          (Expressed in U.S. Dollars)

<TABLE>
<CAPTION>
                                          Capital Stock            Options             Treasury Stock        
                                        Number                 Number                 Number                
                                       of Shares   Amount     of Shares   Amount     of Shares   Amount     
                                       ---------  --------    ---------  --------    ---------  --------    
<S>                                    <C>        <C>         <C>       <C>           <C>      <C>         
BALANCE AS AT JANUARY 31, 1995         5,700,000  $211,483           -     $     -          -  $       -   
Net earnings for 1996                          -         -           -           -          -          -   
Foreign exchange adjustment for 1996           -         -           -           -          -          -   
Additional shares issued  pursuant 
 to original acquisition  of                                                                                            
 subsidiaries                            500,000         -           -           -          -          -   
Employee share options issued as
 compensation for services received            -         -       5,250           -          -          -   
Shares issued as  compensation for
 services received                       935,002    14,265           -           -          -          -   
                                       ---------  --------    --------  ----------    -------  ---------   
BALANCE AS AT JANUARY 31,  1996        7,135,002   225,748       5,250           -          -          -   
Net earnings for 1997                          -         -           -           -          -          -   
Foreign exchange adjustment for 1997           -         -           -           -          -          -   
Unrealized holding gain on restricted
 marketable securities                         -         -           -           -          -          -   
Employee share options issued as 
 compensation for services
 received - net                                -         -     158,750      16,000          -          -   
Shares issued as compensation for
 services received                       278,000    19,720           -           -          -          -   
                                       ---------  --------    --------  ----------    -------  ---------   
BALANCE AS AT JANUARY 31, 1997         7,413,002   245,468     164,000      16,000          -          -   
Net earnings for 1998                          -         -           -           -          -          -   
Foreign exchange  adjustment for 1998          -         -           -           -          -          -   
Unrealized holding gain on                                                                                 
 restricted marketable securities              -         -           -           -          -          -   
Employee share options issued as
 compensation for services
 received - net                                -         -     100,000       1,000          -          -   
Shares issued as compensation for
 services received                        55,000     5,500           -           -          -          -   
Purchase of stock on open market               -         -           -           -    145,000   (112,332)  
Dividend paid                                  -         -           -           -          -          -   
                                       ---------  --------    --------  ----------    -------  ---------   
BALANCE AS AT JANUARY 31,  1998        7,468,002  $250,968     264,000     $17,000    145,000  $(112,332)  
                                       =========  ========    ========  ==========    =======  =========   
 
</TABLE>




<TABLE>
<CAPTION>
                                                      Unrealized   Foreign
                                          Retained    Gain on      Exchange
                                          Earnings    Investment   Adjustment      TOTAL
                                        ------------  -----------  -----------  ------------
                                         
<S>                                     <C>           <C>          <C>          <C>
                                         
BALANCE AS AT JANUARY 31, 1995           $  449,528    $       -    $ (79,288)   $  581,723
Net earnings for 1996                        80,313            -            -        80,313
Foreign exchange adjustment for 1996              -            -        3,238         3,238
Additional shares issued pursuant
 to original acquisition  of
 subsidiaries                                     -            -            -             -
Employee share options issued as
 compensation for services received               -            -            -             -
Shares issued as compensation
 for services received                            -            -            -        14,265
                                         ----------   ----------    ---------    ----------
BALANCE AS AT JANUARY 31, 1996              529,841            -      (76,050)      679,539
Net earnings for 1997                       342,284            -            -       342,284
Foreign exchange adjustment for 1997              -            -       11,632        11,632
Unrealized holding gain on               
 restricted marketable securities                 -      343,267            -       343,267
Employee share options issued as
 compensation for services received - net         -            -            -        16,000
Shares issued as compensation for
 services received                                -            -            -        19,720
                                         ----------   ----------    ---------    ----------
BALANCE AS AT JANUARY 31, 1997              872,125      343,267      (64,418)    1,412,442
Net earnings for 1998                       500,768            -            -       500,768
Foreign exchange adjustment for 1998              -            -      (63,389)      (63,389)
Unrealized holding gain on restricted
 marketable securities                            -     (343,267)           -      (343,267)
Employee share options  issued as
 compensation for services received - net         -            -            -         1,000
Shares issued as compensation for
 services received                                -            -            -         5,500
Purchase of stock on open market                  -            -            -      (112,332)
Dividend paid                               (25,000)           -            -       (25,000)
                                         ----------   ----------    ---------    ----------
BALANCE AS AT JANUARY 31, 1998           $1,347,893    $       -    $(127,807)   $1,375,722
                                         ==========   ==========    =========    ==========
 
</TABLE>

                             See accompanying notes

                                       24
<PAGE>
 
                               ALPHA BYTES, INC.

                      CONSOLIDATED STATEMENT OF CASH FLOW

                          YEAR ENDED JANUARY 31, 1998
                          (Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
 
                                                        1998        1997        1996
                                                     ----------  ----------  ----------
<S>                                                  <C>         <C>         <C>
CASH WAS PROVIDED BY (USED FOR):
 
OPERATING ACTIVITIES
Net earnings                                         $ 500,768   $ 342,284   $  80,313
Loss on note receivable and sundry investments               -           -      44,265
Amortization                                            21,205      21,043      14,943
Deferred income taxes                                   11,830      46,400           -
                                                     ---------   ---------   ---------
                                                       533,803     409,727     139,521
                                                     ---------   ---------   ---------
 
CHANGES IN NON-CASH WORKING CAPITAL ITEMS:
Accounts receivable and work in process               (587,162)    345,035    (161,517)
Income taxes payable                                   186,969      34,281     197,941
Prepaid expenses and sundry assets                       4,153     (17,033)     (5,064)
Accounts payable and accrued liabilities               (91,262)    105,796     (26,635)
Unearned revenue                                       (24,707)      8,501       2,043
                                                     ---------   ---------   ---------
                                                      (512,009)    476,580       6,768
                                                                 ---------   ---------
 
                                                        21,794     886,307     146,289
                                                     ---------   ---------   ---------
 
FINANCING ACTIVITIES
Issue of shares                                          5,500      19,720      14,265
Issue of employee share options                          1,000      16,000           -
Purchase of stock for treasury                        (112,332)          -           -
Foreign exchange adjustment                            (63,389)     11,632       3,238
Dividend paid                                          (25,000)          -           -
Loans payable to directors                                   -     (88,507)    (24,345)
Vehicle loan                                                 -      (2,206)     (4,332)
Loan payable                                                 -    (100,000)    100,000
                                                     ---------               ---------
                                                      (194,221)   (143,361)     88,826
                                                                             ---------
 
INVESTING ACTIVITIES
Long term accounts receivable and work in process      352,334    (270,000)    (82,334)
Net purchase of capital assets                         (29,884)    (38,171)    (35,380)
Sundry investments - net                                     -      13,422      22,135
Marketable securities - restricted                     161,026           -    (164,666)
                                                     ---------   ---------
                                                       483,476    (294,749)   (260,245)
                                                     ---------
 
INCREASE (DECREASE) IN CASH                            311,049     448,197     (25,130)
 
Cash and equivalents at the beginning of the year      610,142     161,945     187,075
                                                     ---------   ---------   ---------
 
CASH AND EQUIVALENTS AT THE END OF THE YEAR          $ 921,191   $ 610,142   $ 161,945
                                                     =========   =========   =========
 
</TABLE>



                             See accompanying notes

                                       25
<PAGE>
 
                               ALPHA BYTES, INC.

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                          YEAR ENDED JANUARY 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 January 31, 1998,
were as follows:

Alphabytes Computer Corporation (Canada)  - ("AlphaBytes Canada")
Alpha Bytes Computer Corporation (U.S.A.) - ("Alpha Bytes U.S.")

          In accordance with the reverse takeover method of accounting, as
referred to in note 2, these consolidated financial statements of the company
include the accounts of Alphabytes Canada and Alpha Bytes U.S. together with the
results of Alpha Bytes, INC. from the date of the business combination.

(B)  WORK IN PROCESS

          The company uses the percentage of completion method of revenue
recognition for its long term development contracts.  The value of unbilled
services is calculated using the contracted billing rates and is included with
accounts receivable and work in process on the balance sheet.

(C)  CAPITAL ASSETS
 
          Capital assets are stated at cost less accumulated amortization.
Amortization is calculated at the following annual rates:
<TABLE>
<CAPTION>
<S>                                         <C>
Furniture and equipment                     20% declining balance
Vehicles                                    30% declining balance
Computer hardware                           30% declining balance
Computer software                           100% declining balance
</TABLE>
(D)  FOREIGN CURRENCY

     The financial statements are expressed in U.S. dollars.

     Current assets and liabilities denominated in Canadian dollars at year
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 income.


1.   ACCOUNTING POLICIES (continued)

     (D)  FOREIGN CURRENCY (continued)

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

     (E)  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 expenses.

2.    BUSINESS COMBINATION

Pursuant to an agreement dated December 3, 1995, and effective December 13, 1995
Alpha Bytes, INC. (formerly Uptick Ventures, Inc.) issued 225,000,000 common
shares in exchange for all of the outstanding shares in the capital of
Alphabytes Canada and Alpha Bytes U.S.  Subsequently, the company's shareholders
authorized a reverse stock split of all outstanding shares on a fifty shares for
one share (50 for 1) basis.  A further 1,000,000 shares were issued after the
reverse stock split, as part of the consideration.

                                       26
<PAGE>
 
                               ALPHA BYTES, INC.

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                          YEAR ENDED JANUARY 31, 1998
                          (Expressed in U.S. Dollars)


As a result of this transaction, control of the combined companies passed to the
former stockholders of Alphabytes Canada and Alpha Bytes U.S. as a group.  This
business combination situation is referred to as a "reverse takeover".  Legally
Alpha Bytes, INC. would be regarded as the parent or continuing company;
however, generally accepted accounting principles require that the former
stockholders of Alphabytes Canada and Alpha Bytes U.S. be identified as the
acquirer and that Alpha Bytes, INC. be treated as the acquired company.
Accordingly, control of the assets and business of Alpha Bytes, INC. has been
acquired by Alphabytes Canada and Alpha Bytes U.S. in consideration for the
issuance of common shares.

3.      MARKETABLE SECURITIES - RESTRICTED
 
        Pursuant to an agreement in the settlement of a lawsuit with a
customer in 1994, the company received payment for an account receivable of
$164,666 in the form of the customer's capital stock.  At that time, the
customer acknowledged an additional amount outstanding of $82,334.  This
receivable was due in March 1997.  The customer is a publicly traded company and
pursuant to the Securities Act, this company was restricted from selling the
shares for a two year period ending in March 1997.  During the 1996 fiscal year,
the company provided the customer with additional services totalling $270,000
which

3.      MARKETABLE SECURITIES - RESTRICTED (continued)
 
was also due in March 1997.  The company did not receive payment for these
services or the $82,334 account receivable noted above and initiated a legal
action for payment.

In January 1997, the customer initiated an action against the company.  Alleging
breach of contract once again, they disputed the $270,000 claim for services and
the $82,334 account receivable, seeking the return of the shares issued pursuant
to the prior legal settlement mentioned above and claiming an unspecified amount
for costs and damages.

In November 1997, a final settlement was reached with this customer.  The
company received 197,600 free trading shares in exchange for the 263,466
restricted shares that it had previously received and agreed to write off the
$352,334 it had previously reflected as a long term receivable.

The free trading shares have been included with other marketable securities as
cash and equivalents and the unrealized gain on the restricted investment has
been eliminated.
<TABLE>
<CAPTION>
 
4.                          CAPITAL ASSETS
 
                                          Accumulated         Balance
                                 Cost     Amortization      1998      1997
                               --------   ------------    -------   -------
<S>                         <C>             <C>          <C>       <C>
 Furniture and equipment       $ 59,372     $ 31,251      $28,121   $18,198
 Vehicles                        38,315       33,344        4,971     7,102
 Computer hardware               63,641       24,754       38,887    37,721
 Computer software               13,802       13,802            -       279
                               --------     --------      -------   -------
                                                        
                               $175,130     $103,151     $71,979   $63,300
                               ========     ========      =======   =======
</TABLE>                                                
5.    CAPITAL STOCK

The company is authorized to issue 30,000,000 common shares.

In addition to the shares issued on the business combination as described in
note 2, the company issued 55,000 shares during 1998, 278,000 shares during 1997
and 935,002 shares during 1996 as compensation for services rendered to the
company.  The value assigned to these shares was $5,500, $19,720 and $14,265
respectively.

The company has granted outstanding options to purchase shares as follows:
<TABLE>
<CAPTION>
 
<S>         <C>
    54,750  employee share options with an exercise price of $0.01 per share expiring October 31, 2000
    54,750  employee share options with an exercise price of $0.01 per share expiring May 31, 2001
    54,500  employee share options with an exercise price of $0.01 per share expiring October 31, 2001
   100,000  employee share options with an exercise price of $0.01 per share commencing January 1, 1998 and expiring
            October 31, 2002
</TABLE>

                                       27
<PAGE>
 
                               ALPHA BYTES, INC.

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                          YEAR ENDED JANUARY 31, 1998
                          (Expressed in U.S. Dollars)


6.  SHARES HELD IN TREASURY

    During the year, the Board of Directors authorized a stock repurchase plan
    whereby the company will purchase up to 500,000 shares of the company's
    common stock to be used for reissuance upon the exercise of stock options,
    in future acquisitions for stock or for other corporate purposes. During
    1998, the company purchased 145,000 common shares for treasury at a cost of
    $112,332.

7.  EARNINGS PER SHARE

    In February 1997, the Financial Accounting Standards Board issued Statement
    No. 128 Earnings Per Share which required the company to change the method
    used for computing earnings per share. Under the new requirements for
    calculating primary earnings per share, the dilutive effect of stock options
    is excluded.

    Earnings per share has been calculated using the weighted average number of
    common shares outstanding excluding the dilutive effect of stock options and
    all prior periods have been restated. The average number of shares
    outstanding under this assumption would be as follows:

<TABLE>
<CAPTION>
 
<S>                       <C>      <C>
Year ended January 31,    1998     $7,434,276
                          1997      7,183,647
                          1996      6,533,454
</TABLE>

8.    RELATED PARTY TRANSACTION

During the year, the company was charged $77,000 (1997 - $145,000) for the
management services of the president and vice-president by a related company,
$41,000 (1997 - $119,000) of which remains unpaid at the year end and is
included in accounts payable.  Rent paid to a shareholder company amounted to
$10,500 (1997 - $18,000).
 
 9.    COMMITMENTS

LEASES OF PREMISES

The company is committed under existing leases for premises to the following
minimum annual rents:
<TABLE>
<CAPTION>
 
<S>                        <C>      <C>
Year ending January 31,    1999      $19,000
                           2000       21,000
                           2001       22,000
                           2002       24,000
                           2003        4,000
 
</TABLE>

                                       28
<PAGE>
 
                                   SIGNATURES
                                   ----------

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

Alpha Bytes, INC.

By      
        -----------------------------------------
           Anton Stephens, President and Director
                     (Principal Executive Officer)
 
Date:                     April 30, 1998

By      
        -----------------------------------------
                               Christine Stephens
                           Secretary and Director

Date:                              April 30, 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:                               April 30,1998


By    
        -----------------------------------------
                               Christine Stephens
                           Secretary and Director

Date:                               April 30,1998

                                       29


© 2022 IncJournal is not affiliated with or endorsed by the U.S. Securities and Exchange Commission